Columbus, Ohio, April 28/ -- Value City Department Stores, Inc. (NYSE: VCD - news)

Annual Report (SEC form 10-K)
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, except for the 12 month period ended January 30, 1999, which is presented here for comparative purposes.

	For the Year Ended 1/29/00	For the 12 Months Ended 1/30/99	For the 6 Months Ended 1/30/99	For the Year Ended
				8/1/98	8/2/97
Net sales, excluding sales licensed departments	100.0%	100.0%	100.0%	100.0%	100.0%
Cost of sales	(62.2)	(62.2)	(62.2)	(63.1)	(65.0)
Gross profit	37.8	37.8	38.0	36.9	35.0
Selling, general and administrative expenses	(34.7)	(35.2)	(33.9)	(35.8)	(36.0)
License fees from affiliates and other operating income	0.8	1.2	1.1	2.1	2.0
Operating profit	3.9	3.8	5.2	3.2	1.0
Gain on disposal of assets	—	—	—	0.1	—
Interest expense, net	(0.6)	(0.8)	(0.8)	(0.5)	(0.5)
Other income, net	—	—	—	—	—
Amortization of excess net assets over cost	—	—	—	0.1	0.1
Equity in income (loss) of joint venture	0.1	—	—	(0.1)	—
Income before income taxes	3.4	3.0	4.4	2.8	0.6
Provision for income taxes	(1.4)	(1.2)	(1.8)	(1.0)	(0.2)
Net income	2.0%	1.8%	2.6%	1.8%	0.4%

Fiscal Year Ended January 29, 2000 Compared To Twelve Months Ended

January 30, 1999

The Company's net sales increased $306.2 million, or 22.4%, from $1,364.0 million to $1,670.2 million. Comparable store sales increased 7.2%. Net sales for the department stores ("Value City") increased $148.3 million, or 13.5%, from $1,106.8 million to $1,255.1 million. Value City's comparable store sales increased 6.5%, or $69.7 million. The shoe departments in Value City's stores contributed net sales of $168.5 million. Non-apparel sales increased 9.0% and apparel sales increased 15.0%. On a comparable store basis, apparel and non-apparel sales increased 7.9% and 2.1%, respectively. DSW Shoe Warehouse ("DSW") achieved sales of $246.6 million with a 19.5% comparable stores sales increase.

Gross profit increased $115.9 million from $515.1 million to $631.0 million, and remained at 37.8% as a percentage of net sales.

Selling, general and administrative expenses ("SG&A") increased $98.9 million from $480.6 million to $579.5 million, but decreased as a percentage of net sales from 35.2% to 34.7%, a reduction of 0.5%, due primarily to the leveraging effect of higher sales volume partially offset by increased pre- opening costs in fiscal 1999 of approximately $7.6 million.

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 expense and other costs. Preparations for opening a department store generally take between eight and twelve weeks and preparations for a shoe store generally take eight to ten weeks. Effective August 1998, pre-opening costs are expensed as incurred in accordance with Accounting Standards Executive Committee Statement of Position 98-5. Previously, such costs were amortized ratably over the first twelve months of the store's operations. 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. Ten department stores opened less than twelve months as of the beginning of fiscal 1999 had a pre-tax net operating loss of $1.6 million, including $3.8 million of pre-opening expense amortization. Four department stores opened less than twelve months during fiscal 1998 had pre-tax operating losses of $2.0 million in 1998, including $1.5 million of pre-opening expense. 22 DSW stores opened less than twelve months in fiscal 1999 had a pre-tax net operating loss of $3.7 million, including $3.3 million of pre-opening expenses. 12 DSW stores opened less than twelve months during fiscal 1998 had a pre-tax net operating loss of $0.4 million after recognizing $0.9 million of pre-opening expenses.

License fees from affiliates decreased $3.5 million, or 29.5%, from $12.0 million to $8.5 million, and decreased as a percentage of net sales from 0.9% to 0.5%. The decrease is attributable to the consolidation of Shonac, which was previously treated as a licensee.

Other operating income increased $0.9 million, or 18.1%, from $4.8 million to $5.6 million and remained at 0.3% as a percentage of net sales.

Operating profit increased $14.4 million from $51.2 million to $65.6 million, and increased as a percentage of net sales from 3.8% to 3.9% as a result of the above factors.

Interest expense, net of interest income, increased from $10.5 million to $10.7 million.

Equity in income of joint venture increased $1.8 million from a loss of $0.5 million to income of $1.3 million.

Income before provision for income taxes increased $16.1 million from $40.3 million to $56.4 million, and increased as a percentage of sales from 3.0% to 3.4% as a result of the above factors.

Six Month Period Ended January 30, 1999 Compared To Six Month Period

Ended January 31, 1998

Net sales for the department stores ("Value City") increased $25.9 million, or 4.5% from $577.6 million to $603.5 million. Value City's comparable store net sales increased 3.3%, or $19.2 million. Shonac Corporation ("Shonac") contributed net sales of $176.8 million with comparable store sales increases of 2.4%. For the Transition Period, apparel sales increased 1.3% and non-apparel net sales increased 14.4%. On a comparable store basis, apparel and non-apparel sales increased 0.4% and 12.7%, respectively.

Gross profit increased $86.6 million from $210.2 million to $296.8 million, and increased as a percentage of net sales from 36.4% to 38.0%. The acquisition of Shonac contributed $76.2 million. Value City's gross profit increased $10.4 million, or 4.9%, from $210.2 million to $220.6 million, and increased as a percentage of net sales from 36.4% to 36.5%. The percentage increase is due to reduced markdowns and improvement in initial markup.

Selling, general and administrative expenses ("SG&A") increased $65.6 million from $199.0 million to $264.6 million, but decreased as a percentage of net sales from 34.5% to 33.9%, a reduction of 0.6%, due primarily to the leveraging effect of the Shonac acquisition. Shonac incurred SG&A of $59.6 million, or 33.7% of their net sales. Value City's SG&A increased $14.9 million and increased as a percentage of net sales from 34.5% to 35.4%. This is primarily attributable to increases in distribution, advertising, personnel, new stores, net of closed stores, and the addition of Valley Fair operations. However, in total Valley Fair's operations contributed $0.5 million to operating profit during the period.

Effective in the Transition Period, pre-opening costs are expensed as incurred in accordance with Accounting Standards Executive Committee Statement of Position 98-5. Previously, such costs were amortized ratably over the first twelve months of the store's operations. 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. Two department stores opened less than twelve months during the Transition Period had pre-tax operating losses of $0.8 million.

License fees from affiliates and other operating income decreased $6.7 million, or 43.8%, from $15.3 million to $8.6 million, and decreased as a percentage of net sales from 2.7% to 1.1%.This decrease is due primarily to the reduction of license fees from Shonac resulting from its acquisition and consolidation with Value City. This was partially offset by $0.9 million of license fees earned from third parties at the two stores purchased from Valley Fair.

Operating profit increased $14.3 million from $26.5 million to $40.8 million, and increased as a percentage of net sales from 4.6% to 5.2% as a result of the above factors.

Interest expense, net of interest income, increased from $1.4 million to $6.7 million and increased as a percentage of net sales from 0.3% to 0.8%. This increase is due primarily to the interest on debt incurred to acquire Shonac and the operations of Valley Fair.

Gain on disposal of assets, net, decreased $1.6 million. The gain in the prior period related to the sale of the land, building and improvements of a site originally purchased for future store development and selling the lease rights for a store that was closed during the second quarter.

Equity in the unconsolidated joint venture represents the Company's fifty percent interest in VCM's operating results. Equity in VCM increased $0.9 million from a loss of $0.8 million to income of $0.1 million.

Income before provision for income taxes increased $8.3 million from $25.9 million to $34.2 million, and decreased as a percentage of net sales from 4.5% to 4.4% as a result of the above factors.

Fiscal Year 1998 Compared To Fiscal Year 1997

Net sales for the department stores increased $1.6 million, or 0.1% from $1,073.4 million to $1,075.0 million. Value City's comparable store net sales increased 5.9%, or $52.8 million. Reported net sales for fiscal 1997 of $1,073.4 million included toys and sporting goods sales of $57.3 million. These departments are now operated by VCM, Ltd., a 50/50 joint venture between the Company and Mazel Stores, Inc. and are therefore treated as licensed department sales. The acquisition of Shonac Corporation effective as of May 3, 1998, contributed net sales since the acquisition date of $86.4 million with comparable store sales increases of 6.6%. For fiscal 1998, apparel sales increased 5.4% and non-apparel net sales increased 7.3%. On a comparable store basis, apparel and non-apparel sales increased 5.3% and 7.7%, respectively.

Gross profit increased $52.9 million from $375.6 million to $428.5 million, and increased as a percentage of net sales from 35.0% to 36.9%. The acquisition of Shonac contributed $33.9 million. Value City's gross profit increased $19.0 million, or 5.1%, from $375.6 million to $394.6 million, and increased as a percentage of net sales from 35.0% to 36.7%. The percentage increase is due to reduced markdowns and improvement in initial markup as well as exclusion of toys and sporting goods gross margin.

Selling, general and administrative expenses ("SG&A") increased $30.3 million from $385.9 million to $416.2 million, but decreased as a percentage of net sales from 36.0% to 35.8%, a reduction of 0.2%, due primarily to the leveraging effect of the Shonac acquisition. Shonac incurred SG&A of $24.3 million, or 28.1% of their net sales. Value City's SG&A increased $6.0 million and increased as a percentage of net sales from 36.0% to 36.5%. This increase is attributable to higher store and home office expenses, partially offset by the elimination of certain direct expenses for the toys and sporting goods operations transferred to VCM.

Nine department stores opened less than twelve months as of the beginning of fiscal 1998 had a pre-tax net operating loss of $5.1 million, including $1.5 million of pre-opening expense amortization. Twelve department stores opened less than twelve months during fiscal 1997 had pre-tax operating losses of $7.0 million in 1997, including $6.3 million of pre-opening expense amortization.

License fees from affiliates and other operating income increased $3.9 million, or 18.8%, from $20.8 million to $24.7 million, and increased as a percentage of net sales from 1.9% to 2.1%. The change is the net result of an increase in license fees received during the year along with fees from the VCM venture on toys and sporting goods sales partially offset by the elimination of license fees related to the acquisition of Shonac for the fourth quarter.

Operating profit increased $26.4 million from $10.5 million to $36.9 million, and increased as a percentage of net sales from 1.0% to 3.2% as a result of the above factors.

Interest expense, net of interest income, increased from $5.1 million to $5.3 million.

Gain on disposal of assets, net, increased from $0.2 million to $1.6 million due to selling the land, building and improvements of a site originally purchased for future store development and selling the lease rights for a store that was closed during the second quarter.

Equity in loss of unconsolidated joint venture represents the Company's fifty percent interest in VCM's operating results. These losses are due primarily to weak sales attributable to transitioning the toys and sporting goods and health and beauty care departments to a new format.

Income before provision for income taxes increased $25.4 million from $6.5 million to $31.9 million, and increased as a percentage of net sales from 0.6% to 2.7% as a result of the above factors.

Seasonality
The Company's business is affected by the pattern of seasonality common to most retail businesses. Historically, the majority of its sales and operating profit have been generated during the back-to-school and Christmas selling seasons. Fiscal Year
In June 1998, the Company decided to change its fiscal year to a 52/53 week year that ends on the Saturday nearest to January 31. This change was made to reflect the reporting period common to most retailers.

Income Taxes
The effective tax rate for fiscal 1999 was 40.6% versus 38.2% for the 12 months ended January 1999. The earlier period's provision was reduced by approximately $1.4 million relating to the resolution of certain federal and state income tax issues.

The effective tax rate for the Transition Period ended January 30, 1999 was 40.8%. The rate increase resulted primarily from the effect of non-deductible goodwill amortization related to the Shonac acquisition. The effective tax rate for the year ended August 1, 1998 was 36.2%. The effective tax rate for the year ended August 2, 1997 was 39.0%. The 2.8% reduction reflects the benefits of several fourth quarter favorable settlements of federal and state income tax issues.

The effective tax rate for fiscal 2000 is expected to be approximately 41.0% due primarily to the effect of non-deductible goodwill amortization related to the Shonac acquisition.

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 Company's fiscal year.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is required to be adopted in years beginning after June 15, 2000. The Company is currently evaluating the effect this statement might have on the consolidated financial position and results of operations of the Company.

Inflation
The results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation because of the nature of the estimates required, management believes that the effect of inflation, if any, on the results of operations and financial condition has been minor.

Liquidity and Capital Resources
Net working capital was $205.0 million, $166.5 million and $205.8 million at January 29, 2000, January 30, 1999 and August 1, 1998, respectively. Current ratios at those dates were 1.8, 2.0 and 1.9, respectively.

Net cash provided from operating activities totaled $27.5 million, $93.2 million, $43.3 million, and $38.7 million for the fiscal years 1999, Transition Period 1998, 1998 and 1997, respectively. Net income, adjusted for depreciation and amortization, provided $67.7 million of operating cash flow for the fiscal year 1999. This was decreased by $67.0 million representing an increase in inventories net of a decrease in accounts payable. Other changes in working capital assets and liabilities provided $26.8 million.

During the twelve months ended January 30, 1999, net income adjusted for depreciation and amortization, provided $55.9 million of operating cash flow. This was increased by $9.6 million representing a reduction in inventories net of an increase in accounts payable. Other changes in working capital assets and liabilities provided $6.3 million.

Net cash used for investing activities totaled $49.7 million, $18.2 million, $127.5 million and $46.8 million for fiscal years 1999, Transition 1998, 1998 and 1997, respectively.

Net cash used for capital expenditures was $37.3 million, $17.3 million, $27.2 million and $46.8 million for fiscal years 1999, Transition 1998, 1998 and 1997, respectively. During fiscal 1999, capital expenditures included $14.5 million for new stores, $8.0 million for improvements in existing stores, $2.5 million for renovations in existing warehouses, $10.6 million for MIS equipment upgrades and new systems $1.4 million for energy management systems and $0.3 for other capital expenditures. Total capital expenditures for 2000 are estimated at approximately $72.0 million including $28.0 million for new stores, $17.0 million for distribution centers, $15.0 million for management information systems and $12.0 million for store remodels and other capital expenditures.

At January 29, 2000, the Company had a $167.5 million credit facility bearing interest primarily at a floating rate of LIBOR plus 1.5%. The interest rate on $40.0 million has been locked in a fixed annual rate of 7.395% for a three-year period under a swap agreement. The terms of the credit facility required the Company to comply with certain restrictive covenants and financial ratio tests. At January 29, 2000 the borrowings aggregated $70.0 million, $21.1 million of letters of credit were issued and outstanding for merchandise purchases and the VCM loan guarantee totaled $2.4 million leaving $74.0 million available under the facility. See discussion under subsequent events for details regarding the Company's amendment and restatement of the credit facility in March 2000. The Company believes that the cash generated by its operations, along with the available proceeds from the credit facility and other sources of financing will be sufficient to meet its future obligations including capital expenditures.

Acquisitions
Effective May 3, 1998, the Company purchased 99.9% of the common stock of Shonac from Nacht Management, Inc. and Schottenstein Stores Corporation ("SSC"). SSC owns approximately 55.3% of the Company's outstanding common shares. The Company also acquired the store operations of Valley Fair Corporation from SSC. The combined purchase price for both acquisitions was $108.5 million. Shonac had been the shoe licensee in all of the Company's stores since its inception in 1969 and also operated a chain of retail shoe outlets located throughout the United States, principally under the name DSW Shoe Warehouse. Valley Fair Corporation operated two department stores located in Irvington and Little Ferry, New Jersey. The Company had been a licensee of certain departments in these two stores for 18 years.

Both acquisitions were accounted for as purchases. The acquisitions were funded by cash provided by operations and approximately $88.0 million from the Company's $167.5 million long-term unsecured revolving bank credit facility. This facility replaced Value City's $100.0 million credit facility and Shonac's $30.0 million facility. The initial term of the facility was effective through May 1, 2001 with interest primarily at a floating rate of LIBOR plus 1.5%. The interest rate on $40.0 million had been locked in at a fixed annual rate of 7.395% for a three year period under a swap agreement. The terms of the credit facility require the Company to comply with certain restrictive covenants and financial ratio tests, including minimum tangible net worth; a maximum consolidated debt to earnings before interest, taxes, depreciation and amortization ratio; a minimum fixed charge coverage ratio; and, limitations on dividends, additional incurrence of debt and capital expenditures.

On November 19, 1999, we purchased 100% of the common stock of Gramex Retail Stores, Inc. ("Gramex") from Gramex Corporation pursuant to a Stock Purchase Agreement, dated as of November 8, 1999. Gramex operated a chain of fifteen discount stores under the name "Grandpa's" in the greater St. Louis metropolitan area.

The purchase price for Gramex was $13.1 million including cash of $8.0 million, 255,949 shares of the Company's common stock with an agreed value of $4.0 million and an unsecured, 5-year note of $1.1 million. In conjunction with the acquisition, the Company satisfied approximately $37 million of Gramex bank debt at closing and assumed certain trade payable and other obligations which was satisfied from the proceeds from liquidation of inventory and certain other assets. The transaction was funded by cash from operations and a $25 million, 180 day bank loan bearing interest at 8.0925%. The acquisition was accounted for as a purchase. Allocation of the purchase price will be determined based on fair market valuation of the net assets acquired.

Of the 15 stores acquired and after liquidation of the existing Grandpa's inventory, 13 stores were converted to the Value City format. Six stores received only minor improvements and were reopened in March 2000. Seven stores were remodeled based on the current Value City format and were reopened in April 2000. The lease for one store, with terms consistent with current market conditions, is located near our existing store in St. Louis. This location was assigned, without payment of additional consideration to the Value City Furniture Division of Schottenstein Stores Corporation after completion of liquidation of the store inventory and fixtures.

Subsequent Event
On March 17, 2000, the Company, through its wholly-owned subsidiary, Base Acquisition Corp. ("Base Acquisition"), completed the acquisition of substantially all of the assets and assumed certain liabilities of Filene's Basement Corp., a Massachusetts corporation, and Filene's Basement Inc., a wholly owned subsidiary of Filene's Basement Corp. (collectively, "Filene's") pursuant to the closing of the asset purchase agreement, dated February 2, 2000.

The purchase price included cash of $3.5 million paid at closing, $6 million to be paid in three equal annual installments, 403,208 shares of the Company's common stock with an agreed value of $5.5 million and the assumption of specified liabilities. The assumed liabilities included the payment of amounts outstanding under Filene's debtor-in-possession financing facility of approximately $30.6 million and certain trade payable and other obligations which will be paid in the ordinary course. Allocation of the purchase price will be determined based on fair market valuation of the net assets acquired.

The acquisition was funded by cash from operations and a portion of the proceeds from the Company's new $300.0 million Amended and Restated Credit Agreement, dated as of March 15, 2000 (the "New Bank Facility"). It was co-underwritten by National City Bank and Bank One Capital Markets, Inc. and has a three year term ending March 15, 2003. This facility replaced the $167.5 million facility that would have matured in May 2001. The New Bank Facility is secured only by a pledge of the stock of Base Acquisition and the Filene's assets acquired. It provides for various borrowing rates, currently equal to 200 basis points over LIBOR.

On March 17, 2000, the Company also closed a $75.0 million Senior Subordinated Convertible Loan Agreement, dated as of March 15, 2000 (the "Senior Facility") with Prudential Securities Credit Corporation ("Prudential"), as lender. The Senior Facility also bears interest at various rates, currently equal to 250 basis points over LIBOR. The interest rate increases to 400 basis points over LIBOR on the first anniversary of the closing and increases an additional 50 basis points every 90 days thereafter. The Senior Facility is due in September 2003. However, if the Company has not repaid the Senior Facility prior to March 17, 2001, from the proceeds of an equity offering or other subordinated debt acceptable to the lenders under the New Bank Facility, then after that date Prudential has the right to convert the debt into stock of the Company 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. After that date, Prudential also has the right to require Schottenstein Stores Corporation ("SSC"), the owner of a majority of the Company's outstanding stock, to purchase the Senior Facility at par plus accrued interest, pursuant to the terms of a Put Agreement, dated as of March 15, 2000 between Prudential and SSC. The Company paid SSC a one time fee of 200 basis points, or $1.5 million, at closing in consideration for entering into the Put Agreement.

Both the New Bank Facility and the Senior Facility contain customary, affirmative and negative covenants, including certain financial covenants.

Safe Harbor Statement Under The Private Securities Litigation

Reform Act of 1995
The Company cautions 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 Security and Exchange Commission or made by management of the Company 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 the Company's financial performance and actual results and could cause actual results for 1999 and beyond to differ materially from those expressed or implied in any such forward-looking statements: decline in demand for the Company's merchandise, the ability to repay the $75.0 million Senior Facility through an equity offering or refinancing, 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, the Company's 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 the Company during this period, including adverse weather, the timing and level of markdowns or unfavorable economic conditions, could have a material adverse effect on the Company's financial condition and results of operations for the entire year.

Item 7a. Quantitative And Qualitative Disclosures About Market

Risk.
The Company is exposed to market risk from changes in interest rates which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not party to any leveraged financial instruments.

The Company is exposed to interest rate risk primarily through its borrowings under its revolving credit facility. At January 29, 2000, direct borrowings aggregated $70.0 million. The facility as amended and restated effective March 17, 2000 permits debt commitments up to $300.0 million, has a March 15, 2003 maturity date and generally bears interest at a floating rate of LIBOR plus 2.0%. The Company has swap agreements to help manage the exposure to interest rate movements and reduce borrowing costs. As of January 29, 2000 the interest rate on $40.0 million has been locked in at a fixed rate of 7.395% until May 2001 and has a fair market value of $402,000. After January 29, 2000 the interest rate on an additional $35.0 million was locked in at a fixed rate of 8.99% until April 2003.

At January 29, 2000, the Company performed a sensitivity analysis assuming an average outstanding principal amount of $218.9 million subject to variable interest rates. A 10% increase in LIBOR would result in approximately $1.5 million of additional interest expense annually.

Item 8. Financial Statements And Supplementary Data.
The financial statements and financial statement schedule of the Company and the Independent Auditors' Report thereon are filed pursuant to this Item 8 and are included in this report beginning on page F-1.

Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.
None.

For More Information Contact:

James McGrady
Phone: (614) 478-2300
Value City Department Stores, Inc.
3241 Westerville Road, Columbus, OH 43224