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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 3, 2002
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, 43224
Ohio
- ------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
(614) 471-4722
--------------------------------------------------
Registrant's telephone number, including area code
Not applicable
--------------------------------------------------------------------------
(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 5, 2002 was 33,988,374.
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at August 3, 2002
and February 2, 2002...............................................3
Condensed Consolidated Statements of Operations for the
three and six months ended August 3, 2002 and August 4, 2001......4
Condensed Consolidated Statements of Cash Flows
for the six months ended August 3, 2002 and August 4, 2001.........5
Notes to Consolidated Financial Statements.............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk............23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................24
Item 2. Changes in Securities and Use of Proceeds.............................24
Item 3. Defaults Upon Senior Securities.......................................24
Item 4. Submission of Matters to a Vote of Security Holders...................24
Item 5. Other Information.....................................................24
Item 6. Exhibits and Reports on Form 8-K......................................24
Signature........................................................................25
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.........26
-2-
VALUE CITY DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
August 3, February 2,
2002 2002
- -------------------------------------------------------------------------
ASSETS
Cash and equivalents $ 31,952 $ 35,915
Accounts receivable, net 5,135 6,650
Receivables from affiliates 899 905
Inventories 417,309 396,830
Prepaid expenses and other assets 12,401 15,741
Deferred income taxes 70,505 63,102
- -------------------------------------------------------------------------
Total current assets 538,201 519,143
- -------------------------------------------------------------------------
Property and equipment, net 241,006 244,644
Goodwill 37,619 40,974
Tradenames, net 18,245 19,038
Other assets 67,186 56,512
- -------------------------------------------------------------------------
$ 902,257 $ 880,311
- -------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 196,877 $ 149,864
Accounts payable to affiliates 5,644 8,909
Accrued expenses 125,902 130,930
Current maturities of long-term obligations 743 665
- -------------------------------------------------------------------------
Total current liabilities 329,166 290,368
- -------------------------------------------------------------------------
Long-term obligations, net of current maturities 314,874 337,199
Deferred rent and other noncurrent liabilities 41,178 32,315
Commitments and contingencies -- --
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 33,988,374 and
34,227,540 shares, respectively 144,183 145,772
Retained earnings 76,931 82,432
Deferred compensation expense, net (1,283) (4,150)
Treasury shares, at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (2,733) (3,566)
- -------------------------------------------------------------------------
217,039 220,429
- -------------------------------------------------------------------------
$ 902,257 $ 880,311
- -------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
VALUE CITY DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Six months ended
----------------------------- ------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $ 569,062 $ 536,477 $ 1,154,974 $ 1,066,591
Cost of sales (345,463) (330,877) (708,188) (659,098)
- -------------------------------------------------------------------------------------------------------------------
Gross profit 223,599 205,600 446,786 407,493
Selling, general and
administrative expenses (216,005) (211,284) (439,275) (419,796)
License fees from affiliates 792 2,139 1,681 4,251
Other operating income 1,639 2,094 2,912 2,589
- -------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 10,025 (1,451) 12,104 (5,463)
Interest expense, net (7,863) (8,058) (14,201) (16,494)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in loss
of joint venture, extraordinary item and
cumulative effect of accounting
change and income taxes 2,162 (9,509) (2,097) (21,957)
Equity in loss of joint venture -- (327) -- (1,211)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
item and cumulative effect of accounting
change and income taxes 2,162 (9,836) (2,097) (23,168)
(Provision) benefit for income taxes (818) 4,065 746 9,598
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
item and cumulative effect of
accounting change 1,344 (5,771) (1,351) (13,570)
Extraordinary (charge), net of
income taxes (2,070) -- (2,070) --
Cumulative effect of accounting
change, net of income taxes -- -- (2,080) --
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (726) $ (5,771) $ (5,501) $ (13,570)
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 33,651 33,547 33,641 33,523
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary
item and cumulative effect of
accounting change $ 0.04 $ (0.17) $ (0.04) $ (0.40)
Extraordinary (charge), net of
income taxes $ (0.06) -- $ (0.06) --
Cumulative effect of accounting
change, net of income taxes -- -- $ (0.06) --
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (0.02) $ (0.17) $ (0.16) $ (0.40)
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
VALUE CITY DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended
-------------------------
August 3, August 4,
2002 2001
- -------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (5,501) $ (13,570)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary charge 2,070 --
Cumulative effect of accounting change 2,080 --
Depreciation and amortization 27,408 25,243
Deferred income taxes and other noncurrent liabilities (3,839) (8,603)
Equity in loss of joint venture -- 1,211
Loss (gain) on disposal of assets 52 (5)
Change in working capital, assets and liabilities:
Receivables 1,521 41,075
Inventories (20,479) (53,379)
Prepaid expenses and other assets 3,018 6,722
Accounts payable 43,748 3,565
Accrued expenses (4,669) (32,395)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 45,409 (30,136)
- -------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (19,989) (15,366)
Proceeds from sale of assets 26 5
Other assets -- 2,550
Proceeds from lease incentives 6,451 --
- -------------------------------------------------------------------------------------
Net cash used in investing activities (13,512) (12,811)
- -------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common shares -- 783
Proceeds from issuance of debt 100,000 --
Debt issuance costs (13,205) --
Net increase (decrease) in:
Revolving credit facility (101,500) 55,000
Capital leases and other debt (21,155) (274)
- -------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (35,860) 55,509
- -------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (3,963) 12,562
Cash and equivalents, beginning of period 35,915 10,562
- -------------------------------------------------------------------------------------
Cash and equivalents, end of period $ 31,952 $ 23,124
- -------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Value City Department Stores, Inc. and its wholly owned subsidiaries. These
entities are herein referred to collectively as the Company. The Company
operates a chain of full-line, off-price department stores, principally
under the names Value City and Filene's Basement, as well as better-branded
off-price shoe stores, under the name DSW Shoe Warehouse ("DSW"). As of
August 3, 2002, a total of 254 stores were open, including 116 Value City
stores located principally in Ohio (23 stores) and Pennsylvania (18 stores)
with the remaining stores dispersed throughout the Midwest, East and South,
117 DSW Shoe Warehouse stores located throughout the United States and 21
Filene's Basement stores ("Filene's Basement") located principally in the
Northeast United States.
The accompanying consolidated 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.
To facilitate comparisons with the current year, certain previously
reported balances have been reclassified to conform with the current period
presentation.
2. LONG-TERM OBLIGATIONS
On June 11, 2002, the Company, together with its principal subsidiaries,
entered into a $525.0 million refinancing that consists of three separate
credit facilities: (i) a new three-year $350.0 million revolving credit
facility, (ii) two $50.0 million term loan facilities provided equally by
Cerberus Partners, L.P. and Schottenstein Stores Corporation, and (iii) an
amended and restated $75.0 million senior convertible loan, initially
entered into by the Company on March 15, 2000, which is held equally by
Cerberus Partners, L.P. and Schottenstein Stores Corporation.
The Company recorded an extraordinary loss on debt extinguishment of $3.3
million, $2.1 million net of taxes, as a result of the debt financing. This
loss represents the balance of unamortized deferred loan fees as of June
11, 2002.
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is
structured in a manner that allows the Company and its subsidiaries
availability based on the value of their inventories and receivables.
Primary security for the facility is provided by a first priority lien on
all of the inventory and accounts receivable of the Company, as well as
certain intercompany notes and payment intangibles. The facility also has a
second priority perfected interest in all of the collateral securing the
Term Loans. Interest on borrowings is calculated at the bank's base rate or
Eurodollar rate plus 2.00% to 2.75%, depending upon the level of average
excess availability the Company maintains. At August 3, 2002, $147.0
million was available
-6-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
under the Revolving Credit Facility. Direct borrowings aggregated $110.0
million, plus $28.0 million of letters of credit were issued and
outstanding.
$100 Million Term Loans
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt,
ranking pari passu with the Revolving Credit Facility and the Senior
Convertible Facility. The Company and its principal subsidiaries are
obligated on the facility.
The Term Loans stated rate of interest per annum during the initial two
years of the agreement is 14% if paid in cash and 15% if the Company elects
a paid-in-kind ("PIK") option. During the first two years of this facility,
the Company may elect to pay all interest in PIK. During the final year of
the Term Loans, the stated rate of interest is 15.0% if paid in cash or
15.5% by PIK. The PIK option is limited to 50% of the interest due.
The Company has agreed to issue to the Term Loan C Lenders warrants
("Warrants") to purchase shares of common stock initially exercisable for
up to 8.75% of the shares of the common stock outstanding on the closing
date, June 11, 2002, excluding all outstanding convertible securities,
warrants, options or other equity equivalents, at an initial exercise price
of $4.50 per share. The number of shares issuable upon the exercise of the
Warrants and the per share exercise price are subject to adjustment upon
the occurrence of specified events. The Warrants are exercisable at any
time prior to the 10th anniversary of the date of issuance at the then
Warrant exercise price. The Company has granted the Term Loan C Lenders
registration rights with respect to the shares issuable upon exercise of
the Warrants.
The issuance of the Warrants is subject to shareholder approval.
Schottenstein Stores Corporation has agreed to vote its shares of Company
common stock in favor of the approval of the issuance of the Warrants.
$75 Million Senior Convertible Loan
The Company has amended and restated its $75.0 million Senior Subordinated
Convertible Loan Agreement dated March 15, 2000. As amended, borrowings
under the convertible loan will bear interest at 10% per annum. At the
Company's option, interest may be PIK from the closing date to the second
anniversary thereof, and thereafter, at the option of the Company, up to
50% of the interest due may be PIK until maturity. The convertible loan is
guaranteed by all principal subsidiaries and is secured by a lien on assets
junior to liens granted in favor of the Lenders on the Revolving Credit
Agreement and Term Loans. The Senior Convertible Loan is not prepayable for
five years from the closing date. The agent has the right to designate two
observers to the Board of Directors for so long as the agent is the
beneficial owner of at least 50% of the advances initially made by it and
has the right to designate two individuals to the Board of Directors for so
long as the agent is the beneficial owner of at least 50% of the conversion
shares issued upon conversion of the advances initially made by it.
-7-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The convertible notes are convertible at the option of the holders into
shares of Value City Department Stores, Inc. common stock at an initial
conversion price of $4.50. The conversion price is subject to adjustment
upon the occurrence of specified events. The conversion of the Senior
Convertible Loan for shares representing in excess of 19.9% of the shares
of Company common stock currently outstanding is subject to shareholder
approval. Schottenstein Stores Corporation has agreed to vote its shares of
Company common stock in favor of the approval of such conversion rights.
Long-term obligations consist of the following (in thousands):
August 3, February 2,
2002 2002
------------------------------------------------------------
Credit facilities:
Revolving credit facility $ 110,000 $ 211,000
Term loans 99,042 --
Senior convertible loan 75,000 75,000
SSC loan -- 20,000
------------------------------------------------------------
284,042 306,000
Capital lease obligations 31,085 31,281
Other 490 583
------------------------------------------------------------
315,617 337,864
Less current maturities (743) (665)
------------------------------------------------------------
$ 314,874 $ 337,199
------------------------------------------------------------
3. SHAREHOLDERS' EQUITY
Shareholders' equity for the six months ended August 3, 2002 consists of
(in thousands, except shares):
Total shareholders' equity, beginning of period $220,429
Net Loss (5,501)
Amortization of deferred compensation expense 278
Net unrealized gain on derivative financial instruments,
net of income tax provision of $379 833
Forfeitures of 570,000 restricted shares at $2,590 --
Issuance of common stock purchase warrants 1,000
---------------------------------------------------------------------
Total shareholders' equity, end of period $217,039
---------------------------------------------------------------------
4. VALUATION ACCOUNTS
Reserves established and used for severance costs are the result of head
count and job elimination reductions of approximately 360 associates at
Value City Department Stores and an inventory alignment reserve as follows
(in thousands):
-8-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six months ended
------------------------------------------
August 3, 2002 August 4, 2001
-------------- -------------------------
Severance Inventory Severance
--------- --------- ---------
Balance at beginning of period $ 5,357 $ 43,700 $ 3,397
Provisions to establish reserves 1,860 -- --
Charges/payments (5,048) (43,700) (2,540)
- --------------------------------------------------------------------------------
Balance at end of period $ 2,169 -- $ 857
- --------------------------------------------------------------------------------
5. 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 the
fiscal year.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 applies
to all business combinations completed after June 30, 2001, and requires
the use of purchase accounting. SFAS No. 141 also establishes new criteria
for determining whether intangible assets should be recognized separately
from goodwill.
Under SFAS 142, the Company was required to test all existing goodwill for
impairment as of February 3, 2002, on an operating segment basis. A fair
value approach is used to test goodwill for impairment. An impairment
charge is recognized for the amount, if any, by which the carrying amount
of goodwill exceeds its implied fair value. Fair values and the related
implied fair values of their respective goodwill were established using
discounted cash flows. When available and as appropriate, comparative
market multiples were used to corroborate results of the discounted cash
flows.
The result of testing goodwill for impairment in accordance with SFAS 142,
as of February 3, 2002, was a non-cash charge of $3.4 million, $2.1 million
net of taxes, which is reported in the caption "Cumulative effect of
accounting change". Substantially all of the charge relates to goodwill
associated with the Company's purchase of the Mazel partner's interest in
VCM, Ltd. and is included in the net loss for the six months ended August
3, 2002.
The following proforma amount reflects the effect of retroactive
application on the previously reported quarter ended May 4, 2002 (in
thousands, except per share amounts).
Net loss before cumulative effect of accounting change $ (2,695)
Cumulative effect of accounting change, net of income taxes (2,080)
-------------------------------------------------------------------------
Net loss as restated $ (4,775)
-------------------------------------------------------------------------
-9-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Per share amounts:
Basic and diluted loss per share:
Net loss before cumulative effect of accounting change $ (0.08)
Cumulative effect of accounting change, net of income taxes (0.08)
----------------------------------------------------------------------
Net loss as restated $ (0.16)
----------------------------------------------------------------------
The proforma effect of ceasing amortization of goodwill under SFAS 142 is
as follows (in thousands, except per share amounts):
Six months ended
--------------------------
August 3, August 4,
2002 2001
---------------------------------------------------------------
Reported net loss $ (5,501) $(13,570)
Addback goodwill amortization -- 1,670
---------------------------------------------------------------
Adjusted net loss $ (5,501) $(11,900)
---------------------------------------------------------------
Basic and diluted loss per share $ (0.16) $ (0.35)
Amortization of intangible assets are as follows (in thousands):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
As of August 3, 2002
Tradenames:
Gross amount $ 1,120 $ 12,749 $ 9,900 $ 23,769
Accumulated amortization (317) (3,612) (1,595) (5,524)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 -- $ 24,993 $ 39,410
Accumulated amortization (3,602) -- (4,563) (8,165)
Average useful life (in years) 25 -- 20
As of February 2, 2002
Tradenames:
Gross amount $ 1,120 $ 12,750 $ 9,900 $ 23,770
Accumulated amortization (280) (3,188) (1,265) (4,733)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 -- $ 24,993 $ 39,410
Accumulated amortization (3,295) -- (3,602) (6,897)
Average useful life (in years) 25 20
-10-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Aggregate amortization expense for the current and each of the five
succeeding years is as follows (in thousands):
Filene's
Fiscal Year Value City DSW Basement Total
----------- ---------- --- -------- -----
2002 $ 688 $ 850 $ 2,253 $ 3,791
2003 681 850 1,794 3,325
2004 676 850 1,794 3,320
2005 676 850 1,794 3,320
2006 676 850 1,794 3,320
2007 676 850 1,794 3,320
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addressed financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Under this
Statement, obligations that meet the definition of a liability will be
recognized consistently with the retirement of the associated tangible
long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of SFAS No. 143. At this time, the Company
has yet to determine the effect of this pronouncement on its results of
operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Because SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation under
Opinion 30, two accounting models existed for long-lived assets to be
disposed of. The FASB decided to establish a single accounting model, based
on the framework established in Statement 121, for long-lived assets to be
disposed of by sale. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. At this time, the Company is currently
evaluating the impact of SFAS No. 144.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The standard rescinds FASB Statements No. 4 and 64 that deal
with issues relating to the extinguishment of debt. The standard also
rescinds FASB Statement No. 44 that deals with intangible assets of motor
carriers. The standard modifies SFAS No. 13, "Accounting for Leases," so
that certain capital lease modifications must be accounted for by lessees
as sale-leaseback transactions. Additionally, the standard identifies
amendments that should have been made to previously existing pronouncements
and formally amends the appropriate pronouncements.
This statement is effective for fiscal years beginning after May 15, 2002.
The adoption of SFAS No. 145 will not have a significant effect on the
Company's results of operations or its financial position.
-11-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of costs covered by the standard include lease
termination costs that are associated with a restructuring, discontinued
operations, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
Statement 146 replaces Issue 94-3 and is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002.
6. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represent net income (loss) plus the results of
certain non-shareowner's equity changes not reflected in the Consolidated
Statement of Operations.
The components of comprehensive income (loss), net of tax are as follows
(in thousands):
Three months ended Six months ended
------------------------------ ------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------
Net loss $(726) $(5,771) $(5,501) $(13,570)
Net unrealized gain (loss), on
derivative financial instruments,
net of income tax 381 (2,309) 832 (2,309)
Minimum pension liability,
net of income tax -- -- -- --
----------------------------------------------------------------------------------------------------------------
Other comprehensive loss $(345) $(8,080) $(4,669) $(15,879)
----------------------------------------------------------------------------------------------------------------
The components of the balance sheet caption accumulated other comprehensive
loss are as follows (in thousands):
August 3, February 2,
2002 2002
-----------------------------------------------------------------------
Net unrealized loss on derivative
financial instruments, net of income tax $(1,762) $(2,595)
Minimum pension liability, net of income tax (971) (971)
-----------------------------------------------------------------------
Accumulated other comprehensive loss $(2,733) $(3,566)
-----------------------------------------------------------------------
7. INVESTMENT IN JOINT VENTURE
Effective at the close of business on February 2, 2002, the Company
acquired the Mazel partner's interest in the VCM, Ltd. joint venture for
$8.4 million. The consolidated balance sheet and current operations for the
period ended August 3, 2002 reflect this acquisition.
-12-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited proforma consolidated financial results for the
three and six months ended August 4, 2001 are presented as if the
acquisition had taken place at the beginning of the applicable period (in
thousands, except per share amounts):
Three Months Six Months
Proforma Proforma
Total Total
---------------------------------------------------------------
Net sales $ 562,126 $ 1,115,171
Net loss $ (5,487) $ (13,401)
Basic and diluted loss per share $ (0.16) $ (0.40)
8. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW and Filene's Basement. 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.
Three month period ended August 3, 2002 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $336,456 $158,833 $73,773 $569,062
Operating profit 892 8,745 388 10,025
Capital expenditures 5,623 8,079 679 14,381
Depreciation and amortization 10,280 1,909 1,746 13,935
Three month period ended August 4, 2001 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $336,657 $130,916 $68,904 $536,477
Operating (loss) profit (4,732) (1,397) 4,678 (1,451)
Capital expenditures 4,774 939 119 5,832
Depreciation and amortization 9,033 1,684 1,694 12,411
Six month period ended August 3, 2002 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $695,681 $314,809 $144,484 $1,154,974
Operating (loss) profit (3,402) 13,732 1,774 12,104
Capital expenditures 8,033 10,637 1,319 19,989
Depreciation and amortization 20,557 3,381 3,470 27,408
Identifiable assets 420,907 363,230 118,120 902,257
-13-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Six month period ended August 4, 2001 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $681,499 $252,666 $132,426 $1,066,591
Operating (loss) profit (13,482) 3,716 4,303 (5,463)
Capital expenditures 8,689 5,725 952 15,366
Depreciation and amortization 17,816 4,222 3,205 25,243
Identifiable assets 399,257 417,728 109,575 926,560
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental to
the conduct of its business. In the opinion of management, the amount of
any liability with respect to these proceedings will not be material.
10. EARNINGS PER SHARE
Basic earnings per share is based on a simple weighted average of common
shares outstanding. Diluted earnings per share give effect to all dilutive
potential common shares outstanding during a period. The quarterly
calculation for dilution indicated the result would be antidilutive and
therefore would not be included in the statement.
-14-
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.
The Company's Form 10-K for the year ended February 2, 2002 included a
discussion of the Company's critical accounting policies, which discussion
should be read in conjunction with the quarterly information contained in this
Form 10-Q.
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 3, August 4, August 3, August 4,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
Cost of sales (60.7) (61.7) (61.3) (61.8)
- -----------------------------------------------------------------------------------------------------------------
Gross profit 39.3 38.3 38.7 38.2
Selling, general and
administrative expenses (38.0) (39.4) (38.0) (39.4)
License fees from affiliates and
other operating income 0.5 0.8 0.4 0.7
- -----------------------------------------------------------------------------------------------------------------
Operating profit (loss) 1.8 (0.3) 1.1 (0.5)
Interest expense, net (1.4) (1.5) (1.2) (1.6)
Income (loss) before equity in loss
of joint venture, extraordinary item and
cumulative effect of accounting
change and income taxes 0.4 (1.8) (0.1) (2.1)
Equity in loss of joint venture -- -- -- (0.1)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item
and cumulative effect of accounting
change and income taxes 0.4 (1.8) (0.1) (2.2)
(Provision) benefit for income taxes (0.1) 0.7 -- 0.9
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary
item and cumulative effect of
accounting change 0.3 (1.1) (0.1) (1.3)
Extraordinary (charge), net of
income taxes (0.4) -- (0.2) --
Cumulative effect of accounting
change, net of income taxes -- -- (0.2) --
- -----------------------------------------------------------------------------------------------------------------
Net loss (0.1)% (1.1)% (0.5)% (1.3)%
- -----------------------------------------------------------------------------------------------------------------
-15-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 3, 2002 COMPARED TO THREE MONTHS ENDED AUGUST 4, 2001
The Company's net sales increased $32.6 million, or 6.1%, from $536.5 million to
$569.1 million. Sales for the period ended August 3, 2002 include $24.0 million
attributable to sales of departments formally operated by the joint venture VCM,
Ltd. Comparable stores sales decreased 4.3% for the quarter. By segment,
comparable store sales were:
Three months ended
-----------------------
August 3, August 4,
2002 2001
----------------------------------------------------
Value City Department Stores (6.1)% (7.2)%
DSW (2.1)% 1.3%
Filene's Basement 1.2% 2.8%
----------------------------------------------------
Total (4.3)% (4.5)%
----------------------------------------------------
Value City Department Store's non-apparel comparable sales decreased 5.8% while
apparel sales decreased 8.1%. Each of the three apparel divisions: Children's,
Men's and Ladies, had negative comparable sales for the quarter of 14.1%, 11.4%
and 2.8%, respectively, and shoe sales increased 3%.
DSW sales were $158.8 million, a 21.3% increase in the quarter, which includes a
net increase of 28 stores.
Filene's Basement sales were $73.8 million, a 7.1% increase in the quarter,
which includes a net increase of 2 stores.
Gross profit increased $18.0 million, an 8.8% improvement, from $205.6 million
to $223.6 million, and increased as a percentage of sales to 39.3%. Gross
profit, as a percent of sales by segment in the second quarter, was:
Three months ended
--------------------
August 3, August 4,
2002 2001
-------------------------------------------------
Value City Department Stores 39.7% 38.8%
DSW 40.9% 38.3%
Filene's Basement 33.9% 36.0%
-------------------------------------------------
Total 39.3% 38.3%
-------------------------------------------------
Selling, general and administrative expenses ("SG&A") increased $4.7 million,
from $211.3 million to $216.0 million, and decreased as a percentage of sales
from 39.4% to 38.0%. This increase includes $7.0 million attributable to new
stores in operation at DSW and Filene's Basement, a charge of $0.7 million for
store closings and a $0.2 million provision for severance costs. SG&A for the
quarter ended August 4, 2001 included $0.8 million of goodwill amortization.
SG&A as a percent of sales by segment in the second quarter was:
-16-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended
---------------------
August 3, August 4,
2002 2001
-------------------------------------------------
Value City Department Stores 39.9% 41.1%
DSW 35.5% 39.7%
Filene's Basement 34.3% 30.3%
-------------------------------------------------
Total 38.0% 39.4%
-------------------------------------------------
License fees from affiliates and other operating income decreased $1.8 million,
from $4.2 million to $2.4 million, and decreased as a percentage of sales from
0.8% to 0.4% as a result of VCM, Ltd. acquisition. License fees received
from the VCM, Ltd. joint venture in the quarter ended August 4, 2001 were
approximately $1.7 million.
Operating profit (loss) increased $11.5 million, from a loss of $1.5 million to
income of $10.0 million, and increased as a percentage of sales from a loss of
0.3% to income of 1.8%.
Net interest expense for the quarter decreased $0.2 million to $7.9 million.
This decrease is due primarily to a $44.1 million drop in average borrowings
from last year to this year, primarily due to inventory management and expense
controls and a 5.7% decrease in our weighted average borrowing rate.
Effective at the close of business on February 2, 2002, the Company acquired the
Mazel partner's interest in the VCM, Ltd. joint venture for $8.4 million. The
consolidated balance sheet as of August 3, 2002 and February 2, 2002, and
statements of operations for the three month period ended August 3, 2002 reflect
this acquisition.
The Company recorded an extraordinary loss on debt extinguishment of $3.3
million, $2.1 million net of taxes, as a result of the debt refinancing. This
loss represents the balance of unamortized deferred loan fees as of June 11,
2002.
SIX MONTHS ENDED AUGUST 3, 2002 COMPARED TO SIX MONTHS ENDED AUGUST 4, 2001
The Company's net sales increased $88.4 million, or 8.3%, from $1,066.6 million
to $1,155.0 million. Sales for the six-month period ended August 3, 2002 include
$49.1 million attributable to sales of departments formally operated by the
joint venture VCM, Ltd. Comparable stores sales decreased 2.1%. By segment,
comparable store sales were:
Six months ended
-----------------------
August 3, August 4,
2002 2001
---------------------------------------------------
Value City Department Stores (3.6)% (6.8)%
DSW (0.4)% 1.8%
Filene's Basement 3.0% 6.3%
---------------------------------------------------
Total (2.1)% (4.2)%
---------------------------------------------------
-17-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Value City Department Store's non-apparel comparable sales decreased 1.9% while
apparel sales decreased 5.4%. Each of the three apparel divisions: Children's,
Men's and Ladies, had negative comparable sales for the six-month period of
7.8%, 9.0% and 1.6%, respectively, and shoe sales increased 1.1%.
DSW sales were $314.8 million, a 24.6% increase in the six-month period, which
includes a net increase of 28 stores.
Filene's Basement sales were $144.5 million, a 9.1% increase in the six-month
period, which includes a net increase of 2 stores.
Gross profit increased $39.3 million, a 9.6% improvement from $407.5 million to
$446.8 million, and increased as a percentage of sales from 38.2% to 38.7%.
Gross profit, as a percent of sales by segment in the six-month period, was:
Six months ended
----------------------
August 3, August 4,
2002 2001
-------------------------------------------------------
Value City Department Stores 38.8% 38.4%
DSW 40.0% 39.0%
Filene's Basement 35.4% 35.8%
-------------------------------------------------------
Total 38.7% 38.2%
-------------------------------------------------------
Selling, general and administrative expenses ("SG&A") increased $19.5 million,
from $419.8 million to $439.3 million, and decreased as a percentage of sales
from 39.4% to 38.0%. This increase includes $11.7 million attributable to new
stores in operation at DSW and Filene's Basement, a charge of $1.8 million for
store closings and a $1.9 million provision for severance costs. SG&A for the
six months ended August 3, 2001 included $1.7 million of goodwill amortization.
SG&A as a percent of sales by segment in the six-month period was:
Six months ended
-------------------------
August 3, August 4,
2002 2001
-----------------------------------------------------------
Value City Department Stores 39.8% 41.2%
DSW 35.7% 37.6%
Filene's Basement 34.9% 33.4%
-----------------------------------------------------------
Total 38.0% 39.4%
-----------------------------------------------------------
License fees from affiliates and other operating income decreased $2.2 million,
from $6.8 million to $4.6 million, and decreased as a percentage of sales from
0.6% to 0.4% as a result of VCM, Ltd. acquisition. License fees received from
the VCM, Ltd. joint venture in the six-month period ended August 4, 2001 were
approximately $3.1 million.
Operating profit (loss) increased $17.6 million, from a loss of $5.5 million to
income of $12.1 million, and increased as a percentage of sales from a loss of
0.5% to income of 1.0%.
-18-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net interest expense for the six-month period decreased $2.3 million to $14.2
million. This decrease is due primarily to a $34.0 million drop in average
borrowings from last year to this year, primarily due to inventory management
and expense controls and a 20.2% decrease in our weighted average borrowing
rate.
Effective at the close of business on February 2, 2002, the Company acquired the
Mazel partner's interest in the VCM, Ltd. joint venture for $8.4 million. The
consolidated balance sheets as of August 3, 2002 and February 2, 2002 and
statements of operations for the six month period ended August 3, 2002 reflect
this acquisition.
Under SFAS 142, the Company was required to test all existing goodwill for
impairment as of February 3, 2002, on an operating segment basis. A fair value
approach is used to test goodwill for impairment. An impairment charge is
recognized for the amount, if any, by which the carrying amount of goodwill
exceeds its implied fair value. Fair values and the related implied fair values
of their respective goodwill were established using discounted cash flows. When
available and as appropriate, comparative market multiples were used to
corroborate results of the discounted cash flows.
The result of testing goodwill for impairment in accordance with SFAS 142, as of
February 3, 2002, was a non-cash charge of $3.4 million, $2.1 million net of
taxes, which is reported in the caption "Cumulative effect of accounting
change". Substantially all of the charge relates to goodwill associated with the
Company's purchase of the Mazel partner's interest in VCM, Ltd. and is included
in the net loss for the six months ended August 3, 2002.
The Company recorded an extraordinary loss on debt extinguishment of $3.4
million, $2.1 million net of taxes, as a result of the debt refinancing. This
loss represents the balance of unamortized deferred loan fees as of June 11,
2002.
The effective tax rate for fiscal 2002 is 35.6% versus 41.4% for fiscal 2001.
The Company expects its tax rate to trend lower than last year, the extent to
which will depend upon the relative taxable income in the various taxing
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $209.0 million at August 3, 2002, compared to $273.9
million at August 4, 2001. Current ratios at those dates were each 1.63 and
1.93, respectively.
Net cash provided by operating activities totaled $45.4 million for the six
months ended August 3, 2002 compared to a use of cash of $30.1 million for the
six months ended August 4, 2001. Earnings before interest, taxes, depreciation
and amortization (EBITDA) for the six months ended August 3, 2002 was $42.1
million.
Net cash used for capital expenditures was $13.5 million and $15.4 million for
the six months ended August 3, 2002 and August 4, 2001, respectively. During the
six months ended August 3, 2002, capital expenditures included $2.9 million for
new stores, $7.7 million on remodeled and existing stores, $1.4 million for MIS
upgrades and new systems and $1.5 million for office and warehousing.
-19-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On June 11, 2002, the Company, together with its principal subsidiaries, entered
into a $525.0 million refinancing that consists of three separate credit
facilities: (i) a new three-year $350.0 million revolving credit facility, (ii)
two $50.0 million term loan facilities provided equally by Cerberus Partners,
L.P. and Schottenstein Stores Corporation, and (iii) an amended and restated
$75.0 million senior convertible loan, initially entered into by the Company on
March 15, 2000, which is held equally by by Cerberus Partners, L.P. and
Schottenstein Stores Corporation.
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is structured in
a manner that allows the Company and its subsidiaries availability based on the
value of their inventories and receivables. Primary security for the facility is
provided by a first priority lien on all of the inventory and accounts
receivable of the Company, as well as certain intercompany notes and payment
intangibles. The facility also has a second priority perfected interest in all
of the collateral securing the Term Loans. Interest on borrowings is calculated
at the bank's base rate or Eurodollar rate plus 2.00% to 2.75%, depending upon
the level of average excess availability the Company maintains.
$100 Million Term Loans
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0 million
Term Loan C. All obligations under the Term Loans are senior debt, ranking pari
passu with the Revolving Credit Facility and the Senior Convertible Loans. The
Company and its principal subsidiaries are obligated on the Term Loans.
The Term Loans stated rate of interest per annum during the initial two years of
the agreement is 14% if paid in cash and 15% if the Company elects a
paid-in-kind ("PIK") option. During the first two years of this facility, the
Company may pay all interest by PIK. During the final year of the Term Loans,
the stated rate of interest is 15.0% if paid in cash or 15.5% by PIK and the PIK
option is limited to 50% of the interest due.
The Company has agreed to issue to the Term Loan C Lenders warrants ("Warrants")
to purchase shares of common stock initially exercisable for up to 8.75% of the
shares of the common stock outstanding on the closing date, June 11, 2002,
excluding all outstanding convertible securities, warrants, options or other
equity equivalents, at an initial exercise price of $4.50 per share. The number
of shares issuable upon the exercise of the Warrants and the per share exercise
price are subject to adjustment upon the occurrence of specified events. The
Warrants are exercisable at any time prior to the 10th anniversary of the date
of issuance at the then Warrant exercise price. The Company has granted the Term
Loan C Lenders registration rights with respect to the shares issuable upon
exercise of the Warrants.
The issuance of the Warrants is subject to shareholder approval. Schottenstein
Stores Corporation has agreed to vote its shares of Company common stock in
favor of the approval of the issuance of the Warrants.
-20-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$75 Million Senior Convertible Loan
The Company has amended and restated its $75.0 million Senior Subordinated
Convertible Loan Agreement dated March 15, 2000. As amended, borrowings under
the convertible loan will bear interest at 10% per annum. At the Company's
option, interest may be PIK from the closing date to the second anniversary
thereof, and thereafter, at the option of the Company, up to 50% of the interest
due may be PIK until maturity. The convertible loan is guaranteed by all
principal subsidiaries and is secured by a lien on assets junior to liens
granted in favor of the Revolving Credit Agreement and Term Loans. The Senior
Convertible Loan is not prepayable for five years from the closing date. The
agent has the right to designate two observers to the Board of Directors for so
long as the agent is the beneficial owner of at least 50% of the advances
initially made by it and has the right to designate two individuals to the Board
of Directors for so long as the agent is the beneficial owner of at least 50% of
the conversion shares issued upon conversion of the advances initially made by
it.
The convertible notes are convertible at the option of the holders into shares
of Value City Department Stores, Inc. common stock at a initial conversion price
of $4.50. The conversion price is subject to adjustment upon the occurrence of
specified events. The conversion of the Senior Convertible Loan for shares
representing in excess of 19.9% of the shares of Company common stock currently
outstanding is subject to shareholder approval. Schottenstein Stores Corporation
has agreed to vote its shares of Company common stock in favor of the approval
of such conversion rights.
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 the fiscal year.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 applies to all
business combinations completed after June 30, 2001, and requires the use of
purchase accounting. SFAS No. 141 also establishes new criteria for determining
whether intangible assets should be recognized separately from goodwill.
Under SFAS 142, the Company was required to test all existing goodwill for
impairment as of February 3, 2002, on an operating segment basis. A fair value
approach is used to test goodwill for impairment. An impairment charge is
recognized for the amount, if any, by which the carrying amount of goodwill
exceeds its implied fair value. Fair values and the related implied fair values
of their respective goodwill were established using discounted cash flows. When
available and as appropriate, comparative market multiples were used to
corroborate results of the discounted cash flows.
The result of testing goodwill for impairment in accordance with SFAS 142, as of
February 3, 2002, was a non-cash charge of $3.4 million, $2.1 million net
of taxes, which is reported in the caption "Cumulative effect of accounting
change". Substantially all of the charge relates to goodwill associated with the
Company's purchase of the Mazel partner's interest in VCM, Ltd. and is included
in the new loss for the six months ended August 3, 2002.
-21-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addressed financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under this Statement, obligations that meet
the definition of a liability will be recognized consistently with the
retirement of the associated tangible long-lived assets. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company is currently assessing the impact of SFAS No. 143. At this
time, the Company has yet to determine the effect of this pronouncement on its
results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under Opinion 30, two accounting models existed for long-lived assets
to be disposed of. The FASB decided to establish a single accounting model,
based on the framework established in Statement 121, for long-lived assets to be
disposed of by sale. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. At this time, the Company is currently evaluating the impact
of SFAS No. 144.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The
standard rescinds FASB Statements No. 4 and 64 that deal with issues relating to
the extinguishment of debt. The standard also rescinds FASB Statement No. 44
that deals with intangible assets of motor carriers. The standard modifies SFAS
No. 13, "Accounting for Leases," so that certain capital lease modifications
must be accounted for by lessees as sale-leaseback transactions. Additionally,
the standard identifies amendments that should have been made to previously
existing pronouncements and formally amends the appropriate pronouncements.
This statement is effective for fiscal years beginning after May 15, 2002. The
adoption of SFAS No. 145 will not have a significant effect on the Company's
results of operations or its financial position.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs that are associated with
a restructuring, discontinued operations, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". Statement 146 replaces Issue 94-3 and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
-22-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
and/or other risk factors that may be described in the Safe Harbor Statement and
Business Risks section of the Company's Form 10-K, filed April 29, 2002, or
contained in 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 2002 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 2002 business plan, expected cash from operations, vendor and their
factor relations, flow of merchandise, compliance with the terms of our credit
facilities, our ability to strengthen our liquidity, 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.
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. To minimize the effect of interest rate
fluctuations, the Company has entered into a $75.0 million interest rate swap
arrangement. Under this agreement, the Company pays a fixed rate of interest on
a portion of the outstanding balance.
-23-
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. Not
applicable
Item 5. OTHER INFORMATION. Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Part A Exhibits.
Exhibit No. Document
----------- --------
10 Employment Agreement by and between
Value City Department Stores, Inc.
and John C. Rossler, effective as
of February 3, 2002.
99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted, Pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002 by the
Chief Executive Officer.
99.2 Certification Pursuant to 18 U.S.C.
Section 1350, as adopted, Pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002 by the
Chief Financial Officer.
Part B Reports on Form 8-K.
On June 12, 2002, we filed a Form 8-K, Items 5 and 7,
relating to our new credit facility.
-24-
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 12, 2002 By: /s/ James A. McGrady
--------------------------------
James A. McGrady,
Chief Financial Officer and Treasurer
-25-
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John C. Rossler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Value
City Department Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002
/s/ John C. Rossler
------------------------------------------
John C. Rossler
President and Chief Executive Officer of
Value City Department Stores, Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. McGrady, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Value
City Department Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002
/s/ James A. McGrady
-----------------------------------
James A. McGrady
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary of
Value City Department Stores, Inc.