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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 AUGUST 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For The Transition Period From _____ To _____
COMMISSION FILE NUMBER: 1-10767
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
OHIO NO. 31-1322832
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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,
12,103,667 Common Shares, based on the $9.3125 closing sale price on October 26,
1998, was $112,715,399.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 32,283,067 Common Shares were
outstanding at October 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for 1998 Annual Meeting of Shareholders, 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 .....................................28
8. Financial Statements and Supplementary Data.....................................................28
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........28
PART III
10. Directors and Executive Officers of the Registrant..............................................29
11. Executive Compensation..........................................................................29
12. Security Ownership of Certain Beneficial Owners and Management..................................29
13. Certain Relationships and Related Transactions..................................................29
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K..................................30
Signatures...............................................................................................31
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report............................................................................F-1
Consolidated Balance Sheets.............................................................................F-3
Consolidated Statements of Income.......................................................................F-4
Consolidated Statements of Shareholders' Equity.........................................................F-5
Consolidated Statements of Cash Flows...................................................................F-6
Notes to the Consolidated Financial Statements..........................................................F-7
SCHEDULES
- ---------
II - Valuation and Qualifying Accounts..................................................................S-1
Index to Exhibits.......................................................................................E-1
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PART I
ITEM 1 BUSINESS.
ORGANIZATION AND HISTORY
Value City Department Stores, Inc. ("VCDS") was incorporated on March
15, 1985 and was inactive until June 18, 1991 when it sold 8,025,000 Common
Shares in a public offering and issued 22,500,000 Common Shares to Schottenstein
Stores Corporation ("SSC") in exchange for substantially all of the net assets
of the Value City Department Store Division of SSC (the "Division"). In
connection with the acquisition of the Division, VCDS entered into a number of
agreements with SSC. These agreements are described in the material incorporated
by reference pursuant to Item 13 of this annual report on Form 10-K.
On September 18, 1992, VCDS acquired all of the outstanding stock of GB
Stores, Inc., a Pennsylvania corporation, from GB Stores, a Pennsylvania limited
partnership ("GB Partnership") in exchange for the issuance by VCDS to GB
Partnership of 1,312,500 Common Shares of VCDS. GB Partnership is an affiliate
of SSC.
Two of the Company's department stores operated as partnerships owned
by the Company and the manager of the respective stores through July and October
1995. During fiscal 1996 the Company bought the 25% minority interest in the
partnership stores for approximately $1,328,000 which was the net book value of
the minority interests in those partnerships.
In July 1997, the Company entered into agreements with Mazel Stores,
Inc. ("Mazel") to create VCM, Ltd. ("VCM"), a 50/50 joint venture. VCM operates
the health and beauty care and toy and sporting goods departments in the
Company's stores as licensed departments. The Company accounts for its fifty
percent interest in the joint venture under the equity method. See "Licensed
Departments."
Effective as of May 3, 1998, VCDS purchased 99.9% of the common stock
of Shonac Corporation ("Shonac") from Nacht Management, Inc. and SSC. Shonac had
been the shoe licensee in all of VCDS' stores since its inception in 1969 and
also operated a chain of retail shoe outlets located throughout the United
States principally under the name DSW Shoe Warehouse ("DSW"). Also effective as
of May 3, 1998 , VCDS acquired the store operations of Valley Fair Corporation
("Valley Fair") from SSC. Valley Fair operated two department stores located in
Irvington and Little Ferry, New Jersey. VCDS had been a licensee of certain
departments in these two stores for eighteen years.
VCDS and its wholly owned subsidiaries are herein referred to
collectively as the "Company."
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GENERAL
The Company currently operates a chain of 96 department stores located
in Ohio, Pennsylvania and 14 other Midwestern, Eastern and Southern states,
principally under the name "Value City" as well as 47 DSW shoe stores located
throughout the United States. For over 80 years, the Company's strategy has been
to provide exceptional value by offering a broad selection of brand name
merchandise at prices substantially below conventional retail prices. The
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. The Value
City stores average 86,000 square feet which allow them to offer over 100,000
different items of merchandise similar to the items found in traditional
department, specialty and discount stores. The DSW stores are a chain of upscale
shoe stores located throughout the country, offering a wide selection of dress
and casual footwear below traditional retail prices. These stores average
22,000 square feet with up to 55,000 pairs of women's and men's designer brand
shoes and athletic footwear per store.
The Company's pricing strategy is supported by its ability to purchase
large quantities of goods in a variety of special buying opportunities. For many
years, the Company has had a reputation in the marketplace as a leading
purchaser of buy-outs and manufacturers' closeouts.
BUSINESS STRATEGY
The Company's strategy is to provide brand name merchandise
substantially below conventional retail prices. The strategy is reflected in its
name, "Value City," and the Company's motto, "Better Living for Less."
Management believes that Value City's large department stores facilitate a
full-line merchandise offering and range of brands, which differentiate them
from other off-price retailers.
The DSW stores' mission is to be our customers' favorite retailer of
branded footwear by satisfying customer expectations for selection, service and
value. The principal elements of the Value City and DSW business strategies are
discussed below.
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. The Value
City stores strive to
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offer customers one-stop-shopping in terms of categories of merchandise carried.
The large physical size of the department stores facilitates the offering of a
wide range of merchandise categories with broad, deep selections of goods within
each category. The 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 its
customers, the Company continuously refines the Value City merchandise mix
eliminating less productive departments and introducing new merchandise
categories.
The Company believes customers are attracted to the 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 in the stores, 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.
The DSW stores attract customers because of their wide assortment of
top quality name brand dress and casual footwear together with a regularly
changing selection of more fashion- oriented footwear. Brand name products
include Fila, Reebok, Keds, J. Renee, Lifestride, Naturalizer, Bostonian, Nunn
Bush, Florsheim and Sperry, to only name a few.
The following table sets forth relative contributions of each major
merchandise category to total sales.
Percentage of Aggregate Sales Volume
Fiscal Years Ended
------------------
1998 1997 1996
---- ---- ----
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 August 1, 1998 ........ 62.2% 61.6% 62.2%
Hard goods and Home Furnishings - Includes: domestics;
jewelry; housewares; giftware; small appliances; and for
fiscal years 1997 and 1996, toys and sporting goods ......... 19.0 23.9 23.3
Licensed Departments - includes: shoes through May 2, 1998;
health and beauty care; toys and sporting goods for fiscal
1998; and other incidental departments .................... 15.2 14.5 14.5
DSW Stores..................................................... 3.6 - -
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
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Value Pricing
The 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. The Company can offer exceptional values because its buyers
purchase merchandise directly from manufacturers and other vendors generally at
prices substantially below those paid by conventional retailers. This allows the
Company to pass on the savings directly to its customers. See "Supplier
Relationships and Purchasing."
DSW price points are targeted to be a minimum of 20% to 50% lower than
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 the Value City and DSW 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 some 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."
Licensed Departments
All store departments are operated by the Company except for the health
and beauty care and toys and sporting goods, and certain other incidental
departments in the Value City stores. 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 15 years with, in some instances,
an option to renew. In addition, the Company receives a fee from some licensees
for general and administrative expenses. The aggregate annual license fees
received by the Company from affiliated licensees for fiscal years ended August
1, 1998, August 2, 1997 and August 3, 1996 were approximately $20,674,000,
$17,685,000 and $15,162,000, respectively.
SSC owned a controlling interest in L. F. Widmann, Inc. ("Widmann"),
the licensee that operated the health and beauty care departments in the
Company's stores. In July 1997, the Company 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 the Company's toys
and sporting goods departments. VCM operates the health and beauty care and toys
and sporting goods departments in the Company's 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. The Company provides certain personnel, administrative and service
functions for which it receives a monthly fee from VCM to cover the
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related costs. The license and joint venture agreements are for a term of ten
years ending on the last day of fiscal 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 stores until May 1998 when the
Company 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 the Company's associates to operate
their departments. The licensees reimburse the Company for all costs associated
with such associates. Licensees operate their departments under the general
supervision of the Company and are required to abide by the policies of the
Company with regard to pricing, quality of merchandise, refunds and store hours.
Licensed departments complement the operations of the stores and are considered
an integral part of the Company's 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 the Company's growth has been its many years of
experience in purchasing merchandise directly from manufacturers and other
vendors at prices substantially below those generally paid by conventional
retailers. The Company believes that over the years its buyers have established
excellent relationships with suppliers and have established a reputation for its
willingness and ability to purchase entire lots of merchandise and to make
prompt payment. The Company continuously seeks to find and negotiate special
purchase opportunities. As a result of the Company's relationships, experience
and reputation for prompt payment, many suppliers offer special purchase
opportunities to the Company 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 to be
competitors in their regular distribution channels. By selling such merchandise
through its own retail stores, the Company is able to assure its suppliers that
the merchandise will be sold without disturbing the suppliers' regular channels
of distribution.
Although the Company cannot quantify the amount by which the prices it
pays for its special purchases are lower, if any, than the prices paid by its
competitors for similar purchases, the Company believes that such special
purchases are made at prices sufficiently favorable to enable it to offer
merchandise to its customers at prices that are significantly lower than those
prices offered by many of its competitors.
The Company purchases merchandise from more than 4,100 suppliers, none
of which
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accounted for a material percentage of the Company's purchases during the past
fiscal year. The Company does not maintain any long-term or exclusive
commitments to purchase merchandise from any one supplier. The Company regularly
purchases 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, the Company purchases all
or substantially all of the inventories of financially distressed retailers and
makes other special purchases. Also, the Company has begun to more aggressively
seek advantageous buying opportunities overseas, particularly in non-apparel
categories.
The Company's distribution facilities are designed to enable it to
prioritize the processing of merchandise on short notice and to deliver
merchandise to the stores within days of its receipt. This allows the Company's
buyers to purchase merchandise very late in the season, when prices are more
favorable, and still deliver the merchandise to the stores before the end of the
season. At the same time, the Company has devoted warehouse space to
out-of-season goods for its department stores. This merchandise is held 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 the Company to offer
high-quality merchandise to customers at prices significantly below usual retail
prices. The Company believes that this ability distinguishes it from the typical
discount or department store and provides it with a competitive advantage in
making purchases as favorable opportunities arise.
The relatively large size of the Value City stores provides the Company
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 the Company seeks, the Company believes that, because of
the factors discussed above, it 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 determine the fashion direction for an
upcoming season. Once the styles and merchandise mix is determined, the
merchandising group works to assure that the required quantities are brought in
at the lowest cost with the highest possible quality.
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 that, consistent with
the retail footwear industry as a whole, most of its domestic vendors import a
large portion of their merchandise from abroad. Quality control programs are in
place under which buyers inspect the product for fit, color and material, as
well as for overall quality of manufacturing. In general, DSW has not
experienced any difficulties with merchandise manufactured overseas. As the
number of DSW locations increase, management believes 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.
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DISTRIBUTION
The Company pursues a centralized distribution strategy with eleven
distribution centers, located in Columbus, Ohio and also utilizes a third party
processor located in Secaucus, New Jersey. The aggregate area of the Ohio
facilities is approximately 2,200,000 square feet, however, use of multi-tier
processing levels in some of the distribution centers substantially increases
their operating capacity. The distribution centers are organized by merchandise
type, with warehouses for hanging apparel, flat apparel, housewares, domestics,
shoes and overflow and buyout merchandise.
The Company uses material handling equipment in its warehouses,
including new mechanized conveyor systems to separate and collate shipments to
the stores. The Company's distribution facilities are designed to allow priority
delivery of late season purchases and fast-moving merchandise to have it in the
stores quickly to take full advantage of the remaining selling season. The
Company continues to focus on improving inventory turns by implementing changes
such as expediting the delivery of merchandise from the store receiving area to
the selling floor by distributing goods on hangers. The Company believes that
the existing distribution centers, with certain modifications and additional
equipment, will support store expansion for the foreseeable future.
Merchandise is processed, ticketed and consolidated prior to shipment
to the stores to ensure full- truck loads to minimize shipping costs. The
Company leases its fleet of road tractors and approximately 40% of its semi-rig
trailers with the remainder being owned. The Company's fleet makes the majority
of all deliveries to the stores.
ADVERTISING AND PROMOTION
The Company commits substantial resources to advertising and believes
that its marketing strategy is one of the keys to its success. Value City
advertises frequently in print, including newspaper 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. See "Supplier Relationships and Purchasing."
DSW stores currently use a radio and television campaign focusing on
the slogan "The shoes of the moment, the deal of a lifetime." This campaign is
supplemented by print promotions. In addition, a valuable marketing tool for DSW
is the "Reward Your Style" club. Customers are asked to join the club when
checking out at the cash registers. By analyzing the member database, as well as
the sales transactions of those members, the Company is able to direct the
advertising to encourage repeat shopping and to attract targeted customers.
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STORES
Store Location and Design
The Value City stores average approximately 86,000 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 very
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.
Management continues to implement initiatives to enhance the appearance
of its Value City stores and to offer a more convenient and pleasurable shopping
experience for its customers. These initiatives include: widening aisles;
consolidating inventories; putting together more logical department adjacencies;
eliminating the sign pollution; addressing cashiering problems and tackling
clean-up issues.
DSW stores average approximately 22,000 square feet, with about 90% 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,
an uncomplicated cardboard case presentation which groups the shoes together by
category. Interior signage is tasteful and kept to a 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 the customer 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, except for one owned location.
Management believes that customers are attracted to the Company's
stores principally by the wide assortment of quality items at substantial
savings. Of the 96 department stores open as of October 1998, 20 are
free-standing and 76 are in shopping centers, 22 of which are enclosed malls in
which they serve as an anchor. Of the 47 shoe stores open as of October 1998, 7
are free-standing and 40 are in shopping centers. All of the Company's stores
are located in suburban areas, near large residential neighborhoods and away
from downtown commercial centers.
Store Operations
The Company is 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.
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The Company's 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. The Company prides itself on ease of checkout and has 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. The Company accepts all major credit
cards, and also provides a private label credit card program at the department
stores. Private label and other credit card sales are nonrecourse to the
Company, 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.
The Company's 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 the Company's 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, an
assistant manager, a lead staff person and full and part-time hourly
associates. Each manager reports directly to one of six district managers who
in turn report to a national operations manager.
The Company's 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. The
Company's store managers are an important source of information concerning local
market conditions, trends and customer preferences.
The Company prefers 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
The Company has increased its department store base from 74 stores at
the start of fiscal 1994 to 95 stores at the end of fiscal 1998. The Company has
expanded both by leasing newly constructed locations and by acquiring existing
locations from other retailers. Effective May 3, 1998, the Company acquired 47
shoe stores when it purchased the common stock of Shonac and two Valley Fair
stores when it purchased the store operations of Valley Fair Corporation.
During fiscal 1999, the Company plans to focus on improving the
profitability of existing
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stores in addition to opening new stores. The Company has planned 4 to 6
department stores and 3 to 5 shoe stores to open during the remainder of fiscal
1999. Expansion continues to be a central element of the Company's business
strategy with a view towards deepening penetration in existing or contiguous
markets. Factors considered in evaluating new store sites include store size,
configuration, demographics and lease terms. The Company seeks to cluster stores
in targeted metropolitan areas to enhance name recognition, share advertising
costs and achieve economies of scale in management and distribution.
DSW intends to open additional stores in both existing and new markets.
The primary emphasis of expansion plans focuses on locating stores in highly
visible sites on high traffic streets in relatively affluent trade areas.
The table below sets forth certain information relating to the
Company's stores during the last five fiscal years:
Fiscal Year
-----------
1994 1995 1996 1997 1998(3)
---- ---- ---- ---- -------
Beginning of Year(1) 74 75 79 86 95
Opened(2) ........ 3 6 7 9 49
Closed ........... 2 2 0 0 2
--- --- --- --- ---
End of Year ........ 75 79 86 95 142
=== === === === ===
(1) Excludes apparel, domestics and housewares departments operated by the
Company in two Valley Fair department stores prior to May 3, 1998.
(2) For fiscal 1998, includes the two department stores obtained in the
purchase of Valley Fair and the 47 shoe stores obtained in the purchase of
Shonac.
(3) In September 1998, the Company opened one shoe store and closed another and
in October 1998, it opened one department store.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $5,000,000 to
$6,500,000 and the cost of opening a new shoe store to range from approximately
$1,000,000 to $2,000,000, including leasehold improvements, fixtures, inventory,
pre-opening expenses and other costs. Preparations for opening a department
store generally take between eight and twelve weeks and preparations for opening
a shoe store generally take eight to ten weeks. The Company charges pre-opening
expenses to operations ratably over the first twelve months of store operations.
Effective in fiscal 1999, pre-opening costs will be expensed as incurred in
accordance with Accounting Standards Executive Committee Statement of Position
98-5. It has been the Company's experience that new stores generally achieve
profitability and contribute to net income following the first year of
operations.
The Company continually refurbishes its stores by updating the
merchandise displays and in-store signage. The costs of refurbishing on a per
store basis are generally not substantial. On
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an annual basis, the Company selects stores to be remodeled, which generally
involves more significant changes to the interior or exterior of the store. The
Company maintains its 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.
The Company believes that a high level of automation is essential to
maintaining and improving its competitive position. The Company relies upon
computerized data systems to provide information at all levels, including
warehouse operations, store billing, inventory control and automated accounting.
Value City utilizes two IBM AS/400 computer systems, and Shonac utilizes one
additional AS400 computer system.
The Company utilizes 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
the department store business, an automated system to capture and control
layaways is integrated into the POS system.
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies include
both information technology in the form of hardware and software, as well as
embedded technology in the Company's facilities and equipment. Similar to most
companies, the Company must determine whether its systems are capable of
recognizing and processing date sensitive information properly as the year 2000
approaches. The Company is utilizing a multi-phased concurrent approach to
address this issue. The phases included in the Company's approach are the
awareness, assessment, remediation, validation and implementation phases. The
Company has completed the awareness phase of its project. Furthermore, the
Company has substantially completed the assessment phase and is well into the
remediation phase. The Company is actively correcting and replacing those
systems which are not year 2000 ready in order to ensure the Company's ability
to continue to meet its internal needs and those of its suppliers and customers.
The Company currently intends to substantially complete the remediation,
validation and implementation phases of the year 2000 project prior to July
1999. This process includes the testing of critical systems to ensure that year
2000 readiness has been accomplished. The Company currently believes it will be
able to modify, replace, or mitigate its affected systems in time to avoid any
material detrimental impact on its operations. If the Company determines that it
may be unable to remediate and properly test affected systems on a timely basis,
the Company intends to develop appropriate contingency plans for any such
mission-critical systems at the time such determination is made. While the
Company is not presently aware of any significant exposure that its systems will
not be properly remediated on a timely basis, there can be no assurances that
any or all of the Company's systems are or will be year 2000 compliant. An
interruption of the Company's ability to conduct its business due to a year 2000
readiness problem could have a material adverse effect on the Company's
financial condition.
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The Company estimates that the aggregate costs of its year 2000 project
will be approximately $5.0 million to $6.0 million, including costs already
incurred. A portion of these costs are not likely to be incremental costs, but
rather will represent the redeployment of existing employees and equipment. This
reallocation of resources is not expected to have a significant impact on the
day-to-day operations of the Company. Total costs of approximately $1.5 million
were incurred by the Company for this project during fiscal 1998. The
anticipated impact and costs of the project, as well as the date on which the
Company expects to complete the project, are based on management's best
estimates using information currently available and numerous assumptions about
future events. Based on its current estimates and information currently
available, the Company does not anticipate that the costs associated with this
project will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows in future periods.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans.
The Company has initiated formal communications with its significant
suppliers and critical business partners to determine the extent to which the
Company may be vulnerable, in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces,
as the year 2000 approaches. The Company will develop appropriate contingency
plans in the event that a significant exposure is identified relative to the
dependencies on third-party systems. While the Company is not presently aware of
any such significant exposure, there can be no guarantee that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that a failure to properly convert by another company would not have a
material adverse effect on the Company.
ASSOCIATES
As of September 1998, the Company had approximately 14,200 associates
of which 7,300 were full-time and 6,900 were part-time. Approximately 920 of
these associates in twelve stores are covered by collective bargaining
agreements. Contracts with United Food and Commercial Workers Union Locals 23
and 880 expired in February 1998 and March 1998. Agreements have been reached
with both Locals and receipt of signed agreements is pending.
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.
The Company believes that, in general, it has satisfactory relations
with all of its associates.
COMPETITION
The retail industry is highly competitive. The Company generally
competes with a variety
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of conventional and discount retail stores, including national, regional and
local independent department and specialty stores, as well as with catalog
operations, factory outlet stores and other off-price stores.
In the discount or off-price retailing segment, the Company
differentiates itself through its store format and the breadth of its product
offering. The Company's large stores differ from most other off-price retailers
that tend to operate substantially smaller stores focusing predominantly on
either hard or soft goods. The Company's large stores facilitate its merchandise
offering and broad range of brands and products.
In addition, because the Company purchases much of its inventory
opportunistically, the Company competes for merchandise with other national and
regional off-price apparel and discount outlets. Many of the Company's
competitors handle identical or similar lines of merchandise and have comparable
locations, and some have greater financial resources than the Company.
Competitive factors important to the Company's customers include
fashion, value, merchandise selection, brand name recognition and, to a lesser
degree, store location. The Company competes primarily on the basis of value,
merchandise quality and selection. Management believes the Company's competitive
advantages include its reputation in the marketplace for being able to purchase
and promptly pay for entire lots of merchandise, together with its ability to
either quickly distribute or hold the merchandise for sale at the most opportune
time, as well as its 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. The Company's four department stores in Columbus
operate under the tradename "Schottenstein's," which has been registered by the
Company in the state of Ohio. The Company is entitled to use such names for the
sole purpose of operating department stores on an exclusive basis pursuant to a
perpetual, royalty-free license from SSC. SSC also operates a chain of furniture
stores under the name "Value City Furniture." The Company has also registered in
the U.S. Patent and Trademark Office various trademarks used in its private
label program.
Shonac has 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; Flites; Jonathan Victor; Kristi G; Lakota Trail; Landmarks;
Sander; Shoes by Kari and Sylvia Cristie.
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ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated
by the Company as of August 1, 1998:
Department Shoe
Stores Stores
---------- ------
Arizona - 1
California - 1
Colorado - 2
Delaware 3 -
Florida - 1
Georgia 3 2
Illinois 6 3
Indiana 7 1
Kansas - 2
Kentucky 4 -
Maryland 6 2
Massachusetts - 1
Michigan 6 3
Minnesota - 1
Missouri 1 1
New Jersey 7 1
New York - 2
North Carolina 1 1
Ohio 23 9
Oklahoma - 1
Pennsylvania 19 2
Tennessee 1 1
Texas - 8
Virginia 3 -
Washington D.C 1 -
West Virginia 4 -
Wisconsin - 1
---- ----
95 47
The Company maintains buying offices in Columbus, Ohio; Boston,
Massachusetts; and Los Angeles, California. The Company operates eleven
warehouse/distribution complexes located in Columbus, one third party processor
located in Secaucus, New Jersey and occasionally utilizes temporary warehouse
space. One warehouse is used by VCM, the 50/50 joint venture between the Company
and Mazel. VCM reimburses the Company for the cost of maintaining and operating
the warehouse. The Company's executive offices occupy approximately 45,000
square feet in a building which includes a store and also serves as one of the
Company's apparel
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distribution centers. Shonac occupies approximately 33,000 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 August 1, 1998 the Company leased or subleased nineteen stores and four of
its warehouse facilities from SSC or entities affiliated with SSC. The remaining
stores and warehouses were 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.
The Company's office, warehouse and distribution facilities are
adequate for its current needs and the Company believes that such facilities,
with certain modifications and additional equipment will be adequate for its
foreseeable future demands.
ITEM 3. LEGAL PROCEEDINGS.
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.
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 October 26, 1998, there were 547 shareholders of record.
HIGH LOW
Fiscal 1997:
First Quarter ........................... $ 13 1/4 $ 8 1/8
Second Quarter .......................... 14 3/8 9 1/8
Third Quarter ........................... 9 1/2 7 1/2
Fourth Quarter .......................... 9 1/4 8
Fiscal 1998:
First Quarter ........................... $ 8 1/2 $ 7 5/8
Second Quarter .......................... 10 3/8 7 9/16
Third Quarter ........................... 21 1/16 9 1/8
Fourth Quarter .......................... 22 3/8 16 7/8
The Company has paid no dividends and presently anticipates that all of its
future earnings will be retained for the development of its business and does
not anticipate paying cash dividends on its Common Shares during fiscal 1999.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, general financial condition of the Company and
general business conditions. The payment of dividends under the Company's
long-term unsecured revolving bank 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)
Fiscal Year 1998(1) 1997 1996(2) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Net Owned Sales (3) $1,161,379 $1,073,399 $954,308 $871,949 $864,855
Operating Profit $36,921 $10,513 $36,213 $24,209 $62,237
Net Income (4) $20,359 $3,951 $21,718 $13,819 $38,936
Basic Earnings per Share(4) $0.64 $0.12 $0.68 $0.43 $1.21
Diluted Earnings per Share (4) $0.63 $0.12 $0.68 $0.43 $1.21
Total Assets $683,057 $457,973 $437,010 $361,887 $358,606
Working Capital $205,752 $158,476 $161,397 $154,112 $164,140
Current Ratio 1.89 2.14 2.21 2.48 2.59
Long-term Obligations $165,648 $57,763 $46,942 $20,853 $31,650
Number of Stores (5)
Department Stores 95 95 86 79 75
Shoe Stores 47 - - - -
Department Store Sales per
Selling Sq. Ft. (6) $229 $217 $221 $220 $229
Comp Department Store
Sales Change (7) 5.9% 0.1% (0.1)% (3.8)% 2.9%
(1) Fiscal 1998 includes the operations of Shonac and Valley Fair Corporation from the date of acquisition, May
3, 1998, through August 1, 1998.
(2) Fiscal 1996 includes 53 weeks; all other years contain 52 weeks.
(3) Excludes sales of licensed departments. Prior to fiscal 1998, sales from the Company's toys and sporting
goods departments were included in Net Owned Sales. At the start of fiscal 1998 these departments became
licensed departments operated by VCM, Ltd., a 50/50 joint venture between the Company and Mazel Stores, Inc.
(4) Fiscal 1994 includes a tax benefit of $0.07 per share due primarily to the elimination of deferred tax
allowances.
(5) Includes all stores operating at the end of the fiscal year. Years prior to 1998 exclude the apparel,
domestic and housewares departments operated by the Company in two affiliated department stores which were
acquired effective May 3, 1998.
(6) Excludes stores not operated during the entire year and licensed departments.
(7) Comparable Department Store Sales Change excludes licensed departments. A store is considered to be
comparable in its second full fiscal year of operation. For fiscal 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.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
The Company's total sales, which include licensed departments sales,
increased $112.7 million from $1,255.6 million to $1,368.3 million. Net owned
sales for the department stores ("Value City") increased $1.6 million, or 0.1%
from $1,073.4 million to $1,075.0 million. Value City's comparable store owned
sales increased 5.9%, or $52.8 million. Last year's reported net owned sales of
$1,073.4 million included toys and sporting goods sales of $57.3 million. These
departments are now operated by VCM, Ltd. ("VCM"), a 50/50 joint venture between
the Company and Mazel Stores, Inc. and are therefore treated as licensed
department sales. The acquisition of Shonac Corporation ("Shonac") effective as
of May 3, 1998, contributed net owned sales since the acquisition date of $86.4
million with comparable store sales increases of 6.6%. For fiscal 1998, apparel
sales increased 5.4% and non-apparel owned sales increased 7.3%. On a comparable
store basis, apparel and non-apparel sales increased 5.3% and 7.7%,
respectively.
Gross profit increased $52.9 million from $375.6 million to $428.5
million, and increased as a percentage of owned sales from 35.0% to 36.9%. The
acquisition of Shonac contributed $33.9 million. Value City's gross profit
increased $19.0 million, or 5.1%, from $375.6 million to $394.6 million, and
increased as a percentage of owned sales from 35.0% to 36.7%. The percentage
increase is due to reduced markdowns and improvement in initial markup as well
as exclusion of toys and sporting goods gross margin.
Selling, general and administrative expenses ("SG&A") increased $30.3
million from $385.9 million to $416.2 million, but decreased as a percentage of
owned sales from 36.0% to 35.8%, a reduction of 0.2%, due primarily to the
leveraging effect of the Shonac acquisition. Shonac incurred SG&A of $24.3
million, or 28.1% of their owned sales. Value City's SG&A increased $6.0 million
and increased as a percentage of owned sales from 36.0% to 36.5%. This increase
is attributable to higher store and home office expenses, partially offset by
the elimination of certain direct expenses for the toys and sporting goods
operations transferred to VCM.
Based upon its experience, the Company estimates the average cost of
opening a new department store to range from approximately $5.0 million to $6.5
million and the cost of opening a new shoe store to range from approximately
$1.0 million to $2.0 million including leasehold improvements, fixtures,
inventory, pre-opening expenses and other costs. Preparations for opening a
department store generally take between eight and twelve weeks, and preparations
for a shoe store generally take eight to ten weeks. Through August 1, 1998, the
Company charged pre-opening expenses to operations ratably over the first twelve
months of store operations. Effective in fiscal 1999, pre-opening costs will be
expensed as incurred in accordance with Accounting Standards Executive Committee
Statement of Position 98-5. It has
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been the Company's experience that new stores generally achieve profitability
and contribute to net income after the first full year of operations. Nine
department stores opened less than twelve months as of the beginning of the
current fiscal year had a pre-tax net operating loss of $5.1 million for this
year, including $1.5 million of pre-opening expense amortization. Twelve
department stores opened less than twelve months during fiscal 1997 had pre-tax
operating losses of $7.0 million in 1997, including $6.3 million of pre-opening
expense amortization. The Company plans to open four to six Value City stores
and three to five shoe stores during fiscal 1999.
License fees from affiliates and other operating income increased $3.9
million, or 18.8%, from $20.8 million to $24.7 million, and increased as a
percentage of owned sales from 1.9% to 2.1%. The change is the net result of an
increase in license fees received during the year along with fees from the VCM
venture on toys and sporting goods sales partially offset by the elimination of
license fees related to the acquisition of Shonac for the fourth quarter.
Operating profit increased $26.4 million from $10.5 million to $36.9
million, and increased as a percentage of owned sales from 1.0% to 3.2% as a
result of the above factors.
Interest expense, net of interest income, increased from $5.1 million to
$5.3 million.
Gain on disposal of assets, net, increased from $0.2 million to $1.6
million due to selling the land, building and improvements of a site originally
purchased for future store development and selling the lease rights for a store
that was closed during the second quarter.
Equity in loss of unconsolidated joint venture represents the Company's
fifty percent interest in VCM's operating results. These losses are due
primarily to weak sales attributable to transitioning the toys and sporting
goods and health and beauty care departments to a new format.
Income before provision for income taxes increased $25.4 million from
$6.5 million to $31.9 million, and increased as a percentage of owned sales from
0.6% to 2.7% as a result of the above factors.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company's total sales increased $139.7 million from $1,115.9 million
to $1,255.6 million. Excluding an additional $18.3 million week in last year's
period, due to the Company's adoption of the National Retail Federation's
suggested retail calendar, total sales increased 14.4% from $1,097.6 million to
$1,255.6 million. Net owned sales increased $119.1 million, or 12.5% from $954.3
million to $1,073.4 million. Value City's comparable store owned sales increased
0.1%, or $1.3 million. For fiscal 1998, apparel sales increased 18.4% and
non-apparel owned sales increased 17.2%. On a comparable store basis apparel
decreased 0.7% and non- apparel increased 2.3%.
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Gross profit increased $20.8 million or 5.8% from $354.8 million to
$375.6 million. Expressed as a percentage of owned sales, gross profit decreased
from 37.2% to 35.0% due primarily to higher markdowns than last year, especially
in the area of overstocked merchandise, and a less favorable physical inventory
variance than last year.
SG&A increased $48.8 million, or 14.5%, from $337.1 million to $385.9
million, and increased as a percentage of owned sales from 35.3% to 36.0%. New
stores contributed an increase in expenses of $33.3 million, and stores opened
during the prior fiscal year that are not yet considered comparable increased
$10.4 million. New store SG&A, as a percentage of owned sales, is higher than
that of comparable stores, due primarily to pre-opening expenses and the result
of aggressive advertising to develop name recognition in new markets. Home
office expenses, including distribution costs, increased by approximately $12.0
million, primarily to support the new stores. Comparable store SG&A declined by
approximately $2.1 million. Closed store expenses were $0.4 million. The
remaining $5.2 million decline resulted from the extra week in last year's
period.
Twelve stores opened less than twelve months had a pre-tax operating loss
of $7.0 million for this year, including $6.3 million of pre-opening expense
amortization. Seven stores opened less than twelve months during fiscal 1996 had
pre-tax net operating losses of $0.2 million in 1996, including $2.2 million of
pre-opening expense amortization.
License fees from affiliates increased from $15.2 million to $17.7
million and remained constant as a percentage of owned sales at 1.6%.
Operating profit decreased $25.7 million, or 71.0%, from $36.2 million to
$10.5 million and decreased as a percentage of owned sales from 3.8% to 1.0% as
a result of the above factors.
Amortization of excess net assets over cost decreased from $1.4 million
to $0.9 million due to the amount being fully amortized as of the third quarter
of fiscal 1997.
Interest expense, net of interest income, increased from $1.3 million to
$5.1 million due to increased borrowings.
Other income, net, increased from $33,000 to $161,000 due primarily to a
non-cash gain on termination of a capital lease for transportation equipment.
The Company no longer incurs an expense related to the minority interest
in partnerships due to the Company's purchase of the 25% minority interest in
the partnerships during 1996 for approximately $1.3 million representing the net
book value of the minority interest in those partnerships.
Income before provision for income taxes decreased $29.8 million, or
82.1%, from $36.3 million to $6.5 million and decreased as a percentage of owned
sales from 3.8% to 0.6% as a
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result of the above factors.
SEASONALITY
The Company's business is affected by the pattern of seasonality common
to most retail businesses. Historically, the majority of its sales and operating
profit have been generated during the first six months of its fiscal year, which
includes the back-to-school and Christmas selling seasons.
FISCAL YEAR
During 1996, the Company changed its fiscal year end from the last
Saturday in July to the Saturday closest to July 31 to conform to the National
Retail Federation's suggested retail calendar. As a result, fiscal year 1996 had
53 weeks. In June 1998, the Company decided to change its fiscal year to a 52/53
week year that ends on the Saturday nearest to January 31. This change is being
made to reflect the reporting period common to most retailers. The financial
report covering the transition period from August 2, 1998 to January 30, 1999,
will be filed on Form 10-K.
INCOME TAXES
The effective tax rate for the year ended August 1, 1998 was 36.2%. The
effective tax rate for the year ended August 2, 1997 was 39.0%. The 2.8%
reduction reflects the benefits of several fourth quarter favorable settlements
of federal and state income tax issues. The effective tax rate for fiscal 1999
is expected to be approximately 41.0% due primarily to the effect of
non-deductible goodwill amortization.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements on Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of the Company's
fiscal year.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements and is effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS No. 130 is not expected to have a significant impact on the
consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
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establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company is
currently evaluating the effects of this change on its financial statements
which will be limited to the form and content of its disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The adoption of SFAS No.
133 is not expected to have a significant impact on the Company's financial
statements.
INFLATION
The results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $205.8 million and $158.5 million at August 1,
1998 and August 2, 1997, respectively. Current ratios at those dates were 1.89
and 2.14, respectively.
Net cash provided from operating activities totaled $43.3 million, $38.7
million and $21.4 million for fiscal years 1998, 1997 and 1996, respectively.
Net income, adjusted for depreciation and amortization, provided $48.1 million
of operating cash flow for fiscal year 1998. This was reduced by $23.0 million
representing an increase in inventories net of an increase in accounts payable
of $16.3 million. Other changes in working capital assets and liabilities
provided $18.2 million.
During fiscal year 1997, net income, adjusted for depreciation and
amortization, provided $33.5 million of operating cash flow which was increased
by $13.6 million representing a decrease in inventories including an increase in
accounts payable of $2.9 million. Other changes in working capital assets and
liabilities used $8.4 million.
Net cash used for investing activities totaled $127.5 million, $46.8
million and $47.7 million for fiscal years 1998, 1997, and 1996, respectively.
Net cash used for capital expenditures was $27.2 million, $46.8 million
and $45.4 million for fiscal years 1998, 1997 and 1996, respectively. During
1998, capital expenditures included $1.0 million for stores opened in the prior
year, $12.5 million for capital improvements in existing stores, $1.6 million
for energy management systems, $2.9 million for renovations in existing
warehouses, $0.3 million for transportation equipment and $8.9 million for
M.I.S.
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equipment upgrades. Capital expenditures were partially offset by $22.4 million
of proceeds from the sale of assets, primarily from those classified as assets
held for sale as of August 2, 1997, including the land, building and
improvements at a site originally purchased for future store development; the
inventory and fixed assets related to the Company's toys and sporting goods
departments which were sold to VCM, at net book value in August 1997; and, the
lease rights and leasehold improvements at a store that was closed during the
second quarter. The Company also incurred net cash outlays of $9.6 million to
obtain a fifty percent interest in the VCM joint venture. Other investing
activities include cash outlays of $6.5 million for other assets and cash
receipts of $1.9 million from notes receivable. Total capital expenditures for
1999 are estimated at $31.0 million.
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies include
both information technology in the form of hardware and software, as well as
embedded technology in the Company's facilities and equipment. Similar to most
companies, the Company must determine whether its systems are capable of
recognizing and processing date sensitive information properly as the year 2000
approaches. The Company is utilizing a multi-phased concurrent approach to
address this issue. The phases included in the Company's approach are the
awareness, assessment, remediation, validation and implementation phases. The
Company has completed the awareness phase of its project. Furthermore, the
Company has substantially completed the assessment phase and is well into the
remediation phase. The Company is actively correcting and replacing those
systems which are not year 2000 ready in order to ensure the Company's ability
to continue to meet its internal needs and those of its suppliers and customers.
The Company currently intends to substantially complete the remediation,
validation and implementation phases of the year 2000 project prior to July
1999. This process includes the testing of critical systems to ensure that year
2000 readiness has been accomplished. The Company currently believes it will be
able to modify, replace, or mitigate its affected systems in time to avoid any
material detrimental impact on its operations. If the Company determines that it
may be unable to remediate and properly test affected systems on a timely basis,
the Company intends to develop appropriate contingency plans for any such
mission-critical systems at the time such determination is made. While the
Company is not presently aware of any significant exposure that its systems will
not be properly remediated on a timely basis, there can be no assurances that
any or all of the Company's systems are or will be year 2000 compliant. An
interruption of the Company's ability to conduct its business due to a year 2000
readiness problem could have a material adverse effect on the Company's
financial condition.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $5.0 million to $6.0 million, including costs already
incurred. A significant portion of these costs are not likely to be incremental
costs, but rather will represent the redeployment of existing employees and
equipment. This reallocation of resources is not expected to have a significant
impact on the day-to-day operations of the Company. Total costs of approximately
$1.5 million were incurred by the Company for this project during fiscal 1998.
The anticipated impact and costs of the project, as well as the date on which
the Company expects to complete the project, are based on management's best
estimates using information
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currently available and numerous assumptions about future events. Based on its
current estimates and information currently available, the Company does not
anticipate that the costs associated with this project will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows in future periods. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those plans.
The Company has initiated formal communications with its significant
suppliers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces,
as the year 2000 approaches. The Company will develop appropriate contingency
plans in the event that a significant exposure is identified relative to the
dependencies on third-party systems. While the Company is not presently aware of
any such significant exposure, there can be no guarantee that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that a failure to properly convert by another company would not have a
material adverse effect on the Company.
Effective May 3, 1998, the Company purchased 99.9% of the common stock of
Shonac from Nacht Management, Inc. and Schottenstein Stores Corporation ("SSC").
SSC owns approximately 56.3% of the Company's outstanding common shares. The
Company also acquired the store operations of Valley Fair Corporation from SSC.
The combined purchase price for both acquisitions was $108.5 million. Shonac had
been the shoe licensee in all of the Company's stores since its inception in
1969 and also operated a chain of retail shoe outlets located throughout the
United States, principally under the name DSW Shoe Warehouse. Valley Fair
Corporation operated two department stores located in Irvington and Little
Ferry, New Jersey. The Company had been a licensee of certain departments in
these two stores for 18 years.
Both acquisitions were accounted for as purchases. The acquisitions were
funded by cash provided by operations and approximately $88.0 million from the
Company's new $185.0 million long-term unsecured revolving bank credit facility.
This new facility replaced Value City's $100.0 million credit facility and
Shonac's $30.0 million facility. The facility has a three year term and
primarily bears interest a floating rate of LIBOR plus 1.5%. The interest rate
on $40.0 million has been locked in at a fixed annual rate of 7.395% for a three
year period under a swap agreement. The terms of the credit facility require the
Company to comply with certain restrictive covenants and financial ratio tests,
including minimum tangible net worth; a maximum consolidated debt to earnings
before interest, taxes, depreciation and amortization ratio; a minimum fixed
charge coverage ratio; and, limitations on dividends, additional incurrence of
debt and capital expenditures. At August 1, 1998 the LIBOR rate was 5.66%,
borrowings aggregated $140.0 million and $23.5 million of letters of credit were
issued and outstanding for merchandise purchases under the credit facility.
The Company believes that the cash generated by its operations, along
with the available proceeds from the credit facility will be sufficient to meet
its future obligations including capital
26
27
expenditures.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained in
this Report, the Form 10-K or made by management of the Company involve risks
and uncertainties, and are subject to change based on various important factors.
The following factors, among others, in some cases have affected and in the
future could affect the Company's financial performance and actual results and
could cause actual results for 1999 and beyond to differ materially from those
expressed or implied in any such forward-looking statements: the ability of the
Company to integrate the operations of Shonac and Valley Fair, the ability of
the Company and its vendors and suppliers to become year 2000 compliant, 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.
27
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The Company is exposed to market risk from changes in interest rates
which may adversely affect its financial position, results of operations and
cash flows. In seeking to minimize the risks from interest rate fluctuations,
the Company manages exposures through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowings under its unsecured revolving credit facility which permits debt
commitments up to $185.0 million. The facility has a three-year term and
generally bears interest at a floating rate of LIBOR plus 1.5%. The interest
rate on $40.0 million has been locked in at a fixed rate of 7.395% for a
three-year period under a swap agreement to help manage the Company's exposure
to interest rate movements and reduce borrowing costs.
The Company has performed a sensitivity analysis and assuming an
average outstanding principal amount subject to variable interest rates, each 1%
adverse movement in interest rates would result in approximately $1.0 million of
additional interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and financial statement schedules of the
Company and the Independent Auditors' Reports 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.
28
29
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 the
Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on December 9, 1998 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE 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 the
Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on December 9, 1998 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 the
Company's Proxy Statement relating to the Company's Annual Meeting of
Shareholders to be held on December 9, 1998 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 the Company's Proxy Statement
relating to the Company's Annual Meeting of Shareholders to be held on December
9, 1998 and is incorporated herein by reference.
29
30
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:
Page in
Form 10-K
---------
Independent Auditors' Report F - 1
Consolidated Balance Sheets at August 1, 1998 and August 2, 1997 F - 3
Consolidated Statements of Income for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 F - 4
Consolidated Statements of Shareholders' Equity for the years ended August 1,
1998, August 2, 1997 and August 3, 1996 F - 5
Consolidated Statements of Cash Flows for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 F - 6
Notes to the Consolidated Financial Statements F - 7
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 and Reserves 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
The Company filed a Form 8-K on June 24, 1998 relating to Item 8 -
"Change in Fiscal Year" and a Form 8-KA on July 22, 1998 relating to Item 2 -
"Acquisition or Disposition of Assets" during the quarter ended August 1, 1998.
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 August 1, 1998 and August 2, 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for the two years then
ended. Our audits also included its financial statement schedule for the years
ended August 1, 1998 and August 2, 1997 listed in the index at Item S-1. 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 generally accepted
auditing standards. 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 consolidated financial position of Value
City Department Stores, Inc. and its wholly owned subsidiaries as of August 1,
1998 and August 2, 1997 and the consolidated results of their operations and
their cash flows for the two years then ended in conformity with generally
accepted accounting principles. Also, in our opinion, such 1998 and 1997
financial statement schedule, when considered in relation to the basic 1998 and
1997 consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Deloitte & Touche LLP
Columbus, Ohio
October 2, 1998
F - 1
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Value City
Department Stores, Inc.:
We have audited the financial statement schedule of Value City
Department Stores, Inc. (a majority owned subsidiary of Schottenstein Stores
Corporation), its partnerships and its wholly owned subsidiaries (the Company)
as of August 3, 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for the year in the period then ended August
3, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations, cash
flows, and changes in shareholders' equity of Value City Department Stores,
Inc., its partnerships and its wholly owned subsidiaries for the year in the
period ended August 3, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
Columbus, Ohio
October 28, 1996
F - 2
33
CONSOLIDATED BALANCE SHEETS
at August 1, 1998 and August 2, 1997
(in thousands, except share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and equivalents $32,802 $11,614
Accounts receivable, net 5,458 5,683
Receivables from affiliates 636 1,084
Inventories 373,175 236,784
Prepaid expenses and other assets 8,192 12,137
Assets held for sale - 20,776
Deferred income taxes 17,687 9,208
-------- --------
TOTAL CURRENT ASSETS 437,950 297,286
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 165,261 141,588
Leasehold improvements 122,011 97,798
Land and building 1,001 -
Capital leases 15,276 15,213
-------- --------
303,549 254,599
Accumulated depreciation and amortization (133,707) (101,148)
-------- --------
Property and equipment, net 169,842 153,451
INVESTMENT IN JOINT VENTURE 8,260 -
GOODWILL AND TRADENAMES, NET 46,717 -
OTHER ASSETS 20,288 7,236
-------- --------
TOTAL ASSETS $683,057 $457,973
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $133,539 $69,649
Accounts payable to affiliates 7,235 11,344
Accrued expenses:
Compensation 13,524 8,882
Taxes 17,646 11,753
Other 28,030 22,901
Demand note payable - 12,000
Current maturities of long-term obligations 32,224 2,281
-------- --------
TOTAL CURRENT LIABILITIES 232,198 138,810
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 165,648 57,763
DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 4,460 4,960
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 32,619,767 shares
and 32,259,045 shares, respectively 112,749 110,068
Contributed capital 12,097 10,728
Retained earnings 159,814 139,455
Deferred compensation expense, net (1,080) (982)
Treasury shares, at cost, 368,600 shares (2,829) (2,829)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 280,751 256,440
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $683,057 $457,973
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
34
CONSOLIDATED STATEMENTS OF INCOME
Years ended August 1, 1998, August 2, 1997 and August 3, 1996
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
52 Weeks 52 Weeks 53 Weeks
- -------------------------------------------------------------------------------------------------------------------
Total sales $ 1,368,349 $ 1,255,632 $ 1,115,900
Less licensed department sales (206,970) (182,233) (161,592)
----------- ----------- -----------
Net owned sales 1,161,379 1,073,399 954,308
Cost of sales (732,902) (697,822) (599,460)
----------- ----------- -----------
Gross profit 428,477 375,577 354,848
Selling, general and administrative expenses (416,218) (385,911) (337,097)
License fees from affiliates 20,674 17,685 15,162
Other operating income 3,988 3,162 3,300
----------- ----------- -----------
Operating profit 36,921 10,513 36,213
Interest expense, net (5,267) (5,126) (1,328)
Gain on disposal of assets, net 1,623 161 33
Amortization of excess net assets over cost - 927 1,390
----------- ----------- -----------
Income before equity in loss of joint
venture, minority interest and
provision for income taxes 33,277 6,475 36,308
Equity in loss of joint venture (1,377) - -
Minority interest in partnerships - - (41)
----------- ----------- -----------
Income before provision for income taxes 31,900 6,475 36,267
Provision for income taxes (11,541) (2,524) (14,549)
----------- ----------- -----------
Net income $ 20,359 $ 3,951 $ 21,718
=========== =========== ===========
Basic earnings per share $ 0.64 $ 0.12 $ 0.68
=========== =========== ===========
Diluted earnings per share $ 0.63 $ 0.12 $ 0.68
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
35
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Years ended August 1, 1998, August 2, 1997, and August 3, 1996
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Shares
----------------
Common Deferred
Common Shares Common Contributed Retained Compensation Treasury
Shares in Treasury Shares Capital Earnings Expense Shares Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 29, 1995 32,051 149 $109,385 $9,704 $113,786 $(1,043) $(1,231) $230,601
Net income 21,718 21,718
Exercise of stock options 8 65 7 72
Tax liability incurred on
vested restricted shares (23) (23)
Repurchase of common shares 220 (1,598) (1,598)
Amortization of deferred
compensation expense 675 675
------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 3, 1996 32,059 369 109,450 9,688 135,504 (368) (2,829) 251,445
Net income 3,951 3,951
Exercise of stock options 80 618 102 720
Tax liability incurred on
vested restricted shares (52) (52)
Grant of restricted shares 120 990 (990) -
Amortization of deferred
compensation expense 376 376
------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 2, 1997 32,259 369 110,068 10,728 139,455 (982) (2,829) 256,440
Net income 20,359 20,359
Exercise of stock options 331 2,681 921 3,602
Tax benefit incurred 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 $112,749 $12,097 $159,814 $(1,080) $(2,829) $280,751
============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 1, 1998, August 2, 1997 and August 3, 1996
(in thousands)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
52 Weeks 52 Weeks 53 Weeks
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 20,359 $ 3,951 $ 21,718
Adjustments to reconcile net income to net
cash provided by (used in)operating activities:
Depreciation and amortization 27,773 29,583 23,903
Amortization of excess net assets over cost - (927) (1,390)
Minority interest in partnerships - - 41
Deferred income taxes and other
noncurrent liabilities (1,920) 232 (562)
Equity in loss of joint venture 1,377 - -
Gain on disposal of assets (1,623) (161) (33)
Change in working capital, assets
and liabilities:
Receivables 1,504 402 (632)
Inventories (39,223) 10,710 (41,894)
Prepaid expenses and other assets 6,383 (10,511) (3,045)
Accounts payable 16,269 2,880 22,646
Accrued expenses 12,358 2,584 674
--------- --------- ---------
Net cash provided by operating activities 43,257 38,743 21,426
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (27,165) (46,750) (45,407)
Investment in joint venture (9,637) - -
Proceeds from sale of assets 22,388 85 65
Acquisitions (108,473) - -
Notes receivable 1,906 738 (1,960)
Other assets (6,532) (900) (376)
--------- --------- ---------
Net cash used in investing activities (127,513) (46,827) (47,678)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares 2,681 618 65
Net (payments) borrowings under
demand note facility (12,000) (21,000) 33,000
Net proceeds from issuance of
long-term obligations 137,225 50,000 -
Net principal payments
under long-term obligations (22,462) (20,404) (10,777)
Purchase of treasury shares - - (1,598)
Distributions to partners in minority
partnerships, net - - (1,328)
--------- --------- ---------
Net cash provided by financing activities 105,444 9,214 19,362
--------- --------- ---------
Net increase (decrease) in cash and equivalents 21,188 1,130 (6,890)
Cash and equivalents, beginning of year 11,614 10,484 17,374
--------- --------- ---------
Cash and equivalents, end of year $ 32,802 $ 11,614 $ 10,484
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
37
NOTES TO THE 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 off-price shoe
stores, principally under the name "DSW Shoe Warehouse." As of August 1,
1998 a total of 142 stores were open, including 95 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
47 shoe stores throughout the United States.
To facilitate comparisons with the current year, certain amounts in prior
year's financial statements have been reclassified to conform to the
current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR:
During 1996, the Company changed its fiscal year end from the last Saturday
in July to the Saturday closest to July 31 to conform to the National
Retail Federation's suggested retail calendar. As a result, fiscal year
1996 had 53 weeks. Reference herein to the years ended August 1, 1998 and
August 2, 1997 include 52 weeks.
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.
ASSETS HELD FOR SALE:
Assets held for sale, stated at lower of cost or market, represent: 1)
land, building and leasehold improvements related to a site originally
purchased for store development which were sold in September 1997; 2)
leasehold improvements at an existing store for which the lease rights were
sold; and 3) inventory and fixed assets related to the Company's toys and
sporting goods departments which were sold in August 1997 at net book value
(see Note 3, related party transactions).
PRE-OPENING EXPENSES:
Pre-opening expenses are charged to operations ratably over the first
twelve months of a new store's operations. Pre-opening costs expensed were
$1,434,000, $6,943,000 and $4,059,000 for fiscal years 1998, 1997 and 1996,
respectively. Effective in fiscal 1999, pre-opening costs will be expensed
as incurred in accordance with Accounting Standards Executive Committee
Statement of Position 98-5. Deferred pre-opening costs at August 1, 1998
were $798,000.
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 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.
F - 7
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
REVENUE RECOGNITION:
Sales of merchandise and services are net of returns and allowances and
exclude sales tax. Layaway sales are recognized once the merchandise has
been paid for in full.
ADVERTISING EXPENSE:
The cost of advertising is expensed as incurred. During fiscal years 1998,
1997 and 1996, advertising expense was $38,245,000, $39,005,000, and
$36,020,000, respectively.
INTEREST RATE SWAP AGREEMENT:
The Company utilizes an interest rate swap agreement to manage the interest
rate risk associated with a portion of its borrowings. The counterparty to
this instrument is a major financial institution. This agreement is 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:
The Company adopted Statement on Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share," in the quarter ended January 31, 1998. In
accordance with the provisions of this statement, all prior periods
presented have been restated to comply with SFAS No. 128. 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 equivalent shares (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):
1998 1997 1996
-------------------------------------------------------------
Weighted average shares
outstanding 31,997 31,740 31,722
Assumed exercise of
dilutive stock options 364 277 135
------ ------ ------
Number of shares for
computation of diluted
earnings per share 32,361 32,017 31,857
====== ====== ======
-------------------------------------------------------------
Options to purchase 13,000 shares of stock at prices ranging from $20.25 to
$21.44 per share were outstanding during the year ended 1998 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:
During 1997 the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards
for reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 is not expected to have a
significant impact on the consolidated financial statements.
During 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company is currently evaluating the
effects of this change on its financial statements which will be limited to
the form and content of its disclosures.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
F - 8
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
years beginning after June 15, 1999. The adoption of SFAS No. 133 is not
expected to have a significant impact on the Company's financial
statements.
3. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from and sells merchandise to affiliates
of Schottenstein Stores Corporation ("SSC"), direct owner of approximately
56.3% of the Company's common shares, and VCM, LTD. ("VCM"), a 50/50 joint
venture between the Company and Mazel Stores, Inc. ("Mazel"). The related
party transactions are as follows (in thousands):
1998 1997 1996
---------------------------------------------------------------
Purchases of merchandise
from affiliates $4,898 $4,477 $6,621
Merchandise sold to
affiliates at cost,
including handling charges 333 12 354
Merchandise purchased
on behalf of and shipped
directly to affiliates, at
cost plus delivery charges 3,935 4 46
---------------------------------------------------------------
Not included in the preceding table are purchases made through SSC's
Importing Division which charges the Company its cost plus an
administrative charge.
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.
Prior to fiscal 1998, L.F. Widmann, Inc. ("Widmann"), a related party as a
result of significant ownership by SSC, operated the health and beauty care
departments in the Company's stores as licensed departments. In July 1997,
the Company entered into agreements to create VCM. An asset and stock
purchase agreement along with an operating agreement were signed on July
14, 1997 pursuant to which VCM would purchase 100% of Widmann's capital
stock and purchase the inventory and other assets of the Company's owned
toys and sporting goods departments. These transactions were completed in
August 1997. VCM operates the health and beauty care and toys and sporting
goods departments in the Company's stores as licensed departments and
subleases warehouse facilities from the Company. The license and operating
agreements are for a term of ten years ending on the last day of fiscal
2007 and contain certain provisions whereby either business partner can
initiate renegotiation of terms if certain minimum requirements are not
met. All license agreements provide for fees based on percentages of sales,
as defined.
Sales of licensed departments and the related license fees earned are as
follows (in thousands):
1998 1997 1996
----------------------------------------------------------------------
VCM
Sales $87,651 - -
License fees 7,540 - -
Widmann
Sales - $38,198 $40,643
License fees - 1,841 1,942
Shonac
Sales $119,319 $144,035 $120,949
License fees 13,134 15,844 13,220
----------------------------------------------------------------------
The Company also leases certain store and warehouse locations owned by SSC
as described in Note 4.
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 $7,265,000, $6,101,000 and $6,696,000 in fiscal years 1998, 1997
and 1996, respectively, for such coverage.
During 1998, 1997 and 1996, the Company contributed $1,120,000 each year to
a private charitable foundation controlled by the Schottenstein family.
4. LEASES
The Company operates stores and warehouses under various arrangements with
related and unrelated parties. Such leases expire through 2018 and in most
cases provide for renewal options. Generally, the Company
F - 9
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
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 thirteen store locations, four 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 had a capital lease agreement for transportation equipment that
expired in 1997. Similar equipment was obtained under a new operating lease
agreement. The Company incurred new capital lease obligations, including
one with a related party, aggregating $9,400,000 and $5,800,000 in 1997 and
1996, respectively, to obtain store facilities. Assets held under capital
leases are amortized over the terms of the related leases. The accumulated
amortization for these assets was $1,017,000 and $442,000 at August 1, 1998
and August 2, 1997, respectively.
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at August
1, 1998 are as follows (in thousands):
Operating Leases
Fiscal ----------------
Year Capital Unrelated Related
Ending Leases Party Party Total
------------------------------------------------------------
1999 $ 911 $ 47,745 $ 8,395 $ 57,051
2000 944 45,592 8,450 54,986
2001 944 42,237 8,487 51,668
2002 969 34,522 6,807 42,298
2003 995 31,744 6,423 39,162
Future Years 21,060 230,619 69,949 321,628
------------------------------------------------------------
Total minimum
lease payments 25,823
Less amount
representing
interest (15,808)
--------
Present value
of minimum
lease payments 10,015
Less current
portion (81)
--------
Total net $ 9,934
========
Prior to the May 1998 acquisition of the operations of Valley Fair, the
Company operated apparel, houseware and domestic departments in the two
stores owned by Valley Fair, a related party, under a license agreement and
paid a license fee of 11% of sales against an aggregate minimum license fee
of $733,000 per annum. Two-thirds of this fee was charged to rent expense
and the remainder was charged to advertising expense.
The composition of rental expense is (in thousands):
1998 1997 1996
---------------------------------------------------------
Minimum rentals:
Unrelated parties $27,618 $14,878 $13,222
Related parties 8,307 15,043 11,400
Contingent rentals:
Unrelated parties 2,681 2,469 2,288
Related parties 1,556 2,366 1,757
------- ------ -------
Total $40,162 $34,756 $28,667
======= ======= =======
---------------------------------------------------------
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 1998
and 1997 the balance of deferred rent was $2,124,000 and $856,000,
respectively, and
F - 10
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
is included in other noncurrent liabilities.
5. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
1998 1997
---------------------------------------------------------
Senior unsecured notes $ 47,857 $ 50,000
Credit facility 140,000 -
Capital lease obligations 10,015 9,984
Other - 60
--------- ---------
197,872 60,044
Less current maturities (32,224) (2,281)
--------- ---------
$ 165,648 $ 57,763
========= =========
---------------------------------------------------------
During 1997, the Company completed a private placement for $50.0 million of
senior unsecured notes. The proceeds were used to repay demand notes
payable. The senior unsecured notes require one principal payment of
$2,143,000 in December 1998 and payments of $9,143,000 annually beginning
December 1999 through December 2003 and bear interest at an average fixed
rate of 7.2% per annum.
The terms of the senior unsecured notes require the Company to comply with
certain restrictive covenants, maintain minimum income and net worth levels
and meet certain financial ratio tests during the terms of the debt. The
most restrictive of these covenants is that the Company's consolidated
funded debt (as defined in the debt agreement) may not exceed 50% of
consolidated total capitalization (as defined).
In conjunction with the acquisition of Shonac and Valley Fair, the Company
replaced its $100.0 million credit facility and Shonac's $30.0 million
facility with a new $185.0 million three-year unsecured revolving bank
credit facility. The facility generally bears interest at a floating rate
of LIBOR plus 1.5%. The interest rate on $40.0 million has been locked in
at a fixed annual rate of 7.395% for a three year period under a swap
agreement. The fair market value of the swap agreement at August 1, 1998
was ($218,000). At August 1, 1998, direct borrowings aggregated $140.0
million and $23.5 million of letters of credit were issued and outstanding
for merchandise under the credit facility. Pursuant to a thirty day
closeout provision, $30.0 million of the $140.0 million outstanding under
the facility is classified as a current liability. The weighted average
interest rate on borrowings under the Company's credit facilities during
fiscal years 1998 and 1997 was 8.56% and 7.11%, respectively. During 1998,
underwriting fees, unused commitment fees and rate swap costs for the new
credit facility increased the weighted average interest rate by 1.2%. The
terms of the credit facility require the Company to comply with certain
restrictive covenants and financial ratio tests, including minimum tangible
net worth; a maximum consolidated debt to earnings before interest, taxes,
depreciation and amortization ratio; a minimum fixed charge coverage ratio;
and, limitations on dividends, additional incurrence of debt and capital
expenditures.
The book value of notes payable and long-term debt approximates fair value.
6. BENEFIT PLANS
The Company participates in the SSC sponsored 401(k) savings plan (the
"401(k) Plan"). Full-time employees who have attained twenty and one-half
years of age and have completed one year of service can contribute up to
fifteen percent of their salaries to the 401(k) Plan on a pre-tax basis,
subject to IRS limitations. The Company will match up to three percent of
participants' eligible compensation. Additionally, the Company contributes
a discretionary profit sharing amount to the 401(k) Plan each year. The
Company incurred costs associated with the 401(k) Plan of $3,907,000,
$3,540,000 and $3,197,000 for fiscal years 1998, 1997 and 1996,
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.
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.
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 fiscal years 1998, 1997 and 1996 were
not material to the consolidated financial statements.
F - 11
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
7. SHAREHOLDERS' EQUITY
During fiscal years 1997 and 1998, 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 $990,000
and $328,000 in 1997 and 1998, 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. One 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-holder's service as a
director of the Company.
The Company has a 1991 Stock Option Plan which provides for the grant of
options to purchase up to 3,000,000 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.
The following table summarizes the Company's stock option plans and related
Weighted Average Exercise Prices ("WAEP") for fiscal years ended August 1,
1998, August 2, 1997 and August 3, 1996 (shares in thousands):
1998 1997 1996
Shares WAEP Shares WAEP Shares WAEP
---------------------------------------------------------------------------
Outstanding
beginning
of year 2,398 $ 8.90 1,603 $ 7.91 1,374 $ 8.20
Granted 357 10.71 1,043 10.26 378 6.98
Exercised (331) 8.12 (80) 7.69 (8) 8.06
Cancelled (93) 9.40 (168) 8.44 (141) 8.14
------- ------- -------
Outstanding
end of
year 2,331 9.27 2,398 8.90 1,603 7.91
======= ======= =======
Options
exercisable
end of
year 885 $ 8.61 808 $ 8.22 679 $ 8.28
======= ======= =======
Shares
available for
additional
grants 316 80 174
======= ======= =======
---------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
as of August 1, 1998 (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
-------------------------------------------------------------------------------------
$5.87-
$ 7.94 236 8yrs $ 6.92 47 $ 6.84
$8.06-
$ 11.19 1,736 7yrs $ 8.54 786 $ 8.28
$13.69-
$ 20.25 359 9yrs $ 14.37 52 $ 15.10
-------------------------------------------------------------------------------------
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):
1998 1997 1996
-------------------------------------------------------------------
Net income:
As reported $20,359 $3,951 $21,718
Pro forma $18,817 $3,373 $21,548
Basic earnings per share:
As reported $0.64 $0.12 $0.68
Pro forma $0.59 $0.11 $0.68
Diluted earnings per share
As reported $0.63 $0.12 $0.68
Pro forma $0.58 $0.11 $0.68
-------------------------------------------------------------------
F - 12
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
---------------------------------------------------------
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
1998, 1997 and 1996, respectively: expected volatility of 38.6%, 37.6% and
40.6%; dividend yield of 0%; risk-free interest rates of 5.6%, 6.3% and
6.5%; and, expected lives of 5.1 and 6.5 years. The weighted average fair
value of options granted in 1998, 1997 and 1996 was $6.17, $5.06 and $3.68,
respectively.
Consistent with SFAS No. 123, pro-forma net income and 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.
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
1998 1997 1996
----------------------------------------------------------
Current:
Federal $12,174 $2,417 $11,315
State and local 1,912 699 2,588
------- ------ -------
14,086 3,116 13,903
Deferred:
Federal (2,227) (533) 474
State and local (318) (59) 172
------- ------ -------
(2,545) (592) 646
------- ------ -------
Income tax expense $11,541 $2,524 $14,549
======= ====== =======
----------------------------------------------------------
The provision (benefit) for deferred income taxes includes the following
amounts (in thousands):
1998 1997 1996
---------------------------------------------------------------------
Type of temporary differences:
Basis differences
in inventory $ (586) $ (950) $ (279)
Depreciation (1,003) 186 526
Amortization of excess
net assets over cost 235 382 572
Deferred bonus (1,030) 288 89
Other (161) (498) (262)
-------- -------- --------
$ (2,545) $ (592) $ 646
======== ======== ========
---------------------------------------------------------------------
A reconciliation of the expected income taxes based upon the statutory
federal rate and the effective rate for the years ended August 1, 1998,
August 2, 1997 and August 3, 1996 are as follows (in thousands):
1998 1997 1996
---------------------------------------------------------------------
Income tax expense at
federal statutory rate $ 11,165 $ 2,266 $ 12,693
Jobs credit (164) (59) -
State and local taxes, net 1,548 161 1,794
Resolution of income
tax issues (1,410)
Non-deductible goodwill 273 - -
Other 129 156 62
-------- -------- --------
$ 11,541 $ 2,524 $ 14,549
======== ======== ========
---------------------------------------------------------------------
The components of the net deferred tax asset as of August 1, 1998 and
August 2, 1997 are (in thousands):
1998 1997
----------------------------------------------------------
Deferred Tax Assets:
Basis differences in
inventory $ 14,320 $ 8,187
Basis differences in
fixed assets 2,333 2,302
Accrued bonus 1,003 402
Other state and local taxes 1,096 1,847
Deferred compensation 281 150
Amortization of lease
acquisition costs 2,434 2,174
Other 2,939 1,099
-------- --------
24,406 16,161
Deferred Tax Liabilities:
Depreciation (5,957) (7,508)
Capital leases (1,723) (1,915)
Prepaid expenses (323) (993)
Other (1,051) (640)
-------- --------
(9,054) (11,056)
-------- --------
Total net $ 15,352 $ 5,105
======== ========
----------------------------------------------------------
F - 13
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
The net deferred tax asset is recorded on the Company's consolidated
balance sheet as of August 1, 1998 and August 2, 1997 as follows (in
thousands):
1998 1997
-----------------------------------------------------------------
Current deferred tax asset $ 17,687 $ 9,208
Non-current deferred tax liability (2,335) (4,103)
-------- --------
Net deferred tax asset $ 15,352 $ 5,105
======== ========
-----------------------------------------------------------------
11. ACQUISITIONS
Effective May 3, 1998, the Company purchased 99.9% of the common stock of
Shonac from Nacht Management, Inc. and SSC. SSC owns approximately 60% of
the Company's outstanding common shares. The Company also acquired the
store operations of Valley Fair from SSC. Shonac has operated, as licensee,
the shoe departments in the Company's department stores since Shonac's
inception in 1969. Shonac also operates a chain of retail shoe outlets
located throughout the United States, principally under the name DSW Shoe
Warehouse. Valley Fair operates two department stores located in Irvington
and Little Ferry, New Jersey. The Company has been a licensee of certain
departments in these two stores for 18 years. The negotiated purchase price
for Shonac and Valley Fair was $108,473,000. The acquisitions were funded
by cash provided by operations and approximately $88,000,000 from the
Company's new long-term revolving bank credit facility.
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 allocation of
purchase price in fiscal 1998 is summarized below (in thousands):
---------------------------------------------
Current assets $ 107,778
Property, plant and equipment 16,861
Goodwill 33,645
Tradenames 13,870
Other assets 7,616
Current liabilities (70,637)
Other long term liabilities (660)
---------
Total purchase price $ 108,473
---------
---------------------------------------------
The operating results of Shonac and Valley Fair 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 years ended
August 1, 1998 and August 2, 1997 are presented as if the acquisitions had taken
place at the beginning of the applicable periods (in thousands, except per share
amounts):
1998 1997
-------------------------------------------------------------
Net Owned Sales $1,408,800 $1,345,986
Net Income $22,427 $7,749
Basic earnings per share $0.70 $0.24
Diluted earnings per share $0.69 $0.24
-------------------------------------------------------------
F - 14
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(in thousands, except per share amounts)
FISCAL YEAR ENDED AUGUST 1, 1998
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
11/1/97 1/31/98(1) 5/2/98 8/1/98(2)
------------------------------------------------
Net Owned Sales $264,385 $313,227 $244,789 $338,978
Cost of Sales (166,955) (200,486) (154,475) (210,986)
--------- --------- --------- ---------
Gross Profit 97,430 112,741 90,314 127,992
Selling, general and
administrative expenses (97,764) (101,232) (93,028) (124,194)
License fees and other
operating income 7,089 8,232 6,268 3,073
--------- --------- --------- ---------
Operating profit 6,755 19,741 3,554 6,871
Interest expense, net (1,049) (391) (556) (3,271)
Gain on sale of assets, net 852 748 5 18
--------- --------- --------- ---------
Income before equity in loss
of joint venture and
provision for income taxes 6,558 20,098 3,003 3,618
Equity in loss of
joint venture (1,109) 327 (136) (459)
--------- --------- --------- ---------
Income before provision
for income taxes 5,449 20,425 2,867 3,159
Provision for income taxes (2,171) (7,960) (1,178) (232)
--------- --------- --------- ---------
Net income $3,278 $12,465 $1,689 $2,927
========= ========= ========= =========
Basic and diluted
earnings per share $0.10 $0.39 $0.05 $0.09
========= ========= ========= =========
FISCAL YEAR ENDED AUGUST 2, 1997
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
11/2/96 2/1/97(1) 5/3/97 8/2/97(2)
------------------------------------------------
Net Owned Sales $266,076 $322,995 $233,660 $250,668
Cost of Sales (167,619) (204,706) (153,686) (171,811)
--------- --------- --------- ---------
Gross Profit 98,457 118,289 79,974 78,857
Selling, general and
administrative expenses (93,591) (102,085) (91,825) (98,410)
License fees and other
operating income 5,301 5,541 4,990 5,015
--------- --------- --------- ---------
Operating profit (loss) 10,167 21,745 (6,861) (14,538)
Interest expense, net (1,194) (1,147) (1,271) (1,514)
Amortization of excess
net assets over cost 348 347 232 -
Gain (loss) on sale of
assets, net 153 (19) 4 23
--------- --------- --------- ---------
Income (loss) before (provision)
benefit for income taxes 9,474 20,926 (7,896) (16,029)
(Provision) benefit for
income taxes (3,772) (7,987) 3,034 6,201
--------- --------- --------- ---------
Net income (loss) $5,702 $12,939 $(4,862) $(9,828)
========= ========= ========= =========
Basic earnings (loss)
per share $0.18 $0.41 $(0.15) $(0.31)
========= ========= ========= =========
Diluted earnings (loss)
per share $0.18 $0.40 $(0.15) $(0.31)
========= ========= ========= =========
(1) The results of operations for the quarters ended 1/31/98 and 2/1/97 include
reductions of $1.5 million and $1.9 million, respectively, to cost of sales
representing the annual book to physical adjustment for the physical
inventory completed in the respective quarters.
(2) The provision for income taxes for the quarter ended August 1, 1998
includes reductions of approximately $1.4 million relating to the
resolution of federal and state income tax issues.
F - 15
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
----------------------------------------------
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
1998 1997 1996
----------------------------------------------
Cash paid during the year for:
Interest $5,911 $5,700 $2,255
====== ======= ======
Income taxes $9,018 $10,365 $8,972
====== ======= ======
Supplemental schedule of non-cash investing and financing activities:
During 1997 the Company incurred capital lease obligations to obtain new store
facilities. Non-cash amounts of $6,155,000 were capitalized as of August 2, 1997
under the captions of property and equipment and long-term obligations in
relation to these leases.
Amounts of $2,126,000 and $3,297,000 were recorded under the captions of
property and equipment and accounts payable for real estate improvements and
construction at new stores as of August 1, 1998 and August 2, 1997,
respectively.
F - 16
47
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:
Year ended:
August 3, 1996 $473 $294 $0 $276 $491
August 2, 1997 491 531 0 659 363
August 1, 1998 363 716 95 832 342
Allowance for
Markdowns:
Year ended:
August 3, 1996 $0 $0 $0 $0 $0
August 2, 1997 0 4,311 0 0 4,311
August 1, 1998 4,311 2,828 8,893 4,203 11,829
Reserves
Store Closing
Reserve:
Year ended:
August 3, 1996 $115 $(21) $0 $94 $0
August 2, 1997 0 400 0 5 395
August 1, 1998 395 511 721 722 905
(1) The charges to other accounts represent balances resulting from the
acquisition of Shonac.
(2) The deductions in Column D are amounts written off against the respective
reserve.
S - 1
48
INDEX TO EXHIBITS
Exhibit
No. Description Exhibit Page No.
------- ----------- ----------------
2.1 Stock Purchase Agreement entered into Previously filed as Exhibit 2.1 to Form 8-K
as of May 1, 1998 between the (file no. 1-10767) filed May 22, 1998, and
Company and Schottenstein Stores incorporated herein by reference.
Corporation and Nacht Management,
Inc.
2.2 Asset Purchase Agreement entered into Previously filed as Exhibit 2.2 to Form 8-K
as of May 1, 1998 between the (file no. 1-10767) filed May 22, 1998, and
Company and Valley Fair Corporation, incorporated herein by reference.
an affiliate of Schottenstein Stores
Corporation.
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.
E - 1
49
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
re Service Marks. Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.3 License Agreement, dated July 1989, Previously filed as Exhibit 10.3 to
between the Company, by assignment Form S-1 Registration Statement ( file no.
from SSC, and Shonac Corporation 33-40214) filed April 29, 1991, and
re shoe departments. incorporated herein by reference.
10.3.1 Amendments dated November 9, 1993 Previously filed as Exhibit 10.3.1 to
to License Agreement dated in July Form 10-K (file no. 1-10767) filed
1989, between the Company and Shonac October 26, 1994, and incorporated
Corporation re shoe departments. herein by reference.
10.3.2 Amendment dated 1995, to Previously filed as Exhibit 10.3.2 to
License Agreement dated in July 1989, Form 10-Q (file no. 1-10767) filed
between the Company and Shonac December 12, 1995, and incorporated
Corporation re shoe departments. herein by reference.
10.4 License Agreement, dated July 1, 1987, Previously filed as Exhibit 10.4 to
as amended, between the Company, by Form S-1 Registration Statement (file no.
assignment from SSC, and L.F. Widmann, 33-40214) filed April 29, 1991, and
Inc. re health and departments. incorporated herein by reference.
10.4.1 Amendment dated June 23, 1993 to Previously filed as Exhibit 10.4.1 to
License Agreement, dated July 1, 1987, Form 10-K (file no. 1-10767) filed
as amended, between the Company, by October 26, 1993, and incorporated
assignment from SSC, and L.F. Widmann, herein by reference.
Inc. re health and beauty aids departments.
10.4.2 Amendment dated September 2, 1993 to Previously filed as Exhibit 10.3.1 to
License Agreement dated July 1, 1987, as Form 10-K (file no. 1-10767) filed
amended, between the Company, by October 26, 1994, and incorporated
assignment from SSC, and L.F. Widmann, herein by reference.
Inc. re health and beauty aids departments.
10.4.3 Amendment dated December 5, 1995 to Previously filed as Exhibit 10.4.3 to
License Agreement dated July 1, 1987, as Form 10-Q (file no. 1-10767) filed
as amended, between the Company by December 12, 1995, and incorporated
assignment from SSC, and herein by reference.
L.F. Widmann, Inc. re health and beauty
aids departments.
E - 2
50
10.4.4 Letter Agreement dated May 1, 1996, Previously filed as Exhibit 10.4.4 to
between the Company and L.F. Widmann, Form 10-K (file no. 1-10767) filed
Inc. extending the license agreement dated November 1, 1997, and incorporated
July 1, 1987 to June 30, 1997. herein by reference.
10.6 Employment Agreement, dated April 26, Previously filed as Exhibit 10.6 to
1991, between George Iacono and Form S-1 Registration Statement (file no.
the Company. 33-40214) filed April 29, 1991, and
incorporated herein by reference.
10.6.1 Agreement, effective as of May 13, 1997 Previously filed as Exhibit 10.6.1 to
between George Iacono and the Company Form 10-K (file no. 1-10767) filed
re non-renewal of employment contract. October 31, 1997, 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
and its directors and executive officers. Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
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.
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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.
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.
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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.
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.
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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
Company and certain officers. Registration Statement (file no. 33-40214)
filed June 6, 1991, and incorporated herein
by reference.
10.18 License Agreements, dated April 13, Previously filed as Exhibit 10.18 to
1984, as amended, between the Company, Form S-1 Registration Statement (file no.
by assignment from SSC, and the Valley 33-40214) filed April 29, 1991, and
Fair Corporation for licensed apparel incorporated herein by reference.
departments operated by the Company.
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.
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.
10.27 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.
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10.28 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.
10.29 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.
10.30 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.
10.30.1 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.
10.31 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.
10.32 License Agreements, dated as of June 1, Previously filed as Exhibit 10.32 to
1992, between the Company, as licensee, Form 10-K (file no.1-10767) filed
and Valley Fair, as licensor, re Linen October 22, 1992, and incorporated
Depts. herein by reference.
10.32.1 Letter Agreement, dated December 18, Previously filed as Exhibit 10.32.1 to
1995, extending License Agreements, Form 10-Q (file no. 1-10767) filed
dated as of June 1, 1992 and as of March 19, 1996, and incorporated
January 12, 1994, between the Company, herein by reference.
as licensee, and Valley Fair Corporation,
as licensor, re Apparel and Linen
Departments and Housewares
Departments, respectively.
10.33 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.
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55
10.33.1 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.
10.34 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.
10.35 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.
10.36 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.
10.37 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.
10.38 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.
10.39 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
10.40 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.
10.41 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.
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10.43 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.
10.44 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.
10.45 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.
10.46 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.
10.47 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.
10.48 Asset Purchase Agreement, dated as of Previously filed as Exhibit 10.48 to
April 24, 1996, between the Company, Form 10-Q (file no. 1-10767) filed
as buyer and Steinbach Stores, Inc., a June 18, 1996 and incorporated
subsidiary of SSC, as seller, re the herein by reference.
Seaview, Shore Mall, Paramus and
Manalapan, NJ Stores.
10.49 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.
10.50 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.
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10.51 Asset and Stock Purchase Agreement, Previously filed as Exhibit 10.51 to
dated as of July 14, 1997, by and among Form 10-K (file no. 1-10767) filed
VCM, LTD., Mazel Stores, Inc., Valley October 31, 1997, and incorporated
Fair Corporation L.F. Widmann, Inc. and herein by reference.
Value City Department Stores, Inc.
10.52 Employment Agreement, dated July 15, Previously filed as Exhibit 10.52 to
1997, between Martin P. Doolan and the Form 10-K (file no. 1-10767) filed
Company. October 31, 1997, and incorporated
herein by reference.
10.52.1 First Amendment to Employment
Agreement, effective as of July 1, 1997,
between Marin P. Doolan and the
Company.
10.53 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.
10.54 Employment Agreement, dated July 2,
1997 between Michael J. Tanner and the
Company.
10.55 Employment Agreement, dated July 2,
1997 between James E. Feldt and the
Company.
10.56 Lease, dated ________, 1998 between the
Company, as tenant, and Jubilee Limited
Partnership, as landlord, re River Oaks West
Shopping Center, Calumet City, Illinois.
10.57 Lease, dated May 3, 1998 between the
Company, as tenant, and Valley Fair
Corporation, as landlord, re Irvington, NJ
16.1 Letter re change in certifying Accountant Previously filed as Exhibit 16.1 to
Form 8-K (file no. 1-10767) filed
May 27, 1997 and incorporated
herein by reference.
21 List of Subsidiaries Page E-11.
23 Consent of Deloitte & Touche LLP Page E-12.
27 Financial Data Schedule Page E-13.
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58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
Date: October 29, 1998 By: *
------------------------------------
(Martin P. Doolan, President and CEO)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* Chairman of the 10/29/98
- -------------------------- Board of Directors
(Jay L. Schottenstein)
* Vice Chairman of the Board of Directors 10/29/98
- -------------------------- Director
(Saul Schottenstein)
* President, Chief Executive Officer 10/29/98
- -------------------------- (Principal Executive Officer) and Director
(Martin P. Doolan)
/s/ Robert M. Wysinski Senior Vice President, Secretary and 10/29/98
- -------------------------- Treasurer (Principal Financial Officer), Director
(Robert M. Wysinski)
* Controller, Assistant Treasurer 10/29/98
- -------------------------- and Assistant Secretary (Principal Accounting Officer)
(Richard L. Walters)
* Director 10/29/98
- --------------------------
(Geraldine Schottenstein)
* Director 10/29/98
- --------------------------
(Jon P. Diamond)
* Director 10/29/98
- --------------------------
(Norman Lamm)
* Director 10/29/98
(Richard Gurian)
- --------------------------
* Director 10/29/98
(Robert L. Shook)
- --------------------------
* Director 10/29/98
(Ari Deshe)
- --------------------------
*By:/s/ Robert M. Wysinski
- --------------------------
Robert M. Wysinski, (Attorney-in-Fact)