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 November 2, 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
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1322832
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
(Address of principal executive offices) (Zip Code)
(614) 471-4722
Registrant's telephone number, including area code
Not applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares outstanding of Common Stock, without par value, as of
December 6, 2002 was 33,913,374.
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at November 2, 2002
and February 2, 2002....................................................................... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended November 2, 2002 and November 3, 2001................................ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended November 2, 2002 and November 3, 2001......................................... 5
Notes to the 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
Item 4. Controls and Procedures........................................................................ 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.............................................................................. 25
Item 6. Exhibits and Reports on Form 8-K............................................................... 25
Signature........................................................................................................ 26
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002......................................... 27
-2-
VALUE CITY DEPARTMENT STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
November 2, February 2,
2002 2002
-------- --------
ASSETS
Cash and equivalents $ 30,626 $ 35,915
Accounts receivable, net 18,423 6,650
Receivables from affiliates 533 905
Inventories 487,931 396,830
Prepaid expenses and other assets 19,278 15,741
Deferred income taxes 60,159 63,102
--------- ---------
Total current assets 616,950 519,143
--------- ---------
Property and equipment, net 238,180 244,644
Goodwill 37,619 40,974
Tradenames and other intangibles, net 48,579 51,652
Other assets 35,523 23,898
--------- ---------
$ 976,851 $ 880,311
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 231,097 $ 149,864
Accounts payable to affiliates 2,653 8,909
Accrued expenses 135,337 130,930
Current maturities of long-term obligations 782 665
--------- ---------
Total current liabilities 369,869 290,368
--------- ---------
Long-term obligations, net of current maturities 354,752 337,199
Deferred rent and other noncurrent liabilities 38,193 32,315
Commitments and contingencies -- --
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 33,913,374 and
34,227,540 shares, respectively 144,182 145,772
Retained earnings 73,435 82,432
Deferred compensation expense, net (1,132) (4,150)
Treasury shares, at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (2,389) (3,566)
--------- ---------
214,037 220,429
--------- ---------
$ 976,851 $ 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 Nine months ended
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales, excluding sales of
licensed departments $ 616,990 $ 584,403 $ 1,771,964 $ 1,650,994
Cost of sales (383,921) (360,943) (1,092,109) (1,020,041)
----------- ----------- ----------- -----------
Gross profit 233,069 223,460 679,855 630,953
Selling, general and
administrative expenses (231,241) (229,185) (670,516) (648,981)
License fees from affiliates 309 2,592 1,990 6,843
Other operating income 948 1,658 3,860 4,247
----------- ----------- ----------- -----------
Operating profit (loss) 3,085 (1,475) 15,189 (6,938)
Interest expense, net (8,765) (7,406) (22,966) (23,900)
----------- ----------- ----------- -----------
Loss before equity in loss
of joint venture, extraordinary item and
cumulative effect of accounting
change and income taxes (5,680) (8,881) (7,777) (30,838)
Equity in loss of joint venture -- (1,242) -- (2,453)
----------- ----------- ----------- -----------
Loss before extraordinary
item and cumulative effect of accounting
change and income taxes (5,680) (10,123) (7,777) (33,291)
Benefit for income taxes 2,184 3,645 2,930 13,243
----------- ----------- ----------- -----------
Loss before extraordinary
item and cumulative effect of
accounting change (3,496) (6,478) (4,847) (20,048)
Extraordinary (charge), net of
income taxes -- -- (2,070) --
Cumulative effect of accounting
change, net of income taxes -- -- (2,080) --
Net loss $ (3,496) $ (6,478) $ (8,997) $ (20,048)
=========== =========== =========== ===========
Weighted average shares outstanding 33,677 33,570 33,652 33,539
Basic and diluted loss per share:
Loss before extraordinary item and cum-
ulative effect of accounting change $ (0.10) $ (0.19) $ (0.15) $ (0.60)
Extraordinary (charge), net of
income taxes -- -- (0.06) --
Cumulative effect of accounting
change, net of income taxes -- -- (0.06) --
----------- ----------- ----------- -----------
Net loss $ (0.10) $ (0.19) $ (0.27) $ (0.60)
=========== =========== =========== ===========
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)
Nine months ended
November 2, November 3,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (8,997) $(20,048)
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 41,273 38,972
Deferred income taxes and other noncurrent liabilities 2,959 (19,194)
Equity in loss of joint venture -- 2,453
Loss on disposal of assets 1,372 13
Change in working capital, assets and liabilities:
Receivables (11,401) 49,270
Inventories (91,101) (99,548)
Prepaid expenses and other assets (3,782) 6,454
Accounts payable 74,977 31,172
Accrued expenses 4,464 (8,384)
-------- --------
Net cash provided by (used in) operating activities 13,914 (18,840)
-------- --------
Cash flows from investing activities:
Capital expenditures (30,042) (22,588)
Proceeds from sale of assets 45 131
Proceeds from lease incentives 6,436 --
-------- --------
Net cash used in investing activities (23,561) (22,457)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common shares -- 784
Proceeds from issuance of debt 65,500 40,000
Debt issuance costs (13,205) --
Net (decrease) increase in:
Revolving credit facility (27,500) 15,000
Capital leases and other debt (20,437) 293
-------- --------
Net cash provided by financing activities 4,358 56,077
-------- --------
Net (decrease) increase in cash and equivalents (5,289) 14,780
Cash and equivalents, beginning of period 35,915 10,562
-------- --------
Cash and equivalents, end of period $ 30,626 $ 25,342
======== ========
Non cash transaction:
Issuance of warrants $ 1,000 --
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 Department Stores and Filene's Basement, as well
as better-branded off-price shoe stores, under the name DSW Shoe Warehouse
("DSW"). DSW operates 70 leased shoe departments with a non-affiliated
Company. As of November 2, 2002, a total of 260 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, 124 DSW Shoe Warehouse stores located throughout
the United States and 20 Filene's Basement stores ("Filene's Basement")
located principally in the Northeast United States.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for fiscal year-end financial statements. In the
opinion of management, all adjustments consisting of normal recurring
adjustments considered necessary to present fairly the consolidated
financial position and results of operations for the periods presented have
been included. For further information, refer to the financial statement
and footnotes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission.
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 ("SSC"), 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 invento-
-6-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ries 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. The
final maturity date is June 11, 2005. At November 2, 2002, $148.0 million
was available under the Revolving Credit Facility. Direct borrowings
aggregated $150.0 million, plus $15.1 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 final maturity date is June 11, 2005.
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 issued 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.
$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 indi-
-7-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
viduals 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 an initial
conversion price of $4.50. The conversion price is subject to adjustment
upon the occurrence of specified events. The final maturity date is June
10, 2009.
Long-term obligations consist of the following (in thousands):
November 2, February 2,
2002 2002
--------- ---------
Credit facilities:
Revolving credit facility $ 150,000 $ 211,000
Term loans 100,000 --
Senior convertible loan 75,000 75,000
SSC loan -- 20,000
Warrant valuation (875) --
--------- ---------
324,125 306,000
Capital lease obligations 30,990 31,281
Other 419 583
--------- ---------
355,534 337,864
Less current maturities (782) (665)
--------- ---------
$ 354,752 $ 337,199
========= =========
3. SHAREHOLDERS' EQUITY
Shareholders' equity for the nine months ended November 2, 2002 consists of
(in thousands, except shares):
Total shareholders' equity, beginning of period $220,429
Net Loss (8,997)
Amortization of deferred compensation expense 428
Net unrealized gain on derivative financial instruments,
net of income tax provision of $457 1,360
Minimum pension liability, net of income tax
provision of $272 (183)
Forfeitures of 570,000 restricted shares at $2,590 --
Issuance of common stock purchase warrants 1,000
--------
Total shareholders' equity, end of period $214,037
========
-8-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. VALUATION ACCOUNTS
Reserves established and used for severance costs are the result of head
count and job elimination reductions of approximately 400 associates at
Value City Department Stores and an inventory alignment reserve as follows
(in thousands):
Nine months ended
-----------------------------------
November 2, 2002 November 3, 2001
---------------- ------------------
Severance Inventory Severance
-------- ------ ------
Balance at beginning of period $ 5,357 $ 43,700 $ 3,397
Provisions to establish reserves 3,218 -- --
Charges/payments (6,155) (43,700) (3,397)
-------- -------- --------
Balance at end of period $ 2,420 $ -- $ --
======== ======== ========
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 initially required to test all existing
goodwill for impairment as of February 3, 2002, on an operating segment
basis and perform an annual test thereafter. 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 initial result of testing for 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
nine months ended November 2, 2002. At November 2, 2002, the Company had
$37.6 million of goodwill subject to annual testing.
-9-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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)
=========
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 (0.06)
---------
Net loss as restated $ (0.14)
=========
The proforma effect of ceasing amortization of goodwill under SFAS 142 is
as follows (in thousands, except per share amounts):
Nine months ended
--------------------
November 2, November 3,
2002 2001
-------- --------
Reported net loss $ (8,997) $(20,048)
Addback goodwill amortization -- 2,504
-------- --------
Adjusted net loss $ (8,997) $(17,544)
======== ========
Basic and diluted loss per share $ (0.27) $ (0.52)
Amortization of intangible assets are as follows (in thousands):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
As of November 2, 2002
Tradenames:
Gross amount $ 1,120 $ 12,750 $ 9,900 $ 23,770
Accumulated amortization (336) (3,825) (1,760) (5,921)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 $ 140 $ 23,057 $ 37,614
Accumulated amortization (3,755) (47) (3,082) (6,884)
Average useful life (in years) 25 14 20
-10-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of February 2, 2002
Tradenames:
Gross amount $ 1,120 $ 12,750 $ 9,900 $ 23,770
Accumulated amortization (280) (3,189) (1,265) (4,734)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 $ 140 $ 24,993 $ 39,550
Accumulated amortization (3,295) (37) (3,602) (6,934)
Average useful life (in years) 25 14 20
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 $ 863 $ 2,253 $ 3,804
2003 681 863 1,794 3,338
2004 676 863 1,794 3,333
2005 676 863 1,794 3,333
2006 676 855 1,794 3,325
2007 676 854 1,794 3,324
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 April 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. The Company for fiscal year 2003 will
be required to reclassify the loss on
-11-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the extinguishment of debt from extraordinary to operating profit, in the
condensed consolidated statements of operations, under the provisions of
SFAS No. 145.
In June 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) represents net income (loss) plus the results
of certain non-shareholder's equity changes not reflected in the
Consolidated Statement of Operations.
The components of comprehensive loss, net of tax are as follows (in
thousands):
Three months ended Nine months ended
------------------ -----------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
------- ------- ------- --------
Net loss $(3,496) $(6,478) $(8,997) $(20,048)
Net unrealized gain (loss), on
derivative financial instru-
ments, net of income tax 528 (833) 1,360 (3,142)
Minimum pension liability,
net of income tax (183) -- (183) --
------- ------- ------- --------
Other comprehensive loss $(3,151) $(7,311) $(7,820) $(23,190)
======= ======= ======= ========
The components of the balance sheet caption accumulated other comprehensive
loss are as follows (in thousands):
November 2, February 2,
2002 2002
------- -------
Net unrealized loss on derivative
financial instruments, net of income tax $(1,235) $(2,595)
Minimum pension liability, net of income tax (1,154) (971)
------- -------
Accumulated other comprehensive loss $(2,389) $(3,566)
======= =======
-12-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 November 2, 2002 reflect this acquisition.
The following unaudited proforma consolidated financial results for the
three and nine months ended November 3, 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 Nine Months
Proforma Proforma
Total Total
----- -----
Net sales $ 613,295 $ 1,728,466
Net loss $ (6,724) $ (20,125)
Basic and diluted loss per share $ (0.20) $ (0.60)
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 the operating (loss) profit
before interest expense and income taxes.
Three month period ended November 2, 2002 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $367,010 $170,193 $79,787 $616,990
Operating (loss) profit (2,122) 3,147 2,060 3,085
Capital expenditures 2,716 6,771 566 10,053
Depreciation and amortization 11,461 723 1,681 13,865
Three month period ended November 3, 2001 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $370,543 $136,219 $77,641 $584,403
Operating (loss) profit (4,645) 2,094 1,076 (1,475)
Capital expenditures 2,175 5,432 216 7,823
Depreciation and amortization 8,640 3,264 1,825 13,729
-13-
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine month period ended November 2, 2002 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $1,062,691 $485,002 $224,271 $1,771,964
Operating (loss) profit (5,524) 16,879 3,834 15,189
Capital expenditures 10,749 17,408 1,885 30,042
Depreciation and amortization 32,018 4,104 5,151 41,273
Identifiable assets 581,754 277,927 117,170 976,851
Nine month period ended November 2, 2001 (in thousands):
Value City DSW Filene's Total
---------- --- -------- -----
Net sales $1,052,042 $388,885 $210,067 $1,650,994
Operating (loss) profit (18,127) 5,810 5,379 (6,938)
Capital expenditures 10,022 11,999 567 22,588
Depreciation and amortization 26,456 7,486 5,030 38,972
Identifiable assets 661,101 194,556 118,101 973,758
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 have a material
adverse impact on the Company's financial position or results of
operations.
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 that the result would be antidilutive
and therefore is not included in the statement of operations.
-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 Nine months ended
------------------ -----------------
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
---- ---- ---- ----
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
Cost of sales (62.2) (61.8) (61.6) (61.8)
---- ---- ---- ----
Gross profit 37.8 38.2 38.4 38.2
Selling, general and
administrative expenses (37.5) (39.2) (37.8) (39.3)
License fees from affiliates and
other operating income 0.2 0.7 0.3 0.7
---- ---- ---- ----
Operating profit (loss) 0.5 (0.3) 0.9 (0.4)
Interest expense, net (1.4) (1.2) (1.3) (1.4)
---- ---- ---- ----
Loss before equity in loss
of joint venture, extraordinary item
and cumulative effect of accounting
change and income taxes (0.9) (1.5) (0.4) (1.8)
Equity in loss of joint venture -- (0.2) -- (0.2)
---- ---- ---- ----
Loss before extraordinary item
and cumulative effect of accounting
change and income taxes (0.9) (1.7) (0.4) (2.0)
Benefit for income taxes 0.3 0.6 0.1 0.8
---- ---- ---- ----
Loss before extraordinary
item and cumulative effect of
accounting change (0.6) (1.1) (0.3) (1.2)
Extraordinary (charge), net of
income taxes -- -- (0.1) --
Cumulative effect of accounting
change, net of income taxes -- -- (0.1) --
---- ---- ---- ----
Net loss (0.6)% (1.1)% (0.5)% (1.2)%
==== ==== ==== ====
-15-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 2, 2002 COMPARED TO THREE MONTHS ENDED NOVEMBER 3,
2001
The Company's net sales increased $32.6 million, or 5.6%, from $584.4 million to
$617.0 million. Sales for the period ended November 2, 2002 include $27.3
million attributable to sales of departments formally operated by the joint
venture VCM, Ltd. Comparable stores sales decreased 4.6% for the quarter. By
segment, comparable store sales were:
Three months ended
--------------------------------
November 2, November 3,
2002 2001
----------- -----------
Value City Department Stores (7.2)% (0.1)%
DSW 1.8% (2.4)%
Filene's Basement 0.0% (1.2)%
----------- -----------
Total (4.6)% (0.7)%
=========== ===========
Value City Department Store's non-apparel comparable sales decreased 5.8% while
apparel sales decreased 8.3%. Each of the three apparel divisions: Children's,
Men's and Ladies, had negative comparable sales for the quarter of 10.8%, 12.7%
and 2.8%, respectively, and shoe sales decreased 4.7%.
DSW sales were $170.2 million, a 24.9% increase in the quarter, which includes a
net increase of 26 stores and 62 leased shoe departments.
Filene's Basement sales were $79.8 million, a 2.8% increase in the quarter, with
net stores remaining unchanged.
Gross profit increased $9.6 million, a 4.3% improvement, from $223.5 million to
$233.1 million, and decreased as a percentage of sales from 38.2% to 37.8%.
Gross profit, as a percent of sales by segment in the third quarter, was:
Three months ended
--------------------------------
November 2, November 3,
2002 2001
----------- -----------
Value City Department Stores 37.9% 38.6%
DSW 39.7% 39.4%
Filene's Basement 33.0% 34.6%
----------- -----------
Total 37.8% 38.2%
=========== ===========
Selling, general and administrative expenses ("SG&A") increased $2.0 million,
from $229.2 million to $231.2 million, and decreased as a percentage of sales
from 39.2% to 37.5%. This increase includes $10.9 million attributable to new
stores in operation at DSW and Filene's Basement and a $1.4 million provision
for severance costs. SG&A for the quarter ended November 3, 2001 includes $0.8
million of goodwill amortization and includes an additional charge of $7.9
million across all segments for costs associated with employee health and
welfare and employment taxes. In addition, the 2001 quarter includes a charge of
$1.3 million for two store closings in Value City. SG&A as a percent of sales by
segment in the third quarter was:
-16-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended
--------------------------------
November 2, November 3,
2002 2001
----------- -----------
Value City Department Stores 38.8% 40.9%
DSW 37.9% 37.8%
Filene's Basement 30.8% 33.6%
----------- -----------
Total 37.5% 39.2%
=========== ===========
License fees from affiliates and other operating income decreased $3.0 million,
from $4.3 million to $1.3 million, and decreased as a percentage of sales from
0.7% to 0.2% as a result of VCM, Ltd. acquisition. License fees received from
the VCM, Ltd. joint venture in the quarter ended November 3, 2001 were
approximately $2.1 million.
Operating profit improved $4.6 million, from a loss of $1.5 million to income of
$3.1 million, and increased as a percentage of sales from a loss of 0.3% to
income of 0.5%.
Net interest expense for the quarter increased $1.4 million to $8.8 million.
This increase is due primarily to an increase of 248 basis points in our
weighted average borrowing rate, offset by a $42.2 million decline in our
average borrowings from last year to this year, primarily due to inventory
management and expense controls.
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 November 2, 2002 and February 2, 2002, and
statements of operations for the three month period ended November 2, 2002
reflect this acquisition.
The effective tax rate for the three months ended November 2, 2002 is 38.5%
versus 36.0% for the three months ended November 3, 2001.
NINE MONTHS ENDED NOVEMBER 2, 2002 COMPARED TO NINE MONTHS ENDED NOVEMBER 3,
2001
The Company's net sales increased $121.0 million, or 7.3%, from $1,651.0 million
to $1,772.0 million. Sales for the nine-month period ended November 2, 2002
include $76.4 million attributable to sales of departments formally operated by
the joint venture VCM, Ltd. Comparable stores sales decreased 3.0% for the nine
month period. By segment, comparable store sales were:
Nine months ended
--------------------------------
November 2, November 3,
2002 2001
----------- -----------
Value City Department Stores (4.9)% (4.6)%
DSW 0.3% 0.4%
Filene's Basement 1.9% 2.3%
----------- -----------
Total (3.0)% (3.0)%
=========== ===========
-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 3.2% while
apparel sales decreased 6.5%. Each of the three apparel divisions: Children's,
Men's and Ladies, had negative comparable sales for the nine-month period of
9.0%, 10.3% and 2.0%, respectively, and shoe sales decreased 1.0%.
DSW sales were $485.0 million, a 24.7% increase in the nine month period, which
includes a net increase of 20 stores and 70 leased shoe departments.
Filene's Basement sales were $224.3 million, a 6.8% increase in the nine month
period, with net stores remaining unchanged.
Gross profit increased $48.9 million, a 7.8% improvement from $631.0 million to
$679.9 million, and increased as a percentage of sales from 38.2% to 38.4%.
Gross profit, as a percent of sales by segment in the nine-month period, was:
November 2, November 3,
2002 2001
----------- -----------
Value City Department Stores 38.5% 38.5%
DSW 39.9% 39.1%
Filene's Basement 34.5% 35.3%
----------- -----------
Total 38.4% 38.2%
=========== ===========
Selling, general and administrative expenses ("SG&A") increased $21.5 million,
from $649.0 million to $670.5 million, and decreased as a percentage of sales
from 39.3% to 37.8%. This increase includes $22.6 million attributable to new
stores in operation at DSW and Filene's Basement, a charge of $1.7 million for
store closings and a $3.2 million provision for severance costs. SG&A for the
nine months ended November 3, 2001 included $2.5 million of goodwill
amortization and an additional charge of $7.9 million across all segments for
costs associated with employee health and welfare and employment taxes plus a
charge of $1.3 million for two store closings in Value City. SG&A as a percent
of sales by segment in the nine month period was:
November 2, November 3,
2002 2001
----------- -----------
Value City Department Stores 39.4% 41.1%
DSW 36.4% 37.7%
Filene's Basement 33.5% 33.5%
----------- -----------
Total 37.8% 39.3%
=========== ===========
License fees from affiliates and other operating income decreased $5.2 million,
from $11.1 million to $5.9 million, and decreased as a percentage of sales from
0.7% to 0.3% as a result of VCM, Ltd. acquisition. License fees received from
the VCM, Ltd. joint venture in the nine month period ended November 3, 2001 were
approximately $5.2 million.
-18-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating profit improved $22.1 million, from a loss of $6.9 million to income
of $15.2 million, and increased as a percentage of sales from a loss of 0.4% to
income of 0.9%.
Net interest expense for the nine-month period decreased $1.0 million to $23.0
million. This decrease is due primarily to a $36.7 million drop in weighted
average borrowings from last year to this year, primarily due to inventory
management and expense controls and a 0.2% 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 November 2, 2002 and February 2, 2002 and
statements of operations for the nine month period ended November 2, 2002
reflect this acquisition.
Under SFAS 142, the Company was initially required to test all existing
goodwill, on an operating segment basis, for impairment as of February 3, 2002,
and perform an annual test thereafter. 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 the initial testing of 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 nine months ended November 2, 2002.
At November 2, 2002, the Company had $37.6 million of recorded goodwill subject
to annual testing.
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 37.7% versus 39.8% 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 $247.1 million at November 2, 2002, compared to $272.2
million at November 3, 2001. Current ratios at those dates were each 1.67 and
1.78, respectively.
Net cash provided by operating activities totaled $13.9 million for the nine
months ended November 2, 2002 compared to a use of cash of $18.8 million for the
nine months ended November 3, 2001. Earnings before interest, taxes,
depreciation and amortization (EBITDA) for the nine months ended November 2,
2002 was $56.7 million.
Net cash used for capital expenditures was $30.0 million and $22.6 million for
the nine months ended November 2, 2002 and November 3, 2001, respectively.
During the nine months ended
-19-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
November 2, 2002, capital expenditures included $14.4 million for new stores,
$10.8 million on remodeled and existing stores, $2.2 million for MIS upgrades
and new systems and $2.6 million for office and warehousing.
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.
$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 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 issued 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.
-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 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.
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.
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 initially required to test all existing goodwill
for impairment as of February 3, 2002, on an operating segment basis and perform
an annual test thereafter. 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 initial result of testing for 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 nine months ended November 2, 2002.
At November 2, 2002, the Company had $37.6 million of recorded goodwill subject
to annual testing.
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
-21-
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 April 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. The Company for fiscal year 2003 will be required to reclassify the
loss on the extinguishment of debt from extraordinary to operating profit, in
the condensed consolidated statements of operations, under the provisions of
SFAS No. 145.
In June 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.
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
-22-
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. The fair value of the interest rate at
November 2, 2002 was $2.1 million.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Operating Officer and Chief Financial Officer of the
effectiveness of the design and operation of the company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation,
the Company's President and Chief Executive Officer along with the Company's
Chief Operating Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. There were no significant
changes in internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
-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.
A. The Company held its fiscal 2002 Annual Meeting of
Shareholders on September 26, 2002. Holders of
31,173,299 Common Shares of the Company were present
representing 92.46% of the Company's 33,716,770 Common
Shares issued and outstanding and entitled to vote at
the meeting.
B. The following persons were elected as members of the
Company's Board of Directors to serve until the annual
meeting following their election or until their
successors are duly elected and qualified. Each person
received the number of votes for or the number of votes
with authority withheld indicated below.
Name Votes For Votes Withheld
---------------------- ---------- --------------
Henry L. Aaron 26,299,904 4,873,395
Roger D. Blackwell 26,303,510 4,869,789
Ari Deshe 26,302,920 4,870,379
Jon P. Diamond 25,915,702 5,257,597
Elizabeth M. Eveillard 25,926,906 5,246,983
William R. Fields 26,303,910 4,869,389
Marvin Goldstein 25,926,906 5,246,393
Roger S. Markfield 26,199,501 4,973,798
Jay L. Schottenstein 24,909,388 6,263,911
Harvey L. Sonnenberg 25,925,106 5,248,193
James L. Weisman 25,927,106 5,246,193
C. The proposal to approve the issuance of warrants to
purchase shares of the Company's common stock, initially
exercisable for up to 2,954,793 shares of common stock
and the issuance of shares of common stock issuable
pursuant to the anti-dilution and other provisions of
the warrants passed with 23,764,345 shares voting in
favor, 764,634 shares voting against and 2,141,789
shares abstaining.
D. The proposal to approve the issuance of shares of the
Company's common stock as interest on and upon
conversion of amounts outstanding under the Amended and
Restated Senior Convertible Loan Agreement, as well as
any additional shares of common stock issuable pursuant
to the terms of the Amended and Restated Senior
Convertible Loan
-24-
Agreement passed with 23,872,788 shares voting in favor,
354,574 shares voting against and 2,443,406 shares
abstaining.
E. The proposal to amend the Company's 2000 Stock Incentive
Plan to increase the number of shares that may be issued
thereunder from 3,000,000 to 13,000,000 and to increase
the number of shares that may be awarded to an
individual in any performance period from 2,500,000 to
3,000,000 passed with 20,028,118 shares voting in favor,
4,494,882 shares voting against and 2,147,767 shares
abstaining.
F. The proposal to approve the merger of a subsidiary of
the Company with and into the Company in order to create
a holding company structure (the "Merger") passed with
23,946,834 shares voting in favor, 299,522 shares voting
against and 2,424,392 shares abstaining.
G. The proposal to approve the Company's 2003 Incentive
Compensation Plan passed with 21,642,769 shares voting
in favor, 2,891,606 shares voting against and 2,136,392
shares abstaining.
Item 5. OTHER INFORMATION. Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Part A Exhibits.
Exhibit No. Document
----------- --------
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 September 12, 2002, we filed a Form 8-K, Item 7,
relating to John C. Rossler, Chief Executive Officer,
and James A. McGrady, Chief Financial Officer, each to
which filed with the Securities and Exchange Commission
a Statement Under Oath of Principal Executive Officer
and Principal Financial Officer Regarding Facts and
Circumstances Relating to Exchange Act Filings as
required by SEC Order 4-460 issued on June 27, 2002.
On September 24, 2002, we filed a Form 8-K, Item 7,
relating to the issue of a press release announcing the
appointment of Stuart Glasser to head the softlines
merchandising operations in its department stores.
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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: December 11, 2002 By: /s/ James A. McGrady
---------------------------
James A. McGrady,
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
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CERTIFICATION
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;
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;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
-27-
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 11, 2002
/s/ John C. Rossler
--------------------------------------
John C. Rossler
President and Chief Executive Officer of
Value City Department Stores, Inc.
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CERTIFICATION
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;
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;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 11, 2002
/s/ James A. McGrady
--------------------------
James A. McGrady
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary of
Value City Department
Stores, Inc.