<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 28, 2000
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
-------
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1322832
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3241 Westerville Road, Columbus, Ohio 43224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 471-4722
--------------
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 DECEMBER 7, 2000
------------------------------- -------------------------------
Common Stock, Without Par Value 33,568,779 Shares
<PAGE> 2
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
October 28, 2000 and January 29, 2000 3
Consolidated Statements of Operations for the three and
nine months ended October 28, 2000 and October 30, 1999 4
Consolidated Statements of Cash Flows for the nine months
ended October 28, 2000 and October 30, 1999 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 13
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 November 3, 2000
relating to Item 5 - "Other Items".
</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)
================================================================================
<TABLE>
<CAPTION>
OCTOBER 28, JANUARY 29,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 5,114 $ 6,027
Accounts receivable, net 50,528 10,131
Receivables from affiliates 10,260 299
Inventories 502,916 412,479
Prepaid expenses and other assets 7,723 8,544
Deferred income taxes 25,919 18,052
--------- ---------
Total current assets 602,460 455,532
Property and equipment, at cost:
Furniture, fixtures and equipment 230,123 191,632
Leasehold improvements 169,153 142,066
Land and building 4,996 1,376
Capital leases 38,203 42,328
--------- ---------
442,475 377,402
Accumulated depreciation and amortization (197,553) (169,907)
--------- ---------
Property and equipment, net 244,922 207,495
Investment in joint venture 8,941 9,679
Goodwill and tradenames, net 55,202 45,566
Lease acquisition costs, net 32,571 11,825
Other assets 42,950 14,084
--------- ---------
Total assets $ 987,046 $ 744,181
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 213,467 $ 164,196
Accounts payable to affiliates 30,865 4,532
Accrued expenses:
Compensation 19,035 17,118
Taxes 29,570 22,604
Other 57,122 41,611
Current maturities of long-term obligations 539 460
--------- ---------
Total current liabilities 350,598 250,521
Long-term obligations, net of current maturities 356,597 144,168
Deferred income taxes and other noncurrent liabilities 6,859 7,131
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized; issued, including
treasury shares, 33,572,530 shares and
32,992,122 shares, respectively 121,607 114,733
Contributed capital 18,620 17,868
Retained earnings 134,054 212,946
Deferred compensation expense, net (1,230) (2,513)
Treasury shares, at cost, 7,651 shares and 87,651 shares, respectively
shares respectively (59) (673)
--------- ---------
Total shareholders' equity 272,992 342,361
--------- ---------
Total liabilities and shareholders' equity $ 987,046 $ 744,181
========= =========
</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 OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales, excluding sales of licensed departments $ 559,820 $ 441,281 $ 1,550,119 $1,158,574
Cost of sales (446,973) (272,109) (1,059,252) (719,511)
--------- --------- ----------- ----------
Gross profit 112,847 169,172 490,867 439,063
Selling, general and administrative expenses (235,835) (155,558) (607,090) (416,140)
License fees from affiliates 1,599 1,640 6,248 4,463
Other operating income 614 1,372 2,048 3,933
--------- --------- ----------- ----------
Operating (loss) profit (120,775) 16,626 (107,927) 31,319
Interest expense, net (7,873) (3,288) (21,191) (8,160)
(Loss) gain on disposal of assets, net (597) 32 244 79
--------- --------- ----------- ----------
(Loss) income before equity in loss of joint
venture and benefit (provision) for income taxes (129,245) 13,370 (128,874) 23,238
Equity in loss of joint venture (551) (168) (712) (525)
--------- --------- ----------- ----------
(Loss) income before benefit (provision) for
income taxes (129,796) 13,202 (129,586) 22,713
Benefit (provision) for income taxes 50,781 (5,504) 50,694 (9,492)
--------- --------- ----------- ----------
Net (loss) income $ (79,015) $ 7,698 $ (78,892) $ 13,221
========= ========= =========== ==========
Basic (loss) earnings per share $ (2.35) $ 0.24 $ (2.36) $ 0.41
========= ========= =========== ==========
Diluted (loss) earnings per share $ (2.35) $ 0.23 $ (2.36) $ 0.40
========= ========= =========== ==========
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (78,892) $ 13,221
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 32,854 24,345
Deferred income taxes and other noncurrent liabilities (32,183) (5,847)
Equity in loss of joint venture 712 525
Gain on disposal of assets (244) (59)
Change in working capital, assets and liabilities
excluding effect of acquisition:
Receivables (48,154) (6,218)
Inventories (64,224) (150,926)
Prepaid expenses and other assets 3,165 (1,864)
Accounts payable 59,983 72,647
Accrued expenses 10,809 24,930
--------- ---------
Net cash used in operating activities (116,174) (29,246)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (55,052) (28,297)
Proceeds from sale of assets 359 98
Acquisitions (3,506) --
Other assets and lease acquisition costs (14,392) (5,329)
--------- ---------
Net cash used in investing activities (72,591) (33,528)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common shares 1,374 937
Net proceeds under long-term credit facility 186,478 67,912
--------- ---------
Net cash provided by financing activities 187,852 68,849
--------- ---------
Net (decrease) increase in cash and equivalents (913) 6,075
Cash and equivalents, beginning of period 6,027 20,895
--------- ---------
Cash and equivalents, end of period $ 5,114 $ 26,970
========= =========
Non-cash transactions:
Issuance of common shares related to acquisition $ 5,500
Contribution made in treasury shares $ 1,080
Issuance of restricted shares $ 2,646
</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 OCTOBER 28, 2000 AND OCTOBER 30, 1999
(UNAUDITED)
================================================================================
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," as well as 19 Filene's
Basement stores specializing in high-end brand name men's and women's
apparel, accessories and home goods and a chain of better-branded off-price
shoe stores under the name "DSW Shoe Warehouse."
To facilitate comparisons with the current year, certain amounts in prior
years' financial statements have been reclassified to conform to the
current year presentation.
2. ACQUISITIONS
On March 17, 2000, the Company completed through its wholly owned
subsidiary, Base Acquisition Corp. ("Base Acquisition"), the acquisition of
substantially all of the assets and assumed certain liabilities of Filene's
Basement Corp., a Massachusetts corporation, and Filene's Basement, Inc., a
wholly owned subsidiary of Filene's Basement Corp. (collectively,
"Filene's") pursuant to the closing of an asset purchase agreement, dated
February 2, 2000.
The purchase price included cash of $3.5 million paid at closing, and
403,208 shares of the Company's common stock with an agreed value of $5.5
million and the assumption of specified liabilities. The assumed
liabilities included the payment of amounts outstanding under Filene's
debtor-in-possession financing facility of approximately $30.6 million and
certain trade payable and other obligations which will be paid in the
ordinary course. The acquisition was accounted for as a purchase.
Accordingly, the results of operations include the operations of Filene's
from the date of acquisition. Preliminary amounts have been determined
using available financial information and management estimates. Final
allocation of the purchase price will be determined based on the completion
of a fair market valuation of the net assets acquired and settlement of
certain matters with the creditors committee.
The acquisition was funded by cash from operations and a portion of the
proceeds from the New Bank Facility.
The following unaudited pro forma consolidated financial results are
presented as if the acquisition had taken place at the beginning of the
respective fiscal years. The pro forma results are not indicative of
results of operations in the future or in the period presented below.
Included in the pro forma results are the adjustments to depreciation and
amortization based on the purchase price allocation, the effects of the
issuance of additional common shares and interest on acquisition related
borrowings (in thousands, except per share amounts):
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net Sales $1,583,520 $1,424,309
Net Loss $ (82,824) $ (40,610)
Basic and diluted loss per share $ (2.47) $ (1.22)
</TABLE>
page 6
<PAGE> 7
3. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW Stores and Filene's Basement stores, acquired effective March
17, 2000. 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, other non-operating income and income taxes.
Corporate assets include goodwill and loan costs related to acquisitions.
THREE MONTH PERIOD ENDED OCTOBER 28, 2000: (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
VALUE CITY DSW FILENE'S CORPORATE TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $ 375,525 $111,472 $72,823 $ 559,820
Operating (loss) profit (125,027) 5,906 (1,654) (120,775)
Capital expenditures 14,298 3,891 2,383 20,572
Depreciation and amortization 8,884 785 3,272 928 $13,869
</TABLE>
NINE MONTH PERIOD ENDED OCTOBER 28, 2000: (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
VALUE CITY DSW FILENE'S CORPORATE TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $1,086,432 $300,998 $162,689 $1,550,119
Operating (loss) profit (127,050) 15,048 4,075 (107,927)
Capital expenditures 42,473 9,720 2,859 55,052
Depreciation and amortization 23,570 2,191 4,272 2,821 32,854
Identifiable assets 720,346 98,373 139,526 28,801 $ 987,046
</TABLE>
4. LONG-TERM CREDIT FACILITY
The Company has amended and restated its $300 million bank credit facility
with its existing lenders. The facility, which expires on March 15, 2003,
provides for revolving and overnight loans and letters of credit.
Outstanding advances are secured by a lien on assets and are subject to a
monthly borrowing base of eligible inventories and receivables, as defined.
The new agreement has certain restrictive covenants and financial ratio
tests conducive to the companies operating strategies.
The Company has also completed a $50 million subordinated secured credit
facility with its parent company, Schottenstein Stores Corporation ("SSC"),
an affiliate of the Company, to supplement operating cash requirements.
Outstanding advances under the agreement are subordinated to the bank
credit facility and are subject to a junior lien on assets securing the
bank credit facility.
Additionally, pursuant to terms of the $75 million Senior Subordinated
Convertible Loan Agreement, dated as of March 15, 2000, SSC has purchased
the outstanding balance under the same continuing terms.
5. NON-RECURRING PRE-TAX CHARGES
Third quarter cost of goods sold reflects a $87.4 million charge for the
realignment of excess inventory quantities. Third quarter SG&A expense
includes $3.0 million of severance and asset impairment costs. Severance
payments will extend through approximately October 2001.
6. ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS",
("SAB 101"), which provides guidance on applying generally accepted
accounting principles for recognizing revenue. SAB 101, as amended, is
effective for the fourth quarter 2000. The Company implemented SAB 101
during Fiscal 1999.
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") and in 1999 amended
certain provisions of that Standard with SFAS No. 138. The Company will
adopt the provisions of SFAS Nos. 133 and 138 effective February 4, 2001.
Based upon the review performed, management believes that the effect of
adoption will not be significant (material) to the Company's results of
operations, financial position or cash flows.
page 7
<PAGE> 8
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>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ----------------------------------
OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 28, 2000 OCTOBER 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
Gross profit 20.1 38.3 31.7 37.9
Selling, general and
administrative expenses (42.1) (35.2) (39.2) (35.9)
License fees from affiliates 0.3 0.4 0.4 0.4
Other operating income 0.1 0.3 0.1 0.3
----- ----- ----- -----
Operating (loss) profit (21.6) 3.8 (7.0) 2.7
Interest expense, net and
(loss) gain on disposals (1.5) (0.8) (1.4) (0.7)
Equity in loss of joint venture (0.1) -- -- (0.1)
----- ----- ----- -----
(Loss) income before benefit (provision)
for income taxes (23.2) 3.0 (8.4) 1.9
Benefit (provision) for income taxes 9.1 (1.3) 3.3 (0.8)
----- ----- ----- -----
Net (loss) income (14.1)% 1.7% (5.1)% 1.1%
===== ===== ===== =====
</TABLE>
page 8
<PAGE> 9
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
THREE MONTHS ENDED OCTOBER 28, 2000 COMPARED TO THREE MONTHS ENDED
OCTOBER 30, 1999
The Company's net sales increased $118.5 million, or 26.9%, from $441.3
million to $559.8 million. Comparable store sales decreased 4.3%. Net sales for
the department stores ("Value City") decreased $7.1 million, or 2.2%, from
$327.3 million to $320.2 million. Value City's comparable store sales decreased
10.1%, or $30.2 million. The shoe departments in Value City's stores contributed
net sales of $53.8 million with comparable store sales increase of 4.5%. For the
quarter, non-apparel sales decreased 1.7% and apparel sales decreased 2.3%. On a
comparable store basis, non-apparel sales decreased 10.0% and apparel sales
decreased 10.1%. DSW Shoe Warehouse ("DSW") achieved sales of $111.5 million
with a 18.3% comparable store sales increase. This quarter includes $72.8
million of net sales for the Filene's Basement stores acquired effective March
17, 2000.
Gross profit decreased $56.4 million from $169.2 million to $112.8
million, and decreased as a percentage of sales from 38.3% to 20.1% due
primarily to a $87.4 million charge to address excess inventory quantities.
Selling, general and administrative expenses ("SG&A") increased $80.2
million from $155.6 million to $235.8 million, and increased as a percentage of
sales from 35.2% to 42.1%. $25.0 million of the increase in SG&A is attributable
to new stores, net of closed stores, increased distribution and transportation
costs account for $9.9 million, approximately $16.2 million related to home
office overhead costs and $4.0 million related to comparable store operations.
SG&A expenses for Filene's Basement were $25.1 million. New store pre-opening
expenses for the quarter were $1.6 million more than last year. Home office
overhead costs include $3.0 million of severance and asset impairment costs.
Additional charges of approximately $19.6 million are expected during the fourth
quarter 2000.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $4.5 million to $6.5
million and the cost of opening a new shoe store to range from approximately
$1.1 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 takes eight to ten weeks. Pre-opening costs are
expensed as incurred. 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. Twenty-six department stores opened less than twelve
months had a pre-tax net operating loss of $5.4 million for the current three
month period including $0.9 million of pre-opening expenses. Ten stores opened
less than 12 months during last year's three month period had a pre-tax net
operating loss of $1.0 million. Twenty-three DSW stores opened less than twelve
months had a pre-tax net operating loss of $2.7 million, including $1.6 million
of pre-opening expenses. Six stores opened less than twelve months during last
year's three month period had a pre-tax net operating loss of $0.2 million after
recognizing $0.3 million of pre-opening expenses.
License fees from affiliates and other operating income decreased from
$3.0 million to $2.2 million and decreased as a percentage of sales from 0.7% of
sales to 0.4%.
The Company is reporting a consolidated operating loss of $120.8 million
for the quarter compared to a consolidated operating profit of $16.6 million.
Interest expense, net of interest income, increased $4.6 million from
$3.3 million to $7.9 million and increased as a percentage of sales from 0.8% to
1.5%. The increase is due primarily to increased borrowings for the acquisition
of Gramex Retail Stores, Inc. and Filene's Basement, new store openings and an
increase in inventory levels.
Equity in the loss of the joint venture represents the Company's fifty
percent interest in VCM, Ltd. ("VCM"), a joint venture with Mazel Stores, Inc.
The loss increased from $168 thousand versus a loss of $551 thousand.
A loss of $129.8 million before benefit from income taxes was reported In
the current year third quarter. In the prior year period, income before
provision for income taxes was $13.2 million.
page 9
<PAGE> 10
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
NINE MONTHS ENDED OCTOBER 28, 2000 COMPARED TO NINE MONTHS ENDED
OCTOBER 30, 1999
================================================================================
The Company's net sales increased $391.5 million, or 33.8%, from $1,158.6
million to $1,550.1 million. Comparable store sales increased 1.5%. Net sales
for the department stores ("Value City") increased $85.0 million, or 10.0%, from
$848.9 million to $933.9 million. Value City's comparable store sales decreased
3.2%, or $26.3 million. The shoe departments in Value City's stores contributed
net sales of $148.3 million with comparable store sales increase of 4.9%. For
the nine months ended October 28, 2000, non-apparel and apparel sales increased
10.0%. On a comparable store basis, non-apparel sales decreased 4.4% and apparel
sales decreased 2.7%. DSW Shoe Warehouse ("DSW") achieved sales of $301.0
million with a 21.7% comparable store sales increase. This year's nine months
ended October 28, 2000 includes $162.7 million of net sales for the Filene's
Basement stores acquired effective March 17, 2000.
Gross profit increased $51.8 million from $439.1 million to $490.9
million, and decreased as a percentage of sales from 37.9% to 31.7% due
primarily to the previously mentioned $87.4 million realignment charge.
Selling, general and administrative expenses ("SG&A") increased $191.0
million from $416.1 million to $607.1 million, and increased as a percentage of
sales from 35.9% to 39.2%. $77.3 million of the increase in SG&A is attributable
to new stores, net of closed stores, increased distribution and transportation
costs account for $28.7 million, approximately $19.7 million related to home
office overhead costs and $12.2 million related to comparable store operations.
SG&A expenses for Filene's Basement were $53.1 million. New store pre-opening
expenses for the nine month period were $6.0 million greater than last year.
Twenty-six department stores opened less than twelve months had a pre-tax
net operating loss of $14.2 million for the current nine month period including
$4.8 million of pre-opening expenses. Ten stores opened less than 12 months
during last year's nine month period had a pre-tax net operating loss of $2.4
million. Twenty-three DSW stores opened less than twelve months had a pre-tax
net operating loss of $2.3 million, including $4.6 million of pre-opening
expenses. Ten DSW stores opened less than twelve months during last year's nine
month period had a pre-tax net operating loss of $0.6 million after recognizing
$1.2 million of pre-opening expenses.
License fees from affiliates and other operating income decreased from
$8.4 million to $8.3 million and decreased as a percentage of sales from 0.7% of
sales to 0.5%.
The Company is reporting a consolidated operating loss of $107.9 million
for the nine month period compared to a consolidated operating profit of $31.3
million for last year's nine month period.
Interest expense, net of interest income, increased $13.0 million from
$8.2 million to $21.2 million and increased as a percentage of sales from 0.7%
to 1.4%. The increase is due primarily to increased borrowings for the
acquisition of Gramex Retail Stores, Inc. and Filene's Basement, new store
openings and an increase in inventory levels.
Equity in the loss of the joint venture represents the Company's fifty
percent interest in VCM. The loss increased from $525 thousand to $712 thousand.
A loss of $129.6 million before benefit from income taxes was reported
for the nine month period. In the prior year period income before provision for
income taxes was $22.7 million.
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 $251.9 million at October 28, 2000 compared to
$205.0 million at January 29, 2000. Current ratios at those dates were each 1.72
and 1.82, respectively.
Net cash used in operating activities totaled $116.2 million and $29.2
million for the nine months ended October 28, 2000 and October 30, 1999,
respectively.
Net loss, adjusted for depreciation and amortization, used $46.0 million of
operating cash flow for the nine months ended October 28, 2000. This was
increased by $4.2 million representing an increase in inventories net of an
increase in accounts payable. Other changes in working capital assets and
liabilities used $66.0 million.
During the nine months ended October 30, 1999, net income adjusted for
depreciation and amortization, provided $37.6 million of operating cash flow.
This was reduced by $78.3 million representing an increase in inventories net of
an increase in accounts payable. Other changes in working capital assets and
liabilities generated $11.5 million.
Net cash used in investing activities totaled $72.6 million and $33.5
million for the nine months ended October 28, 2000 and October 30, 1999,
respectively.
Net cash used for capital expenditures was $55.1 million and $28.3
million for the nine months ended October 28, 2000 and October 30, 1999,
respectively. During the 2000 period, capital expenditures included $17.9
million for new stores, $9.1 million on existing stores, $7.6 million for MIS
equipment upgrades and new systems, $14.5 million for relocation for office
warehousing and operations for the shoe business and $6.0 million for other
capital expenditures.
On March 17, 2000, the Company renegotiated its credit facility and
replaced the existing facility with a $300 million Amended and Restated Credit
Agreement, dated as of March 15, 2000 (the "New Bank Facility"). It has a three
year term ending March 15, 2003 and replaced a $167.5 million facility that
would have matured in May 2001. The New Bank Facility is secured only by a
pledge of the stock of Base Acquisition and the Filene's assets acquired. See
Note 4. It provides for various borrowing rates, currently equal to 200 basis
points over LIBOR. The interest rate on $40.0 million has been locked in at a
fixed annual rate of 7.395% through March 2001. The interest rate on $35.0
million has been locked in at a fixed annual rate of 6.99% through April 18,
2003.
On March 17, 2000, the Company also closed a $75.0 million Senior
Subordinated Convertible Loan Agreement, dated as of March 15, 2000 (the "Senior
Facility") with Prudential Securities Credit Corporation ("Prudential"), as
lender. The Senior Facility also bears interest at various rates, currently
equal to 250 basis points over LIBOR. The interest rate increases an additional
50 basis points every 90 days after the first anniversary date. The Senior
Facility is due in September 2003. However, if the Company has not repaid the
Senior Facility prior to March 17, 2001, from the proceeds of an equity offering
or other subordinated debt acceptable to the lenders under the New Bank
Facility, then after that date Prudential has the right to convert the debt into
stock of the Company at a price equal to 95% of the 20-day average of high and
low sales prices reported on the New York Stock Exchange at the time of
conversion. After that date, Prudential also has the right to require SSC, the
owner of a majority of the Company's outstanding stock, to purchase the Senior
Facility at par plus accrued interest, pursuant to the terms of a Put Agreement,
dated as of March 15, 2000 between Prudential and SSC. The Company paid SSC a
one time fee of 200 basis points, or $1.5 million, at closing in consideration
for entering into the Put Agreement.
The Company has amended and restated its $300 million bank credit facility
with its existing lenders. As part of the amended agreement the Company obtained
waivers for noncompliance with certain covenant requirements that existed at
October 28, 2000. The facility, which expires on March 15, 2003, provides for
revolving and overnight loans and letters of credit. Outstanding advances are
secured by a lien on assets and are subject to a monthly borrowing base of
eligible inventories and receivables, as defined. As of October 28, 2000 the
borrowing base calculation exceeded the $300,000,000 line limitation. The new
agreement has certain restrictive covenants and financial ratio tests conducive
to the companies operating strategies.
The Company has also completed a $50 million subordinated secured credit
facility with its parent company, Schottenstein Stores Corporation (SSC), to
supplement operating cash requirements. Outstanding advances under the agreement
are subordinated to the bank credit facility and are subject to a junior lien on
assets securing the bank credit facility.
Additionally, pursuant to terms of the $75 million Senior Subordinated
Convertible Loan Agreement, dated as of March 15, 2000, SSC has purchased the
outstanding balance under the same continuing terms. Both the New Bank Facility
and the Senior Facility contain customary, affirmative and negative covenants,
including certain financial covenants. At October 28, 2000, the LIBOR rate was
6.62%, borrowings aggregated $250.0 and $11.1 million of letters of credit were
issued and outstanding for merchandise purchases under the credit facility.
page 11
<PAGE> 12
The Company has provided an unconditional guarantee of fifty percent of
amounts outstanding on VCM's $25.0 million revolving line of credit. At October
28, 2000, the aggregate amounts guaranteed were $11.2 million.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS", ("SAB
101"), which provides guidance on applying generally accepted accounting
principles for recognizing revenue. SAB 101, as amended, is effective for the
fourth quarter 2000. The Company implemented SAB 101 during fiscal 1999.
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133") and in 1999 amended certain
provisions of that Standard with SFAS No. 138. The Company will adopt the
provisions of SFAS Nos. 133 and 138 effective February 4, 2001. Based upon the
review performed, management believes that the effect of adoption will not be
significant (material) to the Company's results of operations, financial
position or cash flows.
INCOME TAXES
The effective tax rate for the nine months ended October 28, 2000 and
October 30, 1999 was 39.1% and 41.8%, respectively. The decrease in the
effective tax rate is due primarily to the impact of permanent differences on
lower taxable income.
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, other filings with the Securities and Exchange Commission 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 2000
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, 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
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes that the market risk associated with the Company's
ownership of market-risk sensitive financial instruments as of October 28, 2000
is not material.
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/ James A. McGrady
--------------------------------------
James A. McGrady
Chief Financial Officer and Treasurer*
DATE: December 11, 2000
------------------------
--------------------------------------------------------------------------------
* Mr. McGrady is the principal financial officer and has been duly authorized to
sign on behalf of the registrant.
page 14
