<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 October 30, 1999
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 November 30, 1999
- ------------------------------- --------------------------------
Common Stock, Without Par Value 32,850,114 Shares
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<TABLE>
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
October 30, 1999 and January 30, 1999 3
Consolidated Statements of Income for the three and
nine months ended October 30, 1999 and
October 31, 1998 4
Consolidated Statements of Cash Flows for the nine months
ended October 30, 1999 and October 31, 1998 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
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 14
Item 6. Exhibits and Reports on Form 8-K
Part A: Exhibit 27 Financial Data Schedule for Third Quarter Form 10-Q 15
Part B: Reports on Form 8-K A Form 8-K was filed on
December 6, 1999 relating to Item 2
- "Acquisition or Disposition of
Assets".
</TABLE>
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<TABLE>
VALUE CITY DEPARTMENT STORES, INC.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
==============================================================================================
<CAPTION>
OCTOBER 30, JANUARY 30,
1999 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 26,970 $ 20,895
Accounts receivable, net 13,278 6,996
Receivables from affiliates 523 587
Inventories 436,955 286,029
Prepaid expenses and other assets 6,248 4,384
Deferred income taxes 18,560 14,441
--------- ---------
Total current assets 502,534 333,332
Property and equipment, at cost:
Furniture, fixtures and equipment 181,113 168,270
Leasehold improvements 141,227 126,857
Land and building 1,185 986
Capital leases 15,276 15,276
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338,801 311,389
Accumulated depreciation and amortization (163,536) (143,208)
--------- ---------
Property and equipment, net 175,265 168,181
Investment in joint venture 7,866 8,391
Goodwill and tradenames, net 43,916 45,519
Other assets 22,172 17,983
--------- ---------
Total assets $ 751,753 $ 573,406
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 178,875 $ 110,312
Accounts payable to affiliates 7,771 3,687
Accrued expenses:
Compensation 14,584 6,617
Taxes 23,258 12,925
Other 30,734 24,037
Current maturities of long-term obligations 37,269 9,259
--------- ---------
Total current liabilities 292,491 166,837
Long-term obligations, net of current maturities 141,349 101,447
Deferred income taxes and other noncurrent liabilities 1,476 3,204
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including treasury shares, 32,918,767 shares and
32,637,617 shares, respectively 114,010 113,073
Contributed capital 14,843 12,083
Retained earnings 193,291 180,070
Deferred compensation expense, net (3,070) (671)
Treasury shares, at cost, 343,600 shares (2,637) (2,637)
--------- ---------
Total shareholders' equity 316,437 301,918
--------- ---------
Total liabilities and shareholders' equity $ 751,753 $ 573,406
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
=================================================================================================================
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net sales, excluding sales of
licensed departments $ 441,281 $ 356,755 $1,158,574 $ 940,522
Cost of sales (272,109) (219,575) (719,511) (585,037)
--------- --------- ---------- ---------
Gross profit 169,172 137,180 439,063 355,485
Selling, general and administrative expenses (155,558) (128,749) (416,140) (345,443)
License fees from affiliates 1,640 1,445 4,463 8,552
Other operating income 1,372 1,549 3,933 3,256
--------- --------- ---------- ---------
Operating profit 16,626 11,425 31,319 21,850
Interest expense, net (3,288) (3,557) (8,160) (7,384)
Gain on disposal of assets, net 32 3 79 27
--------- --------- ---------- ---------
Income before equity in loss of
joint venture and provision for income taxes 13,370 7,871 23,238 14,493
Equity in loss of joint venture (168) (1,113) (525) (1,709)
--------- --------- ---------- ---------
Income before provision for income taxes 13,202 6,758 22,713 12,784
Provision for income taxes (5,504) (2,740) (9,492) (4,150)
--------- --------- ---------- ---------
Net income $ 7,698 $ 4,018 $ 13,221 $ 8,634
========= ========= ========== =========
Basic earnings per share $ 0.24 $ 0.12 $ 0.41 $ 0.27
========= ========= ========== =========
Diluted earnings per share $ 0.23 $ 0.12 $ 0.40 $ 0.26
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
===========================================================================================
<CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,221 $ 8,634
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 24,345 23,622
Deferred income taxes and other noncurrent liabilities (5,847) (3,887)
Equity in loss of joint venture 525 1,708
Gain on disposal of assets (59) (26)
Change in working capital, assets and liabilities:
Receivables (6,218) 1,810
Inventories (150,926) (79,338)
Prepaid expenses and other assets (1,864) (1,568)
Accounts payable 72,647 1,584
Accrued expenses 24,930 3,932
--------- ---------
Net cash used in operating activities (29,246) (43,529)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,297) (27,329)
Proceeds from sale of assets 98 44
Acquisitions -- (108,473)
Other assets (5,329) (7,006)
--------- ---------
Net cash used in investing activities (33,528) (142,764)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common shares 937 2,848
Net proceeds under long-term credit facility 67,912 116,959
Net borrowings under demand note facility -- 8,820
--------- ---------
Net cash provided by financing activities 68,849 128,627
--------- ---------
Net increase (decrease) in cash and equivalents 6,075 (57,666)
Cash and equivalents, beginning of period 20,895 68,998
--------- ---------
Cash and equivalents, end of period $ 26,970 $ 11,332
========= =========
Non-cash transactions:
Issuance of restricted shares $ 2,646 --
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 5
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VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
(UNAUDITED)
================================================================================
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Value City Department Stores, Inc. 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," as well as off-price shoe stores, principally
under the name "DSW Shoe Warehouse".
The balance sheet for January 30, 1999 is 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 audited consolidated financial
statements included in the Company's Annual Report on Form 10-K405 for the
Transition Period from August 2, 1998 to January 30, 1999. 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
period financial statements have been reclassified to conform to the
current period presentation. In addition, the income statement presentation
of sales of leased departments has been removed from the income statement
and the related license fee revenue is shown on a separate line of the
income statement to conform with the guidance released on December 3, 1999
in Securities and Exchange Commission Staff Accounting Bulletin No. 101.
2. ACQUISITIONS
On November 19, 1999, the Company purchased 100% of the common stock of
Gramex Retail Stores, Inc. ("Gramex") from Gramex Corporation. Gramex
operated a chain of fifteen discount stores under the name "Grandpa's" in
the greater St. Louis metropolitan area. The purchase price for Gramex was
$13.1 including cash of $8.0 million, 255,949 shares of the Company's
common stock with an agreed value of $4.0 million and an unsecured, 5-year
note of $1.1 million. In conjunction with the acquisition, the Company
satisfied approximately $37.0 million of Gramex bank debt at closing and
assumed certain trade payable and other obligations which will be satisfied
from the proceeds from liquidation of inventory and certain other assets.
The transaction was funded by cash from operations and a $25.0 million, 180
day unsecured bank loan bearing interest at 8.0925%. The acquisition will
be accounted for as a purchase. Allocation of the purchase price will be
determined based on fair market valuation of the net assets acquired.
After liquidation of the existing Grandpa's inventory, 14 of the 15 stores
acquired will be converted to the Value City format, with seven stores
receiving only minor improvements scheduled to be reopened early in the
first quarter of fiscal 2000 and seven stores will be remodeled based on
the current Value City format scheduled to open late in the first quarter.
It is expected that the average costs of opening these stores will be below
the historical average as a result of the condition of the stores. The
lease for one store with terms consistent with current market conditions is
located near an existing store in St. Louis. This location will be assigned
without the payment of additional consideration to Schottenstein Stores
Corporation ("SSC"), direct owner of approximately 56.3% of the Company's
common shares. After completion of the liquidation of the store inventory
and fixtures SSC will reopen the site as a Value City Furniture store.
Effective May 31, 1998, the Company purchased 99.9% of the common stock of
Shonac Corporation ("Shonac") from Nacht Management, Inc. and SSC. The
Company also acquired the store operations of Valley Fair Corporation
("Valley Fair") from SSC. Shonac had operated, as licensee, the shoe
department in the Company's department stores since Shonac's inception in
1969. Shonac also operated a chain of retail shoe outlets located
throughout the United States, principally under the name DSW Shoe
Warehouse. Valley Fair operated two department stores located in Irvington
and Little Ferry, New Jersey. The Company had been a licensee of certain
departments in these two stores for 18 years. The acquisitions were
accounted for using the purchase method of accounting.
page 6
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VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
(UNAUDITED)
================================================================================
Accordingly, the results of operations for the nine months ended October
31, 1998 include the operations of Shonac and Valley Fair for the six month
period beginning May 3, 1998. The following unaudited pro forma consolidated
financial results are presented as if the May 1998 acquisitions had taken place
at the beginning of the fiscal nine month period ended October 31, 1998 (in
thousands, except per share amounts):
<TABLE>
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Net Sales $1,027,411
Net Income $9,842
Basic earnings per share $0.31
Diluted earnings per share $0.30
</TABLE>
3. SEGMENT REPORTING
The Company is managed in two operating segments: Value City Department
Stores and DSW Stores. All of the operations are located in the United
States. The Company has identified such segments based on management
responsibility and measures segment profit as operating profit which is
defined as income before interest expense and income taxes. Corporate
assets include goodwill and loan costs related to the Shonac acquisition.
Prior to the acquisition of Shonac effective May 3, 1998, the Company was
managed as one operating segment.
THREE MONTH PERIOD ENDED OCTOBER 30, 1999 (IN THOUSANDS):
<TABLE>
<CAPTION>
VALUE CITY DSW CORPORATE TOTAL
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<S> <C> <C> <C> <C>
Net sales $376,757 $64,524 $441,281
Operating profit 12,410 4,216 16,626
Capital expenditures 10,247 1,692 11,939
Depreciation and amortization 6,946 562 863 8,371
</TABLE>
NINE MONTH PERIOD ENDED OCTOBER 30,1999 (IN THOUSANDS):
<TABLE>
<CAPTION>
VALUE CITY DSW CORPORATE TOTAL
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<S> <C> <C> <C> <C>
Net sales $979,746 $178,828 $1,158,574
Operating profit 23,011 8,308 31,319
Identifiable assets 696,375 24,655 30,723 751,753
Capital expenditures 24,827 3,470 28,297
Depreciation and amortization 20,224 1,592 2,529 24,345
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
================================================================================
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in the Company's
Consolidated Statements of Income.
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 38.3 38.5 37.9 37.8
Selling, general and
administrative expenses (35.2) (36.1) (35.9) (36.7)
License fees from affiliates
and other operating income 0.7 0.8 0.7 1.2
----- ----- ----- -----
Operating profit 3.8 3.2 2.7 2.3
Interest expense, net (0.8) (1.0) (0.7) (0.8)
Equity in loss of joint venture -- (0.3) -- (0.2)
----- ----- ----- -----
Income before income taxes 3.0 1.9 2.0 1.3
Provision for income taxes (1.3) (0.8) (0.9) (0.4)
----- ----- ----- -----
Net income 1.7% 1.1% 1.1% 0.9%
===== ===== ===== =====
</TABLE>
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
THREE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1998
The Company's net sales increased $84.5 million, or 23.7%, from $356.8
million to $441.3 million. Comparable store sales increased 11.1%. Net sales for
the department stores ("Value City") increased $61.9 million, or 23.3%, from
$265.4 million to $327.3 million. Value City's comparable store sales increased
10.6%, or $27.5 million. The shoe departments in Value City's stores contributed
net sales of $49.5 million with comparable store sales increase of 3.2%. For the
quarter, non-apparel sales increased 14.1% and apparel sales increased 25.9%. On
a comparable store basis, non-apparel sales increased 1.8% and apparel sales
increased 13.0%. DSW Shoe Warehouse ("DSW") achieved sales of $64.5 million with
a 22.7% comparable store sales increase.
Gross profit increased $32.0 million from $137.2 million to $169.2
million, but decreased as a percentage of sales from 38.5% to 38.3% due
primarily to slightly lower initial mark-up in this year's quarter.
Selling, general and administrative expenses ("SG&A") increased $26.9
million from $128.7 million to $155.6 million, but decreased as a percentage of
sales from 36.1% to 35.2%, a reduction of 0.9%. $12.9 million of the increase in
SG&A is attributable to new stores, net of closed stores, approximately $6.8
million relates to home office overhead costs and the remaining $7.2 million
relates to comparable store operations. New store pre-opening expenses for the
quarter were $1.8 million greater than last year.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $4.4 million to $6.5
million and the cost of opening a new shoe store to range from approximately
$1.0 million to $2.0 million including leasehold improvements, fixtures,
inventory, pre-opening expenses and other costs. Preparations for opening a
department store generally takes between eight and twelve weeks, and
preparations for a shoe store generally takes eight to ten weeks. Effective
August 1998, pre-opening costs are expensed as incurred in accordance with
Accounting Standards Executive Committee Statement of Position 98-5. Previously,
such costs were amortized ratably over the first twelve months of the store's
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. Ten department stores opened less than twelve months had a pre-tax
net operating loss of $0.1 million for the current three month period including
$2.0 million of pre-opening expenses. Two stores opened less than 12 months
during last year's three month period had a pre-tax net operating loss of $0.4
million. Six DSW stores opened less than twelve months had a pre-tax net
operating loss of $0.2 million, including $0.3 million of pre-opening expenses.
Five stores opened less than twelve months during last year's three month period
had a negligible pre-tax net operating loss after recognizing $0.2 million of
pre-opening expenses.
License fees from affiliates and other operating income were
approximately $3.0 million for both periods and declined from 0.8% of sales to
0.7%.
Operating profit increased $5.2 million from $11.4 million to $16.6
million and as a percentage of sales increased from 3.2% to 3.8%.
Interest expense, net of interest income, decreased $0.3 million from
$3.6 million to $3.3 million and decreased as a percentage of sales from 1.0% to
0.8%.
Equity in the loss of the joint venture represents the Company's fifty
percent interest in a joint venture with Mazel Stores, Inc. The loss improved
from $(1.1) million to $(0.2) million due primarily to increases in comparable
store sales and improvement in gross margin and SG&A as a percentage of sales.
Income before provision for income taxes increased $6.4 million from $6.8
million to $13.2 million, and increased as a percentage of sales from 1.9% to
3.0% as a result of the above factors.
page 9
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
NINE MONTHS ENDED OCTOBER 30, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1998
Effective May 3, 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 56.3% of the Company's
outstanding common shares. The Company also acquired the store operations of
Valley Fair Corporation ("Valley Fair") from SSC. Shonac had operated, as
licensee, the shoe departments in the Company's department stores since Shonac's
inception in 1969. Shonac also operated a chain of retail shoe outlets located
throughout the United States, principally under the name DSW Shoe Warehouse.
Valley Fair operated two department stores located in Irvington and Little
Ferry, New Jersey. The Company had been a licensee of certain departments in
these two stores for 18 years. The acquisitions were accounted for using the
purchase method of accounting. Accordingly, the nine months ended October 31,
1998 include the results of operations of Shonac and Valley Fair for the six
month period beginning May 3, 1998.
Sales for the nine months increased 12.9% to $1,158.6 million from
$1,026.5 million in the comparable year-earlier period which includes $86.0
million of Shonac Corporation sales prior to its May 3, 1998 acquisition date.
On a comparable store basis sales increased 6.3%. Net sales for the department
stores increased $86.1 million, or 11.3%, from $762.8 million to $848.9 million.
Value City's comparable store sales increased 5.1%, or $38.7 million. The shoe
departments in Value City stores had sales of $130.9 million with a comparable
store sales increase of 0.9%. For the nine months, non-apparel sales increased
7.2% and apparel sales increased 12.5%. On a comparable store basis, non-apparel
sales increased 1.2% and apparel sales increased 6.3%. DSW achieved sales of
$178.8 million with a 19.0% comparable store sales increase.
Gross profit increased $83.6 million from $355.5 million to $439.1
million, and increased as a percentage of sales from 37.8% to 37.9%. The
acquisition of Shonac contributed $122.1 million this year versus $71.8 million
last year. Value City's gross profit increased $33.3 million, or 11.7%, from
$283.7 million to $317.0 million and increased from 37.2% to 37.3% of sales.
Selling, general and administrative expenses ("SG&A") increased $70.7
million from $345.4 million to $416.1 million, but decreased as a percentage of
sales from 36.7% to 35.9%, a reduction of 0.8%. Approximately $27.0 million of
the increase relates to the Shonac acquisition. $20.1 million of the increase in
SG&A is attributable to new stores, net of closed stores, approximately $10.5
million relates to home office overhead costs and the remaining $13.1 million
relates to comparable store operations. New store pre-opening expenses for the
nine month period were $3.6 million greater than last year.
Ten department stores opened less than twelve months had a pre-tax net
operating loss of $2.4 million for the current nine month period, including $3.8
million of pre-opening expenses. Two department stores opened less than twelve
months during last year's nine month period had a pre-tax net operating loss of
$1.0 million, including $0.2 million of pre-opening expenses. DSW stores opened
less than twelve months had a pre-tax net operating loss of $0.6 million for the
current nine month period, including $1.2 million of pre-opening expenses.
License fees from affiliates and other operating income decreased $3.4
million, or 28.9%, from $11.8 million to $8.4 million, and decreased as a
percentage of sales from 1.2% to 0.7%. All of the decrease is attributable to
the consolidation of Shonac previously treated as a licensee.
Operating profit increased $9.4 million from $21.9 million to $31.3
million and as a percentage of sales increased from 2.3% to 2.7%.
Interest expense, net of interest income, increased $0.8 million, or
10.5% from $7.4 million to $8.2 million. This increase is due primarily to the
interest on debt incurred to acquire Shonac and the operations of Valley Fair.
Income before provision for income taxes increased $9.9 million, or
77.7%, from $12.8 million to $22.7 million, and increased as a percentage of
sales from 1.3% to 2.0% as a result of the above factors.
page 10
<PAGE> 11
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 $210.0 at October 30, 1999 compared to $166.5
million at January 30, 1999. Current ratios at those dates were 1.72 and 2.00,
respectively.
Net cash used in operating activities totaled $29.2 million and $43.5
million for the nine months ended October 30, 1999 and October 31, 1998,
respectively.
Net income, adjusted for depreciation and amortization, provided $37.6
million of operating cash flow for the nine months ended October 30, 1999. This
was decreased by $78.3 million representing an increase in inventories net of an
increase in accounts payable. Other changes in working capital assets and
liabilities provided $11.5 million.
During the nine months ended October 31, 1998, net income adjusted for
depreciation and amortization, provided $32.3 million of operating cash flow.
This was reduced by $77.8 million representing an increase in inventories net of
an increase in accounts payable. Other changes in working capital assets and
liabilities provided $2.0 million.
Net cash used by investing activities totaled $33.5 million and $142.8
million for the nine months ended October 30, 1999 and October 31, 1998,
respectively.
Net cash used for capital expenditures was $28.3 million and $27.3
million for the nine months ended October 30, 1999 and October 31, 1998,
respectively. During the 1999 period, capital expenditures included $11.7
million for new stores, $5.3 million on existing stores, $8.4 million for MIS
equipment upgrades and new systems and $2.9 million for other capital
expenditures.
The Company has available a $167.5 million long-term unsecured revolving
bank credit facility with a three year initial term that primarily bears
interest at a floating rate of LIBOR plus 1.50%. The interest rate on $40.0
million has been locked in at a fixed 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, including
minimum tangible net worth; a maximum consolidated debt to earnings before
interest, taxes, depreciation and amortization ratio, a minimum fixed charge
coverage ratio; and, limitations on dividends, incurrance of additional debt and
capital expenditures. At October 30, 1999 the LIBOR rate was 5.41%, borrowings
aggregated $123.0 million and $17.4 million of letters of credit were issued and
outstanding for merchandise purchases under the credit facility. The Company
believes that the cash generated by its operations, along with the available
proceeds from the credit facility will be sufficient to meet its future
obligations including capital expenditures.
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 existing credit facilities and the possible issuance from time
to time of long-term debt or equity securities. Depending upon the conditions in
the capital markets and certain other factors, the Company may from time to time
consider the issuance of debt or equity securities, or other possible capital
market transactions, the proceeds of which could be used to refinance current
indebtedness or for other corporate purposes.
On November 19, 1999, the Company purchased 100% of the common stock of
Gramex Retail Stores, Inc. ("Gramex") from Gramex Corporation. Gramex operated a
chain of fifteen discount stores under the name "Grandpa's" in the greater St.
Louis metropolitan area. The purchase price for Gramex was $13.1 including cash
of $8.0 million, 255,959 shares of the Company's common stock with an agreed
value of $4.0 million and an unsecured, 5-year note of $1.1 million. In
conjunction with the acquisition, the Company satisfied approximately $37.0
million of Gramex bank debt at closing and assumed certain trade payable and
other obligations which will be satisfied from the proceeds from liquidation of
inventory and certain other assets. The transaction was funded by cash from
operations and a $25.0 million, 180 day unsecured bank loan bearing interest at
8.0925%. The acquisition will be accounted for as a purchase. Allocation of the
purchase price will be determined based on fair market valuation of the net
assets acquired.
After liquidation of the existing Grandpa's inventory, 14 stores of the
15 acquired will be converted to the Value City format, with seven stores
receiving only minor improvements scheduled to be reopened early in the first
quarter of fiscal 2000 and seven stores will be remodeled based on the current
Value City format scheduled to open late in the first quarter. It is expected
that the average costs of opening these stores will be below the historical
average as a result of the condition of the stores. The lease for one store with
terms consistent with current market conditions is located near an existing
store in St. Louis. This location will be assigned without the payment of
additional consideration to SSC. After completion of the liquidation of the
store inventory and fixtures SSC will reopen the site as a Value City Furniture
store.
page 11
<PAGE> 12
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
YEAR 2000
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies include
both information technology in the form of hardware and software, as well as
embedded technology in the Company's facilities and equipment. Similar to most
companies, the Company must determine whether its systems are capable of
recognizing and processing date sensitive information properly as the year 2000
approaches. The Company is utilizing a multi-phased concurrent approach to
address this issue. The phases included in the Company's approach are the
awareness, assessment, remediation, validation and implementation phases. The
Company has completed the awareness phase of its project. Furthermore, the
Company has substantially completed the assessment, remediation, validation and
implementation phases of the year 2000 project. The Company is actively
correcting and replacing those systems which are not year 2000 ready in order to
ensure the Company's ability to continue to meet its internal needs as well as
those of its suppliers and customers. While the Company is not presently aware
of any significant exposure that its systems will not be properly remediated,
there can be no assurances that all of the Company's systems are year 2000
compliant. An interruption of the Company's ability to conduct its business due
to a year 2000 readiness problem could have a material adverse effect on the
Company's financial condition.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $8.0 million which includes remediation costs as well as
accelerated strategic capital spending. Remediation costs are expensed as
incurred, while accelerated strategic investments are capitalized to the extent
the investment adds functionally. A significant portion of the remediation costs
represent the redeployment of existing resources and as such are not considered
incremental. Non-incremental remediation costs incurred through October 30, 1999
approximate $3.5 million. The reallocation of existing resources is not expected
to have a significant impact on the day-to-day operations of the Company.
Incremental remediation costs incurred through October 30, 1999 total
approximately $0.9 million. Accelerated capital spending of $2.2 million has
been invested through October 30, 1999. This represents enhancement to existing
systems that were prioritized due to the year 2000 project. Estimated remaining
costs total $1.4 million, comprised of $0.6 million of accelerated strategic
capital spending, $0.7 million of non-incremental remediation costs and $0.1
million of incremental remediation costs. The anticipated impact and costs of
the project are based on management's best estimates using information currently
available and numerous assumptions about future events. Based on its current
estimates and information currently available, the Company does not anticipate
that the costs associated with this project will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows in future periods. However, there can be no guarantee that these estimates
will be achieved and actual results may differ from those plans.
The Company has initiated formal communications with its significant
suppliers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and is testing critical system interfaces. The
Company will develop appropriate contingency plans in the event that a
significant exposure is identified relative to the dependencies on third-party
systems. While the Company is not presently aware of any such significant
exposure, there can be no guarantee that the systems of third-parties on which
the Company relies will be converted in a timely manner, or that a failure to
properly convert by another party would not have a material adverse effect on
the Company.
page 12
<PAGE> 13
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements on Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of the Company's
fiscal year.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The adoption of SFAS No. 133 is not expected to have a significant impact on the
Company's financial statements.
The staff of the Securities and Exchange Commission recently released
Staff Accounting Bulletin ("SAB") No. 101, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the Commission. In accordance with SAB No. 101 the income statement
presentation of sales of leased departments has been removed from the income
statement and the related license fee revenue is shown on a separate line of the
income statement.
INCOME TAXES
The effective tax rate for the nine months ended October 30, 1999 and
October 31, 1998 was 41.8% and 32.5%, respectively. Last year's provision was
reduced by approximately $1.4 million relating to the resolution of certain
federal and state income tax issues.
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 in
this Report, 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 1999 and beyond to differ materially from those
expressed or implied in any such forward-looking statements: decline in demand
for the Company's merchandise, the availability of desirable store locations on
suitable terms, changes in consumer spending patterns, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, the ability of the Company and its vendors and suppliers to
become year 2000 compliant, changes in existing or potential duties, tariffs or
quotas, paper and printing costs, and the ability to hire and train associates.
Historically, the Company's operations have been seasonal, with a
disproportionate amount of sales and a majority of net income occurring in the
back-to-school and Christmas selling seasons. As a result of this seasonality,
any factors negatively affecting the Company during this period, including
adverse weather, the timing and level of markdowns or unfavorable economic
conditions, could have a material adverse effect on the Company's financial
condition and results of operations for the entire year.
page 13
<PAGE> 14
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: December 7, 1999
- --------------------------------------------------------------------------------
* Mr. Wysinski is the principal financial officer and has been duly authorized
to sign on behalf of the registrant.
page 14
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<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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> OCT-30-1999
<CASH> 26,970
<SECURITIES> 0
<RECEIVABLES> 13,801
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<PP&E> 338,801
<DEPRECIATION> 163,536
<TOTAL-ASSETS> 751,753
<CURRENT-LIABILITIES> 292,491
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0
<COMMON> 114,010
<OTHER-SE> 202,427
<TOTAL-LIABILITY-AND-EQUITY> 751,753
<SALES> 1,158,574
<TOTAL-REVENUES> 1,158,574
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<INTEREST-EXPENSE> 8,160
<INCOME-PRETAX> 22,713
<INCOME-TAX> 9,492
<INCOME-CONTINUING> 13,221
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