<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 29, 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
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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 Identification No.)
incorporation or organization)
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 September 9, 2000
------------------------------- --------------------------------
Common Stock, Without Par Value 33,576,430 Shares
<PAGE> 2
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
July 29, 2000 and January 29, 2000 3
Consolidated Statements of Income for the three and
six months ended July 29, 2000 and July 31, 1999 4
Consolidated Statements of Cash Flows for the six months
ended July 29, 2000 and July 31, 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 Second Quarter Form 10-Q 15
Part B: Reports on Form 8-K N/A
</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>
JULY 29, JANUARY 29,
2000 2000
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 15,146 $ 6,027
Accounts receivable, net 17,857 10,131
Receivables from affiliates 3,223 299
Inventories 598,912 412,479
Prepaid expenses and other assets 10,192 8,544
Deferred income taxes 23,475 18,052
----------- --------
Total current assets 668,805 455,532
Property and equipment, at cost:
Furniture, fixtures and equipment 222,471 191,632
Leasehold improvements 159,910 142,066
Land and building 1,831 1,376
Capital leases 38,347 42,328
----------- --------
422,559 377,402
Accumulated depreciation and amortization (186,015) (169,907)
----------- --------
Property and equipment, net 236,544 207,495
Investment in joint venture 9,492 9,679
Goodwill and tradenames, net 55,998 45,566
Lease acquisition costs, net 32,998 11,825
Other assets 42,281 14,084
----------- --------
Total assets $1,046,118 $744,181
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 278,474 $164,196
Accounts payable to affiliates 13,380 4,532
Accrued expenses:
Compensation 16,751 17,118
Taxes 21,891 22,604
Other 58,414 41,611
Current maturities of long-term obligations 700 460
----------- --------
Total current liabilities 389,610 250,521
Long-term obligations, net of current maturities 298,663 144,168
Deferred income taxes and other noncurrent liabilities 6,790 7,131
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized; issued, including
treasury shares, 33,572,130 shares and
32,770,467 shares, respectively 121,604 114,733
Contributed capital 18,584 17,868
Retained earnings 213,068 212,946
Deferred compensation expense, net (2,142) (2,513)
Treasury shares, at cost, 7,651 shares and 87,651 shares, respectively
shares respectively (59) (673)
----------- --------
Total shareholders' equity 351,055 342,361
----------- --------
Total liabilities and shareholders' equity $1,046,118 $744,181
========== ========
</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 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales, excluding sales of licensed departments $ 528,246 $ 372,812 $ 990,299 $ 717,293
Cost of sales (327,958) (232,543) (612,279) (447,402)
---------- ---------- ---------- ----------
Gross profit 200,288 140,269 378,020 269,891
Selling, general and administrative expenses (197,063) (133,661) (371,255) (260,582)
License fees from affiliates 2,731 1,831 4,650 3,354
Other operating income 1,156 1,028 1,433 2,030
---------- ---------- ---------- ----------
Operating profit 7,112 9,467 12,848 14,693
Interest expense, net (7,963) (2,424) (13,318) (4,872)
Gain on disposal of assets, net 861 34 841 47
---------- ---------- ---------- ----------
Income before equity in gain (loss) of joint
venture and provision for income taxes 10 7,077 371 9,868
Equity in gain (loss) of joint venture 107 (245) (161) (356)
---------- ---------- ---------- ----------
Income before provision for income taxes 117 6,832 210 9,512
Provision for income taxes (49) (2,870) (87) (3,988)
---------- ---------- ---------- ----------
Net income $ 68 $ 3,962 $ 123 $ 5,524
========== ========== ========== ==========
Basic and diluted earnings per share $ 0.00 $ 0.12 $ 0.00 $ 0.17
========== ========== ========== ==========
</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>
SIX MONTHS ENDED
----------------------
JULY 29, JULY 31,
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 123 $ 5,524
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 18,985 15,974
Deferred income taxes and other noncurrent liabilities (2,154) (3,525)
Equity in loss of joint venture 161 356
Gain on disposal of assets (841) (47)
Change in working capital, assets and liabilities
excluding effect of acquisition:
Receivables (8,446) (7,770)
Inventories (160,221) (95,127)
Prepaid expenses and other assets 696 (2,757)
Accounts payable 105,191 43,066
Accrued expenses (11,559) 5,038
--------- ---------
Net cash used in operating activities (58,065) (39,268)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34,480) (16,358)
Proceeds from sale of assets 116 73
Acquisitions (3,506) --
Other assets and lease acquisition costs (25,022) (3,548)
--------- ---------
Net cash used in investing activities (62,892) (19,833)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common shares 1,371 470
Net proceeds under long-term credit facility 128,705 50,942
--------- ---------
Net cash provided by financing activities 130,076 51,412
--------- ---------
Net increase (decrease) in cash and equivalents 9,119 (7,689)
Cash and equivalents, beginning of period 6,027 20,895
--------- ---------
Cash and equivalents, end of period $ 15,146 $ 13,206
========= =========
Non-cash transactions:
Issuance of common shares related to acquisition $ 5,500
Contribution made in treasury shares $ 1,080
Issuance of restricted shares $ 996
</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 SIX MONTHS ENDED JULY 29, 2000 AND JULY 31, 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 17 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.
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
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<S> <C> <C>
Net Sales $1,023,700 $854,116
Net (Loss) Income $ (3,809) $ 3,535
Basic and diluted earnings per share $ (0.12) $ 0.11
</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.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED JULY 29, 2000:
VALUE CITY DSW FILENE'S CORPORATE TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $364,268 $101,139 $62,839 $528,246
Operating profit (2,017) 5,797 3,332 7,112
Capital expenditures 16,916 3,709 476 21,101
Depreciation and amortization 6,706 931 620 $927 9,184
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JULY 29, 2000:
VALUE CITY DSW FILENE'S CORPORATE TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $710,907 $189,526 $89,866 $990,299
Operating profit (loss) (2,023) 9,142 5,729 12,848
Capital expenditures 28,175 5,829 476 34,480
Depreciation and amortization 14,686 1,406 1,000 $1,893 18,985
Identifiable assets 850,979 79,424 86,338 29,377 1,046,118
</TABLE>
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>
3 months ended Six Months Ended
------------------------------ ---------------------------------
July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
Gross profit 37.9 37.6 38.2 37.6
Selling, general and
administrative expenses (37.3) (35.9) (37.5) (36.3)
License fees from affiliates 0.5 0.5 0.5 0.5
Other operating income 0.2 0.3 0.1 0.3
-------- ------- -------- -------
Operating profit 1.3 2.5 1.3 2.1
Interest expense, net and
gain on disposals (1.3) (0.6) (1.3) (0.7)
Equity in loss of joint venture - (0.1) - -
-------- ------- -------- -------
Income before income taxes - 1.8 - 1.4
Provision for income taxes - (0.7) - (0.6)
-------- ------- -------- -------
Net income 0.0% 1.1% 0.0% 0.8%
======== ======= ======== =======
</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 JULY 29, 2000 COMPARED TO THREE MONTHS ENDED JULY 31, 1999
The Company's net sales increased $155.4 million, or 41.7%, from $372.8
million to $528.2 million. Comparable store sales increased 3.2%. Net sales for
the department stores ("Value City") increased $40.2 million, or 14.6%, from
$276.0 million to $316.2 million. Value City's comparable store sales decreased
2.4%, or $6.4 million. The shoe departments in Value City's stores contributed
net sales of $46.7 million with comparable store sales increase of 8.8%. For the
quarter, non-apparel sales increased 19.8% and apparel sales increased 12.9%. On
a comparable store basis, non-apparel sales increased 1.2% and apparel sales
decreased 3.5%. DSW Shoe Warehouse ("DSW") achieved sales of $101.1 million with
a 26.8% comparable store sales increase. This quarter includes $62.8 million of
net sales for the 17 Filene's Basement stores acquired effective March 17, 2000.
Gross profit increased $60.0 million from $140.3 million to $200.3
million, and increased as a percentage of sales from 37.6% to 37.9% due
primarily to a decrease in the level of markdowns associated with our shoe
business.
Selling, general and administrative expenses ("SG&A") increased $63.4
million from $133.7 million to $197.1 million, and increased as a percentage of
sales from 35.9% to 37.3%. $22.0 million of the increase in SG&A is attributable
to new stores, net of closed stores, increased distribution and transportation
costs account for $11.8 million, approximately $7.6 million related to home
office overhead costs and $3.0 million related to comparable store operations.
SG&A expenses for Filene's Basement were $19.0 million. New store pre-opening
expenses for the quarter were $1.6 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 $4.5 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 $0.6 million for the current three
month period including $1.3 million of pre-opening expenses. Five stores opened
less than 12 months during last year's three month period had a pre-tax net
operating loss of $0.0 million. Twenty DSW stores opened less than twelve months
had a pre-tax net operating profit of $5.4 million, including $1.6 million of
pre-opening expenses. Four 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 $0.5 million of pre-opening expenses.
License fees from affiliates and other operating income increased from
$2.9 million to $3.9 million and decreased as a percentage of sales from 0.8% of
sales to 0.7%. One half of the $1.0 million increase is attributable to stronger
sales in the VCM joint venture and the remainder relates to the Filene's
Basement stores.
Operating profit decreased $2.4 million from $9.5 million to $7.1 million
and decreased as a percentage of sales from 2.5% to 1.3%.
Interest expense, net of interest income, increased $5.6 million from
$2.4 million to $8.0 million and increased as a percentage of sales from 0.7% 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 gain of the joint venture represents the Company's fifty
percent interest in VCM, Ltd. ("VCM"), a joint venture with Mazel Stores, Inc.
The gain increased from $0.1 million versus a loss of $0.2 million.
Income before provision for income taxes decreased $6.7 million from $6.8
million to $0.1 million, and decreased as a percentage of sales from 1.8% to
0.0% 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.
SIX MONTHS ENDED JULY 29, 2000 COMPARED TO SIX MONTHS ENDED JULY 31, 1999
================================================================================
The Company's net sales increased $273.0 million, or 38.1%, from $717.3
million to $990.3 million. Comparable store sales increased 4.8%. Net sales for
the department stores ("Value City") increased $92.0 million, or 17.6%, from
$54.6 million to $613.6 million. Value City's comparable store sales increased
0.8%, or $3.9 million. The shoe departments in Value City's stores contributed
net sales of $94.4 million with comparable store sales increase of 5.2%. For the
six months ended July 29, 2000, non-apparel sales increased 16.2% and apparel
sales increased 18.1%. On a comparable store basis, non-apparel sales decreased
1.9% and apparel sales increased 1.6%. DSW Shoe Warehouse ("DSW") achieved sales
of $189.5 million with a 23.6% comparable store sales increase. This year's six
months ended July 29, 2000 includes $89.9 million of net sales for the 17
Filene's Basement stores acquired effective March 17, 2000.
Gross profit increased $108.1 million from $269.9 million to $378.0
million, and increased as a percentage of sales from 37.6% to 38.2% due
primarily to a decrease in the level of markdowns as a percentage of sales.
Selling, general and administrative expenses ("SG&A") increased $110.7
million from $260.6 million to $371.3 million, and increased as a percentage of
sales from 36.3% to 37.5%. $49.2 million of the increase in SG&A is attributable
to new stores, net of closed stores, increased distribution and transportation
costs account for $18.5 million, approximately $8.0 million related to home
office overhead costs and $8.2 million related to comparable store operations.
SG&A expenses for Filene's Basement were $26.8 million. New store pre-opening
expenses for the six month period were $1.0 million greater than last year.
Twenty-six department stores opened less than twelve months had a pre-tax
net operating loss of $1.2 million for the current three month period including
$3.9 million of pre-opening expenses. Five stores opened less than 12 months
during last year's six month period had a pre-tax net operating loss of $1.3
million. Twenty DSW stores opened less than twelve months had a pre-tax net
operating income of $1.9 million, including $3.2 million of pre-opening
expenses. Ten DSW stores opened less than twelve months during last year's six
month period had a pre-tax net operating loss of $0.7 million after recognizing
$0.5 million of pre-opening expenses.
License fees from affiliates and other operating income increased from
$5.4 million to $6.1 million and declined as a percentage of sales from 0.8% of
sales to 0.6%.
Operating profit decreased $1.9 million from $14.7 million to $12.8
million and decreased as a percentage of sales from 2.1% to 1.3%.
Interest expense, net of interest income, increased $8.4 million from
$4.9 million to $13.3 million and increased as a percentage of sales from 0.7%
to 1.3%. 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 decreased from $0.4 million to $0.2 million.
Income before provision for income taxes decreased $9.3 million from $9.5
million to $0.2 million, and decreased as a percentage of sales from 1.4% to
0.0% 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 $279.2 million at July 29, 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 $58.1 million and $39.3
million for the six months ended July 29, 2000 and July 31, 1999, respectively.
Net income, adjusted for depreciation and amortization, provided $19.1
million of operating cash flow for the six months ended July 29, 2000. This was
decreased by $55.0 million representing an increase in inventories net of an
increase in accounts payable. Other changes in working capital assets and
liabilities used $22.2 million.
During the six months ended July 31, 1999, net income adjusted for
depreciation and amortization, provided $21.5 million of operating cash flow.
This was reduced 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.
Net cash used in investing activities totaled $62.9 million and $19.8
million for the six months ended July 29, 2000 and July 31, 1999, respectively.
Net cash used for capital expenditures was $34.5 million and $16.4
million for the six months ended July 29, 2000 and July 31, 1999, respectively.
During the 2000 period, capital expenditures included $12.9 million for new
stores, $5.5 million on existing stores, $4.6 million for MIS equipment upgrades
and new systems, $6.2 million for relocation for office warehousing and
operations for the shoe business and $5.3 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 2. 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.
Both the New Bank Facility and the Senior Facility contain customary,
affirmative and negative covenants, including certain financial covenants. At
July 29, 2000, the LIBOR rate was 6.62%, borrowings aggregated $192,000,000 and
$35.1 million of letters of credit were issued and outstanding for merchandise
purchases under the credit facility.
The Company has provided an unconditional guarantee of fifty percent of
amounts outstanding on VCM's $25.0 million revolving line of credit. At April
29, 2000, the aggregate amounts guaranteed were $11.5 million.
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.
page 11
<PAGE> 12
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.
INCOME TAXES
The effective tax rate for the six months ended July 29, 2000 and July 31,
1999 was 41.4% and 41.9%, respectively.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained 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
ability to repay the $75.0 million Senior Facility through an equity offering or
refinancing, 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.
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<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 July 29, 2000 is
not material.
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<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: September 11, 2000
----- ------------------
--------------------------------------------------------------------------------
* Mr. McGrady is the principal financial officer and has been duly authorized to
sign on behalf of the registrant.
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