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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 1-10767
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
OHIO NO. 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 the filing
requirements for at least the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,490,447 Common Shares, based on the $7.69 closing sale price on April 16,
2001, was $96,051,537.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 34,338,212 Common Shares were
outstanding at April 16, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for Annual Meeting of Shareholders to be held in July
2001 in part, as indicated.
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TABLE OF CONTENTS
FORM
10-K
REPORT
ITEM NO. PAGE
- -------- ----
PART I
1. Business............................................................................................3
2. Properties.........................................................................................16
3. Legal Proceedings..................................................................................17
4. Submission of Matters to a Vote of Security Holders................................................17
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..........................18
6. Selected Financial Data............................................................................19
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............20
7A. Quantitative and Qualitative Disclosures about Market Risk ........................................26
8. Financial Statements and Supplementary Data........................................................27
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............27
PART III
10. Directors and Executive Officers of the Registrant.................................................28
11. Executive Officer Compensation.....................................................................28
12. Security Ownership of Certain Beneficial Owners and Management.....................................28
13. Certain Relationships and Related Transactions.....................................................28
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................29
Signatures.........................................................................................30
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report...............................................................................F-1
Consolidated Balance Sheets................................................................................F-2
Consolidated Statements of Operations......................................................................F-3
Consolidated Statements of Shareholders' Equity............................................................F-4
Consolidated Statements of Cash Flows......................................................................F-5
Notes to Consolidated Financial Statements.................................................................F-6
SCHEDULES
- ---------
II - Valuation and Qualifying Accounts.....................................................................S-1
Index to Exhibits..........................................................................................E-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Value City Department Stores, Inc. currently operates a chain of 119
department stores located in Ohio, Pennsylvania and 13 other Midwestern, Eastern
and Southern states, principally under the name Value City, as well as 81 DSW
Shoe Warehouse Stores located throughout the United States. In addition, we
operate 19 Filene's Basement stores ("Filene's") located principally in the New
England states. For over 80 years, our strategy has been to provide exceptional
value by offering a broad selection of brand name merchandise at prices
substantially below conventional retail prices. Our department stores carry
men's, women's and children's apparel, housewares, giftware, home furnishings,
toys, sporting goods, jewelry, shoes and health and beauty care items, with
apparel comprising over 60% of total sales. Our department stores average 87,000
square feet which allow us to offer over 100,000 different items of merchandise
similar to the items found in traditional department, specialty and discount
stores. Our DSW stores are a chain of upscale shoe stores offering a wide
selection of dress and casual footwear below traditional retail prices. These
stores average 25,000 square feet with up to 45,000 pairs of women's and men's
designer brand shoes and athletic footwear per store. Our Filene's stores
average 27,000 square feet and specialize in high-end brand name merchandise of
men's and women's apparel, accessories and home goods.
Our pricing strategy is supported by our ability to purchase large
quantities of goods in a variety of special buying opportunities. For many
years, we have had a reputation in the marketplace as a purchaser of buy-outs
and manufacturers' closeouts.
HISTORY OF OUR BUSINESS
We opened our first department store in Columbus, Ohio in 1917. The
Value City department stores operated as a division of Schottenstein Stores
Corporation ("SSC") until we went public on June 18, 1991. SSC still owns 53.0%
of our stock. We have a number of ongoing related party agreements with SSC that
are described in Item 13 of this report.
In July 1997, we entered into agreements with Mazel Stores, Inc. to
create VCM, Ltd., a 50/50 joint venture. VCM operates the health and beauty
care, toy and sporting goods departments and; beginning in fiscal 2000, the food
department, as licensed departments. We account for our fifty percent interest
in the joint venture under the equity method. See "Licensed Departments."
Effective May 3, 1998, we purchased 99.9% of the common stock of Shonac
Corporation from Nacht Management, Inc. and SSC. In September 2000, we purchased
the remaining 0.1% to give us 100% ownership. Shonac had been the shoe licensee
in all of the Value City stores since its inception in 1969 and also operated
the DSW chain of retail shoe stores. Also effective May 3, 1998, we acquired the
store operations of Valley Fair Corporation from SSC. Valley Fair operated two
department stores located in New Jersey. Prior to their acquisition, we had been
a licensee of certain departments in these two stores for eighteen years.
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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 15
discount stores under the name "Grandpa's" in the greater St. Louis metropolitan
area. 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. The other 7
stores were remodeled based on our current Value City format and were reopened
in April 2000.
On March 17, 2000, we completed the acquisition of substantially all of
the assets and the assumption of certain liabilities of Filene's Basement Corp.,
a Massachusetts corporation, and Filene's Basement, Inc., a wholly owned
subsidiary of Filene's Basement Corp. through our wholly owned subsidiary, Base
Acquisition Corp., pursuant to the closing of an asset purchase agreement, dated
February 2, 2000. Filene's was operating as debtor-in-possession under Chapter
11 of the Bankruptcy Code. We continue to operate the 14 Filene's stores
acquired on March 17 and have reopened 3 other Filene's stores in the Washington
D.C. area. During fiscal 2000, 2 new Filene's stores were opened.
We and our wholly owned subsidiaries are sometimes referred to
collectively in this report as the "Company" or as "VCDS."
CHANGE IN FISCAL YEAR-END
On June 10, 1998, we determined to change our fiscal year from a 52/53
week year that ended on the Saturday nearest to July 31 to a 52/53 week year
that ends on the Saturday nearest to January 31. The six-month transition period
of August 2, 1998 through January 30, 1999 (the "Transition Period") preceded
the start of the 1999 fiscal year which ended January 29, 2000. Fiscal 2000
contains 53 weeks.
OPERATING SEGMENTS
See Note 12 of Notes to Consolidated Financial Statements beginning on
page F-21 of this annual report for information regarding our Company's
segments.
BUSINESS STRATEGIES
Our strategy is to provide brand name merchandise substantially below
conventional retail prices. The strategy is reflected in our name, "Value City,"
and our motto, "It's your money, get more for it." We believe that the size of
our Value City department stores facilitates a full-line merchandise offering
and range of brands that differentiates us from other off-price retailers.
Our DSW stores' mission is to be each customers' favorite retailer of
branded footwear by satisfying customer expectations for selection, convenience
and value.
Filene's strategy is similar to Value City's focus on providing the
best brand names at everyday low prices for men's and women's apparel,
accessories and home goods. The principal elements of Value City's, DSW's and
Filene's business strategies are discussed below.
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MERCHANDISING
Selection
Value City is a full-line, off-price retailer carrying men's, women's
and children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes and health and beauty care items. Off-price retailing, as
distinguished from traditional full-price retailing and discount or off-brand
merchandising, is characterized by the purchase of primarily high quality brand
name merchandise, at prices below normal cost to most retailers. A portion of
the cost savings is then passed on to customers through lower prices. Our Value
City stores strive to offer customers one-stop-shopping in terms of categories
of merchandise carried. The large size of our stores facilitates the offering of
a wide range of merchandise categories with broad, deep selections of goods
within each category. Our stores carry over 100,000 different items of
merchandise similar to the items found in traditional department, specialty and
discount stores. To improve store profitability and meet the changing needs of
our customers, we continually refine the Value City merchandise mix eliminating
less productive departments and introducing new merchandise categories.
We believe customers are attracted to Value City stores because of
continuous new offerings of value-priced merchandise acquired in special
purchases. At the same time, Value City maintains a broad and consistent range
of goods, it purchases continuing lines of merchandise and draws upon its vendor
contacts to ensure constant availability of certain basic categories of
merchandise as well as current fashion trends.
DSW stores attract customers because of their wide assortment of top
quality name brand dress, casual and athletic footwear for men and women
together with a regularly changing selection of more fashion-oriented footwear.
Our DSW stores are large, contemporary, upscale warehouses, averaging 25,000
square feet and allow us to sell a large selection of branded footwear in a
clean and simple environment.
Filene's stores average 27,000 square feet and offer branded apparel,
home goods, accessories and retail stocks purchased directly from major upscale
retailers. The branded merchandise represents a focused assortment of
fashionable, nationally-recognized men's and women's apparel, accessories and
home goods bearing prominent designers' and manufacturers' names. Branded
merchandise constitutes most of the product line and is obtained through
opportunistic purchases from a diverse group of quality manufacturers and
vendors.
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The following table sets forth relative contributions of each major
merchandise category to total sales.
Fiscal Year Fiscal Year 6 Months Fiscal Year
Ended Ended Ended Ended
2/3/01 1/29/00 1/30/99 8/1/98
------ ------- ------- ------
Apparel and Ready-to-Wear - Includes: Men's, Women's
and Children's outerwear, suits, dresses, sportswear,
sleepwear, underwear and accessories; and department
store shoe sales from May 3, 1998 to February 3, 2001................... 61.9% 62.7% 62.8% 62.2%
Hard goods and Home Furnishings - Includes: domestics;
jewelry; housewares; giftware; and small appliances .................... 14.7 17.2 18.8 19.0
Licensed Departments - Includes: shoes through May 2, 1998;
health and beauty care; food; toys and sporting goods and
other incidental departments............................................ 6.0 6.3 7.5 15.2
DSW Stores................................................................. 17.4 13.8 10.9 3.6
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Value Pricing
Value City stores offer quality brand name merchandise at prices
typically 50% to 70% below prices charged by traditional department stores for
similar items and at prices comparable to or lower than prices charged by other
off-price retailers. We can offer exceptional values because our buyers purchase
merchandise directly from manufacturers and other vendors generally at prices
substantially below those paid by conventional retailers. This allows us to pass
on the savings directly to our customers. See "Supplier Relationships and
Purchasing."
DSW price points are targeted to be up to 50% lower than the regular
prices of other specialty retailers and traditional department stores. DSW
continually strives to improve its merchandise sourcing to maintain quality,
lower costs and shortened delivery cycles. Identifying and building
relationships with cost-efficient manufacturers and suppliers of quality
merchandise is essential to DSW's merchandising strategy.
Well known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City and Filene's stores. Many items
carry labels and/or original price tags showing brand names identifiable with
major designers, manufacturers and retail stores, as well as tags showing
original retail, comparable or "nationally advertised" prices. In certain cases
suppliers may require removal of labels or original retail price tags as a
condition to a special purchase arrangement. See "Supplier Relationships and
Purchasing."
Our Filene's stores' merchandise assortment is typically priced at
levels 30%-60% below regular prices at traditional department and specialty
stores. These discounts are achieved by buying in-season
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overruns and end-of-season surplus at advantageous prices and offering them for
sale at lower markups than those of traditional department stores. We are also
able to keep the cost of merchandise low because we do not require markdown or
advertisement allowances, or anticipation of returns from vendors, all of which
are typical in the department store industry.
Licensed Departments
We operate all departments in the Value City stores except for the
health and beauty care, toy and sporting goods, food and certain other
incidental departments. These departments are licensed to others, including
affiliated parties, for a percentage of net sales, generally ranging from 5% to
11%, for initial periods of up to 10 years with, in some instances, an option to
renew. In addition, we receive a fee from some licensees for general and
administrative expenses. The aggregate annual license fees received from
licensees for fiscal year ended February 3, 2001 were $11,323,000.
SSC owned a controlling interest in L. F. Widmann, Inc., the licensee
that operated the health and beauty care departments in our stores. In July
1997, we entered into agreements with Mazel to create VCM, a 50/50 joint
venture. Effective August 3, 1997, VCM purchased 100% of Widmann's capital stock
and purchased the assets of Value City's toys and sporting goods departments.
VCM operates the health and beauty care and toys and sporting goods departments
in our stores as licensed departments. The license agreements provide for fees
based on a percentage of sales, as defined, for license fees, advertising fees
and credit and administrative charges. We provide certain personnel,
administrative and service functions for which we receive a monthly fee from VCM
to cover the related costs. The license and joint venture agreements are for a
term of ten years ending in 2007 and contain certain provisions whereby either
business partner can initiate renegotiation of terms if certain minimum
requirements are not met.
SSC also owned 49.9% of the outstanding stock of Shonac, the licensee
that operated the shoe departments in all of the Value City stores until May
1998 when we purchased 99.9% of the common stock of Shonac.
Licensees supply their own merchandise and generally supply their own
store fixtures but in most instances utilize our associates to operate their
departments. The licensees reimburse us for all costs associated with such
associates. Licensees operate their departments under our general supervision
and are required to abide by our policies with regard to pricing, quality of
merchandise, refunds and store hours. Licensed departments complement the
operations of our stores and are considered an integral part of our store
operations. The common ownership interest in licensees facilitates the
uniformity of merchandising strategy in the stores, including the overall
emphasis on values resulting from special purchase opportunities.
SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in our growth has been our many years of experience
in purchasing merchandise directly from manufacturers and other vendors at
prices substantially below those generally paid by conventional retailers. We
believe that over the years our buyers have established excellent relationships
with suppliers and have established a reputation for our willingness and ability
to purchase entire lots of merchandise and make prompt payment. We continuously
seek to find and negotiate special purchase opportunities. As a result of our
relationships, experience and reputation for prompt payment,
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many suppliers offer us special purchase opportunities prior to attempting to
dispose of merchandise through other channels. Many manufacturers of brand name
merchandise are reluctant to sell merchandise for resale at discounted prices
through their normal channels of distribution or to retailers which may be
considered competitors in their regular distribution channels. By selling such
merchandise through our own retail stores, we are able to assure suppliers that
the merchandise will be sold without disturbing the suppliers' regular channels
of distribution.
Although we cannot quantify the amount by which the prices we pay for
special purchases are lower, if any, than the prices paid by our competitors for
similar purchases, we believe that such special purchases are made at prices
sufficiently favorable to enable us to offer merchandise to our customers at
prices significantly lower than those prices offered by many of our competitors.
We purchase merchandise from more than 4,700 suppliers, none of which
accounted for a material percentage of purchases during the past fiscal year. We
do not maintain any long-term or exclusive commitments to purchase merchandise
from any one supplier. We regularly purchase overstocked or overproduced items
from manufacturers and other retailers, including end-of-season, out-of-season
and end-of-run merchandise and manufacturers' slight irregulars. From time to
time, we purchase all or substantially all of the inventories of financially
distressed retailers and make other special purchases. Also, we have started to
more aggressively seek advantageous buying opportunities overseas, particularly
in non-apparel categories.
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we have
devoted warehouse space to out-of-season goods for our department stores. We
strive to hold this merchandise until the most opportune time to offer it in the
Value City stores, which in most cases is the next season. This ability to
purchase and quickly distribute or hold merchandise in substantial quantities
has enabled us to offer high-quality merchandise to customers at prices
significantly below usual retail prices. We believe that this ability
distinguishes us from the typical discount or department store and provides us
with a competitive advantage in making purchases as favorable opportunities
arise.
The relatively large size of the Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
DSW's merchandising group constantly monitors current fashion trends as
well as historical sales trends to identify popular styles and styles that may
become popular in the upcoming season. Once our buyer determines the styles and
merchandise mix for any upcoming season, they focus on purchasing the
appropriate quantities of each category at the lowest cost and the highest
quality available.
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. DSW believes
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that, consistent with the retail footwear industry as a whole, most of its
domestic vendors import a large portion of their merchandise from abroad. We
have implemented quality control programs under which buyers inspect incoming
merchandise for fit, color and material, as well as for overall quality of
manufacturing. As the number of DSW locations increase, we believe there will be
adequate sources available to acquire and/or produce a sufficient supply of
quality goods in a timely manner and on satisfactory economic terms.
We believe that the acquisition of Filene's, a well-known institution
in Boston since 1908, is a good fit with our `deal driven' merchandise strategy.
Because of the longstanding relationships Filene's has with vendors, it receives
quality buying opportunities at competitive prices. These longstanding
relationships make Filene's a prime choice for vendors with overruns, department
store cancellations and unmet volume objectives. From time to time, Filene's
commits to the future purchase of branded merchandise from vendors at
advantageous prices. These forward purchases allow for timely, fashionable
assortments. Based on our experience, we believe that the current supply of
branded merchandise is adequate for our needs.
DISTRIBUTION
We use a regionalized distribution strategy with 11 distribution
centers located in Columbus, Ohio, a distribution facility in St. Louis,
Missouri and one distribution facility in Auburn, Massachusetts. The aggregate
area of the distribution facilities is approximately 3,000,000 square feet;
however, use of multi-tier processing levels in some of the distribution centers
substantially increases their operating capacity. In addition, to expedite the
flow of merchandise to certain clusters of stores, we use third party processors
located in New Jersey, Chicago and Detroit.
Our distribution facilities utilize material handling equipment,
including mechanized conveyor systems to separate and collate shipments to the
stores. Our distribution facilities are designed to allow priority delivery of
late season purchases and fast-moving merchandise to have it in our stores
quickly to take full advantage of the remaining selling season. We continue to
focus on improving inventory turns by implementing changes which will expedite
the flow of merchandise to our selling floors.
Merchandise is processed, ticketed and consolidated prior to shipment
to the stores to ensure full-truck loads to minimize shipping costs. We lease
our fleet of road tractors and approximately 70% of our semi-rig trailers with
the remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
To support the planned growth of our DSW Shoe Warehouse operation, we
recently consolidated and relocated DSW's principal offices and distribution
center operations to a new 625,000 square feet facility located in Columbus,
Ohio. We have entered into a 15-year lease with three five-year option periods
with an affiliate of SSC.
Our new distribution center facility uses a warehouse management system
by Retek and modern material handling equipment, including new Rapistan/Demag
conveyor systems, to separate and collate shipments to our stores. The design of
the distribution center facilitates the prompt delivery of priority purchases
and fast selling footwear to stores so that we can take full advantage of each
selling season. We continue to focus on improving inventory controls and turns
by implementing changes which will expedite the flow of footwear and related
accessories to our stores.
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For Filene's merchandise we currently lease a 457,000 square foot
distribution facility situated on 32.8 acres with adjacent rail service in
Auburn, Massachusetts.
ADVERTISING AND PROMOTION
We commit substantial resources to advertising and believe that our
marketing strategy is one of the keys to our success. Value City advertises
frequently in print, including newspapers, circulars and flyers, and on
television and radio. The promotional strategy is carefully planned and budgeted
to include not only institutional and seasonal promotions, but also weekly
storewide sales events highlighting recent buy-outs and other specially
purchased brand name merchandise designed to maximize customer interest. In some
cases, a supplier may prohibit the advertising or non-store promotion of its
brand name.
Our DSW stores currently use a broadcast campaign, primarily radio,
focusing on the slogan "The Shoes of the Moment. The Deal of a Lifetime." This
campaign is supplemented by print promotions and, increasingly, television. In
addition, a valuable marketing tool for DSW is the "Reward Your Style" loyal
customer program. Customers are asked to join the program during the checkout
procedure. By analyzing the member database, as well as the sales transactions
of those members, we are able to direct the advertising to encourage repeat
shopping and to reach targeted customers.
Filene's employs a multi-media approach, using print, broadcast and
direct mail. The communication strategy is designed to target customer segments
and generate increased store trips and cross shopping opportunities.
STORES
Store Location and Design
Our Value City stores average approximately 87,000 square feet, with
approximately 70% of the total area of each store representing selling space.
The stores are generally laid out on a single level, with central traffic aisles
providing access to major departments. Each department strives to display and
stock large quantities and assortments of merchandise, giving the store a full
appearance. The stores are generally open from 9:30 am until 9:30 pm Monday
through Saturday and 11:00 am until 6:00 pm on Sunday. All of the stores are
located in leased facilities.
We believe that customers are attracted to our stores principally by
the wide assortment of quality items at substantial savings. Of the 119
department stores open as of April 16, 2001, 27 are free-standing and 92 are in
shopping centers, 25 of which are enclosed malls in which they serve as an
anchor. Of the 81 shoe stores open as of April 17, 2001, 11 are free-standing
and 70 are in shopping centers. Most of our stores are located in suburban
areas, near large residential neighborhoods and away from downtown commercial
centers.
Our DSW stores average approximately 25,000 square feet, with about 87%
of the total area of each store representing selling space. The stores'
exteriors feature black and white color schemes and in many cases, windows with
striped awnings. The store interiors are well lit and feature a unique display
concept, a simple case presentation which groups the shoes together by style.
Interior signage is tasteful and kept to a
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minimum. The shoe stores are generally laid out on a single level, with the
cases of shoes forming the aisles in the stores. This allows customers to view
the entire store when they enter. The stores are generally open from 10:00 a.m.
until 9:00 p.m. Monday through Saturday and 12:00 p.m. until 6:00 p.m. on
Sunday. The stores are located in leased facilities.
The Filene's Boston store is a landmark institution recognized by
generations of New England families and visitors as a source of quality
off-price men's and women's merchandise. The downtown location is famous for a
unique marketing concept - the Automatic Markdown Plan - whereby certain
merchandise is automatically discounted based on the number of days the
merchandise has been on the sales floor. Filene's believes that the Automatic
Markdown Plan generates a sense of shopping urgency and creates customer
excitement and loyalty. Filene's subleases 178,000 square feet (approximately
65,300 square feet of selling space) on four floors. The sublease terminates in
2009 with rights on behalf of Filene's to extend until 2024. The Boston store
generated over $1,061 in sales per square foot of selling space during fiscal
2000.
In addition to the downtown Boston store, Filene's operates 18 branch
stores in four states and Washington, D.C. with an average of approximately
27,000 square feet of selling space per store. Generally, the branch store's
selling space is on a single level and uses a prototypical "racetrack" aisle
layout for merchandise presentation. The branch stores are designed to be
convenient and attractive in their merchandise presentation, dressing rooms,
checkouts and customer service areas. Filene's branch stores that were opened
from the date of acquisition generated $463 in sales per square foot of selling
space.
The branch stores that were opened from the date of acquisition
averaged $12,827 million in sales volume per store in fiscal 2000. Their
merchandise mix is similar to that of the Boston flagship store. Because of the
operational complexities associated with transferring the Automatic Markdown
Plan to the branch stores, the branch stores do not operate under the Automatic
Markdown Plan, although markdowns are taken as required.
Store Operations
We are committed to offering customers a convenient, pleasurable
shopping experience and a high level of satisfaction. At Value City, a training
program is utilized to assure that every associate maintains the highest level
of professionalism and places customer service at the forefront. At DSW, all
associates receive Retail Results University training in both product knowledge
and sales/service. This in-house training program emphasizes acknowledgment of
all customers, customized levels of service, and realization of sales
opportunities at all moments of customer contact.
Our stores are designed for self-service shopping, although sales
personnel are available to help customers locate merchandise and to assist in
the selection and fitting of apparel and footwear. In all stores, a customer
service desk is conveniently located generally adjacent to the central check-out
area. We pride ourselves on ease of checkout and have invested in point of sale
scanning systems which expedite the checkout process by providing automated
check and credit approval and price lookup. Sales associates are trained to
create a "customer-friendly" environment. We accept all major credit cards, and
also provide a private label credit card program at the department stores.
Private label and other credit card sales are nonrecourse to us, with the
servicing agent assuming all of the credit risk. Value City offers a convenient
layaway program in its department stores and maintains a liberal return policy.
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Our stores are organized into separate geographic regions and
districts, each with a regional or district manager. Regional and district
managers are headquartered in their region and spend the majority of their time
in their stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a Value City store consists of a store manager,
an operations manager, two assistant managers, a human resource administrator, a
customer service manager, a receiving manager, and full and part-time hourly
associates. Each store manager reports directly to one of the regional or
district managers, and each of the regional or district managers reports to a
Regional Vice President who in turn reports to the Vice President of Operations.
The typical staff for a DSW store consists of a store manager and two
assistant managers who supervise 20 to 25 full and part-time hourly associates.
Each store manager reports directly to one of 13 district managers who in turn
report to a regional manager who in turn report to the Vice President of
Operations.
Our Filene's stores' typical staff consists of a general manager, an
assistant store manager, merchandising group managers and full and part-time
associates. Each general manager reports to the group store manager who in turn
reports to the Senior Vice President, Director of Stores.
Our store managers function both as administrators and merchants. All
managers are responsible on a day-to-day basis for maintenance of displays and
inventories in all departments, for the overall condition of their stores, for
customer relations, personnel hiring and scheduling, and for all other
operational matters arising in the stores. Each store manager is compensated, in
part, based on the performance of his or her store. Our store managers are an
important source of information concerning local market conditions, trends and
customer preferences.
We prefer to fill management positions through promotion of existing
associates. A store management training program is maintained to develop the
management skills of associates and to provide a source of management personnel
for future store expansion.
Expansion
We have increased our department store base from 74 stores at the start
of fiscal 1994 to 119 stores at the end of fiscal 2000. We have expanded both by
leasing newly constructed locations and by acquiring existing locations from
other retailers. No new stores are planned for fiscal 2001.
We plan to open 25 to 30 new DSW shoe stores during fiscal 2001. We
intend to open new DSW stores in both existing and new markets with an emphasis
on locating stores in highly visible sites on high traffic streets in relatively
affluent trade areas. Factors considered in evaluating new store sites include
store size, configuration, demographics and lease terms. We seek to cluster
stores in targeted metropolitan areas to enhance name recognition, share
advertising costs and achieve economies of scale in management and distribution.
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The table below sets forth certain information relating to the
Company's stores during each of the last five fiscal years:
Fiscal Year Ended 6 Months Fiscal Year Ended
-------------------- Ended -----------------------------
2/3/01 1/29/00 1/30/99 8/1/98 8/2/97 8/3/96
------ ------- ------- ------ ------ ------
Beginning of Year(1) ........ 167 145 142 95 86 79
Opened(2).................. 55 22 4 49 9 7
Closed ................... 1 - 1 2 0 0
---- ---- ---- ---- --- ---
End of Year ................. 221 167 145 142 95 86
=== === === === == ==
(1) Excludes apparel, domestics and housewares departments operated by the
Company in two Valley Fair department stores prior to May 3, 1998.
(2) Fiscal year ended February 3, 2001 includes 14 Filene's Basement stores
acquired on March 17, 2000. Fiscal year ended August 1, 1998 includes 2
department stores obtained in the purchase of Valley Fair and the 43 shoe
stores obtained in the purchase of Shonac.
Based upon our experience, we estimate that the average cost of opening
a new department store ranges from approximately $4.5 million to $6.5 million
and the cost of opening a new DSW shoe store ranges 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 million to $3.5 million range. Preparations for opening a department
store generally take eight to twelve weeks and preparations for opening a DSW
shoe store or a Filene's store generally take eight to ten weeks. We charge
pre-opening expenses to operations as incurred. It has been our experience that
new stores generally achieve profitability and contribute to net income
following the first year of operations.
We continually refurbish our stores by updating the merchandise
displays and in-store signage. The costs of refurbishing on a per store basis
are generally not substantial. On an annual basis, we select stores to be
remodeled, which generally involves more significant changes to the interior or
exterior of the store. We maintain our own architectural design staff,
construction crews and carpentry shop to assist in refurbishing and remodeling
store interiors and to build in-store display tables and racks.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe that a high level of automation is essential to maintaining
and improving our competitive position. We rely upon computerized data systems
to provide information at all levels, including warehouse operations, store
billing, inventory control, merchandising and automated accounting. Value City
utilizes two IBM AS/400 computer systems, and Shonac utilizes one additional
AS400 computer system.
We utilize point of sale ("POS") registers with full scanning
capabilities to increase speed and accuracy at customer check-outs and
facilitate inventory restocking. Since layaways represent an important part of
our department store business, an automated system to capture and control
layaways is integrated into the POS system.
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ASSOCIATES
As of April 2001, we had approximately 19,300 associates of which 9,900
were full-time and 9,400 were part-time. Approximately 1,400 of these associates
in 21 stores are covered by collective bargaining agreements.
Group hospitalization, surgical, medical, vision, dental, disability
and life insurance benefits and a 401(k) plan are provided to full-time
non-union associates. The Company is a co-sponsor with SSC in these plans. The
Company also sponsors an associate stock purchase plan and a stock option plan
for salaried associates.
We believe that, in general, we have satisfactory relations with all of
our associates.
COMPETITION
The retail industry is highly competitive. We compete with a variety of
conventional and discount retail stores, including national, regional and local
independent department and specialty stores, as well as with catalog operations,
on-line providers, factory outlet stores and other off-price stores.
In the discount or off-price retailing segment, we differentiate
ourselves through our store format and breadth of product offering. Our large
stores differ from most other off-price retailers which tend to operate
substantially smaller stores focusing predominantly on either hard or soft
goods. Our large stores facilitate our merchandise offering and broad range of
brands and products.
In addition, because we purchase much of our inventory
opportunistically, we compete for merchandise with other national and regional
off-price apparel and discount outlets. Many of our competitors handle identical
or similar lines of merchandise and have comparable locations, and some have
greater financial resources than we do.
Competitive factors important to our customers include fashion, value,
merchandise selection, brand name recognition and, to a lesser degree, store
location. We compete primarily on the basis of value, merchandise quality and
selection. We believe our competitive advantages include our reputation in the
marketplace for being able to purchase and promptly pay for entire lots of
merchandise, together with our ability to either quickly distribute or hold the
merchandise for sale at the most opportune time, as well as our full-line
merchandise offering and range of brand names.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S.
Patent and Trademark Office. Our four department stores in Columbus operate
under the tradename "Schottenstein's," which has been registered in the State of
Ohio. We are entitled to use such names for the sole purpose of operating
department stores on an exclusive basis pursuant to a perpetual license from
SSC. SSC also operates a chain of furniture stores under the name "Value City
Furniture." We have also registered in the U.S. Patent and Trademark Office
various trademarks used in our marketing program.
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Through the acquisition of Shonac, we registered in the U.S. Patent and
Trademark Office a number of trademarks and service marks, including: DSW; DSW
Shoe Warehouse; Coach and Four; Crown Shoes; Reward Your Style; Flites; Jonathan
Victor; Kristi G; Lakota Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia
Cristie.
Filene's has an exclusive, perpetual, world-wide, royalty-free license
to use the name Filene's Basement and Filene's Basement of Boston trademark and
service mark registrations as well as certain other tradenames. Filene's
Basement's exclusive licensee status with respect to these registered marks has
been recorded with the United States Patent and Trademark Office and relevant
state offices.
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ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated
by the Company as of February 3, 2001:
VCDS,
DSW
Value City DSW &
Department Shoe Filene's
Stores Warehouse Filene's Total
----------- ------------ ------------- -----------
Arizona - 1 - 1
California - 3 - 3
Colorado - 2 - 2
Delaware 3 - - 3
Florida - 4 - 4
Georgia 4 2 - 6
Illinois 16 6 2 24
Indiana 7 2 - 9
Kansas - 2 - 2
Kentucky 4 - - 4
Maryland 7 3 - 10
Massachusetts - 3 9 12
Michigan 9 4 - 13
Minnesota - 2 - 2
Missouri 9 1 - 10
New Hampshire - 1 - 1
New Jersey 7 2 - 9
New York - 10 4 14
North Carolina 1 1 - 2
Ohio 23 7 1 31
Oklahoma - 1 - 1
Pennsylvania 19 5 - 24
Tennessee 1 2 - 3
Texas - 9 - 9
Virginia 4 4 - 8
Washington D.C. 1 - 3 4
West Virginia 4 - - 4
Wisconsin - 1 - 1
---- --- --- ----
119 78 19 216
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts;
and Los Angeles, California. We operate 11 warehouse/distribution complexes
located in Columbus, Ohio, a distribution facility in St. Louis, Missouri and a
distribution facility in Auburn, Massachusetts. In addition, to expedite the
flow of merchandise to certain clusters of stores, we use third party processors
located in New Jersey, Chicago and Detroit. Our executive offices occupy
approximately 45,000 square feet in a building which
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includes a store and also serves as one of our apparel distribution centers.
Shonac occupies approximately 70,000 square feet in a building which also serves
as the shoe division's distribution center.
The stores and all of the warehouse, buying and executive office
facilities are leased or subleased except for one owned shoe store location. As
of February 3, 2001 we leased or subleased 22 stores and 3 warehouse facilities
from SSC or entities affiliated with SSC. The remaining stores and warehouses
are leased from unrelated entities. Most of the store leases provide for an
annual rent based upon a percentage of gross sales, with a specified minimum
rent.
Our office, warehouse and distribution facilities for our department
store business are adequate for our current needs and we believe that such
facilities, with certain modifications and additional equipment will be adequate
for our foreseeable future demands.
To support the planned growth of our DSW shoe warehouse business, we
have consolidated and relocated the related back office and distribution
operations of our shoe business to a new 625,000 square foot facility located in
Columbus, Ohio. We recently entered into a 15 year lease with 3 five-year option
periods. The lease is with an affiliate of SSC and is at current market rate
rents.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that are incidental to the
conduct of our business. In the opinion of management, the amount of any
liability with respect to these proceedings individually or in the aggregate,
will not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the high and low sales prices of the Common
Shares as reported on the NYSE Composite Tape during the periods indicated. As
of April 25, 2001, there were 540 shareholders of record.
HIGH LOW
Six Months Ended January 30, 1999:
First Quarter ..................................... $19.25 $7.75
Second Quarter ..................................... 14.375 8.25
Fiscal 1999:
First Quarter ..................................... $12.00 $8.625
Second Quarter ..................................... 15.375 8.3125
Third Quarter ..................................... 15.9375 12.0625
Fourth Quarter ..................................... 19.50 13.875
Fiscal 2000:
First Quarter ..................................... $16.50 $9.375
Second Quarter ..................................... 11.375 8.00
Third Quarter ..................................... 9.9375 6.875
Fourth Quarter ..................................... 8.125 4.625
Fiscal 2001:
First Quarter (through April 25, 2001) ................ $9.03 $6.85
We have paid no dividends and presently anticipate that all of our future
earnings will be retained for development of our businesses and we do not
anticipate paying cash dividends on our common shares during fiscal 2001. The
payment of any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. The payment of dividends under our long-term credit facility is
restricted to the greater of $5.0 million or 10% of consolidated net income.
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ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands, except per share and per square foot amounts)
The following table sets forth for the periods indicated selected financial data
included in our consolidated financial statements and our underlying books and
records. The 12 month period ended January 30, 1999 is presented for comparative
purposes.
Transition
12 Months Period
For the Fiscal Year Ended Ended 6 Months For the Year Ended
------------------------- 1/30/99 Ended ------------------------------------
2/3/01(1) 1/29/00 (unaudited) 1/30/99(1)(2) 8/1/98(2) 8/2/97 8/3/96(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales(3) $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379 $1,073,399 $954,308
Operating (Loss) Profit $(135,585) $65,642 $51,226 $40,799 $36,921 $10,513 $36,213
Net (Loss) Income $(101,791) $33,468 $24,871 $20,256 $20,359 $3,951 $21,718
Basic (Loss) Earnings per Share $(3.03) $1.03 $0.77 $0.63 $0.64 $0.12 $0.68
Diluted (Loss) Earnings per Share $(3.03) $1.02 $0.76 $0.62 $0.63 $0.12 $0.68
Total Assets $908,009 $744,181 $574,427 $574,427 $684,078 $457,973 $437,010
Working Capital $211,402 $205,011 $165,527 $165,527 $204,784 $158,476 $161,397
Current Ratio 1.66 1.82 1.98 1.98 1.88 2.14 2.21
Long-term Obligations $326,449 $144,168 $101,447 $101,447 $165,648 $57,763 $46,942
Number of(4):
Department Stores 119 105 97 97 95 95 86
Shoe Stores 78 58 44 44 43 - -
Filene's Basement Stores 19 - - - - - -
Net Sales per
Selling Sq. Ft.(5) $256 $249 $235 $126 $229 $217 $221
Comp Sales Change(6) (1.1)% 7.2% 6.0% 3.3% 5.9% 0.1% (0.1)%
(1) Fiscal 2000 and 1996 include 53 weeks; all other years contain 52
weeks. The six month period includes 26 weeks.
(2) The operations of Shonac and Valley Fair are included from the date of
acquisition, May 3, 1998.
(3) Excludes sales of licensed departments. Prior to fiscal 1998, sales
from our toys and sporting goods departments were included in Net
Sales. At the start of fiscal 1998 these departments became licensed
departments operated by VCM, Ltd., a 50/50 joint venture with Mazel
Stores, Inc.
(4) Includes all stores operating at the end of the fiscal year. Years
prior to 1998 exclude the apparel, domestic and housewares departments
operated by us in two affiliated department stores which were acquired
effective May 3, 1998.
(5) Excludes licensed departments and stores not operated during the entire
fiscal period.
(6) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable in its second full fiscal year of
operation. For fiscal years 2000 and 1996, comparable store sales are
computed using like 52-week periods.
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ITEM 7. 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 our Consolidated
Statements of Operations, except for the 12 month period ended January 30, 1999,
which is presented here for comparative purposes.
- ---------------------------------------------------------------------------------------------------------------------------
For the Year For the Year For the 12 Months For the 6 Months For the Year
Ended Ended Ended Ended Ended
2/3/01 1/29/00 1/30/99 1/30/99 8/1/98
53 Weeks 52 Weeks 52 Weeks 26 Weeks 52 Weeks
- ---------------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales
licensed departments 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (67.5) (62.2) ( 62.2) (62.0) ( 63.1)
----- ----- ------ ----- ------
Gross profit 32.5 37.8 37.8 38.0 36.9
Selling, general and
administrative expenses (39.3) (34.7) (35.2) (33.9) (35.8)
License fees from affiliates
and other operating income 0.7 0.8 1.2 1.1 2.1
------- ------- ------- ------- -------
Operating (loss) profit (6.1) 3.9 3.8 5.2 3.2
Gain on disposal of assets - - - - 0.1
Interest expense, net (1.3) (0.6) (0.8) (0.8) (0.5)
Amortization of excess
net assets over cost - - - - 0.1
Equity in (loss) income
of joint venture (0.1) 0.1 - - (0.1)
------ ------ ------- ------- ----
(Loss) income before income taxes (7.5) 3.4 3.0 4.4 2.8
Benefit (provision) for income taxes 2.9 (1.4) (1.2) (1.8) (1.0)
------ ------- ------- ------- -------
Net (loss) income (4.6)% 2.0% 1.8% 2.6% 1.8%
====== ======= ======= ======= =======
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FISCAL YEAR ENDED FEBRUARY 3, 2001 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
2000
Our net sales increased $542.8 million, or 32.5%, from $1,670.2 million
to $2,213.0 million. Fiscal 2000's sales included $249.1 million net owned sales
of the Filene's stores acquired effective March 17, 2000. Comparable store sales
decreased 1.1%. Net sales for the department stores ("Value City") increased
$130.3 million, or 9.2%, from $1,423.6 million to $1,553.9 million. Value City's
comparable store sales decreased 4.3%, or $60.7 million. Non-apparel sales
increased 7.2% and apparel sales increased 6.4%. On a comparable store basis,
apparel and non-apparel sales decreased 5.1% and 5.4%, respectively. DSW Shoe
Warehouse achieved sales of $410.0 million with a 19.1% comparable stores sales
increase.
Gross profit increased $89.1 million from $631.0 million to $720.1
million, and decreased to 32.5% as a percentage of net sales, compared to 37.8%
as a percentage of net sales in the prior year. The decrease in the gross margin
percentage is due primarily to a $105.4 million charge for the realignment of
excess inventory quantities.
Selling, general and administrative expenses ("SG&A") increased $290.7
million from $579.5 million to $870.2 million, and increased as a percentage of
net sales from 34.7% to 39.3%, an increase of 4.6%. New DSW and Value City
stores accounted for $102.5 million of the SG&A increase; the Filene's stores
added $84.8 million. Comparable store SG&A increased $37.0 million, primarily in
the areas of payroll, benefits and occupancy costs. Distribution and
transportation costs were up $41.1 million. Overhead increased $14.1 million to
support expansion of our shoe business and the relocation of its distribution
complex. SG&A also includes $4.6 million of non-recurring severance and asset
impairment charges. All other expenses as a group were up approximately $6.6
million.
Based upon our experience, we estimate 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. Similar costs for a Filene's store are in the $2.5
million to $3.5 million range. Preparations for opening a department store
generally take between 8 and 12 weeks and preparations for a shoe store or a
Filene's store generally take 8 to 10 weeks. Pre-opening costs are expensed as
incurred. It has been our experience that new stores generally achieve
profitability and contribute to net income after the first full year of
operations. Twenty-three department stores opened less than 12 months as of the
beginning of fiscal 2000 had a pre-tax net operating loss of $22.8 million,
including $4.5 million of pre-opening expense amortization. Ten department
stores opened less than 12 months during fiscal 1999 had pre-tax operating
losses of $1.6 million in 1999, including $3.8 million of pre-opening expense.
Twenty DSW stores opened less than 12 months in fiscal 2000 had a pre-tax net
operating loss of $6.5 million, including $4.6 million of pre-opening expenses.
Twenty-two DSW stores opened less than 12 months during fiscal 1999 had a
pre-tax net operating loss of $3.7 million after recognizing $3.3 million of
pre-opening expenses.
License fees from affiliates increased $2.9 million, or 34.0%, from $8.5
million to $11.3 million, and remained at 0.5% as a percentage of net sales.
Other operating income decreased $2.4 million, or 42.0%, from $5.6
million to $3.3 million and decreased as a percentage of net sales from 0.34% to
0.15%.
Operating (loss) profit decreased $201.2 million from $65.6 million to a
loss of $135.6 million, and decreased as a percentage of net sales from 3.9% to
a 6.1% loss as a result of the above factors.
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Interest expense, net of interest income, increased from $10.7 million to
$30.5 million due to increased borrowing.
Equity in income (loss) of joint venture decreased $2.7 million from
income of $1.3 million to a loss of $1.3 million due primarily to markdowns
taken to liquidate inventory.
Income (loss) before provision for income taxes decreased $223.8 million
from income of $56.4 million to a loss of $167.4 million, and decreased as a
percentage of sales from 3.4% to a 7.5% loss as a result of the above factors.
FISCAL YEAR ENDED JANUARY 29, 2000 COMPARED TO THE TWELVE MONTH PERIOD ENDED
JANUARY 30, 1999
Our 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 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 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.
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.
Ten department stores opened less than 12 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 12 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 12 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 12 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 29.2%, 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.
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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.
SEASONALITY
Our business is affected by the pattern of seasonality common to most
retail businesses. Historically, the majority of our sales and operating profit
have been generated during the back-to-school and Christmas selling seasons.
FISCAL YEAR
In June 1998, we decided to change our 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. Fiscal 2000 contained 53 weeks.
INCOME TAXES
The effective tax rate for fiscal 2000 was 39.2% versus 40.7% for fiscal
1999.
The effective tax rate for fiscal 2001 is expected to be approximately
41.5% 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 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 will adopt SFAS 133
effective February 4, 2001. Management does not expect the adoption of SFAS 133
to have a significant impact on the financial position, results of operations,
or cash flows of the Company.
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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 $211.4 million and $205.0 million at February 3,
2001 and January 29, 2000, respectively. Current ratios at those dates were 1.7
and 1.8, respectively.
Net cash used in operating activities totaled $114.7 million in fiscal
2000. Net cash provided by operating activities was $27.5 million, $93.2 million
and $43.3 million for the fiscal year 1999, the Transition Period 1998 and
fiscal 1998, respectively. Net loss, adjusted for depreciation and amortization,
used $54.3 million of operating cash flow for the fiscal year 2000. This was
reduced by $54.1 million representing a decrease in inventories and an increase
in accounts payable. Increases in accounts receivable, deferred income taxes and
prepaid expenses and other assets used $89.4 million. Other changes in working
capital assets and liabilities used $25.1 million.
During the twelve months ended January 29, 2000, net income adjusted for
depreciation and amortization, provided $67.7 million of operating cash flow.
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.
Net cash used for investing activities totaled $70.1 million, $49.7
million, $18.2 million and $127.5 million for fiscal years 2000, 1999,
Transition 1998 and fiscal 1998, respectively.
Net cash used for capital expenditures was $70.2 million, $37.3 million,
$17.3 million and $27.2 million for fiscal years 2000, 1999, Transition 1998 and
fiscal 1998, respectively. During fiscal 2000, capital expenditures included
$30.5 million for new stores, $10.8 million for improvements in existing stores,
$16.7 million for relocation of office, warehousing and operations of our shoe
business, $5.9 million for MIS equipment upgrades and new systems. All other
capital expenditures aggregated $6.3 million.
At February 3, 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's $25.0 million revolving line of credit. At February 3, 2001, $77.7 million
was available under the Credit Agreement. Borrowings aggregated $200.0 million,
plus $16.0 million of letters of credit were issued and outstanding and the VCM
loan guarantee totaled $6.2 million. 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.
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To supplement operating cash requirements the Company has a $50.0 million
subordinated secured credit facility with SSC. 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, SSC purchased
the outstanding balance under the same continuing terms. The terms provide that
if prior to March 17, 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. As of March 17, 2001, the Senior Facility
was not repaid. We paid SSC a one time fee of 200 basis points, or $1.5 million,
at the initial closing in consideration for entering into a Put Agreement
associated with the Senior Facility.
Although we believe that cash generated by operations, along with the
available proceeds from the Credit Agreement, SSC subordinated secured credit
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 two fiscal months of 2001 were below
plan, we believe principally as a result of severe weather in many of our
markets. This condition, along with the effect of increased heating and fuel
prices affected the retail industry in general. Achievement of expected cash
flows from operations and compliance with our Credit Agreement covenants (see
Note 5 to the Consolidated Financial Statements) are dependent upon a number of
factors, including the attainment of sales, gross profit, expense levels,
vendor relations, and flow of merchandise that are consistent with our
financial projections, particularly for the balance of the Spring season.
A recent discussion with a major factor indicated they intend to reduce
our future availability of credit and that we need to strengthen our liquidity
and increase our credit availability from other sources.
ACQUISITION
On March 17, 2000, we, through our wholly-owned subsidiary, Base
Acquisition Corp, 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. 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, $1.2
million to be paid over a period not to exceed three years, 403,208 shares of
our 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 $22.5 million and certain trade payable and other obligations
which will be paid in the ordinary course. Allocation of the purchase price has
been determined based on fair market valuation of the net assets acquired
subject to resolution of several outstanding matters.
The acquisition was funded by cash from operations and a portion of the
proceeds from the Credit Agreement.
25
26
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, the ability to repay the
$75.0 million Senior Facility through an equity offering or refinancing, our
ability to attain our fiscal 2001 business plan, expected cash flows from
operations, vendor and their factor relations, flow of merchandise,
compliance with the credit agreement, our ability to strengthen our liquidity
and increase our credit availability, the availability of desirable store
locations on suitable terms, changes in consumer spending patterns, consumer
preferences and overall economic conditions, the impact of competition and
pricing, changes in weather patterns, changes in existing or potential duties,
tariffs or quotas, paper and printing costs, and the ability to hire and train
associates.
Historically, our operations have been seasonal, with a disproportionate
amount of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates which may
adversely affect our financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. We do
not use financial instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings
under our revolving credit facility. At February 3, 2001, direct borrowings
aggregated $200.0 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%. We have swap agreements to help manage the exposure to interest rate
movements and reduce borrowing costs. As of February 3, 2001 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 February 3, 2001, we performed a sensitivity analysis assuming an
average outstanding principal amount of $247.6 million subject to variable
interest rates. A 10% increase in LIBOR would result in approximately $1.0
million of additional interest expense annually.
26
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule 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.
27
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item appears under the captions
"Nominees for Election as Directors," "Officers and Key Employees," and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in our
Proxy Statement relating to our Annual Meeting of Shareholders to be held in
July 2001 and is incorporated herein by reference.
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The information required by this item appears under the captions
"Executive Officer Compensation," "Information Concerning Board of Directors,"
and "Compensation Committee Interlocks and Insider Participation" in our Proxy
Statement relating to our Annual Meeting of Shareholders to be held in July 2001
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item appears under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement relating to our Annual Meeting of Shareholders to be held in July 2001
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears under the caption
"Relationship with SSC and its Affiliates" in our Proxy Statement relating to
our Annual Meeting of Shareholders to be held in July 2001 and is incorporated
herein by reference.
28
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
14(a)(1) FINANCIAL STATEMENTS
The documents listed below are filed as part of this Form 10-K:
Form 10-K
---------
Independent Auditors' Report F - 1
Consolidated Balance Sheets at February 3, 2001
and January 29, 2000 F - 2
Consolidated Statements of Operations for the years ended
February 3, 2001, January 29, 2000, 12 months ended January
30, 1999 (unaudited), 6 months ended
January 30, 1999 and for the year ended August 1, 1998 F - 3
Consolidated Statements of Shareholders' Equity for the years
ended February 3, 2001, January 29, 2000, 6 months ended
January 30, 1999 and for the year ended August 1, 1998 F - 4
Consolidated Statements of Cash Flows for the years ended
February 3, 2001, January 29, 2000, 12 months ended January
30, 1999 (unaudited), for 6 months ended
January 30, 1999 and for the year ended August 1, 1998 F - 5
Notes to Consolidated Financial Statements F - 6
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K:
Schedule II. Valuation and Qualifying Accounts S - 1
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or the notes thereto.
14(a)(3) EXHIBITS:
See Index to Exhibits which begins on Page E-1.
14(b) REPORTS ON FORM 8-K
During the fourth quarter, we filed a Form 8-K on January 8, 2001, Item 5 -
"Other Items" relating to the Amendment No. 2 and Waiver to Credit Agreement
for our $300 million bank credit facility with its existing lenders.
29
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
Date: April 27, 2001 By: *
---------------------------
(George Kolber, Vice Chairman and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board of Directors 4/27/01
- --------------------------------- and Chief Executive Officer
(Jay L. Schottenstein)
* Vice Chairman and 4/27/01
- --------------------------------- Chief Executive Officer
(George Kolber) (Principal Executive Officer)
* Vice Chairman of the Board of Directors 4/27/01
- ---------------------------------
(Saul Schottenstein)
* Vice Chairman of the Board of Directors 4/27/01
- ---------------------------------
(Martin P. Doolan)
* Chief Financial Officer and Treasurer 4/27/01
- --------------------------------- (Principal Financial and Accounting Officer)
(James A. McGrady)
* Director 4/27/01
- ---------------------------------
(Henry L. Aaron)
* Director 4/27/01
- ---------------------------------
(Ari Deshe)
* Director 4/27/01
- ---------------------------------
(Jon P. Diamond)
* Director 4/27/01
- ---------------------------------
(Richard Gurian)
* Director 4/27/01
- ---------------------------------
(Norman Lamm)
* Director 4/27/01
- ---------------------------------
(Geraldine Schottenstein)
* Director 4/27/01
- ---------------------------------
(Robert L. Shook)
*By:/s/ George Kolber
-----------------
George Kolber, (Attorney-in-Fact)
30
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Value City
Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets
of Value City Department Stores, Inc. (a majority owned subsidiary of
Schottenstein Stores Corporation) and its wholly owned subsidiaries (the
"Company") as of February 3, 2001 and January 29, 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years ended February 3, 2001, January 29, 2000 and August 1, 1998
and the six months ended January 30, 1999. Our audits also included the
financial statement schedule listed in the Index as Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Value City
Department Stores, Inc. and its wholly owned subsidiaries as of February 3, 2001
and January 29, 2000, and the results of their operations and cash flows for the
years ended February 3, 2001, January 29, 2000, August 1, 1998 and the six
months ended January 30, 1999 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Columbus, Ohio
April 30, 2001
F-1
32
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
at February 3, 2001 and January 29, 2000
(in thousands, except share amounts)
- --------------------------------------------------------------------------------------------------
ASSETS
2/3/01 1/29/00
- --------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and equivalents $10,562 $6,027
Accounts receivable, net 44,927 10,131
Receivables from affiliates 9,452 299
Inventories 393,577 412,479
Prepaid expenses and other assets 22,290 8,544
Deferred income taxes 51,732 18,052
-------- --------
TOTAL CURRENT ASSETS 532,540 455,532
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 223,675 192,207
Leasehold improvements 176,318 142,066
Land and building 801 801
Capital leases 38,348 42,328
-------- --------
439,142 377,402
Accumulated depreciation and amortization (190,103) (169,907)
-------- --------
PROPERTY AND EQUIPMENT, NET 249,039 207,495
INVESTMENT IN JOINT VENTURE 8,292 9,679
GOODWILL AND TRADENAMES, NET 67,056 45,566
OTHER ASSETS 51,082 25,909
-------- --------
TOTAL ASSETS $908,009 $744,181
======== ========
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $180,736 $164,196
Accounts payable to affiliates 13,655 4,532
Accrued expenses:
Compensation 19,662 17,118
Taxes 31,255 22,604
Other 75,227 41,611
Current maturities of long-term obligations 603 460
-------- --------
TOTAL CURRENT LIABILITIES 321,138 250,521
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 326,449 144,168
DEFERRED INCOME TAXES AND
OTHER NONCURRENT LIABILITIES 10,115 7,131
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 34,330,863 shares and
32,992,122 shares, respectively 145,659 132,601
Retained earnings 111,155 212,946
Deferred compensation expense, net (6,448) (2,513)
Treasury shares, at cost, 7,651 and 87,651, respectively (59) (673)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 250,307 342,361
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $908,009 $744,181
======== ========
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
33
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 3, 2001 and January 29, 2000,
Twelve Months Ended January 30, 1999 (Unaudited),
Six Months Ended January 30, 1999 and Year Ended August 1, 1998
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------
For
For For the 12 Months For For
the Year the Year Ended the 6 Months the Year
Ended Ended 1/30/99 Ended Ended
2/3/01 1/29/00 (Unaudited) 1/30/99 8/1/98
53 Weeks 52 Weeks 52 Weeks 26 Weeks 52 Weeks
- --------------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379
Cost of sales (1,492,947) (1,039,145) (848,964) (483,502) (732,902)
----------- ------------ ------------ --------- ---------
GROSS PROFIT 720,070 631,031 515,066 296,761 428,477
Selling, general and
administrative expenses (870,237) (579,460) (480,584) (264,590) (416,218)
License fees from affiliates 11,323 8,451 11,987 4,880 20,674
Other operating income 3,259 5,620 4,757 3,748 3,988
----------- ------------ ------------ --------- ---------
OPERATING (LOSS) PROFIT (135,585) 65,642 51,226 40,799 36,921
Interest expense, net (30,480) (10,728) (10,532) (6,702) (5,267)
(Loss) gain on disposal of assets, net (16) 146 40 16 1,623
----------- ------------ ------------ --------- ---------
(LOSS) INCOME BEFORE EQUITY IN (LOSS)
INCOME OF JOINT VENTURE AND BENEFIT
(PROVISION) FOR INCOME TAXES (166,081) 55,060 40,734 34,113 33,277
Equity in (loss) income of joint venture (1,340) 1,340 (464) 131 (1,377)
----------- ------------ ------------ --------- ---------
(LOSS) INCOME BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES (167,421) 56,400 40,270 34,244 31,900
Benefit (provision) for income taxes 65,630 (22,932) (15,399) (13,988) (11,541)
----------- ------------ ------------ --------- ---------
NET (LOSS) INCOME $(101,791) $33,468 $24,871 $20,256 $20,359
=========== ============ ============ ========= =========
BASIC (LOSS) EARNINGS PER SHARE $(3.03) $1.03 $0.77 $0.63 $0.64
=========== ============ ============ ========= =========
DILUTED (LOSS) EARNINGS PER SHARE $(3.03) $1.02 $0.76 $0.62 $0.63
=========== ============ ============ ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
34
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Years Ended February 3, 2001 and January 29,
2000, Six Months Ended January 30, 1999 and the Year
Ended August 1, 1998
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
--------------------
Common Deferred
Common Shares Common Retained Compensation Treasury
Shares in Treasury Shares Earnings Expense Shares Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT AUGUST 2, 1997 32,259 369 120,796 138,863 (982) (2,829) 255,848
Net income 20,359 20,359
Exercise of stock options 331 3,602 3,602
Tax benefit realized on
vested restricted shares 120 120
Grant of restricted shares 30 328 (328)
Amortization of deferred
compensation expense 230 230
-----------------------------------------------------------------------------------------------------
BALANCE, AUGUST 1, 1998 32,620 369 124,846 159,222 (1,080) (2,829) 280,159
Net income 20,256 20,256
Sale of treasury shares (25) 119 192 311
Exercise of stock options 41 324 324
Tax benefit realized on
vested restricted shares 145 145
Forfeiture of restricted shares (23) (278) 278
Amortization of deferred
compensation expense 131 131
-----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 30, 1999 32,638 344 125,156 179,478 (671) (2,637) 301,326
Net income 33,468 33,468
Exercise of stock options 198 1,660 1,660
Tax benefit on stock options
and restricted shares 1,548 1,548
Grant of restricted shares 156 2,201 (2,201)
Amortization of deferred 359 359
compensation expense
Acquisitions (256) 2,036 1,964 4,000
-----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 29, 2000 32,992 88 132,601 212,946 (2,513) (673) 342,361
Net loss (101,791) (101,791)
Sales of treasury shares (80) 466 614 1,080
Exercise of stock options 182 1,431 1,431
Tax benefit on stock options
and restricted shares 228 228
Grant of restricted shares,
net of forfeitures 754 5,433 (4,703) 730
Amortization of deferred
compensation expense 768 768
Acquisitions 403 5,500 5,500
-----------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 3, 2001 34,331 8 $145,659 $111,155 $(6,448) $(59) $250,307
=====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
35
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 3, 2001 and January 29, 2000,
Twelve Months Ended January 30, 1999 (Unaudited),
Six Months Ended January 30, 1999 and Year ended August 1, 1998
(in thousands)
12 Months
Year Year Ended 6 Months Year
Ended Ended 1/30/99 Ended Ended
2/3/01 1/29/00 (Unaudited) 1/30/99 8/1/98
53 Weeks 52 Weeks 52 Weeks 26 Weeks 52 Weeks
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(101,791) $33,468 $24,871 $20,256 $20,359
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 47,495 34,230 31,012 16,299 27,773
Deferred income taxes and other noncurrent liabilities (35,058) (68) (696) 1,990 (1,920)
Equity in (income) loss of joint venture 1,340 (1,340) 464 (131) 1,377
Loss (gain) on disposal of assets 16 (146) (39) (16) (1,623)
Change in working capital, assets and liabilities,
excluding effects of acquisitions:
Receivables (42,657) 4,317 669 (1,490) 1,504
Inventories 44,194 (126,284) 11,027 87,146 (39,223)
Prepaid expenses and other assets (11,675) (3,178) 2,028 3,808 6,383
Accounts payable 7,271 59,265 (1,425) (26,775) 16,269
Accrued expenses (23,852) 27,263 3,884 (7,908) 12,358
--------- --------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (114,717) 27,527 71,795 93,179 43,257
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (70,226) (37,317) (36,889) (17,305) (27,165)
Investment in joint venture - - - - (9,637)
Proceeds from sale of assets 326 167 60 24 22,388
Acquisitions (3,506) (8,000) (108,473) - (108,473)
Notes receivable - - - - 1,906
Other assets 3,355 (4,580) (7,301) (963) (6,532)
--------- --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (70,051) (49,730) (152,603) (18,244) (127,513)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 1,431 1,660 2,912 324 2,681
Net payments under demand note facility - - - - (12,000)
Net proceeds from issuance of debt 187,872 15,000 137,225 - 137,225
Net principal payments under long-term obligations - (9,325) (107,402) (87,166) (22,462)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 189,303 7,335 32,735 (86,842) 105,444
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 4,535 (14,868) (48,073) (11,907) 21,188
CASH AND EQUIVALENTS, BEGINNING OF YEAR 6,027 20,895 68,968 32,802 11,614
--------- --------- --------- --------- ---------
CASH AND EQUIVALENTS, END OF YEAR $10,562 $6,027 $20,895 $20,895 $32,802
========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BUSINESS OPERATIONS AND 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 February 3, 2001 a total of 216 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 78 shoe stores located
throughout the United States and 19 Filene's Basement stores
("Filene's") located principally in the New England states.
To facilitate comparisons with the current year, certain amounts in
prior years' and interim period financial statements have been
reclassified to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
On June 10, 1998, the Company determined to change its fiscal year from
a 52/53 week year that ends on the Saturday nearest to July 31 to a
52/53 week year that ends on the Saturday nearest to January 31. The
six-month transition period of August 3, 1998 through January 30, 1999
(the "Transition Period") contains 26 weeks and precedes the start of
the new fiscal year. Fiscal 2000 contains 53 weeks.
An unaudited consolidated statement of income and an unaudited
consolidated statement of cash flows for the twelve months ended
January 30, 1999 is presented for comparative purposes. All necessary
adjustments for fair presentation have been made.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company after elimination of significant intercompany transactions and
balances.
CASH AND EQUIVALENTS
Cash and equivalents represent cash and highly liquid investments with
maturities when purchased of three months or less.
INVENTORIES
Merchandise inventories are stated at the lower of cost or market using
the retail method.
PRE-OPENING EXPENSES
Pre-opening expenses are expensed as incurred. Pre-opening costs
expensed were $10,902,000, $7,563,000, $1,308,000 and $1,434,000 for
fiscal 2000, 1999, the Transition Period and for fiscal year 1998,
respectively.
F-6
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
INVESTMENT IN JOINT VENTURE
VCM, Ltd. ("VCM") operates the health and beauty care, food and toy and
sporting goods departments in the Company's stores as licensed
departments. VCM is a 50/50 joint venture with Mazel Stores, Inc.
("Mazel"). The Company accounts for its fifty percent interest in the
joint venture under the equity method. (See Note 3, Related Party
Transactions.)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are recognized principally on the straight-line method in
amounts adequate to amortize costs over the estimated useful lives of
the respective assets. Leasehold improvements are amortized over the
shorter of their useful lives or lease term. The estimated useful lives
by class of asset are:
Buildings 31 years
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements 10 years
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
full recoverability is questionable.
GOODWILL AND TRADENAMES
Goodwill represents the excess cost over the estimated fair values of
net assets and identifiable intangible assets of businesses acquired
and is being amortized over 15 years. Tradenames represent the values
assigned to names that the Company acquired and is being amortized over
15 years. The accumulated amortization for these assets was $10,638,000
and $5,631,000 at February 3, 2001 and January 29, 2000, respectively.
REVENUE RECOGNITION
Sales of merchandise and services are net of returns and allowances and
exclude sales tax. Layaway sales are recognized when the merchandise
has been paid for in full.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. During fiscal year
2000, 1999, the Transition Period and during fiscal year 1998,
advertising expense was $78,224,000, $59,194,000, $29,741,000 and
$38,245,000, respectively.
INTEREST RATE SWAP AGREEMENT
The Company utilizes interest rate swap agreements to manage the
interest rate risk associated with a portion of its borrowings. The
counterparty to this instrument is a major financial institution. These
agreements are used to reduce the potential impact of increases in
interest rates on variable rate long-term debt. The differential to be
paid or received is accrued as interest rates change and is recognized
as an adjustment to interest expense.
EARNINGS PER SHARE
Basic earnings per share is based on a simple weighted average of
common shares outstanding. Diluted earnings per share reflects the
potential dilution of common shares, related to outstanding
F-7
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
stock options, calculated using the treasury stock method. The
numerator for the calculation of basic and diluted earnings per
share is net income. The denominator is summarized as follows
(in thousands):
6 Months
Year Ended Year Ended Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 33,567 32,495 32,285 31,997
Assumed exercise of dilutive stock
options - 366 350 364
------ ------ ------ ------
Number of shares for computation of
diluted earnings per share 33,567 32,861 32,635 32,361
====== ====== ====== ======
-----------------------------------------------------------------------------------------------------------
Options to purchase 2,615,550 shares of stock at prices ranging from
$5.56 to $21.44 per share were outstanding during the year ended
February 3, 2001 but were not included in the computation of diluted
loss per share. Options to purchase 16,000 shares of stock at prices
ranging from $16.56 to $21.44 per share were outstanding during the
year ended January 29, 2000 but were not included in the computation of
diluted earnings per share because the options' exercise prices were
greater than the average market price of the stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based
on management's knowledge of current events and actions it may
undertake in the future, actual results could differ from these
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
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 will adopt SFAS 133
effective February 4, 2001. Management has concluded that the adoption
of SFAS 133 will not have a significant impact on the financial
position, results of operations, or cash flows of the Company.
F-8
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
3. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from and sells merchandise to
affiliates of Schottenstein Stores Corporation ("SSC"), direct owner of
approximately 53.0% of the Company's common shares, and VCM. The
related party transactions are as follows (in thousands):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
----------------------------------------------------------------------------------------------------------------
Purchases of merchandise
from affiliates $24,787 $7,228 $1,471 $4,898
Merchandise sold to affiliates at cost,
including handling charges 14,300 - - 333
Merchandise purchased on behalf of
and shipped directly to affiliates, at
cost plus delivery charges - - - 3,935
----------------------------------------------------------------------------------------------------------------
The Company had license agreements with Shonac prior to its
acquisition. The license agreement was for the operation of shoe
departments in all of the Company's stores and provided for fees based
on a percentage of sales, as defined.
Sales by licensed departments and the related license fees earned are
as follows (in thousands):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
-------------------------------------------------------------------------------------------------------
VCM
Sales $140,240 $112,333 $63,480 $87,651
License fees 9,144 8,451 4,880 7,540
Shonac
Sales - - - 119,319
License fees - - - 13,134
-------------------------------------------------------------------------------------------------------
The Company also leases certain store and warehouse locations owned by
SSC as described in Note 4.
F-9
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
Accounts receivable from and payable to affiliates principally result
from commercial transactions with entities owned or controlled by SSC
or intercompany transactions with SSC.
The Company shares certain personnel, administrative and service costs
with SSC and its affiliates. The costs of providing these services are
allocated among the Company, SSC and its affiliates without a premium.
The allocated amounts are not significant. SSC does not charge the
Company for general corporate management services. In the opinion of
the Company and SSC management, the aforementioned charges are
reasonable.
The Company participates in SSC's self insurance program for general
liability, casualty loss and Ohio workers' compensation. The Company
expensed $16,550,000, $9,564,000, $4,001,000 and $7,265,000 in fiscal
years 2000, 1999, the Transition Period and 1998, respectively, for
such coverage.
In July 2000, the Company assigned to SSC the future proceeds from a
lease termination agreement with a lessor in exchange for $13.5
million. This agreement was subsequently canceled in November 2000 and
the proceeds were returned to SSC. No gain or loss was recorded on the
transaction. During the Transition Period and fiscal year 1998, the
Company contributed $1,120,000 each period to a private charitable
foundation controlled by the Schottenstein family. The fiscal 1999
contribution was made in March 2000 by utilizing 80,000 common shares
of the Company held in Treasury. During fiscal 2000, $2.2 million of
contributions were expensed.
See Footnote 5 Long-Term Obligations and Notes Payable.
4. LEASES
The Company operates stores and warehouses under various arrangements
with related and unrelated parties. Such leases expire through 2019 and
in most cases provide for renewal options. Generally, the Company is
required to pay real estate taxes, maintenance, insurance and
contingent rentals based on sales in excess of specified levels.
The Company has entered into several leasing agreements with SSC and
affiliates. Under a Master Lease Agreement, as amended, the Company
leases five store locations owned by SSC for an annual minimum rent of
$1,314,000 and additional contingent rents based on aggregate sales in
excess of specified sales levels for the store locations. The Company
also leased or subleased from SSC and affiliates fourteen store
locations, three warehouse facilities and a parcel of land for
specified minimum rentals, plus contingent rents based on sales in
excess of specified sales levels for the store locations. Leases and
subleases with related parties are for initial periods generally
ranging from five to twenty years, provide for renewal options and
require the Company to pay real estate taxes, maintenance and
insurance.
On August 12, 1997, seventeen related party leases (thirteen stores and
four other facilities) were renegotiated and became unrelated party
leases pursuant to a sale-leaseback transaction between SSC and a third
party. All of the new leases for the thirteen stores covered by the SSC
sale-leaseback transaction eliminated percentage rents and provided for
increased fixed rents for an initial twenty year term.
The Company incurred new capital lease obligations, including one with
a related party, aggregating $27,100,000 and $9,400,000 in 1999 and
1997, respectively, to obtain store facilities. The total cost of
capital leases at February 3, 2001 and January 29, 2000 were
$36,186,000 and $42,328,000, respectively. Assets held under capital
leases are amortized over the terms of the related leases. The
F-10
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
accumulated amortization for these assets was $2,595,000 and $1,988,000
at February 3, 2001 and January 29, 2000, respectively.
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at
February 3, 2001 are as follows (in thousands):
Operating Leases
Fiscal ---------------------------------------------------
Year Unrelated Related Capital
Ending Total Party Party Leases
----------------------------------------------------------------------------- --------
2002 $90,502 $76,065 $14,437 $3,774
2003 87,915 74,466 13,449 3,693
2004 83,447 70,466 12,981 3,589
2005 77,587 64,760 12,827 3,465
2006 75,056 62,153 12,903 3,541
Future Years 523,027 402,693 120,334 57,464
-------
Total minimum lease payments 75,526
Less amount representing interest (44,279)
-------
Present value of minimum lease payments 31,247
Less current portion (171)
-------
Total long-term portion $31,076
=======
The composition of rental expense (in thousands):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
----------------------------------------------------------------------
Minimum rentals:
Unrelated parties $47,203 $47,562 $20,421 $27,618
Related parties 11,265 8,361 4,093 8,307
Contingent rentals:
Unrelated parties 3,981 5,648 1,585 2,681
Related parties 2,195 2,289 357 1,556
------- ------- ------- -------
Total $64,644 $63,860 $26,456 $40,162
======= ======= ======= =======
----------------------------------------------------------------------
Many of the Company's leases contain fixed escalations of the minimum
annual lease payments during the original term of the lease. For these
leases, the Company recognizes rental expense on a straight-line basis
and records the difference between the average rental amount charged to
expense and the amount payable under the lease as deferred rent. At the
end of fiscal 2000 and fiscal 1999, the balance of deferred rent was
$6,721,000 and $3,863,000, respectively, and is included in other
noncurrent liabilities.
F-11
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
5. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
2/3/01 1/29/00
----------------------------------------------------------------------
Senior unsecured notes - $36,571
Credit facilities $295,000 70,000
Capital lease obligations 31,247 37,042
Other 805 1,015
-------- --------
327,052 144,628
Less current maturities (603) (460)
-------- --------
$326,449 $144,168
======== ========
----------------------------------------------------------------------
The senior unsecured notes were retired in March 2000.
At February 3, 2001, the Company 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's $25.0 million revolving line of credit. At
February 3, 2001, $77.7 million was available under the Credit
Agreement. Borrowings aggregated $200.0 million, plus $16.1 million of
letters of credit were issued and outstanding and the VCM loan
guarantee totaled $6.2 million. 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. The fair market
value of the swap agreement at February 3, 2001 and January 29, 2000
was $(59,496) and $402,000, respectively. In addition, the LIBOR rate
on $35 million has been locked in at fixed annual rate of 6.99% through
April 2002 under a swap agreement. The fair market value of this swap
agreement at February 3, 2001 was $(2,700,359).
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, SSC purchased the outstanding
balance under the same continuing terms. The terms provide that if
prior to March 17, 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. As of March 17, 2001, the Senior Facility was not repaid.
We paid SSC a one time fee of 200 basis points, or $1.5 million, at the
initial closing in consideration for entering into a Put Agreement
associated with the Senior Facility.
F-12
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
To supplement operating cash requirements the Company has a $50.0
million subordinated secured credit facility with SSC. Outstanding
advances under the agreement are subordinated to the Credit Agreement
and are subject to a junior lien on assets securing the Credit
Agreement. At 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 weighted average interest rate on borrowings under the Company's
credit facilities during fiscal year 2001, 1999, the Transition Period
and fiscal year 1998 was 10.7%, 8.8%, 8.3% and 8.56%, respectively.
The book value of notes payable and long-term debt approximates fair
value at February 3, 2001.
The Company believes that the availability under the Credit Agreements
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, vender and their
factor relations, flow of merchandise, and compliance with the Credit
Agreements' covenants are dependent upon the Company's attainment of
its Fiscal 2001 business plan.
6. BENEFIT PLANS
The Company participates in the SSC sponsored 401(k) savings plan (the
"401(k) Plan"). Employees who attained twenty and one-half years of age
and completed one year of service could contribute up to twenty percent
of their salaries to the 401(k) Plan on a pre-tax basis, subject to IRS
limitations. The Company matched up to three percent of participants'
eligible compensation. Effective January 1, 2001, the Company matches
up to four and one-half percent of participants' eligible compensation.
Effective as of April 1, 1999 employees who work 20 or more hours per
week are eligible to participate in the 401K Plan after 60 days of
service, with the Company matching contributions beginning after one
full year of service. Employees who work less than 20 hours per week
continue to participate under the pre-April 1999 rules. Additionally,
the Company has contributed a discretionary profit sharing amount to
the 401(k) Plan each year. The Company incurred costs associated with
the 401(k) Plan of $4,684,000, $4,696,000, $1,591,000 and $3,907,000
for fiscal year 2000, 1999, the Transition Period and for fiscal year
1998, respectively. In 1998, the Company recognized the benefit of
approximately $1,639,000 of forfeitures attributable to employer
contributions pursuant to an amendment to the plan.
The Company provides an Associate Stock Purchase Plan. Eligibility
requirements are similar to the 401(k) Plan. Eligible employees can
purchase common shares of the Company through payroll deductions. The
Company will match 15% of employee investments up to a maximum
investment level. Plan costs to the Company for all fiscal periods
presented are not material to the consolidated financial statements.
Certain employees of the Company are covered by union-sponsored,
collectively bargained, multi-employer pension plans, the costs of
which are not material to the consolidated financial statements.
Certain employees of the Company participate in the Schottenstein
Stores Corporation Deferred Compensation Plan which is a non-qualified,
pre-tax, income deferral plan. The cost of the plan is not material to
the consolidated financial statements.
F-13
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
7. SHAREHOLDERS' EQUITY
During fiscal years 1999 and 1997, the Company issued common shares to
certain key employees pursuant to individual employment agreements. The
agreements and grants were approved by the Board of Directors and each
consists of a one time grant of restricted shares. As a result, the
Company recorded the market value of the shares at the date of grant of
$5,433,000 and $2,201,000 in fiscal 2000 and 1999, respectively, as
deferred compensation expense. The agreements condition the vesting of
the shares upon continued employment with the Company with such
restrictions expiring as to 20% of the shares on each of the five
anniversary dates of the grants. Deferred compensation is charged to
income on a straight-line basis over the period during which the
restrictions lapse.
8. STOCK OPTION PLANS
The Company has a Non-employee Director Stock Option Plan (the
"Non-employee Director Plan") which provides for the issuance of
options to purchase up to 130,000 common shares. An option to purchase
1,000 common shares is automatically granted to each non-employee
director on the first New York Stock Exchange ("NYSE") trading day in
each calendar quarter. The exercise price for each option is the fair
market value of the common shares on the date of grant. All options
become exercisable one year after the grant date and remain exercisable
for a period of ten years from the grant date, subject to continuation
of the option-holders' service as directors of the Company.
The Company has a 1991 Stock Option Plan which provides for the grant
of options to purchase up to 4,000,000 common shares. Such options are
exercisable 20% per year on a cumulative basis and remain exercisable
for a period of ten years from the date of grant.
In December 2000, the Board of Directors approved the 2000 Stock
Incentive Plan (the "2000 Stock Plan"). The 2000 Stock Plan is subject
to shareholder approval. The 2000 Stock Plan provides for the grant of
up to 3,000,000 options to purchase shares of common stock or the
issuance of restricted stock.
Such options and restricted stock generally vest 20% per year on a
cumulative basis. Options granted under the 2000 Stock Plan remain
exercisable for a period of ten years from the date of grant.
F-14
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
The following table summarizes the Company's stock option plans and related
Weighted Average Exercise Prices ("WAEP") (shares in thousands):
Fiscal Years Ended
-------------------------------------- 6 Months Ended Fiscal Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
--------------- ---------------- --------------- -----------------
Shares WAEP Shares WAEP Shares WAEP Shares WAEP
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding beginning of year 2,460 $10.12 2,296 $9.31 2,331 $9.27 2,398 $8.90
Granted 961 9.24 526 9.56 48 11.56 357 10.71
Exercised (176) 8.12 (201) 8.14 (41) 8.05 (331) 8.12
Canceled (629) 9.83 (161) 9.07 (42) 11.08 (93) 9.40
----- ------ ----- -----
Outstanding end of year 2,616 9.32 2,460 10.12 2,296 9.31 2,331 9.27
===== ====== ===== =====
Options exercisable end of year 1,100 $9.63 1,171 $9.08 1,028 $8.77 885 $8.61
===== ====== ===== =====
Shares available for additional grants 1,233 443 310 316
===== ====== ===== =====
- ----------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding as of
February 3, 2001 (shares in thousands):
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Average Average Average
exercise Remaining Exercise Exercise
prices Shares Contract Life Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
$5.56-
$7.94 826 9 yrs $7.07 105 $6.76
$8.06-
$12.69 1,380 6 yrs $9.12 789 $8.71
$13.25-
$21.44 410 7 yrs $14.49 206 $14.64
- -------------------------------------------------------------------------------------------------------------------------
F-15
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and accordingly has elected
to retain the intrinsic value method of accounting for stock-based
compensation. Had the compensation cost for the Company's stock-option
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the methods of SFAS No. 123,
the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands, except per
share data):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
-------------------------------------------------------------------------------------------------------------------
Net (loss) income:
As reported $(101,791) $33,468 $20,256 $20,359
Pro forma $(101,953) $31,877 $19,519 $18,817
Basic (loss) earnings per share:
As reported $(3.03) $1.03 $0.63 $0.64
Pro forma $(3.04) $0.98 $0.61 $0.59
Diluted (loss) earnings per share
As reported $(3.03) $1.02 $0.62 $0.63
Pro forma $(3.04) $0.97 $0.60 $0.58
-------------------------------------------------------------------------------------------------------------------
To determine the pro forma amounts, the fair value of each stock option
has been estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions
used for grants in the fiscal year 2000, 1999, Transition Period, and
fiscal 1998, respectively: expected volatility of 55.4%, 48.9%, 67.8%
and 38.6%; dividend yield of 0%; risk-free interest rates of 4.8%,
6.7%, 4.9% and 5.6%; and, expected lives of 6.5, 6.8, 5.8 and 5.1
years. The weighted average fair value of options granted in the fiscal
year 2000, 1999 and the Transition Period was $4.91, $7.25 and $7.43,
respectively.
Consistent with SFAS No. 123, pro-forma net (loss) income and (loss)
earnings per share have not been calculated for options granted prior
to July 30, 1995. Pro forma disclosures may not be representative of
that to be expected in future years.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are
incidental to the conduct of its business. In the opinion of
management, the amount of any liability with respect to these
proceedings will not be material.
F-16
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
10. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in
thousands):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
--------------------------------------------------------------------------------------------
Current:
Federal $(29,092) $22,852 $10,323 $12,174
State and local (5,847) 4,071 2,510 1,912
-------- -------- -------- --------
(34,939) 26,923 12,833 14,086
-------- -------- -------- --------
Deferred:
Federal (25,818) (3,492) 1,015 (2,227)
State and local (4,873) (499) 140 (318)
-------- -------- -------- --------
(30,691) (3,991) 1,155 (2,545)
-------- -------- -------- --------
Income tax (benefit) expense $(65,630) $22,932 $13,988 $11,541
======== ======== ======== ========
--------------------------------------------------------------------------------------------
The provision (benefit) for deferred income taxes includes the following amounts
(in thousands):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
----------------------------------------------------------------------------------------------------------
Type of temporary differences:
Basis differences in inventory $(19,106) $(4,707) $2,778 $(586)
Depreciation 3,669 (142) (1,376) (1,003)
Deferred bonus (1,151) (168) 1,107 (1,030)
Net operating loss carry forward (10,321) 1,026 (1,354) 74
Federal income tax credit carry forward (5,645) - - -
Other 1,863 - - -
-------- -------- -------- --------
$(30,691) $(3,991) $1,155 $(2,545)
======== ======== ======== ========
----------------------------------------------------------------------------------------------------------
A reconciliation of the expected income taxes based upon the statutory federal
rate are as follows (in thousands):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
------------------------------------------------------------------------------------------------
Income tax (benefit) expense at
federal statutory rate $(58,597) $19,740 $11,986 $11,165
Jobs credit (822) (712) (235) (164)
State and local taxes, net (7,668) 2,843 1,753 1,548
Resolution of income tax issues - (269) - (1,410)
Non-deductible goodwill 1,080 1,080 388 273
Other 377 250 96 129
-------- -------- -------- --------
$(65,630) $22,932 $13,988 $11,541
======== ======== ======== ========
------------------------------------------------------------------------------------------------
F-17
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
The components of the net deferred tax asset as of February 3, 2001 and January
29, 2000 are (in thousands):
2/3/01 1/29/00
-------------------------------------------------------------------------
Deferred tax assets:
Basis differences in inventory $31,558 $15,565
Basis differences in fixed assets 3,454 2,416
State and local taxes 1,580 1,085
Deferred compensation 1,151 39
Amortization of lease acquisition costs 1,395 1,415
Net operating loss carry forward 10,320 -
Federal tax credit carry forward 5,645 -
Other 7,143 4,362
-------- --------
62,246 24,882
-------- --------
Deferred tax liabilities:
Depreciation (5,779) (5,730)
Capital leases (2,995) (2,173)
-------- --------
(8,774) (7,903)
-------- --------
Total net $53,472 $16,979
======== ========
-------------------------------------------------------------------------
The net deferred tax asset is recorded in the Company's consolidated balance
sheet as follows (in thousands):
2/3/01 1/29/00
- ---------------------------------------------------------------------------------------------------
Current deferred tax asset $51,732 $18,052
Non-current deferred tax asset (liability) 1,740 (1,073)
--------- ---------
Net deferred tax asset $53,472 $16,979
======= =======
- ---------------------------------------------------------------------------------------------------
11. ACQUISITIONS
Effective May 3, 1998, the Company purchased 99.9% of the common stock of
Shonac from Nacht Management, Inc. and SSC (in September 2000 the remaining
0.1% was acquired). SSC owned approximately 60% of the Company's outstanding
common shares at the time of the acquisition. The Company also acquired the
store operations of Valley Fair from SSC. Shonac had operated, as licensee,
the shoe departments in the Company's department stores since Shonac's
inception in 1969. Shonac also operated a chain of retail shoe outlets
located throughout the United States, principally under the name DSW Shoe
Warehouse. Valley Fair 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. The negotiated purchase price
for Shonac and Valley Fair was
F-18
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
$108,473,000. The acquisitions were funded by cash provided by
operations and approximately $88,000,000 of borrowings.
The acquisitions have been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to
the net assets and identifiable intangible assets acquired based upon
their estimated fair values at the date of acquisition. The aggregate
amount of goodwill recorded was $35,218,000.
On November 19, 1999, the Company 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 were 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 was 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 an
existing store in St. Louis. This location was assigned without payment
of additional consideration to the Value City Furniture Division of SSC
after completion of liquidation of the store inventory and fixtures.
The operating results of Grandpa's have been included in the
consolidated results of the Company from the date of acquisition. The
following unaudited pro forma consolidated financial results for the
fiscal year ended January 29, 2000 are presented as if the acquisition
had taken place at the beginning of fiscal 1999. The proforma results
are not indicative of results of operations in future periods or in the
period presented below. Included in the proforma results are the
adjustments to depreciation and amortization based on the purchase
price allocation, the effects of the issuance of additional common
shares and interest on acquisition related borrowings (in thousands,
except per share amounts):
F-19
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
1/29/00
----------------------------------------------------------------------
Net Sales $1,818,008
Net Income $31,799
Basic earnings per share $0.98
Diluted earnings per share $0.97
----------------------------------------------------------------------
On March 17, 2000, the Company completed through its wholly owned
subsidiary, Base Acquisition Corp. ("Base Acquisition"), 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 an
asset purchase agreement, dated February 2, 2000.
The operating results of Filene's have been included in the
consolidated results of the Company from the date of acquisition. The
following unaudited proforma consolidated financial results for the
fiscal year ended February 3, 2001 are presented as if the acquisition
had taken place at the beginning of fiscal 2000 (in thousands, except
per share amounts):
2/3/01 1/29/00
----------------------------------------------------------------------
Net sales $2,248,605 $2,140,966
Net (loss) income $(108,888) $(20,678)
Basic loss per share $(3.24) $(0.64)
Diluted loss per share $(3.24) $(0.63)
----------------------------------------------------------------------
The purchase price included cash of $3.5 million paid at closing, $1.2
million to be paid over a period not to exceed three years, 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 $22.5 million
and certain trade payable and other obligations which will be paid in
the ordinary course. The acquisition will be accounted for as a
purchase. Allocation of the purchase price has been determined based on
fair market valuation of the net assets acquired subject to resolution
of several outstanding matters.
The acquisition was funded by cash from operations and a portion of the
proceeds from the Credit Agreement. See Note 5 for further discussion.
F-20
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
12. SEGMENT REPORTING
The Company has adopted FASB Statement No. 131, "Disclosure about
Segments of a Business Enterprise and Related Information." The Company
is managed in three operating segments: Value City Department Stores,
DSW Stores and Filene's Basement Stores. All of the operations are
located in the United States. The Company has identified such segments
based on the management responsibility and measures segment profit as
operating profit which is defined as income before interest expense and
income taxes. Corporate assets include goodwill and loan costs related
to the Shonac acquisition.
YEAR ENDED FEBRUARY 3, 2001 (in thousands):
Value City DSW Filene's Corporate Total
---------- --- -------- --------- -----
Net sales $1,553,902 $409,968 $249,147 - $2,213,017
Operating (loss) profit (150,530) 13,368 1,577 - (135,585)
Identifiable assets 688,308 104,172 87,304 $28,225 908,009
Capital expenditures 51,829 12,649 5,748 - 70,226
Depreciation and amortization 35,658 2,914 5,175 3,748 47,495
YEAR ENDED JANUARY 29, 2000 (in thousands):
Value City DSW Corporate Total
---------- --- -------- ---------
Net sales $1,423,581 $246,595 - $1,670,176
Operating profit 57,982 7,660 - 65,642
Identifiable assets 656,758 56,893 $30,530 744,181
Capital expenditures 32,293 5,024 - 37,317
Depreciation and amortization 28,308 2,216 3,706 34,230
SIX MONTH PERIOD ENDED JANUARY 30, 1999 (in thousands):
Value City DSW Corporate Total
---------- --- -------- ---------
Net sales $688,103 $92,160 - $780,263
Operating profit 35,380 5,419 - 40,799
Identifiable assets 486,242 54,473 $33,712 574,427
Capital expenditures 16,377 928 - 17,305
Depreciation and amortization 13,655 942 1,702 16,299
F-21
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
YEAR ENDED AUGUST 1, 1998 (IN THOUSANDS):
Value City DSW Corporate Total
---------- --- --------- -----
Net Sales $1,113,894 $47,485 - $1,161,379
Operating profit 35,173 1,748 - 36,921
Identifiable assets 608,185 39,556 36,337 684,078
Capital expenditures 26,501 664 - 27,165
Depreciation and amortization 24,641 444 2,688 27,773
The following sets forth sales by each major merchandise category (in
thousands):
Fiscal Year 12 Months 6 Months Fiscal Year
Ended Ended Ended Ended
2/3/01 1/29/00 1/30/99 8/1/98
------ ------- ------- ------
Apparel and ready to wear $1,266,479 $943,798 $444,759 $814,599
Hard goods and home furnishings 332,039 305,694 158,702 260,436
Shoes and other footwear 614,499 420,684 176,802 86,344
---------- ---------- -------- ----------
Total $2,213,017 $1,670,176 $780,263 $1,161,379
========== ========== ======== ==========
F-22
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except per share amounts)
FISCAL YEAR ENDED FEBRUARY 3, 2001
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
04/29/00 07/29/00 10/28/00 02/03/01
13 Weeks 13 Weeks 13 Weeks(1) 14 Weeks(1)
- ----------------------------------------------------------------------------------------------------------
Net sales $462,053 $528,246 $559,820 $662,898
Cost of sales (284,322) (327,958) (446,973) (433,694)
----------- ----------- ----------- ------------
GROSS PROFIT 177,731 200,288 112,847 229,204
Selling, general and
administrative expenses (174,192) (197,063) (235,835) (263,147)
License fees 1,919 2,731 1,599 5,074
Other operating income 277 1,156 614 1,212
----------- ----------- ----------- ------------
OPERATING PROFIT (LOSS) 5,735 7,112 (120,775) (27,657)
Interest expense, net (5,354) (7,963) (7,873) (9,290)
(Loss) gain on sale of assets, net (20) 861 (597) (260)
----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE EQUITY IN INCOME
(LOSS) OF JOINT VENTURE AND
PROVISION FOR INCOME TAXES 361 10 (129,245) (37,207)
Equity in (loss) income of
joint venture (269) 107 (551) (627)
----------- ----------- ----------- ------------
INCOME (LOSS) BEFORE (PROVISION)
BENEFIT FOR INCOME TAXES 92 117 (129,796) (37,834)
(Provision) benefit for income taxes (37) (49) 50,781 14,935
----------- ----------- ----------- ------------
NET INCOME (LOSS) $55 $68 $(79,015) $(22,899)
=========== =========== =========== =============
BASIC AND DILUTED LOSS PER SHARE $0.00 $0.00 $(2.35) $(0.67)
=========== =========== =========== =============
FISCAL YEAR ENDED JANUARY 30, 2000
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
05/01/99 07/31/99 10/30/99 01/29/00(2)
13 Weeks 13 Weeks 13 Weeks 13 Weeks
- ---------------------------------------------------------------------------------------------------------
Net sales $344,481 $372,812 $441,281 $511,602
Cost of sales (214,859) (232,543) (272,109) (319,634)
---------- ---------- ---------- ---------
GROSS PROFIT 129,622 140,269 169,172 191,968
Selling, general and
administrative expenses (126,820) (133,731) (155,558) (163,351)
License fees 1,523 1,832 1,640 3,456
Other operating income 933 1,097 1,372 2,218
---------- ---------- ---------- ---------
OPERATING PROFIT 5,258 9,467 16,626 34,291
Interest expense, net (2,480) (2,424) (3,288) (2,536)
Gain on sale of assets, net 13 34 32 67
---------- ---------- ---------- ---------
INCOME BEFORE EQUITY IN INCOME
(LOSS) OF JOINT VENTURE AND
PROVISION FOR INCOME TAXES 2,791 7,077 13,370 31,822
Equity in (loss) income of
joint venture (111) (245) (168) 1,864
---------- ---------- ---------- ---------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,680 6,832 13,202 33,686
Provision for income taxes (1,118) (2,870) (5,504) (13,440)
---------- ---------- ---------- ---------
NET INCOME $1,562 $3,962 $7,698 $20,246
========== ========== ========== =========
BASIC EARNINGS PER SHARE $0.05 $0.12 $0.24 $0.62
========== ========== ========== =========
DILUTED EARNINGS PER SHARE $0.05 $0.12 $0.23 $0.61
========== ========== ========== =========
F-23
54
(1) The results of operations for the quarters ended 10/28/00 and
2/3/01include non-recurring pretax charges for inventory realignment,
asset impairment and severance costs of $90.4 million and $19.6
million, respectively.
(2) The results of operations for the quarter ended 1/29/00 include a
reduction of $3.1 million to cost of sales representing the annual book
to physical adjustment for the physical inventory.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
Year Ended Year Ended 6 Months Ended Year Ended
2/3/01 1/29/00 1/30/99 8/1/98
-----------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $29,723 $11,756 $7,586 $5,911
======= ======= ======= =======
Income taxes $4,700 $17,101 $15,465 $9,018
======= ======= ======= =======
Supplemental schedule of non-cash investing and financing activities:
In December 1998, the Company exchanged 25,000 of its treasury shares
with a fair market value of $311,000 for the right to acquire several
leases.
During 1999 the Company incurred capital lease obligations to obtain
new store facilities. Non-cash amounts of $27,100,000 were capitalized
as of January 29, 2000 under the captions of property and equipment and
long-term obligations in relation to these leases.
In March 2000, the Company issued 403,208 common shares with a market
value of $4.0 million for the acquisition of Filene's. Also in March
2000, the Company contributed 80,000 common shares with a market value
of $1.1 million to a private charitable foundation controlled by the
Schottenstein family.
Amounts of $779,000, $756,000, $490,000 and $2,126,000 were recorded
under the captions of property and equipment and accounts payable for
real estate improvements and construction at new stores as of February
3, 2001, January 29, 2000, January 30, 1999 and August 1, 1998,
respectively.
In November 1999, the Company exchanged 255,959 of its treasury shares
with a fair market value of $4.0 million as part of its acquisition of
Gramex. See Note 11.
F-24
55
VALUE CITY DEPARTMENT STORES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- ------------------------- -------- --------
Balance at Charge to Charges to Balance at
Beginning Costs and Other End
Description Of Period Expenses Accounts(1) Deductions(2) Of Period
- ---------------------------------------------------------------------------------------------------------------
Allowance deducted
from asset to which
it applies:
Allowance for doubtful
accounts:
Period Ended:
12 Months, 8/1/98 363 716 95 832 342
6 Months, 1/30/99 342 195 0 227 310
12 Months, 1/29/00 310 3,742 442 3,469 1,025
12 Months, 2/3/01 1,025 341 1 385 982
Allowance for Markdowns:
Period Ended:
12 Months, 8/1/98 4,311 2,828 8,893 4,203 11,829
6 Months, 1/30/99 11,829 4,460 0 5,897 10,392
12 Months, 1/29/00 10,392 13,745 0 6,908 17,229
12 Months, 2/3/01 17,229 125,348 2,941 93,431 52,087
Allowance for Sales Returns:
Period Ended:
12 Months, 8/1/98 968 0 645 0 1,613
6 Months, 1/30/99 1,613 0 0 0 1,613
12 Months, 1/29/00 1,613 0 0 227 1,386
12 Months, 2/3/01 1,386 521 127 168 1,866
Reserves
Store Closing
Reserve:
Year ended:
12 Months, 8/1/98 395 511 721 722 905
6 Months, 1/30/99 905 145 0 973 77
12 Months, 1/29/00 77 0 0 4 73
12 Months, 2/3/01 73 0 970 0 1,043
(1) The charges to other accounts represent balances resulting from the
acquisition of Shonac in 1998 and Gramex Retail Stores, Inc. in 1999.
(2) The deductions in Column D are amounts written off against the respective
reserve.
S-1
56
INDEX TO EXHIBITS
Exhibit
No. Description Exhibit Page No.
- -------- ----------- ----------------
3.1 First Amended and Restated Articles Previously filed as Exhibit 3.2 to Registration
of Incorporation of the Company. Statement on Form S-1 (file no. 33-40214)
filed April 29, 1991, and incorporated herein
by reference.
3.2 Code of Regulations of the Previously filed as Exhibit 3.3 to Registration
Company. Statement on Form S-1 (file no. 33-40214)
filed April 29, 1991, and incorporated herein
by reference.
10.1.1 Corporate Services Agreement, dated Previously filed on Exhibit 10.1.1 to Form
October 12, 1994, between the Company 10-Q (file no. 1-10767) filed December 12,
and Schottenstein Stores Corporation. 1994, and incorporated herein by reference.
10.1.2 Corporate Services Agreement, dated Previously filed as Exhibit 10.1.2 to
September 27, 1995, between Form 10-K (file no. 1-10767) filed
the Company and SSC. October 27, 1995, and incorporated
herein by reference.
10.1.3 Corporate Services Agreement, dated Previously filed as Exhibit 10.1.3 to
October 1996, between the Company Form 10-K (file no. 1-10767) filed
and SSC. November 1, 1996, and incorporated
herein by reference.
10.1.4 Corporate Services Agreement, dated Previously filed as Exhibit 10.1.4 to Form 10-Q
October 13, 1997, between the Company (file no. 1-10767) filed December 16, 1997, and
and SSC. incorporated herein by reference.
10.2 License Agreement, dated June 5, 1991, Previously filed as Exhibit 10.2 to
between the Company and SSC Amendment No. 1 to Form S-1 Registration
re Service Marks. Statement (file no. 33-40214) filed June 6, 1991,
and incorporated herein by reference.
10.7 Form of Indemnification Agreement, Previously filed as Exhibit 10.7 to
dated 1991, between the Company Amendment No. 1 to Form S-1 Registration
and its directors and executive officers. Statement (file no. 33-40214) filed June 6, 1991,
and incorporated herein by reference.
E-1
57
10.8 Form of Company's 1991 Stock Previously filed as Exhibit 10.8 to
Option Plan. Amendment No. 1 to Form S-1
Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.9 Master Store Lease, dated April 25, 1991, Previously filed as Exhibit 10.9 to
between the Company, as lessee, and SSC, Form S-1 Registration Statement (file no.
as lessor, re fourteen stores. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.9.1 First Amendment to Master Store Lease, Previously filed as Exhibit 10.9.1 to
dated February 1991, between the Form S-1 Registration Statement (file no.
Company, as lessee, and SSC, 33-47252) filed April 16, 1992, and
as lessor, re fourteen stores. incorporated herein by reference.
10.9.2 Lease Modification Agreement to Master Previously filed as Exhibit 10.9.2 to
Store Lease, dated June 5, 1995, between Form 10-K (file no. 1-10767) filed
the Company, as lessee, and SSC, October 27, 1995, and incorporated
as lessor, re Beckley, West Virginia. herein by reference.
10.9.3 Exercise of the first five-year renewal Previously filed as Exhibit 10.9.3 to
option commencing August 1, 1996 Form 10-Q (file no. 1-10767) filed
under Master Store Lease, dated March 19, 1996, and incorporated
June 5, 1995, as amended, between herein by reference.
the Company, as lessee, and SSC, as
lessor, re fourteen stores.
10.10 Master Warehouse Lease, dated April 25, Previously filed as Exhibit 10.10 to
1991, between the Company, as lessee, Form S-1 Registration Statement (file no.
and SSC, as lessor, re three warehouses, 33-40214) filed April 29, 1991, and
office, and shop locations. incorporated herein by reference.
10.10.1 First Amendment to Master Warehouse Previously filed as Exhibit 10.10.1 to
Lease, dated February 1992, between the Form S-1 Registration Statement (file no.
Company, as lessee, and SSC, as lessor, re 33-47252) filed April 16, 1992, and
three warehouse, office, and shop. incorporated herein by reference.
locations.
10.10.2 Second Amendment to Master Warehouse Previously filed as Exhibit 10.10.2 to
Lease, dated June 1993, between the Form 10-K (file no. 1-10767) filed
Company, as lessee, and SSC, as lessor, re October 26, 1993, and incorporated
three warehouse, office, and shop herein by reference.
locations.
E-2
58
10.10.3 Exercise of the first five-year renewal Previously filed as Exhibit 10.10.3 to
option commencing August 1, 1996 Form 10-Q (filed no. 1-10767) filed
under Master Store Lease, dated March 19, 1996, and incorporated
April 25, 1991, as amended, between herein by reference.
the Company, as lessee and SSC, as
lessor, re three warehouse
locations.
10.11 Master Sublease, dated April 25, 1991, Previously filed as Exhibit 10.11 to
between the Company, as sublessee, and Form S-1 Registration Statement (file no.
SSC, as sublessor, re three stores. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.12 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.12 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re one warehouse, with 33-40214) filed April 29, 1991 and
underlying Lease, dated July 15, 1981, incorporated herein by reference.
between SSC, as lessee, and J.A.L. Realty
Co., an affiliate of SSC, as lessor.
10.12.1 Exercise of five-year renewal option Previously filed as Exhibit 10.12.1 to
commencing July 16, 1996 under Form 10-Q (file no. 1-10767) filed
Sublease, dated April 25, 1991 between March 19, 1996, and incorporated
the Company, as sublessee, and SSC, as herein by reference.
sublessor, re 3681 Westerville
Road warehouse.
10.13 Lease, dated July 7, 1987, between the Previously filed as Exhibit 10.13 to
Company, by assignment from SSC, as Amendment No. 1 to Form S-1
lessee, and Schottenstein Trustees, an Registration Statement (file no.
affiliate of SSC, as lessor, re one store. 33-40214) filed June 6, 1991, and
incorporated herein by reference.
10.14.1 Lease, dated June 28, 1989, between Previously filed as Exhibit 10.14.1 to
the Company, by assignment from SSC, Form S-1 Registration Statement (file no.
as lessor, re one warehouse. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.14.2 Lease, dated October 27, 1989, between Previously filed as Exhibit 10.14.2 to
the Company, by assignment from SSC, Form S-1 Registration Statement (file no.
as lessee, and Southeast Industrial 33-40214) filed April 29, 1991, and
Park Realty Company, an affiliate of incorporated herein by reference.
SSC, as lessor, re one warehouse.
E-3
59
10.14.3 Lease, dated March 7, 1989, between Previously filed as Exhibit 10.14.3 to
the Company, by assignment from SSC, Form S-1 Registration Statement (file no.
as lessee, and Southeast Industrial Park 33-40214) filed April 29, 1991, and
Realty Company, an affiliate of SSC, incorporated herein by reference.
as lessor, re one warehouse.
10.15.1 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.1 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Baltimore, MD (Eastpoint) 33-40214) filed April 29, 1991, and
furniture store location. incorporated herein by reference.
10.15.2 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.2 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Baltimore, MD (Westview) 33-40214) filed April 29, 1991, and
furniture store location. incorporated herein by reference.
10.15.3 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.3 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Lansing, MI furniture 33-40214) filed April 29, 1991, and
store location. incorporated herein by reference.
10.15.4 Sublease, dated April 25, 1991, between Previously filed as Exhibit 10.15.4 to
the Company, as sublessor, and SSC, as Form S-1 Registration Statement (file no.
sublessee, re Louisville, KY (Preston 33-40214) filed April 29, 1991, and
Highway) furniture store location. incorporated herein by reference.
10.16 Form of Assignment and Assumption Previously filed as Exhibit 10.16 to
Agreement between the Company, as Form S-1 Registration Statement (file no.
assignee, and SSC, as assignor, re 33-40214) filed April 29, 1991, and
separate assignments of leases incorporated herein by reference.
for 31 stores.
10.17 Form of Restricted Stock Agreement, Previously filed as Exhibit 10.17 to
dated 1991, among SSC, the Amendment No. 1 to Form S-1 Registration
Company and certain officers. Statement (file no. 33-40214) filed June 6,
1991, and incorporated herein by reference.
10.19 Lease Agreement, dated as of July 1, Previously filed as Exhibit 10.19 to
1988, between SSC as sublessor and the Form 10-K (file no.1-10767) filed
Company as sublessee, by assignment October 24, 1991, and incorporated
dated April 25, 1991, re Benwood, W.V. herein by reference.
store location.
E-4
60
10.20 Lease, dated July 2, 1991, between the Previously filed as Exhibit 10.20 to
Company as lessee and Allied Company/ Form 10-K (file no.1-10767) filed
Saul Schottenstein Realty Company October 24, 1991, and incorporated
as lessor re Springfield, Ohio store. herein by reference.
10.20.1 Exercise of the first five-year renewal Previously filed as Exhibit 10.20.1 to
option commencing November 1, 1996 Form 10-Q (file no. 1-10767) filed
under Lease dated July 2, 1991 March 19, 1996, and incorporated
between the Company, as lessee, and herein by reference.
Allied Company/Saul Schottenstein
Realty Company, as lessor, re
Springfield, Ohio store.
10.21 Form of Restricted Stock Agreement, Previously filed as Exhibit 10.27 to
dated 1992, between the Company Amendment No. 1 to Form S-1 Registration
and certain employees. Statement (file no. 33-47252) filed April 27,
1992, and incorporated herein by reference.
10.22 The Company's Non-employee Director Previously filed as Exhibit 10.28 to
Stock Option Plan. Form 10-K (file no.1-10767) filed
October 22, 1992, and incorporated
herein by reference.
10.23 Lease, dated September 1, 1992, between Previously filed as Exhibit 10.29 to
the Company, as lessee, and SSC, as Form 10-K (file no.1-10767) filed
lessor, re South Bend, IN store. October 22, 1992, and incorporated
herein by reference.
10.24 Lease, dated January 27, 1992, between Previously filed as Exhibit 10.30 to
the Company, as lessee, and J.A.L. Realty Form 10-K (file no.1-10767) filed
Company, as lessor, as amended on July October 22, 1992, and incorporated
29, 1992, re 3080 Alum Creek warehouse. herein by reference.
10.24.1 Exercise of the first five-year renewal Previously filed as Exhibit 10.30.1 to
option commencing February 1, 1997 Form 10-Q (file no. 1-10767) filed
under lease, dated January 27, 1992, March 19, 1996, and incorporated
as amended, between the Company, as herein by reference.
lessee, and J.A.L. Realty Company, as
lessor, re 3080 Alum Creek warehouse.
10.25 Lease, dated July 29, 1992, between the Previously filed as Exhibit 10.31 to
Company, as lessee, and J.A.L. Realty Form 10-K (file no.1-10767) filed
Company, as lessor, re 3232 Alum Creek October 22, 1992, and incorporated
warehouse. herein by reference.
E-5
61
10.26 Lease, dated October 26, 1993 between Previously filed as Exhibit 10.33 to
the Company, as lessee, and J.A.L. Realty Form 10-Q (file no. 1-10767) filed
Company, as lessor. re 2560 Valueway, March 14, 1994, and incorporated
Columbus, OH 43224. herein by reference.
10.26.1 Lease Modification Agreement dated Previously filed as Exhibit 10.33.1
to June 16, 1995 to Lease, dated October Form 10-K (file no.1-10767)
filed 26, 1993, between the Company, as October 27, 1995, and incorporated
lessee, and J.A.L. Realty Company, herein by reference.
as lessor, re 2560 Valueway, Columbus,
Ohio 43224.
10.27 License Agreement dated as of January Previously filed as Exhibit 10.34 to
12, 1994 between the Company, as Form 10-K (file no. 1-10767) filed
licensee, and Valley Fair Corporation, October 26, 1994, and incorporated
as licensor, re Housewares Depts. herein by reference.
10.28 Ground lease, dated April 15, 1994, Previously filed as Exhibit 10.35 to
between the Company, as lessee, and Form 10-K (file no 1-10767) filed
J.A.L. Realty Company, as lessor, re October 26, 1994, and incorporated
19 acres. herein by reference.
10.29 Agreement of Lease dated September 1, Previously filed as Exhibit 10.36 to Form 10-Q
1994, between Company, as tenant, and (file no. 1-10767) filed December 12, 1994,
Jubilee Limited Partnership, as landlord, and incorporated herein by reference.
re Carol Stream, IL store.
10.30 Agreement of Lease, dated March 1, 1994, Previously filed as Exhibit 10.37 to Form 10-Q
between the Company, as tenant, and (file no. 1-10767) filed December 12, 1994,
Jubilee Limited Partnership, as landlord, and incorporated herein by reference.
re Hobart, IN store.
10.31 Agreement of Lease, date February 10, Previously filed as Exhibit 10.38 to Form 10-Q
1995, between the Company, as tenant, (file no. 1-10767) filed March 14, 1995 and
and Jubilee Limited Partnership, as incorporated herein by reference.
landlord, re Gurnee Mills, IL store.
10.32 Agreement of Lease, dated January 13, Previously filed as Exhibit 10.39 to Form 10-Q
1995, between the Company, as tenant, (file no. 1-10767) filed March 14, 1995 and
and Westland Partners, as landlord, re incorporated herein by reference.
Westland, MI store.
10.33 Agreement of Lease, dated January 31, Previously filed as Exhibit 10.40 to Form 10-Q
1995, between the Company, as tenant, (file no. 1-10767) filed March 14, 1995 and
and Taylor Partners, as landlord, re incorporated herein by reference.
Taylor, MI store.
E-6
62
10.34 Sublease, dated December 28, 1994, Previously filed as Exhibit 10.41 to Form 10-Q
between the Company, as subtenant, and (file no. 1-10767) filed March 14, 1995 and
Shonac Corporation, as sublandlord, re incorporated herein by reference.
Alum Creek Drive warehouse space.
10.35 Analysis sheet for Lease re Ft. Wayne, Previously filed as Exhibit 10.43 to
Indiana acquired by SSC pursuant to Form 10-K (file no. 1-10767) filed
Assignment and Assumption Agreement October 27, 1995, and incorporated
dated July 21, 1995. herein by reference.
10.36 Merchandise Royalty Agreement, dated Previously filed as Exhibit 10.44 to
July 15, 1995, between American Eagle Form 10-Q (file no. 1-10767) filed
Outfitters, Inc., and the Company December 12, 1995, and incorporated
re American Eagle merchandise sold herein by reference.
to Value City Department Stores, Inc.
10.37 Agreement of Lease, dated April 10, 1995, Previously filed as Exhibit 10.45 to
between the Company as tenant, and Form 10-Q (file no. 1-10767) filed
Independence Limited Liability Company, December 12, 1995, and incorporated
as landlord, re Charlotte, North Carolina herein by reference.
Store.
10.38 Sublease and Occupancy Agreement, Previously filed as Exhibit 10.46 to
dated December 15, 1995, between the Form 10-Q (file no. 1-10767) filed
Company, SSC and SSC dba Value City March 19, 1996, and incorporated
Furniture, re Louisville, Kentucky herein by reference.
(Preston Highway) store.
10.39 Agreement of Lease, dated March 13, Previously filed as Exhibit 10.47
to 1996, between the Company as tenant, Form 10-Q (file no. 1-10767) filed
and Jubilee Limited Partnership, as March 19, 1996, and incorporated
landlord, re Saginaw, Michigan herein by reference.
store.
10.40 Agreement of lease, dated 1996 Previously filed as Exhibit 10.49 to
between the Company, as tenant, Form 10-K (file no. 1-10767) filed
and SSC, as landlord, re the Melrose November 1, 1997 and incorporated
Park, IL store. herein by reference.
10.41 Agreement of Lease, dated October 4, Previously filed as Exhibit 10.50 to
1996, between the Company, as tenant, Form 10-K (file no. 1-10767) filed
and Hickory Ridge Pavilion, Ltd., as November 1, 1997 and incorporated
landlord, re the Memphis, TN store. herein by reference.
10.42 Restricted Stock Agreement dated Previously filed as Exhibit 10.53 to
July 14, 1997 between Martin P. Form 10-K (file no. 1-10767) filed
Doolan and the Company. October 31, 1997, and incorporated
herein by reference.
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63
10.43 Lease, dated October 30, 1998 between the Previously filed as Exhibit 10.56 to
Company, as tenant, and Jubilee Limited Form 10-K (file no. 1-10767) filed
Partnership, as landlord, re River Oaks West April 30, 1999, and incorporated
Shopping Center, Calumet City, Illinois. herein by reference.
10.44 Lease, dated May 3, 1998 between the Previously filed as Exhibit 10.57 to
Company, as tenant, and Valley Fair Form 10-K (file no. 1-10767) filed
Corporation, as landlord, re Irvington, NJ. April 30, 1999, and incorporated
herein by reference.
10.45 Lease, dated March 22, 2000 between
East Fifth Avenue, LLC, an affiliate of
SSC, and Shonac Corporation.
10.46 Employment Agreement dated
June 21, 2000 between
James A. McGrady and the Company.
10.47 Employment Agreement dated
December 4, 2000 between
George Kolber and the Company.
21 List of Subsidiaries Page E-9.
23 Consent of Deloitte & Touche LLP Page E-10.
24 Power of Attorney Page E-11.
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