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 May 4, 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
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3241 Westerville Road, Columbus, Ohio 43224
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(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)
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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 June
10, 2002 was 33,753,751.
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at May 4, 2002
and February 2, 2002........................................................................3
Condensed Consolidated Statements of Operations for the
three months ended May 4, 2002 and May 5, 2001.............................................4
Condensed Consolidated Statements of Cash Flows
for the three months ended May 4, 2002 and May 5, 2001......................................5
Notes to Consolidated Financial Statements......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................21
Item 2. Changes in Securities and Use of Proceeds......................................................21
Item 3. Defaults Upon Senior Securities................................................................21
Item 4. Submission of Matters to a Vote of Security Holders............................................21
Item 5. Other Information..............................................................................21
Item 6. Exhibits and Reports on Form 8-K...............................................................21
Signature........................................................................................................23
-2-
VALUE CITY DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
May 4, February 2,
2002 2002
--------------------------------------------------------------------------------
ASSETS
Cash and equivalents $ 22,838 $ 35,915
Accounts receivable, net 13,095 6,650
Receivables from affiliates 1,476 905
Inventories 417,392 396,830
Prepaid expenses and other assets 15,037 15,741
Deferred income taxes 60,918 63,102
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Total current assets 530,756 519,143
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Property and equipment, net 238,942 244,644
Goodwill 40,974 40,974
Tradenames, net 18,642 19,038
Other assets 55,771 56,512
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$885,085 $880,311
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $180,103 $149,864
Accounts payable to affiliates 5,414 8,909
Accrued expenses 130,770 130,930
Current maturities of long-term obligations 709 665
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Total current liabilities 316,996 290,368
--------------------------------------------------------------------------------
Long-term obligations, net of current maturities 316,023 337,199
Deferred rent and other noncurrent liabilities 33,863 32,315
Commitments and contingencies - -
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 33,778,374 and
34,227,540 shares, respectively 142,479 145,772
Retained earnings 79,737 82,432
Deferred compensation expense, net (838) (4,150)
Treasury shares, at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (3,116) (3,566)
--------------------------------------------------------------------------------
218,203 220,429
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$885,085 $880,311
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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
------------------
May 4, May 5,
2002 2001
----------------------------------------------------------------------------------
Net sales, excluding sales of licensed departments $ 585,912 $ 530,114
Cost of sales (362,725) (328,221)
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Gross profit 223,187 201,893
Selling, general and administrative expenses (223,270) (208,512)
License fees from affiliates 889 2,112
Other operating income 1,273 495
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Operating profit (loss) 2,079 (4,012)
Interest expense, net (6,338) (8,436)
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Loss before equity in loss of joint venture
and benefit for income taxes (4,259) (12,448)
Equity in loss of joint venture -- (884)
----------------------------------------------------------------------------------
Loss before benefit for income taxes (4,259) (13,332)
Benefit for income taxes 1,564 5,533
----------------------------------------------------------------------------------
Net loss $ (2,695) $ (7,799)
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Basic and diluted loss per share $ (0.08) $ (0.23)
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)
Three months ended
------------------
May 4, May 5,
2002 2001
---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,695) $ (7,799)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 13,473 12,832
Deferred income taxes and other noncurrent liabilities 4,325 (1,724)
Equity in loss of joint venture -- 884
Loss (gain) on disposal of assets 41 (1)
Change in working capital, assets and liabilities:
Receivables (7,016) 7,112
Inventories (20,562) (90,568)
Prepaid expenses 704 (2,629)
Other assets (739) 85
Accounts payable 26,744 73,471
Accrued expenses (619) (8,769)
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Net cash provided by (used in) operating activities 13,656 (17,106)
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Cash flows from investing activities:
Capital expenditures (5,608) (9,534)
Proceeds from sale of assets 7 1
Other assets -- 9
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Net cash used in investing activities (5,601) (9,524)
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Cash flows from financing activities:
Proceeds from issuance of common shares -- 82
Net (repayments) proceeds from issuance of debt (21,132) 64,743
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Net cash (used in) provided by financing activities (21,132) 64,825
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Net (decrease) increase in cash and equivalents (13,077) 38,195
Cash and equivalents, beginning of period 35,915 10,562
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Cash and equivalents, end of period $ 22,838 $ 48,757
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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." As of
May 4, 2002, a total of 248 stores were open, including 117 Value City
stores located principally in Ohio (23 stores) and Pennsylvania (18 stores)
with the remaining stores dispersed throughout the Midwest, East and South,
110 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.
As discussed in Note 9, Subsequent Event, the Company announced the
closing of a $525.0 million refinancing that replaced its existing debt
facilities. Consequently, the debt as of May 4, 2002 is classified as
long-term.
To facilitate comparisons with the current year, certain previously
reported balances have been reclassified to conform with the current period
presentation.
2. SHAREHOLDERS' EQUITY
Three months
ended
May 4, 2002
-----------
(in thousands)
Total shareholders' equity, beginning of period $ 220,429
Net loss (2,695)
Amortization of deferred compensation expense 19
Net unrealized gain on derivative financial
instruments, net of income tax provision of $302 450
Forfeitures of 450 restricted shares valued at $3,293 -
----------------------------------------------------------------------
Total shareholders' equity, end of period $ 218,203
----------------------------------------------------------------------
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 475 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
-6-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 May
6, 2002, 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 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 9, Subsequent Events, regarding the amendment of the Senior
Facility.
3. VALUATION ACCOUNTS
Reserves established and used for severance costs and an inventory
alignment reserve are as follows (in thousands):
Three months ended
------------------------------------------
May 4, 2002 May 5,2001
----------- -------------------------
Severance Inventory Severance
----------- --------- ---------
Balance at beginning of period $ 5,357 $ 43,700 $ 3,397
Provisions to establish reserves 1,707 -- --
Charges/payments (3,600) (24,700) (1,000)
-----------------------------------------------------------------------------
Balance at end of period $ 3,464 $ 19,000 $ 2,397
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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 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.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. SFAS No. 142 provides that goodwill and intangible assets with
indefinite lives will not be amortized, but rather will be tested for
impairment at least on an annual basis. The Company is implementing SFAS
No. 142 effective February 3, 2002. The Company has ceased amortization of
its remaining goodwill and has started its initial impairment test for
existing goodwill. An impairment, if any, will be recognized in accordance
with SFAS No. 142 during 2002 and will be classified as a cumulative effect
of a change in accounting principle. As of May 4, 2002, the Company has net
unamortized goodwill of $41.0 million.
-7-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The effect of ceasing amortization of goodwill under SFAS 142 is as follows
(in thousands):
Three months ended
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May 4, May 5,
2002 2001
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Reported net loss $(2,695) $(7,799)
Addback goodwill amortization -- 850
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Adjusted net loss $(2,695) $(6,949)
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Basic and diluted loss per share $ (0.08) $ (0.21)
Amortization intangible assets are as follows (in thousands):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
As of May 4, 2002
Tradenames:
Gross amount $ 1,120 $ 12,750 $ 9,900 $ 23,770
Accumulated amortization (299) (3,400) (1,430) (5,129)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 - $ 24,993 $ 39,410
Accumulated amortization (3,449) - (4,082) (7,531)
Average useful life (in years) 23 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) 23 20
-8-
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. The Company is currently assessing the
impact of SFAS No. 144. At this time, the Company has yet to determine the
effect of this pronouncement on its results of operations and financial
position.
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.
-9-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other 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 quarters ending May 4, 2002 and May 5, 2001
relates to the change in the fair market value of interest rate swap
agreements. For the quarter ending May 4, 2002, other comprehensive income
is $450,000. Other comprehensive loss was approximately $454,000 for the
quarter ended May 5, 2001.
6. 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 joint venture for
$8,375,000. The balance sheets for both periods, and operations for the
period ended May 4, 2002 have been consolidated in these statements.
The following unaudited proforma consolidated financial results for the
quarter ended May 5, 2001 is presented as if the acquisition had taken
place at the beginning of the applicable period (in thousands, except per
share amounts):
Pro Forma
Total
------------
Net sales $ 553,045
Net loss $ (7,914)
Basic and diluted loss per share $ (0.23)
7. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW Stores and Filene's Basement stores. All of the operations are
located in the United States. The Company has identified such segments
based on management responsibility and measures segment profit as operating
(loss) profit that is defined as income before interest expense and income
taxes.
-10-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three-month period ended May 4, 2002 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $359,225 $155,976 $70,711 $585,912
Operating (loss) profit (4,294) 4,987 1,386 2,079
Identifiable assets 653,657 114,360 117,068 885,085
Capital expenditures 2,410 2,558 640 5,608
Depreciation and amortization 10,277 1,472 1,724 13,473
Three-month period ended May 5, 2001 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $344,842 $121,750 $63,522 $530,114
Operating (loss) profit (8,750) 5,113 (375) (4,012)
Identifiable assets 760,322 153,897 112,636 1,026,855
Capital expenditures 3,073 5,628 833 9,534
Depreciation and amortization 8,783 2,538 1,511 12,832
8. 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.
9. SUBSEQUENT EVENT
On June 12, 2002, the Company, together with its principal subsidiaries,
announced the closing of a $525.0 million refinancing that consists of
three separate credit facilities: (i) a new three-year $350.0 million
revolving credit facility agented by National City Commercial Finance,
Inc., Fleet Retail Finance Inc., Wells Fargo Retail Finance, LLC, The CIT
Group/Business Credit, Inc., and General Electric Capital Corporation, (ii)
a new three-year $100.0 million term loan facility 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 will also be held
equally by Cerberus Partners and Schottenstein Stores Corporation. The
maturity of the senior convertible loan has, as part of the refinancing,
been extended to March 2009 from September 2003.
$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
-11-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. Initially the applicable Eurodollar margin is set at 2.25% for
the first two months of the facility. Based on the borrowing base formula
the Company and its subsidiaries currently have over $115.0 million of
excess availability, after the initial funding and the repayment or
replacement of all borrowings and letters of credit outstanding under the
prior senior credit and subordinated credit facilities.
$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 Loan are senior debt,
ranking pari passu with the Revolving Credit Facility and the Senior
Convertible Loan. 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 paid-in-kind
("PIK") option is elected by the Company. During the first two years of
this facility, the Company may pay all interest by PIK. During the final
year of the Term Loan 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, 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 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
-12-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
-13-
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
------------------
May 4, May 5,
2002 2001
-------------------------------------------------------------
Net sales 100.0% 100.0%
Gross profit 38.1 38.1
Selling, general and administrative
expenses (38.1) (39.3)
License fees from affiliates and
other operating income 0.4 0.4
-------------------------------------------------------------
Operating profit (loss) 0.4 (0.8)
Interest expense, net (1.1) (1.6)
Equity in loss of joint venture -- (0.2)
-------------------------------------------------------------
Loss before benefit for income taxes (0.7) (2.6)
Benefit for income taxes 0.3 1.1
-------------------------------------------------------------
Net loss (0.4)% (1.5)%
-------------------------------------------------------------
THREE MONTHS ENDED MAY 4, 2002 COMPARED TO THREE MONTHS ENDED MAY 5, 2001
The Company's net sales increased $55.8 million, or 10.5%, from $530.1 million
to $585.9 million. Sales for the period ended May 4, 2002 include $25.0 million
attributable to sales of departments formally operated by the joint venture VCM,
Ltd. Comparable stores sales for the quarter were flat. By segment, comparable
store sales were:
Three months ended
------------------
May 4, May 5,
2002 2001
-----------------------------------------------------
Value City Department Stores (1.3)% (6.5)%
DSW 1.4% 2.4%
Filene's Basement 4.9% 18.9%
-----------------------------------------------------
Total 0.0% (3.9)%
-----------------------------------------------------
-14-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Value City's non-apparel comparable sales increased 2.0% while apparel sales
decreased 2.8%. Each of the three apparel divisions: Children's, Men's and
Ladies, had negative comparable sales for the quarter of 1.6%, 6.4% and 0.5%,
respectively.
DSW sales were $156.0 million, a 28.1% increase in the quarter, which includes a
net increase of 27 stores.
Filene's Basement sales were $70.7 million, an 11.3% increase in the quarter,
which includes a net increase of 2 stores.
Gross profit increased $21.3 million, a 10.5% improvement from $201.9 million to
$223.2 million, and remained as a percentage of sales at 38.1%. Gross profit, as
a percent of sales by segment in the first quarter, were:
Three months ended
------------------
May 4, May 5,
2002 2001
---------------------------------------------------
Value City Department Stores 37.9% 38.0%
DSW 39.0% 39.8%
Filene's Basement 37.0% 35.5%
---------------------------------------------------
Total 38.1% 38.1%
---------------------------------------------------
Selling, general and administrative expenses ("SG&A") increased $14.8 million,
from $208.5 million to $223.3 million, and decreased as a percentage of sales
from 39.3% to 38.1%. This increase includes $15.5 million attributable to new
stores in operation at DSW and Filene's Basement, a charge of $1.1 million for a
Value City store closing and a $1.7 million provision for severance costs. SG&A
for the quarter ended May 5, 2001 included $0.9 million of goodwill
amortization. SG&A as a percent of sales by segment in the first quarter were:
Three months ended
------------------
May 4, May 5,
2002 2001
---------------------------------------------------
Value City Department Stores 39.6% 41.3%
DSW 35.9% 35.1%
Filene's Basement 35.6% 36.9%
---------------------------------------------------
Total 38.1% 39.3%
---------------------------------------------------
License fees from affiliates and other operating income decreased $0.4 million,
from $2.6 million to $2.2 million, and remained as a percentage of sales at
0.4%. License fees received from the VCM joint venture in the quarter ended May
5, 2001 were approximately $1.5 million.
Operating profit (loss) increased $6.1 million, from a loss of $4.0 million to
income of $2.1 million, and increased as a percentage of sales from a loss of
0.8% to income of 0.4%.
Net interest expense for the quarter decreased $2.1 million to $6.3 million.
This decrease is due primarily to a 2.8% decline in our weighted average
borrowing rate and a $24.0 million drop in
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
average borrowings from last year to this year, primarily due to inventory
management and expense control.
Effective at the close of business on February 2, 2002 the Company acquired the
Mazel partner's interest in the VCM joint venture for $8,375,000. The balance
sheets for both periods and operations for the period ended May 4, 2002 have
been consolidated in these statements.
The effective tax rate for the three months ended May 4, 2002 is 36.7% versus
41.5% for the three months ended May 5, 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 $213.8 million at May 4, 2002, compared to $281.4
million at May 5, 2001. Current ratios at those dates were each 1.67 and 1.74,
respectively.
Net cash provided by (used in) operating activities totaled $13.7 million and
$(17.1) million for the three months ended May 4, 2002 and May 5, 2001,
respectively. Earnings before interest, taxes, depreciation and amortization
(EBITDA) for the three months ended May 4, 2002 was $15.6 million.
Net cash used for capital expenditures was $5.6 million and $9.5 million for the
three months ended May 4, 2002 and May 5, 2001, respectively. During the three
months ended May 4, 2002, capital expenditures included $1.5 million for new
stores, $2.8 million on remodeled and existing stores, $0.8 million for MIS
upgrades and new systems and $0.5 million for office and warehousing.
To supplement operating cash requirements, we have a $100.0 million subordinated
secured credit facility with SSC. The interest rate and terms of the $100.0
million facility are generally the same as the Credit Agreement. Outstanding
advances under the agreement are subordinated to the Credit Agreement and are
subject to a junior lien on assets securing the Credit Agreement. At May 4,
2002, $20.0 million was outstanding.
We entered 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 425 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, SSC purchased the
outstanding balance under the same continuing terms. The terms provide that if
prior to May 6, 2002, 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. A one time fee of 200 basis points, or $1.5
million, was paid to SSC at the initial closing in consideration for entering
into a Put Agreement associated with the Senior Facility.
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUBSEQUENT EVENT
On June 12, 2002, the Company together with its principal subsidiaries,
announced the closing of a $525.0 million refinancing that consists of three
separate credit facilities: (i) a new three-year $350.0 million revolving credit
facility agented by National City Commercial Finance, Inc., Fleet Retail Finance
Inc., Wells Fargo Retail Finance, LLC, The CIT Group/Business Credit, Inc., and
General Electric Capital Corporation, (ii) a new three-year $100.0 million term
loan facility 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
will also be held equally by Cerberus Partners and Schottenstein Stores
Corporation. The maturity of the senior convertible loan has, as part of the
refinancing, been extended to March 2009 from September 2003.
$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. Initially the
applicable Eurodollar margin is set at 2.25% for the first two months of the
facility. Based on the borrowing base formula the Company and its subsidiaries
currently have over $115.0 million of excess availability, after the initial
funding and the repayment or replacement of all borrowings and letters of credit
outstanding under the prior senior credit and subordinated credit facilities.
$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 Loan are senior debt, ranking pari
passu with the Revolving Credit Facility and the Senior Convertible Loan. 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 paid-in-kind ("PIK") option
is elected by the Company. During the first two years of this facility, the
Company may pay all interest by PIK. During the final year of the Term Loan 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, 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
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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 our 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. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. SFAS
No. 142 provides that goodwill and intangible assets with indefinite lives will
not be amortized, but rather will be tested for impairment at least on an annual
basis. The Company is implementing SFAS No. 142 effective February 3, 2002. The
Company has ceased amortization of its remaining goodwill and has started its
initial impairment test for existing goodwill. An
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
impairment, if any, will be recognized in accordance with SFAS No. 142 during
2002 and will be classified as a cumulative effect of a change in accounting
principle. As of May 4, 2002, the Company has net unamortized goodwill of $41.0
million.
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. The Company has yet to determine the effect of this
pronouncement on its results of operations and financial position.
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 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.
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.
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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 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.
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.
-20-
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
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10.1 Loan and Security Agreement, dated as of
June 11, 2002, between the Company, as
Borrowers, and National City Commercial
Finance, Inc., as Administrative Agent for
the ratable benefit of the Revolving Credit
Lenders.
10.2 Financing Agreement, dated as of June 11,
2002, by and among the Company,. as
Borrowers and Cerberus Partners, L.P. and
the Lenders from time to time party hereto.
10.3 Amended and Restated Senior Convertible
Loan Agreement, dated as of June 11, 2002
by and among Value City Department Stores,
Inc., as Borrower, Shonac Corporation, DSW
Shoe Warehouse, Inc., Gramex Retail Stores,
Inc., VCM, Ltd., Filene's Basement, Inc.,
GB Retailers, Inc., J.S. Overland Delivery,
Inc., Value City Department Stores
Services, Inc., Value City Limited
Partnership, Value City of Michigan, Inc.,
Westerville Road GP, Inc. and Westerville
Road LP, Inc., as guarantors, the Lenders
from time to time party hereto, as Lenders,
and Schottenstein Stores Corporation, as
Agent.
10.3.1 Amendment No. 1 to Amended and Restated
Senior Convertible Loan Agreement, dated
June 11, 2002 by and among Value City
Department Stores, Inc., as Borrower,
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Shonac Corporation, DSW Shoe Warehouse,
Inc. Gramex Retail Stores, Inc., VCM,
Ltd., Filene's Basement, Inc., GB
Retailers, Inc., J.S. Overland Delivery,
Inc., Value City Department Stores
Services, Inc., Value City Limited
Partnership, Value City of Michigan, Inc.,
Westerville Road GP, Inc. and Westerville
Road LP, Inc., as Guarantors, the Lenders
from time to time party hereto, as
Lenders, and Schottenstein Stores
Corporation, as Agent.
10.4 Amended and Restated Registration
Right Agreement, dated as of June 11, 2002
by and among Value City Department Stores,
Inc. and Cerberus Partners, L.P. and
Schottenstein Stores Corporation.
10.5 Form of Warrant, Common Stock Purchase
Warrants, dated as of June 11, 2002 issued
to Cerberus Partners, L.P. and
Schottenstein Stores Corporation.
10.6 Corporate Services Agreement, dated June
12, 2002 between Value City Department
Stores, Inc., and Schottenstein Stores
Corporation.
Part B Reports on Form 8-K.
On June 12, 2002, we filed a Form 8-K, Items 5 and 7 relating
to the closing of a $525.0 million refinancing of existing
debt facilities.
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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: June 14, 2002 By: /s/ James A. McGrady
------------- ---------------------------------------
James A. McGrady,
Chief Financial Officer and Treasurer
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