1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2001
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)
(614) 471-4722
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Registrant's telephone number, including area code
Not applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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 and
(2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of Common Stock, without par value, as of
September 7, 2001 was 34,416,960.
2
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at August 4, 2001 and February 3, 2001.............................3
Consolidated Statements of Operations for the three and six months
ended August 4, 2001 and July 29, 2000......................................................4
Consolidated Statements of Cash Flows for the six months ended
August 4, 2001 and July 29, 2000 ...........................................................5
Notes to the Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................15
Item 2. Changes in Securities and Use of Proceeds......................................................15
Item 3. Defaults Upon Senior Securities................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
Signature........................................................................................................17
Page 2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
AUGUST 4, FEBRUARY 3,
2001 2001
--------- ---------
ASSETS
Current assets:
Cash and equivalents $ 23,124 $ 10,562
Accounts receivable, net 13,825 44,927
Receivables from affiliates 3,093 9,452
Inventories 446,956 393,577
Prepaid expenses and other assets 15,568 22,290
Deferred income taxes 65,492 51,732
--------- ---------
Total current assets 568,058 532,540
Property and equipment, at cost:
Furniture, fixtures and equipment 230,949 223,675
Leasehold improvements 182,451 176,318
Land and building 801 801
Capital leases 37,414 38,348
--------- ---------
451,615 439,142
Accumulated depreciation and amortization (208,117) (190,103)
--------- ---------
Property and equipment, net 243,498 249,039
Investment in joint venture 7,081 8,292
Goodwill and tradenames, net 61,294 67,056
Other assets 46,629 51,082
--------- ---------
Total assets $ 926,560 $ 908,009
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 186,446 $ 180,736
Accounts payable to affiliates 11,510 13,655
Accrued expenses:
Compensation 16,209 19,662
Taxes 33,016 31,255
Other 46,456 75,227
Current maturities of long-term obligations 581 603
--------- ---------
Total current liabilities 294,218 321,138
Long-term obligations, net of current maturities 381,564 326,449
Deferred income taxes and other noncurrent liabilities 14,565 10,115
Commitments and contingencies - -
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including treasury shares, 34,429,783 and
34,330,863 shares, respectively 146,442 145,659
Retained earnings 97,585 111,155
Deferred compensation expense, net (5,447) (6,448)
Treasury shares, at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (2,308) -
--------- ---------
Total shareholders' equity 236,213 250,307
--------- ---------
Total liabilities and shareholders' equity $ 926,560 $ 908,009
========= =========
The accompanying notes are an integral part of the consolidated financial
statements. Page 3
4
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales, excluding sales of licensed departments $ 536,477 $ 528,246 $ 1,066,591 $ 990,299
Cost of sales (330,877) (327,958) (659,098) (612,279)
----------- ----------- ----------- -----------
Gross profit 205,600 200,288 407,493 378,020
Selling, general and administrative expenses (211,288) (197,063) (419,801) (371,255)
License fees from affiliates 2,139 2,731 4,251 4,650
Other operating income 2,094 1,156 2,589 1,433
----------- ----------- ----------- -----------
Operating (loss) profit (1,455) 7,112 (5,468) 12,848
Interest expense, net (8,058) (7,963) (16,494) (13,318)
Gain on disposal of assets, net 4 861 5 841
----------- ----------- ----------- -----------
(Loss) income before equity in (loss) income of
joint venture and benefit (provision) for
income taxes (9,509) 10 (21,957) 371
Equity in (loss) income of joint venture (327) 107 (1,211) (161)
----------- ----------- ----------- -----------
(Loss) income before benefit
(provision) for income taxes (9,836) 117 (23,168) 210
Benefit (provision) for income taxes 4,065 (49) 9,598 (87)
----------- ----------- ----------- -----------
Net (loss) income $ (5,771) $ 68 $ (13,570) $ 123
=========== =========== =========== ===========
Basic and diluted (loss) earnings per share $ (0.17) $ 0.00 $ (0.40) $ 0.00
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements. Page 4
5
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
================================================================================
SIX MONTHS ENDED
-------------------------
AUGUST 4, JULY 29,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (13,570) $ 123
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 25,243 18,985
Deferred income taxes and other noncurrent liabilities (8,603) (2,154)
Equity in loss of joint venture 1,211 161
Gain on disposal of assets (5) (841)
Change in working capital, assets and liabilities excluding
effects of acquisition:
Receivables 41,075 (8,446)
Inventories (53,379) (160,221)
Prepaid expenses and other assets 6,722 696
Accounts payable 3,565 105,191
Accrued expenses (32,395) (11,559)
--------- ---------
Net cash used in operating activities (30,136) (58,065)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,366) (34,480)
Proceeds from sale of assets 5 116
Acquisition - (3,506)
Other assets and lease acquisition costs 2,550 (25,022)
--------- ---------
Net cash used in investing activities (12,811) (62,892)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 783 1,371
Net proceeds from issuance of debt 54,726 128,705
--------- ---------
Net cash provided by financing activities 55,509 130,076
--------- ---------
Net increase in cash and equivalents 12,562 9,119
Cash and equivalents, beginning of period 10,562 6,027
--------- ---------
Cash and equivalents, end of period $ 23,124 $ 15,146
========= =========
Non-cash transactions:
Issuance of common shares related to acquisition - $ 5,500
Contribution made in treasury shares - $ 1,080
The accompanying notes are an integral part of the consolidated financial
statements. Page 5
6
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED AUGUST 4, 2001 AND JULY 29, 2000
(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, a chain of off-price
specialty retail stores under the name Filene's Basement, as well as
better-branded off-price shoe stores, under the name "DSW Shoe Warehouse."
As of August 4, 2001 a total of 227 stores were open, including 119 Value
City stores located principally in Ohio (23 stores) and Pennsylvania (19
stores) with the remaining stores dispersed throughout the Midwest, East
and South and 89 DSW Shoe Warehouse stores (DSW) located throughout the
United States and 19 Filene's Basement stores ("Filene's") located
principally in the New England states.
The accompanying financial statements reflect all adjustments consisting of
only normal recurring adjustments, which are, in the opinion of management,
necessary to present fairly the consolidated financial position and results
of operations for the periods presented.
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. SHAREHOLDERS' EQUITY
The Company entered into a $75.0 million Senior Subordinated Convertible
Loan Agreement ("Senior Facility"), dated as of March 15, 2000. The Senior
Facility 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. In December 2000, pursuant to terms of the Senior
Facility, Schottenstein Stores Corporation ("SSC"), direct owner of
approximately 53.0% of the Company's common shares, purchased the
outstanding balance under the same continuing terms. The terms, as amended,
provide that if prior to August 5, 2001, the balance outstanding thereunder
is not repaid from the proceeds of an equity offering or other subordinated
debt acceptable to lenders under the Credit Agreement, then after that date
SSC, as the lender, has the right to convert the debt into our common stock
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. The
Company paid SSC a one time fee of 200 basis points, or $1.5 million, in
December 2000 as consideration for entering into a Put Agreement associated
with the Senior Facility. See Note 8 "Subsequent Event."
3. VALUATION ACCOUNTS
For the three and six months ended August 4, 2001, charges to the inventory
realignment reserve and the accrued severance liability were $19.1 million,
$43.7 million, $0.2 million and $1.2 million, respectively.
4. ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which
require implementation by a date falling within or after the close of our
fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company's adoption of SFAS 133 effective February 4, 2001 did not have a
significant impact on the financial position, results of operations, or
cash flows of the Company.
The Company utilizes interest rate swap agreements to manage its interest
rate risks on borrowings under its $300 million variable rate credit
agreement. The Company does not hold or issue derivative financial
instru-
Page 6
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VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED AUGUST 4, 2001 AND JULY 29, 2000
(unaudited)
================================================================================
ments for trading purposes. The Company does not have derivative financial
instruments that are held or issued and accounted for as hedges of
anticipated transactions.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". The guidance in SFAS No.
141 supercedes APB 16 and is applicable to business combinations initiated
after June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to
be amortized and will instead be subject to periodic impairment reviews as
set forth in the new standard. The Company is currently evaluating the
Statement's impairment provisions and has not yet determined what effect,
if any, they might have on the consolidated financial position and results
of operations of the Company.
5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated comprehensive loss is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The difference between net earnings and
comprehensive earnings for the quarter ending August 4, 2001 relates to the
change in the fair market value of interest rate swap agreements.
Comprehensive loss is $0.2 million and $0.7 million greater than net loss
for the three and six month periods ended August 4, 2001, respectively.
6. INVESTMENT IN JOINT VENTURE
Pursuant to the terms of the joint venture Operating Agreement the Company
informed Mazel Stores, Inc. of its intention to terminate the joint
venture. The Company is in discussion with Mazel regarding the notice of
termination.
7. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW Shoe Warehouse 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 (loss) profit that
is defined as income before interest expense and income taxes. Corporate
assets include goodwill and loan costs related to the Shonac acquisition.
THREE MONTH PERIOD ENDED AUGUST 4, 2001 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $336,657 $130,916 $68,904 - $536,477
Operating (loss) profit (4,736) (1,397) 4,678 - (1,455)
Capital expenditures 4,774 939 119 - 5,832
Depreciation and amortization 9,033 1,108 1,694 $576 12,411
THREE MONTH PERIOD ENDED JULY 29, 2000 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $363,100 $101,139 $64,007 - $528,246
Operating (loss) profit (2,371) 6,151 3,332 - 7,112
Capital expenditures 16,916 3,709 476 - 21,101
Depreciation and amortization 6,706 931 620 $927 9,184
Page 7
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VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED AUGUST 4, 2001 AND JULY 29, 2000
(unaudited)
================================================================================
SIX-MONTH PERIOD ENDED AUGUST 4, 2001 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $681,499 $252,666 $132,426 - $1,066,591
Operating (loss) profit (13,487) 3,716 4,303 - (5,468)
Identifiable assets 682,094 107,818 109,575 $27,073 926,560
Capital expenditures 7,847 6,567 952 - 15,366
Depreciation and amortization 17,816 2,718 3,205 1,504 25,243
SIX-MONTH PERIOD ENDED JULY 29, 2000 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- -------- -------- --------- -----
Net sales $710,907 $189,526 $89,866 - $990,299
Operating (loss) profit (2,023) 9,142 5,729 - 12,848
Identifiable assets 850,979 79,424 86,338 $29,377 1,046,118
Capital expenditures 28,175 5,829 476 - 34,480
Depreciation and amortization 14,686 1,406 1,000 1,893 18,985
8. SUBSEQUENT EVENT
In August 2001, the Company entered into a non-binding letter of intent
with SSC whereby SSC may acquire all of the outstanding stock or assets of
Shonac Corporation, DSW Shoe Warehouse, Inc. and Filene's Basement, Inc.
(the "Businesses") for an aggregate purchase price of $275 million,
comprised of $200 million in cash and the assumption of the $75 million
Senior Subordinated Convertible Loan held by SSC.
The non-binding letter of intent allowed the Company to solicit third party
preliminary non-binding indications of interest for one or more of the
Businesses through August 31, 2001 and to terminate the letter of intent or
any definitive purchase agreement with SSC pursuant to a superior proposal
for one or more of the Businesses through the later of October 15, 2001, or
the execution of a definitive agreement with SSC, subject to the payment of
a termination fee of $8.45 million.
As part of the consideration, in September 2001 SSC agreed to increase
immediately the line of credit under the Value City Subordinated Credit
Agreement from $50 million to $100 million under the same terms as set
forth in the Subordinated Credit Agreement..
Page 8
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -----------------------------
AUGUST 4, 2001 JULY 29, 2000 AUGUST 4, 2001 JULY 29, 2000
-------------- ------------- -------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 38.3 37.9 38.2 38.2
Selling, general and
administrative expenses (39.4) (37.3) (39.4) (37.5)
License fees from affiliates and
other operating income 0.8 0.7 0.7 0.6
----- ----- ----- -----
Operating (loss) profit (0.3) 1.3 (0.5) 1.3
Interest expense, net, and
gain on disposals (1.5) (1.3) (1.6) (1.3)
Equity in loss of joint venture - - (0.1) -
----- ----- ----- -----
(Loss) income before income taxes (1.8) - (2.2) -
Benefit (provision) for income taxes 0.7 - 0.9 -
----- ----- ----- -----
Net (loss) income (1.1)% 0.0% (1.3)% 0.0%
===== ===== ===== =====
THREE MONTHS ENDED AUGUST 4, 2001 COMPARED TO THREE MONTHS ENDED JULY 29, 2000
The Company's net sales increased $8.3 million, or 1.6%, from $528.2 million to
$536.5 million. Fiscal 2001 includes sales of $68.9 million for Filene's
Basement which was acquired in March 2000. The prior year second quarter sales
for Filene's Basement were $64.0 million. Comparable stores sales for the
quarter decreased 4.5%. By segment, comparable store sales were:
2001 2000
---- ----
Value City Department Stores ........... (7.2)% (1.0)%
DSW .................................... 1.3% 26.8%
Filene's Basement ...................... 2.8% N/A
TOTAL .................................. (4.5)% 3.2%
Value City's non-apparel comparable sales decreased 5.2% while apparel sales
decreased 7.8%. Children's had a comparable store sales increase of 6.4% while
men's and ladies decreased 3.1% and 15.8%, respectively.
DSW sales were $130.9 million, a 29.4% increase in the quarter which includes a
net increase of 25 stores.
Gross profit increased $5.3 million from $200.3 million to $205.6 million, and
increased as a percentage of sales from 37.3% to 39.4% due primarily to a
decrease in the level of markdowns as a percentage of sales. Gross profit as a
percent of sales by segment in the second quarter were:
Page 9
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
2001 2000
---- ----
Value City Department Stores ........... 38.8% 37.8%
DSW .................................... 38.3% 39.9%
Filene's Basement ...................... 36.0% 35.4%
TOTAL .................................. 38.3% 37.9%
Selling, general and administrative expenses ("SG&A") increased $14.2 million
from $197.1 million to $211.3 million, and increased as a percentage of sales
from 37.3% to 39.4%. The percentage increase was due in part to the weak sales
performance in our Value City department stores. $1.2 million of this increase
is attributable to Filene's Basement operations and $10.0 million is associated
with new stores in operation at DSW. SG&A as a percent of sales by segment in
the second quarter were:
2001 2000
---- ----
Value City Department Stores ........... 41.1% 38.6%
DSW .................................... 39.7% 35.8%
Filene's Basement ...................... 30.3% 31.9%
TOTAL 39.4% 37.3%
License fees from affiliates and other operating income increased $0.3 million
from $3.9 million to $4.2 million and increased as a percentage of sales from
0.7% to 0.8%.
Operating profit decreased $8.6 million from $7.1 million to a loss of $1.5
million and decreased as a percentage of sales from 1.3% to a loss of 0.3%. 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. 15 department stores opened less than twelve months had an operating
loss of $4.4 million for the current three-month period.
Interest expense, net of interest income, increased $0.1 million from $8.0
million to $8.1 million and remained at 1.5% of sales. This increase is
attributable to higher weighted average borrowings offset by lower effective
interest rates.
Equity in the (loss) income of the joint venture represents the Company's fifty
percent interest in a joint venture with Mazel Stores, Inc. and decreased from
income of $0.1 million to a loss of $0.3 million. Pursuant to terms of the
Operating Agreement on July 19, 2001, the Company informed Mazel Stores, Inc. of
its intention to terminate the joint venture. The Company is in discussion with
Mazel regarding the notice of termination.
SIX MONTHS ENDED AUGUST 4, 2001 COMPARED TO SIX MONTHS ENDED JULY 29, 2000
The Company's net sales increased $76.3 million, or 7.7%, from $990.3 million to
$1,066.6 million. Fiscal 2001 includes sales of $132.4 million for Filene's
Basement which was acquired in March 2000. The prior year first quarter sales
for Filene's Basement were $89.9 million. Comparable stores sales for the
six-month period decreased 4.2%. By segment comparable store sales were:
2001 2000
---- ----
Value City Department Stores ........... (6.8)% 1.3%
DSW .................................... 1.8% 23.6%
Filene's Basement ...................... 6.3% N/A
TOTAL .................................. (4.2)% 4.8%
Value City's non-apparel comparable sales increased 1.4% while apparel sales
decreased 9.5%. Children's had a comparable stores sales decrease of 0.3% while
the men's division was down 5.8% and the ladies division was down 15.3%.
Page 10
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
DSW sales were $252.7 million, a 33.3% increase in the six-month period which
includes a net increase of 25 stores.
Gross profit increased $29.5 million from $378.0 million to $407.5 million, and
remained at 38.2% of sales. Gross profit as a percent of sales by segment in the
six-month period quarter were:
2001 2000
---- ----
Value City Department Stores ........... 38.4% 38.1%
DSW .................................... 39.0% 38.9%
Filene's Basement ...................... 35.8% 37.6%
TOTAL .................................. 38.2% 38.2%
Selling, general and administrative expenses ("SG&A") increased $48.5 million
from $371.3 million to $419.8 million, and increased as a percentage of sales
from 37.5% to 39.4%. The percentage increase was due in part to the weak sales
performance in our Value City department stores. $46.5 million of the increase
in SG&A is associated with new DSW stores and Filene's Basement stores. New
store pre-opening expenses for the six-month period were $3.0 million less than
last year. SG&A as a percent of sales by segment in the six-month period were:
2001 2000
---- ----
Value City Department Stores ........... 41.2% 38.5%
DSW .................................... 37.6% 35.7%
Filene's Basement ...................... 33.4% 33.1%
TOTAL 39.4% 37.5%
License fees from affiliates and other operating income increased $0.7 million
from $6.1 million to $6.8 million and increased from 0.6% to 0.7% as a
percentage of sales.
Operating profit decreased $18.3 million from $12.8 million to a loss of $5.5
million and decreased as a percentage of sales from a profit of 1.3% to a loss
of 0.5%. 15 department stores opened less than twelve months had an operating
loss of $8.4 million for the current six-month period and 25 DSW stores opened
less than twelve months had an operating loss of $5.8 million, including $4.5
million of pre-opening expenses.
Interest expense, net of interest income, increased $3.2 million from $13.3
million to $16.5 million and increased as a percentage of sales from 1.3% to
1.6%. This increase is attributable to higher weighted average borrowings offset
by lower effective interest rates.
Equity in the loss of the joint venture represents the Company's fifty percent
interest in a joint venture with Mazel Stores, Inc. The loss increased from $0.2
million to $1.2 million. Pursuant to terms of the Operating Agreement on July
19, 2001, the Company informed Mazel Stores, Inc. of its intention to terminate
the joint venture. The Company is in discussion with Mazel regarding the notice
of termination.
The effective tax rate for fiscal 2001 is 41.5% versus 40.2% for fiscal 2000.
The increase is due primarily to the allocation of taxable income to the various
taxing jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $273.9 million at August 4, 2001 compared to $279.2
million at July 29, 2000. Current ratios at those dates were each 1.93 and 1.72,
respectively.
Net cash used in operating activities totaled $30.1 million and $58.1 million
for the six months ended August 4, 2001 and July 29, 2000, respectively. Net
income, adjusted for depreciation and amortization, provided $11.7 million of
operating cash flow for the six months ended August 4, 2001. This was decreased
by $49.8 million representing an increase in inventories net of an increase in
accounts payable. Other changes in working capital assets and liabilities
provided $8.0 million. Earnings before interest, taxes, depreciation and
amortization (EBITDA) for the six months ended August 4, 2001 was $18.6 million.
Page 11
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
Net cash used for capital expenditures was $15.4 million and $34.5 million for
the six months ended August 4, 2001 and July 29, 2000, respectively. During the
six months ended August 4, 2001, capital expenditures included $2.0 million for
new stores, $4.8 million on existing stores, $2.9 million for relocation of
office, warehousing and operations of our shoe business and $5.7 million for
other capital expenditures.
At August 4, 2001, we had a $300 million Amended and Restated Credit Agreement
(Credit Agreement), dated as of March 15, 2000. The Credit Agreement, which
expires on March 15, 2003, provides for revolving and overnight loans and
issuance of 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. Terms of the Credit Agreement require compliance with
certain restrictive covenants, including limitations on dividends, the
incurrence of additional debt and financial ratio tests. Additionally, the
Company has provided an unconditional guarantee of 50% of amounts outstanding on
VCM, Ltd's ("VCM") $25.0 million revolving line of credit. At August 4, 2001,
$18.0 million was available under the Credit Agreement. The Credit Agreement
provides for various borrowing rates, currently equal to 275 basis points over
LIBOR. The LIBOR rate on $75.0 million has been locked in at a fixed annual rate
of 6.99% through March 2003 under a swap agreement.
To supplement operating cash requirements the Company has a $50.0 million
Subordinated Credit Agreement with Schottenstein Stores Corp. ("SSC Facility").
Outstanding advances under the SSC Facility are subordinated to the Credit
Agreement and are subject to a junior lien on assets securing the Credit
Agreement. At August 4, 2001, $20.0 million was outstanding. The interest rate
and terms of the SSC Facility are generally the same as the Credit Agreement. In
September 2001, the SSC Facility was increased to $100 million.
The Company has a $75.0 million Senior Subordinated Convertible Loan Agreement
(Senior Facility), dated as of March 15, 2000. The Senior Facility 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, and is due
to Schottenstein Stores Corp. ("SSC") The terms provide that if prior to August
5, 2001, the balance outstanding thereunder is not repaid from the proceeds of
an equity offering or other subordinated debt acceptable to lenders under the
Credit Agreement, then after that date SSC, as the lender, has the right to
convert the debt into common stock 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. SSC was paid a one-time fee of 200 basis points, or $1.5 million,
in December 2000 as consideration for entering into a Put Agreement associated
with the Senior Facility.
In the first quarter of fiscal 2001 a major factor reduced our availability of
credit and indicated that the Company needed to strengthen its liquidity and
increase its credit availability from other sources. Future limitations of
credit availability by factors and/or vendors will restrict the ability of the
Company to obtain merchandise and services and may impair operating results.
Although operating results in the first six fiscal months of 2001 were below
plan management believes that cash generated by operations, along with the
available proceeds from our Credit Agreement, SSC Facility and other sources of
financing will be sufficient to meet our obligations for working capital,
capital expenditures, and debt service requirements. However, there is no
assurance that we will be able to meet our projections. Further, there is no
assurance that extended financing will be available to us in the future if we
fail to meet our projections.
SUBSEQUENT EVENT
In August 2001, the Company entered into a non-binding letter of intent with SSC
whereby SSC may acquire all of the outstanding stock or assets of Shonac
Corporation, DSW Shoe Warehouse, Inc. and Filene's Basement, Inc. (the
"Businesses") for an aggregate purchase price of $275 million, comprised of $200
million in cash and the assumption of the $75 million Senior Subordinated
Convertible Loan held by SSC.
The non-binding letter of intent allows the Company to continue to solicit third
party preliminary non-binding indications of interest for one or more of the
Businesses through August 31, 2001 and to terminate the letter of intent or any
definitive purchase agreement with SSC pursuant to a superior proposal for one
or more of the Businesses through the later of October 15, 2001, or the
execution of a definitive agreement with SSC, subject to the payment of a
termination fee of $8.45 million.
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
As part of the consideration, in September 2001 SSC agreed to increase
immediately the line of credit under the Value City Subordinated Credit
Agreement from $50 million to $100 million under the same terms as set forth in
the Subordinated Credit Facility.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues Statements
of Financial Accounting Standards ("SFAS"), some of which require implementation
by a date falling within or after the close of our fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company's adoption of SFAS 133
effective February 4, 2001 did not have a significant impact on the financial
position, results of operations, or cash flows of the Company.
The Company utilizes interest rate swap agreements to manage its interest rate
risks on borrowings under its $300 million variable rate credit agreement. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company does not have derivative financial instruments that are
held or issued and accounted for as hedges of anticipated transactions.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets". The guidance in SFAS No. 141
supercedes APB 16 and is applicable to business combinations initiated after
June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to be
amortized and will instead be subject to periodic impairment reviews as set
forth in the new standard. The Company is currently evaluating the Statement's
impairment provisions and has not yet determined what effect, if any, they might
have on the consolidated financial position and results of operations of the
Company.
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
the effect of inflation, if any, on the results of operations and financial
condition has been minor.
RISK FACTORS AND SAFE HARBOR STATEMENT
We caution 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 our
management 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 our financial performance and
actual results and could cause actual results for 2001 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: decline in demand for our merchandise, our ability to attain our
fiscal 2001 business plan, expected cash from operations, vendor and their
factor relations, flow of merchandise, compliance with the credit agreement, our
ability to strengthen our liquidity and increase our credit availability, 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, our 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 us during this period, including adverse weather, the
timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year.
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14
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
The Company's primary market risk results from fluctuations in interest rates.
The Company is exposed to interest rate risk through borrowings under its
revolving credit agreement, which permits borrowings up to $300 million. To
minimize the effect of interest rate fluctuations, the Company has entered into
a $75 million interest rate swap arrangement. Under this agreement, the Company
pays a fixed rate of interest on a portion of the outstanding balance.
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15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A. The Company held its fiscal 2000 Annual Meeting of Shareholders on August
29, 2001. Holders of 31,019,616 Common Shares of the Company were present
representing 92% of the Company's 33,650,632 Common Shares issued and
outstanding and entitled to vote at the meeting.
B. The following persons were elected as members of the Company's Board of
Directors to serve until the annual meeting following their election or
until their successors are duly elected and qualified. Each person
received the number of votes for or the number of votes with authority
withheld indicated below.
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Henry L. Aaron 29,046,190 1,973,426
Ari Deshe 29,042,902 1,976,714
Jon P. Diamond 29,038,891 1,980,725
Martin Doolan 29,046,308 1,973,308
Elizabeth M. Eveillard 29,048,443 1,971,173
Marvin Goldstein 29,045,820 1,973,796
Richard Gurian 29,047,043 1,972,573
George Kolber 27,948,666 3,070,950
Dr. Norman Lamm 29,006,751 2,012,865
Geraldine Schottenstein 27,533,936 3,485,680
Jay L. Schottenstein 27,920,498 3,099,118
Robert L. Shook 29,040,343 1,979,273
Harvey L. Sonnenberg 29,048,390 1,971,226
James L. Weisman 28,980,039 2,039,577
C. The proposal to approve the Company's 2000 Stock Incentive Plan passed
with 23,051,208 shares voting in favor, 4,551,161 shares voting against
and 8,675 shares abstaining.
ITEM 5. OTHER INFORMATION. Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Part A Exhibits
Exhibit 10.1.3 Amendment No. 3 dated as of May 21, 2001 to
Amended and Restated Credit Agreement dated
as of March 15, 2000.
Exhibit 10.1.4 Amendment No. 4 dated as of July 23, 2001 to
Amended and Restated Credit Agreement dated
as of March 15, 2000.
Exhibit 10.3.2 Waiver and Amendment dated as of December
11, 2000 to Senior Subordinated Convertible
Loan Agreement dated as of March 15, 2000.
Exhibit 10.3.3 Second Amendment dated as of January 1, 2001
to Senior Subordinated Convertible Loan
Agreement dated as of March 15, 2000.
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16
Exhibit 10.3.4 Third Amendment dated as of March 14, 2001
to Senior Subordinated Convertible Loan
Agreement dated as of March 15, 2000.
Part B Reports on Form 8-K
Forms 8-K were filed on August 24, 2001 and on July 12, 2001 relating
to Item 5 - "Other Items".
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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)
Date: September 17, 2001 By: /s/ James A. McGrady
--------------------- -----------------------------------------
James A. McGrady,
Chief Financial Officer and Treasurer
Page 17