1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 1-10767
-------
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1322832
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 471-4722
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 1, 2001
------------------------------- ---------------------------
Common Stock, Without Par Value 34,274,712 Shares
2
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
================================================================================
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
May 5, 2001 and February 3, 2001 3
Consolidated Statements of Operations for the three months
ended May 5, 2001 and April 29, 2000 4
Consolidated Statements of Cash Flows for the three
months ended May 5, 2001 and April 29, 2000 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Signature 13
Item 6. Exhibits and Reports on Form 8-K N/A
page 2
3
VALUE CITY DEPARTMENT STORES, INC.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
MAY 5, FEBRUARY 3,
2001 2001
----------- ---------
ASSETS
Current assets:
Cash and equivalents $ 48,757 $ 10,562
Accounts receivable, net 45,526 44,927
Receivables from affiliates 1,742 9,452
Inventories 484,145 393,577
Prepaid expenses and other assets 25,955 22,290
Deferred income taxes 57,019 51,732
----------- ---------
Total current assets 663,144 532,540
Property and equipment, at cost:
Furniture, fixtures and equipment 229,787 223,675
Leasehold improvements 178,398 176,318
Land and building 801 801
Capital leases 37,414 38,348
----------- ---------
446,400 439,142
Accumulated depreciation and amortization (198,025) (190,103)
----------- ---------
Property and equipment, net 248,375 249,039
Investment in joint venture 7,408 8,292
Goodwill and tradenames, net 62,505 67,056
Other assets 45,423 51,082
----------- ---------
Total assets $ 1,026,855 $ 908,009
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 248,124 $ 180,736
Accounts payable to affiliates 19,738 13,655
Accrued expenses:
Compensation 17,963 19,662
Taxes 27,257 31,255
Other 68,080 75,227
Current maturities of long-term obligations 562 603
----------- ---------
Total current liabilities 381,724 321,138
Long-term obligations, net of current maturities 391,762 326,449
Deferred income taxes and other noncurrent liabilities 12,212 10,115
Commitments and contingencies -- --
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including treasury shares, 34,340,863 and
33,552,230 shares, respectively 145,741 145,659
Retained earnings 103,355 111,155
Deferred compensation expense, net (5,770) (6,448)
Treasury shares, at cost, 7,651 shares (59) (59)
Other comprehensive loss (2,110) --
----------- ---------
Total shareholders' equity 241,157 250,307
----------- ---------
Total liabilities and shareholders' equity $ 1,026,855 $ 908,009
=========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
page 3
4
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
THREE MONTHS ENDED
-----------------------------
MAY 5, APRIL 29,
2001 2000
---------- ---------
Net sales, excluding sales of licensed departments $ 530,114 $ 462,053
Cost of sales (328,221) (284,322)
--------- ---------
Gross profit 201,893 177,731
Selling, general and administrative expenses (208,513) (174,426)
License fees from affiliates 2,112 2,153
Other operating income 495 277
--------- ---------
Operating (loss) profit (4,013) 5,735
Interest expense, net (8,436) (5,354)
Gain (loss) on disposal of assets, net 1 (20)
--------- ---------
(Loss) income before equity in loss of joint venture
and benefit (provision) for income taxes (12,448) 361
Equity in loss of joint venture (884) (269)
--------- ---------
(Loss) income before benefit (provision) for income taxes (13,332) 92
Benefit (provision) for income taxes 5,533 (37)
--------- ---------
Net (loss) income $ (7,799) $ 55
========= =========
Basic and diluted (loss) earnings per share $ (0.23) $ 0.00
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
page 4
5
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
================================================================================
THREE MONTHS ENDED
----------------------------
MAY 5, APRIL 29,
2001 2000
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (7,799) $ 55
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 12,832 9,801
Deferred income taxes and other noncurrent liabilities (3,031) (1,939)
Equity in loss of joint venture 884 269
(Gain) loss on disposal of assets (1) 20
Change in working capital, assets and liabilities excluding
effects of acquisition:
Receivables 7,112 (9,632)
Inventories (90,568) (127,023)
Prepaid expenses and other assets (2,629) (9,939)
Accounts payable 73,471 62,332
Accrued expenses (8,769) (10,018)
-------- ---------
Net cash used in operating activities (18,498) (86,074)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,534) (13,379)
Proceeds from sale of assets 1 --
Acquisition -- (3,506)
Other assets and lease acquisition costs 1,401 (27,117)
-------- ---------
Net cash used in investing activities (8,132) (44,002)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 82 3,070
Net proceeds from issuance of debt 64,743 128,705
-------- ---------
Net cash provided by financing activities 64,825 131,775
-------- ---------
Net increase in cash and equivalents 38,195 1,699
Cash and equivalents, beginning of period 10,562 6,027
-------- ---------
Cash and equivalents, end of period $ 48,757 $ 7,726
======== =========
Non-cash transactions:
Issuance of common shares related to acquisition -- $ 5,500
Contribution made in treasury shares -- $ 1,080
The accompanying notes are an integral part of the consolidated financial
statements.
page 5
6
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 5, 2001 AND APRIL 29, 2000
(UNAUDITED)
================================================================================
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Value City Department Stores, Inc. (VCDS) and its wholly owned
subsidiaries. These entities are herein referred to collectively as the
Company. The Company operates a chain of full-line, off-price department
stores, principally under the name Value City, as well as better-branded
off-price shoe stores, under the name "DSW Shoe Warehouse." As of May 5,
2001 a total of 221 stores were open, including 119 Value City stores
located principally in Ohio (23 stores) and Pennsylvania (19 stores) with
the remaining stores dispersed throughout the Midwest, East and South and
83 DSW Shoe Warehouse stores (DSW) located throughout the United States and
19 Filene's Basement stores ("Filene's") located principally in the New
England states.
The accompanying financial statements reflect all adjustments consisting of
only normal recurring adjustments, which are, in the opinion of management,
necessary to present fairly the consolidated financial position and results
of operations for the periods presented.
2. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
The Company entered into a $75.0 million Senior Subordinated Convertible
Loan Agreement ("Senior Facility"), dated as of March 15, 2000. The Senior
Facility bears interest at various rates, currently equal to 250 basis
points over LIBOR. The interest rate increases an additional 50 basis
points every 90 days after the first anniversary date. The Senior Facility
is due in September 2003. In December 2000, pursuant to terms of the Senior
Facility, Schottenstein Stores Corporation ("SSC"), direct owner of
approximately 53.0% of the Company's common shares, purchased the
outstanding balance under the same continuing terms. The terms, as amended,
provide that if prior to August 5, 2001, the balance outstanding thereunder
is not repaid from the proceeds of an equity offering or other subordinated
debt acceptable to lenders under the Credit Agreement, then after that date
SSC, as the lender, has the right to convert the debt into our common stock
at a price equal to 95% of the 20-day average of high and low sales prices
reported on the New York Stock Exchange at the time of conversion. The
Company paid SSC a one time fee of 200 basis points, or $1.5 million, in
December 2000 as consideration for entering into a Put Agreement associated
with the Senior Facility.
The Company believes the availability under its credit facilities along
with its current available cash plus expected cash flows from its
operations, will enable the Company to fund its expected needs for working
capital, capital expenditures, and debt service requirements. Achievement
of expected cash flows from operations, vendor and their factor relations,
flow of merchandise, and compliance with the credit facilities covenants
are dependent upon the Company's attainment of its Fiscal 2001 business
plan.
3. VALUATION ACCOUNTS
During the quarter ended May 5, 2001, charges to the inventory realignment
reserve and the accrued severance liability were $24.7 million and $1.0
million, respectively.
4. ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which
require implementation by a date falling within or after the close of our
fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company's adoption of SFAS 133 effective February 4, 2001 did not have a
significant impact on the financial position, results of operations, or
cash flows of the Company.
The Company utilizes interest rate swap agreements to manage its interest
rate risks on borrowings under its $300 million variable rate credit
agreement. The Company does not hold or issue derivative financial
instruments for trading purposes. The Company does not have derivative
financial instruments that are held or issued and accounted for as hedges
of anticipated transactions.
page 6
7
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 5, 2001
(UNAUDITED)
================================================================================
5. OTHER COMPREHENSIVE LOSS
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 quarter ending May 5, 2001 relates to the
change in the fair market value of interest rate swap agreements.
Comprehensive income equals net income for the quarter ended May 5, 2001.
6. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW Shoe Warehouse stores and Filene's Basement stores, acquired
effective March 17, 2000. All of the operations are located in the United
States. The Company has identified such segments based on management
responsibility and measures segment profit as operating (loss) profit which
is defined as income before interest expense and income taxes. Corporate
assets include goodwill and loan costs related to the Shonac acquisition.
THREE MONTH PERIOD ENDED MAY 5, 2001 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $344,842 $121,750 $63,522 -- $ 530,114
Operating (loss) profit (8,751) 5,113 (375) -- (4,013)
Identifiable assets 760,322 126,248 112,636 $27,649 1,026,855
Capital expenditures 3,073 5,628 833 -- 9,534
Depreciation and amortization 8,783 1,610 1,511 928 12,832
THREE MONTH PERIOD ENDED APRIL 29, 2000 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $347,807 $88,387 $25,859 -- $462,053
Operating profit 347 2,991 2,397 -- 5,735
Identifiable assets 832,675 59,621 61,185 $30,972 984,453
Capital expenditures 11,259 2,120 -- -- 13,379
Depreciation and amortization 7,980 475 380 966 9,801
page 7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
================================================================================
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
--------------------------------------------------------------------------------
Three Months Ended
---------------------------------
May 5, 2001 April 29, 2000
----------- --------------
Net sales 100.0% 100.0%
Gross profit 38.1 38.5
Selling, general and administrative expenses (39.3) (37.8)
License fees from affiliates and other operating income 0.5 0.5
----- -----
Operating (loss) profit (0.7) 1.2
Interest expense, net, and gain (loss) on disposals (1.6) (1.1)
Equity in loss of joint venture (0.2) (0.1)
----- -----
(Loss) income before income taxes (2.5) 0.0
Benefit (provision) for income taxes 1.0 0.0
----- -----
Net (loss) income (1.5)% 0.0%
===== =====
page 8
9
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
THREE MONTHS ENDED MAY 5, 2001 COMPARED TO THREE MONTHS ENDED APRIL 29, 2000
The Company's net sales increased $68.0 million, or 14.7%, from $462.1
million to $530.1 million. Fiscal 2001 includes sales of $63.5 million for
Filene's Basement which was acquired in March 2000. The prior year first quarter
sales for Filene's Basement were $25.9 million. Comparable stores sales for the
quarter were (3.9)%. By segment comparable store sales were:
2001 2000
---- ----
Value City Department Stores ........... (6.5)% 3.9%
DSW .................................... 2.4% 20.4%
Filene's Basement ...................... 18.9% n/a
TOTAL .................................. (3.9)% 6.5%
Value City's non-apparel comparable sales increased 8.7% while apparel
sales decreased 11.1%. Each of the three apparel divisions had negative
comparable sales for the quarter. Children's was down 6.0%; Men's declined 8.5%;
and Ladies' 14.8%.
DSW sales were $121.8 million, a 37.9% increase in the quarter which
includes a net increase of 24 stores and a comparable store sales increase of
2.4%.
Gross profit increased $24.2 million from $177.7 million to $201.9
million, and decreased as a percentage of sales from 38.5% to 38.1% due
primarily to an increase in the level of markdowns as a percentage of sales
particularly in Filene's Basement. Gross profit as a percent of sales by segment
in the first quarter were:
2001 2000
---- ----
Value City Department Stores ........... 38.0% 38.3%
DSW .................................... 39.8% 37.8%
Filene's Basement ...................... 35.5% 43.0%
TOTAL .................................. 38.1% 38.5%
Selling, general and administrative expenses ("SG&A") increased $34.1
million from $174.4 million to $208.5 million, and increased as a percentage of
sales from 37.8% to 39.5%. The percentage increase was due in part to the weak
sales performance in our Value City department stores. $10.6 million of the
increase in SG&A is attributable to new stores, net of closed stores. SG&A
expenses for Filene's Basement were $22.8 million. New store pre-opening
expenses for the quarter were $2.8 million less than last year. In the first
half of the quarter we reduced or eliminated the operation at many of our third
party warehouse locations. SG&A as a percent of sales by segment in the first
quarter were:
2001 2000
---- ----
Value City Department Stores ........... 41.2% 38.4%
DSW .................................... 35.3% 35.6%
Filene's Basement ...................... 36.9% 36.2%
TOTAL 39.3% 37.8%
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $4.5 million to $6.5
million and the cost of opening a new shoe store to range from approximately
$1.0 million to $2.0 million including leasehold improvements, fixtures,
inventory, pre-opening expenses and other costs. Similar costs for a Filene's
store are in the $2.5 to $3.5 million range. Preparations for opening a
department store generally take between eight and twelve weeks, and preparations
for a shoe store generally takes eight to ten weeks. Pre-opening costs are
expensed as incurred. It has been the Company's experience that new stores
generally achieve profitability and contribute to net income after the first
full year of operations. 15 department stores opened less than twelve months had
an operating loss of $4.0 million for the current three-month period. 14
department stores opened less than 12 months during last year's three month
period had an operating loss of $1.4 million including $2.6 million of
preopening expenses. 24 DSW stores opened less than twelve months had an
operating loss of $6.1 million, including $4.7 million of pre-opening expenses.
16 DSW stores opened less than twelve months during last year's three month
period had an operating loss of $1.7 million after recognizing $1.7 million of
pre-opening expenses.
page 9
10
License fees from affiliates and other operating income increased $0.2
million from $2.4 million to $2.6 million and remained flat as a percentage of
sales.
Operating profit decreased $10.5 million from $5.7 million to a loss of
$4.8 million and decreased as a percentage of sales from 1.2% to a loss of 0.9%.
Interest expense, net of interest income, increased $3.1 million from
$5.3 million to $8.4 million and increased as a percentage of sales from 1.2% to
1.6%. The increase is due primarily to increased borrowings for the acquisition
of Gramex Retail Stores, Inc. and Filene's Basement, new store openings and an
increase in inventory levels primarily for DSW Shoe Warehouse and Filene's
Basement offset by reductions in Value City Department Stores.
Equity in the loss of the joint venture represents the Company's fifty
percent interest in a joint venture with Mazel Stores, Inc. The loss increased
from $0.3 million to $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $281.4 million at May 5, 2001 compared to $277.1
million at April 29, 2000. Current ratios at those dates were each 1.74 and
1.77, respectively.
Net cash used in operating activities totaled $18.5 million and $86.1
million for the three months ended May 5, 2001 and April 29, 2000, respectively.
Net income, adjusted for depreciation and amortization, provided $5.0 million of
operating cash flow for the three months ended May 5, 2001. This was decreased
by $17.1 million representing an increase in inventories net of an increase in
accounts payable. Other changes in working capital assets and liabilities used
$6.4 million. Earnings before interest, taxes, depreciation and amortization
(EBITDA) for the quarter of fiscal 2001 was $7.1 million.
Net cash used for capital expenditures was $9.5 million and $13.4
million for the three months ended May 5, 2001 and April 29, 2000, respectively.
During the three months ended May 5, 2001, capital expenditures included $2.4
million for new stores, $0.9 million on existing stores, $2.0 million for
relocation of office, warehousing and operations of our shoe business and $4.2
million for other capital expenditures.
At May 5, 2001, we had a $300 million Amended and Restated Credit
Agreement (Credit Agreement), dated as of March 15, 2000. The Credit Agreement,
which expires on March 15, 2003, provides for revolving and overnight loans and
issuance of letters of credit. Outstanding advances are secured by a lien on
assets and are subject to a monthly borrowing base of eligible inventories and
receivables, as defined. Terms of the Credit Agreement require compliance with
certain restrictive covenants, including limitations on dividends, the
incurrence of additional debt and financial ratio tests. Additionally, the
Company has provided an unconditional guarantee of 50% of amounts outstanding on
VCM, Ltd's ("VCM") VCM's $25.0 million revolving line of credit. At May 5, 2001,
$17.5 million was available under the Credit Agreement. The Credit Agreement
provides for various borrowing rates, currently equal to 275 basis points over
LIBOR. The LIBOR rate on $40.0 million has been locked in at a fixed annual rate
of 5.895% through May 2001 under a swap agreement. In addition, the LIBOR rate
on $35 million has been locked in at a fixed annual rate of 6.99% through April
2002 under a swap agreement.
To supplement operating cash requirements the Company has a $50.0 million
Subordinated Secured Credit Facility with Schottenstein Stores Corp. ("SSC
Facility"). Outstanding advances under the agreement are subordinated to the
bank credit facility and are subject to a junior lien on assets securing the
bank credit facility. At February 3, 2001, $20.0 million was outstanding. The
interest rate and terms of the $50.0 million facility are generally the same as
the Credit Agreement.
The Company entered into a $75.0 million Senior Subordinated Convertible
Loan Agreement (Senior Facility), dated as of March 15, 2000. The Senior
Facility bears interest at various rates, currently equal to 250 basis points
over LIBOR. The interest rate increases an additional 50 basis points every 90
days after the first anniversary date. The Senior Facility is due in September
2003. In December 2000, pursuant to terms of the Senior Facility, as amended,
SSC purchased the outstanding balance under the same continuing terms. The terms
provide that if prior
page 10
11
to August 5, 2001, the balance outstanding thereunder is not repaid from the
proceeds of an equity offering or other subordinated debt acceptable to lenders
under the Credit Agreement, then after that date SSC, as the lender, has the
right to convert the debt into common stock at a price equal to 95% of the
20-day average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. We 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.
Although management believes that cash generated by operations, along
with the available proceeds from our Credit Agreement, SSC Facility and other
sources of financing will be sufficient to meet our obligations for working
capital, capital expenditures, and debt service requirements there is no
assurance that we will be able to meet our projections. Further, there is no
assurance that extended financing will be available to us in the future if we
fail to meet our projections.
Our sales results in the first four fiscal months of 2001 were below plan
principally as a result of unusually extended cold and wet weather patterns in
most our market areas combined with the effect of increased heating and fuel
prices which affected the retail industry in general. Achievement of expected
cash flows from operations and compliance with our Credit Agreement covenants
are dependent upon a number of factors, including the attainment of sales, gross
profit, expense budgets, vendor relations, and flow of merchandise that are
consistent with our financial projections, particularly for the balance of the
Spring season and into the Fall season.
A major factor has reduced our availability of credit and has indicated
that we need to strengthen our liquidity and increase our credit availability
from other sources.
page 11
12
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
================================================================================
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of our fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company's adoption of SFAS 133
effective February 4, 2001 did not have a significant impact on the financial
position, results of operations, or cash flows of the Company.
The Company utilizes interest rate swap agreements to manage its interest
rate risks on borrowings under its $300 million variable rate credit agreement.
The Company does not hold or issue derivative financial instruments for trading
purposes. The Company does not have derivative financial instruments that are
held or issued and accounted for as hedges of anticipated transactions.
INCOME TAXES
The effective tax rate for fiscal 2001 is 41.5% versus 40.2% for fiscal
2000. The increase is due primarily to the allocation of taxable income to the
various taxing jurisdictions.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
the effect of inflation, if any, on the results of operations and financial
condition has been minor.
RISK FACTORS AND SAFE HARBOR STATEMENT
We caution that any forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) contained in this
Report, other filings with the Securities and Exchange Commission or made by our
management involve risks and uncertainties, and are subject to change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect our financial performance and
actual results and could cause actual results for 2001 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: decline in demand for our merchandise, our ability to attain our
fiscal 2001 business plan, expected cash from operations, vendor and their
factor relations, flow of merchandise, compliance with the credit agreement, our
ability to strengthen our liquidity and increase our credit availability, the
availability of desirable store locations on suitable terms, changes in consumer
spending patterns, consumer preferences and overall economic conditions, the
impact of competition and pricing, changes in weather patterns, changes in
existing or potential duties, tariffs or quotas, paper and printing costs, and
the ability to hire and train associates.
Historically, our operations have been seasonal, with a disproportionate
amount of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year.
page 12
13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
(Registrant)
By /s/ James A. McGrady
---------------------------------
James A. McGrady,
Chief Financial Officer and Treasurer
Date: June 15, 2001
--------------------------------------------------------------------------------
* Mr. McGrady is the Principal Financial and Accounting Officer and has been
duly authorized to sign on behalf of the registrant.
page 13