<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 July 31, 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
---- -----
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 September 8, 1999
- ------------------------------------ ------------------------------------
Common Stock, Without Par Value 32,445,167 Shares
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VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
July 31, 1999 and January 30, 1999 3
Consolidated Statements of Income for the three and
six months ended July 31, 1999 and August 1, 1998 4
Consolidated Statements of Cash Flows for the
six months ended July 31, 1999 and August 1, 1998 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 13
Item 6. Exhibits and Reports on Form 8-K
Part A: Exhibit 27 Financial Data Schedule for Second Quarter Form 10-Q 14
Part B: Reports on Form 8-K N/A
</TABLE>
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VALUE CITY DEPARTMENT STORES, INC.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
JULY 31, JANUARY 30,
1999 1999
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 13,206 $ 20,895
Accounts receivable, net 14,685 6,996
Receivables from affiliates 668 587
Inventories 381,156 286,029
Prepaid expenses and other assets 7,141 4,384
Deferred income taxes 16,013 14,441
--------- ---------
Total current assets 432,869 333,332
Property and equipment, at cost:
Furniture, fixtures and equipment 175,906 168,270
Leasehold improvements 135,338 126,857
Land and building 1,097 986
Capital leases 15,276 15,276
--------- ---------
327,617 311,389
Accumulated depreciation and amortization (156,748) (143,208)
--------- ---------
Property and equipment, net 170,869 168,181
Investment in joint venture 8,035 8,391
Goodwill and tradenames, net 43,922 45,519
Other assets 21,136 17,983
--------- ---------
Total assets $ 676,831 $ 573,406
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148,653 $ 110,312
Accounts payable to affiliates 8,412 3,687
Accrued expenses:
Compensation 9,076 6,617
Taxes 19,952 12,925
Other 19,775 24,037
Current maturities of long-term obligations 20,266 9,259
--------- ---------
Total current liabilities 226,134 166,837
Long-term obligations, net of current maturities 141,382 101,447
Deferred income taxes and other noncurrent liabilities 1,251 3,204
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including treasury shares, 32,770,467 shares and
32,637,617 shares, respectively 113,543 113,073
Contributed capital 13,089 12,083
Retained earnings 185,593 180,070
Deferred compensation expense, net (1,524) (671)
Treasury shares, at cost, 343,600 shares (2,637) (2,637)
--------- ---------
Total shareholders' equity 308,064 301,918
--------- ---------
Total liabilities and shareholders' equity $ 676,831 $ 573,406
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 3
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VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total sales $ 393,463 $ 357,033 $ 756,340 $ 658,382
Less licensed departments sales (20,651) (18,055) (39,047) (74,615)
----------- ----------- ----------- -----------
Net owned sales 372,812 338,978 717,293 583,767
Cost of sales (232,543) (210,986) (447,402) (365,461)
----------- ----------- ----------- -----------
Gross profit 140,269 127,992 269,891 218,306
Selling, general and administrative expenses (133,731) (123,677) (260,582) (216,705)
License fees from affiliates
and other operating income 2,929 2,557 5,384 8,825
----------- ----------- ----------- -----------
Operating profit 9,467 6,872 14,693 10,426
Interest expense, net (2,424) (3,272) (4,872) (3,828)
Gain on disposal of assets, net 34 19 47 24
----------- ----------- ----------- -----------
Income before equity in loss of
joint venture and provision for income taxes 7,077 3,619 9,868 6,622
Equity in loss of joint venture (245) (459) (356) (595)
----------- ----------- ----------- -----------
Income before provision for income taxes 6,832 3,160 9,512 6,027
Provision for income taxes (2,870) (233) (3,988) (1,411)
----------- ----------- ----------- -----------
Net income $ 3,962 $ 2,927 $ 5,524 $ 4,616
=========== =========== =========== ===========
Basic and diluted earnings per share $ 0.12 $ 0.09 $ 0.17 $ 0.14
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JULY 31, AUGUST 1,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,524 $ 4,616
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,974 14,713
Deferred income taxes and other noncurrent liabilities (3,525) (2,686)
Equity in loss of joint venture 356 595
Gain on disposal of assets (47) (24)
Change in working capital, assets and liabilities:
Receivables (7,770) 2,159
Inventories (95,127) (76,119)
Prepaid expenses and other assets (2,757) (1,779)
Accounts payable 43,066 25,320
Accrued expenses 5,038 11,791
--------- ---------
Net cash used in operating activities (39,268) (21,414)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (16,358) (19,584)
Proceeds from sale of assets 73 36
Acquisitions -- (108,473)
Other assets (3,548) (6,338)
--------- ---------
Net cash used in investing activities (19,833) (134,359)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (principal payments) under long-term obligations 50,942 (20,236)
Net proceeds from issuance of common shares 470 2,588
Net proceeds from issuance of long-term obligations -- 137,225
--------- ---------
Net cash provided by financing activities 51,412 119,577
--------- ---------
Net decrease in cash and equivalents (7,689) (36,196)
Cash and equivalents, beginning of period 20,895 68,998
--------- ---------
Cash and equivalents, end of period $ 13,206 $ 32,802
========= =========
Non-cash transactions:
Issuance of restricted shares $ 996 --
</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 SIX MONTHS ENDED JULY 31, 1999 AND AUGUST 1, 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 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 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.
2. ACQUISITIONS
Effective May 31, 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 60% 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 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. Accordingly, the
results of operations for the six months ended August 1, 1998 include the
operations of Shonac and Valley Fair for the three month period beginning
May 3, 1998.
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 JULY 31, 1999:
<TABLE>
<CAPTION>
VALUE CITY DSW CORPORATE TOTAL
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<S> <C> <C> <C> <C>
Net owned sales $314,911 $57,901 $372,812
Operating profit 7,371 2,096 9,467
Capital expenditures 8,638 1,192 9,830
Depreciation and amortization 6,667 580 843 8,090
</TABLE>
SIX MONTH PERIOD ENDED JULY 31, 1999:
<TABLE>
<CAPTION>
VALUE CITY DSW CORPORATE TOTAL
---------- --- --------- -----
<S> <C> <C> <C> <C>
Net owned sales $602,989 $114,304 $717,293
Operating profit (loss) 10,601 4,092 14,693
Identifiable assets 602,939 43,407 30,485 676,831
Capital expenditures 14,580 1,778 16,358
Depreciation and amortization 13,278 1,030 1,666 15,974
</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 owned sales of the listed items included in the Company's
Consolidated Statements of Income.
<TABLE>
<CAPTION>
3 Months Ended Six Months Ended
----------------------------- ------------------------------
July 31,1999 August 1, 1988 July 31, 1999 August 1, 1998
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 37.6 37.8 37.6 37.4
Selling, general and
administrative expenses (35.9) (36.5) (36.3) (37.1)
License fees from affiliates
and other operating income 0.8 0.8 0.8 1.5
----- ----- ----- -----
Operating profit 2.5 2.1 2.1 1.8
Interest expense, net (0.6) (1.0) (0.7) (0.7)
Equity in loss of joint venture (0.1) (0.1) -- (0.1)
----- ----- ----- -----
Income before income taxes 1.8 1.0 1.4 1.0
Provision for income taxes (0.7) (0.1) (0.6) (0.2)
----- ----- ----- -----
Net income 1.1% 0.9% 0.8% 0.8%
===== ===== ===== =====
</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 JULY 31, 1999 COMPARED TO THREE MONTHS ENDED AUGUST 1, 1998
The Company's total sales, which include licensed departments sales,
increased $36.5, or 10.2%, million from $357.0 million to $393.5 million.
Comparable store sales increased 6.2%. Net owned sales for the department stores
("Value City") increased $23.4 million, or 9.2%, from $252.6 million to $276.0
million. Value City's comparable store owned sales increased 5.3%, or $13.2
million. The shoe departments in Value City's stores contributed net owned
sales of $38.9 million with comparable store sales decrease of 2.8%. For
the quarter, non-apparel owned sales increased 4.8% and apparel sales
increased 10.7%. On a comparable store basis, non-apparel sales increased
0.4% and apparel sales increased 6.9%. DSW Shoe Warehouse ("DSW") achieved
sales of $57.9 million with a 21% comparable store sales increase.
Gross profit increased $12.3 million from $128.0 million to $140.3
million, but decreased as a percentage of owned sales from 37.8% to 37.6%. The
acquisition of Shonac contributed $38.6 million this year versus $33.9 million
last year. Value City's gross profit increased $7.6 million, or 8.1%, from $94.1
million to $101.7 million, but decreased as a percentage of owned sales from
37.2% to 36.8% due primarily to lower initial markup.
Selling, general and administrative expenses ("SG&A") increased $10.0
million from $123.7 million to $133.7 million, but decreased as a percentage of
owned sales from 36.5% to 35.9%, a reduction of 0.6%. $5.8 million of the
increase in SG&A is attributable to new stores, net of closed stores,
approximately $1.6 million relates to home office overhead costs and the
remaining $2.6 million relates to comparable store operations. New store
pre-opening expenses for the quarter were $1.7 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 take between eight and twelve weeks, and preparations
for a shoe store generally take 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. Four department stores opened less than twelve months had a pre-tax
net operating loss of $0.7 million for the current three month period including
$0.7 million of pre-opening expenses. An additional $1.1 million of
pre-opening costs were expensed during the current three month period for six
stores not yet opened. Two stores opened less than 12 months during last year's
three month period had a pre-tax net operating loss of $0.2 million. Four DSW
stores opened less than twelve months had a pre-tax net operating loss of
$0.2 million, including $0.5 million of pre-opening expenses. Twelve stores
opened less than twelve months during last year's three month period had a
negligible pre-tax net operating loss after recognizing $1.4 million of
pre-opening expenses.
License fees from affiliates and other operating income increased $0.3
million, or 14.5%, from $2.6 million to $2.9 million, and remained flat as a
percentage of owned sales at 0.8%.
Operating profit increased $2.6 million from $6.9 million to $9.5
million. The percentage of owned sales increased from 2.1% to 2.5%.
Interest expense, net of interest income, decreased $0.9 million from
$3.3 million to $2.4 million and decreased as a percentage of owned sales from
1.0% to 0.6%.
Equity in the unconsolidated joint venture represents the Company's fifty
percent interest in VCM's operating results for the quarter.
Income before provision for income taxes increased $3.6 million from $3.2
million to $6.8 million, and increased as a percentage of owned sales from 1.0%
to 1.8% 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.
===============================================================================
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED AUGUST 1, 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 six months ended July 31, 1999
include the results of operations of Shonac and Valley Fair for the three month
period beginning May 3, 1998. As the Company operated as one segment for the
period ended May 2, 1998, the discussion that follows compares operations before
and after the acquisition.
The Company's total sales, which include licensed departments sales,
increased $97.9 million, or 14.9%, from $658.4 million to $756.3 million. Last
years total sales excludes $48.0 million of DSW sales prior to the acquisition.
On a comparable store basis sales increased 3.7%. Net owned sales for the
department stores increased $24.2 million, or 4.9%, from $497.4 million to
$521.6 million. Value City's comparable store owned sales increased 2.3%, or
$11.2 million. The shoe departments in Value City stores had sales of $81.3
million with a comparable store sales decrease of 0.3%. For the six months,
non-apparel owned sales increased 3.9% and apparel sales increased 5.2%. On a
comparable store basis, non-apparel sales increased 1.0% and apparel sales
increased 2.7%. DSW achieved sales of 114.3 million with a 17.1% comparable
store sales increase.
Gross profit increased $51.6 million from $218.3 million to $269.9 million,
and increased 0.2% as a percentage of owned sales from 37.4% to 37.6%. The
acquisition of Shonac contributed $76.6 million this year versus $33.9 million
last year. Value City's gross profit increased $8.9 million, or 4.8%, from
$184.4 million to $193.3 million and remained at 37.1% as a percentage of owned
sales.
Selling, general and administrative expenses ("SG&A") increased $43.9
million from $216.7 million to $260.6 million, but decreased as a percentage of
owned sales from 37.1% to 36.3%, a reduction of 0.8%. Approximately $27 million
of the increase relates to the Shonac acquisition. New stores accounted for
approximately $6.4 million of the increase with the remainder attributable to
comparable stores and home office expenses. New store pre-opening expenses for
the six month period were $1.5 million greater than last year.
Four department stores opened less than twelve months had a pre-tax net
operating loss of $1.3 million for the current six month period, including $0.7
million of pre-opening expenses. An additional $1.1 million of pre-opening costs
were expensed during the current six month period for six stores not yet opened.
Two department stores opened less than twelve months during last year's six
month period had a pre-tax net operating loss of $0.7 million, including $0.2
million of pre-opening expenses. DSW stores opened less than twelve months had a
pre-tax net operating loss of $0.7 million for the current six month period,
including $0.5 million of pre-opening expenses.
License fees from affiliates and other operating income decreased $3.4
million, or 39.0%, from $8.8 million to $5.4 million, and decreased as a
percentage of owned sales from 1.5% to 0.8%. All of the decrease is attributable
to the consolidation of Shonac previously treated as a licensee.
Operating profit increased $4.3 million from $10.4 million to $14.7
million. The percentage of owned sales increased from 1.8% to 2.1%.
Interest expense, net of interest income, increased $1.1 million, or 27.3%
from $3.8 million to $4.9 million. This increase is due primarily to the
interest on debt incurred to acquire Shonac and the operations of Valley Fair.
Equity in the unconsolidated joint venture represents the Company's fifty
percent interest in VCM's operating results.
Income before provision for income taxes increased $3.5 million, or 57.8%
from $6.0 million to $9.5 million, and increased as a percentage of owned sales
from 1.0% to 1.4% 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 $206.7 at July 31, 1999 compared to $166.5 million
at January 30, 1999. Current ratios at those dates were 1.91 and 2.0,
respectively.
Net cash used in operating activities totaled $39.3 million and $21.4
million for the six months ended July 31, 1999 and August 1, 1998, respectively.
Net income, adjusted for depreciation and amortization, provided $21.5
million of operating cash flow for the six months ended July 31, 1999. This was
decreased by $52.1 million representing an increase in inventories net of an
increase in accounts payable. Other changes in working capital assets and
liabilities used $8.7 million.
During the six months ended August 1, 1998, net income adjusted for
depreciation and amortization, provided $19.3 million of operating cash flow.
This was reduced by $50.8 million representing an increase in inventories net of
an increase in accounts payable. Other changes in working capital assets and
liabilities provided $10.1 million.
Net cash used by investing activities totaled $19.8 million and $134.4
million for the six months ended July 31, 1999 and August 1, 1998, respectively.
Net cash used for capital expenditures was $16.4 million and $19.6 million
for the six months ended July 31, 1999 and August 1, 1998, respectively. During
the 1999 period, capital expenditures included $5.6 million for new stores, $4.5
million on existing stores, $4.6 million for MIS equipment upgrades and new
systems and $1.7 million for other capital expenditures.
The Company has available a $167.5 million long-term unsecured revolving
bank credit facility with a three year 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 July 31, 1999 the LIBOR rate was 5.18%, borrowings aggregated
$106.0 million and $26.5 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.
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 phase and is well into the
remediation, validation and implementation phase. 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 and those of
its suppliers and customers. The Company currently intends to substantially
complete the remediation, validation and implementation phases of the year 2000
project prior to November 1999. This process includes the testing of critical
systems to ensure that year 2000 readiness has been accomplished. The Company
currently believes it will be able to modify, replace, or mitigate its affected
systems in time to avoid any material detrimental impact on its operations. If
the Company determines that it may be unable to remediate and properly test
affected systems on a timely basis, the Company intends to develop appropriate
contingency plans for any such mission-critical systems at the time such
determination is made. While the Company is not presently aware of any
significant exposure that its systems will not be properly remediated on a
timely basis, there can be no assurances that all of the Company's systems will
be 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 $6.0 million to $6.5 million, including costs already
incurred. A significant portion of these costs are not likely to be incremental
costs, but rather will represent the redeployment of existing employees and
equipment. This reallocation of resources is not expected to have a significant
impact on the day-to-day operations of the Company. Total costs of approximately
$6.0 million have been incurred by the Company for this project through July 31,
1999. The anticipated impact and costs of the project, as well as the date on
which the Company expects to complete 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 could differ materially from those plans.
page 10
<PAGE> 11
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
===============================================================================
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 intends to test critical system interfaces,
as the year 2000 approaches. 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.
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.
INCOME TAXES
The effective tax rate for the six months ended July 31, 1999 and August 1,
1998 was 41.9% and 23.4%, 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.
page 11
<PAGE> 12
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
===============================================================================
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 12
<PAGE> 13
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: September 10, 1999
- ------------------------
- -------------------------------------------------------------------------------
* Mr. Wysinski is the principal financial officer and has been duly
authorized to sign on behalf of the registrant.
page 13
<TABLE> <S> <C>
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> JUL-31-1999
<CASH> 13,206
<SECURITIES> 0
<RECEIVABLES> 15,353
<ALLOWANCES> 0
<INVENTORY> 381,156
<CURRENT-ASSETS> 432,869
<PP&E> 327,617
<DEPRECIATION> 156,748
<TOTAL-ASSETS> 676,831
<CURRENT-LIABILITIES> 226,134
<BONDS> 0
0
0
<COMMON> 113,543
<OTHER-SE> 194,521
<TOTAL-LIABILITY-AND-EQUITY> 676,831
<SALES> 717,293
<TOTAL-REVENUES> 717,293
<CGS> 447,402
<TOTAL-COSTS> 707,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,872
<INCOME-PRETAX> 9,512
<INCOME-TAX> 3,988
<INCOME-CONTINUING> 5,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,524
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
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