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
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10767
VALUE CITY DEPARTMENT STORES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1322832
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
(614) 471-4722
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Registrant's telephone number, including area code
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES _____ NO __X_
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,840,124 Common Shares, based on the $2.43 closing sale price on August 2,
2002, was $31,201,501.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 33,923,374 Common Shares were
outstanding at April 2, 2003.
TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
1. Business..........................................................................3
2. Properties.......................................................................13
3. Legal Proceedings................................................................14
4. Submission of Matters to a Vote of Security Holders..............................14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters........15
6. Selected Financial Data..........................................................16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................17
7A. Quantitative and Qualitative Disclosures about Market Risk ......................24
8. Financial Statements and Supplementary Data......................................25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................................25
PART III
10. Directors and Executive Officers of the Registrant...............................26
11. Executive Officer Compensation...................................................30
12. Security Ownership of Certain Beneficial Owners and Management...................33
13. Certain Relationships and Related Transactions...................................34
14. Controls and Procedures..........................................................37
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K...................38
Signatures............................................................................39
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the
Chief Executive Officer..........................................................40
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the
Chief Financial Officer..........................................................41
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report.........................................................F-1
Consolidated Balance Sheets..........................................................F-2
Consolidated Statements of Operations................................................F-3
Consolidated Statements of Shareholders' Equity......................................F-4
Consolidated Statements of Cash Flows................................................F-5
Notes to Consolidated Financial Statements...........................................F-6
SCHEDULES
II - Valuation and Qualifying Accounts...............................................S-1
Index to Exhibits....................................................................E-1
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PART I
ITEM 1. BUSINESS.
As used in this Annual Report on Form 10-K and except as the context
otherwise may require, "Company", "we", "us", and "our" refers to Value City
Department Stores, Inc. and its subsidiaries, including but not limited to, DSW
Shoe Warehouse, Inc. and Filene's Basement, Inc.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects", "intends", "plans", "projects", "believes", "estimates", and
similar expressions. In the normal course of business, we, in an effort to help
keep our shareholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statements on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K or elsewhere,
could differ materially from those stated in the forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in our forward-looking statements is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
GENERAL
We are managed in three operating segments: Value City Department Stores
("Value City"), DSW Shoe Warehouse ("DSW") and Filene's Basement.
VALUE CITY. We operate a chain of 116 department stores located in Ohio,
Pennsylvania and 13 other Midwestern, Eastern and Southern states, principally
under the name Value City. For over 80 years, our strategy has been to provide
exceptional value by offering a broad selection of brand name merchandise at
prices substantially below conventional retail prices. Our Value City stores
carry men's, women's and children's apparel, housewares, giftware, home
furnishings, toys, jewelry, shoes and health, beauty care items and commodities,
with apparel comprising well over one-half of total sales. Our Value City stores
average 87,000 square feet which allow us to offer over 100,000 different items
of merchandise similar to the items found in traditional department, specialty
and discount stores. Our pricing strategy is supported by our ability to
purchase large quantities of goods in a variety of special buying opportunities.
For many years, we have had a reputation in the marketplace as a purchaser of
buy-outs and manufacturers' closeouts.
DSW. We also operate a chain of 126 DSW stores located throughout the
United States. Our DSW stores are a chain of upscale shoe stores offering a wide
selection of dress and casual footwear below traditional retail prices. These
stores average 25,000 square feet with up to 45,000 pairs of women's and men's
designer brand shoes and athletic footwear per store. Additionally, Shonac
Corporation, the parent company of DSW, pursuant to license agreements with
Value City and Filene's Basement, operates the licensed shoe departments in
principally all Value City and Filene's Basement stores. Results of operations
of licensed shoe departments are included with the Value City and Filene's
Basement segments. In July 2002, Shonac Corporation entered into a Supply
Agreement with Stein Mart to supply merchandise to some of Stein Mart's shoe
departments. Stein Mart operations are included with the DSW segment.
FILENE'S BASEMENT. Finally, we operate 20 Filene's Basement stores
located principally in the Northeast United States. Our Filene's Basement stores
average 40,000 square feet and specialize in top tier brand name merchandise of
men's and women's apparel, jewelry, shoes, accessories and home goods.
See Note 12 of Notes to Consolidated Financial Statements beginning on
page F-20 of this annual report for information regarding our segments.
HISTORY OF OUR BUSINESS
We opened our first Value City department store in Columbus, Ohio in
1917. Until our initial public offering on June 18, 1991, Value City department
stores operated as a division of Schottenstein Stores Corporation ("SSC"). SSC
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owns approximately 53% of our stock. We also have a number of ongoing related
party agreements and arrangements that exist with SSC. These are more fully
described in Item 13 of this report beginning on page 34.
In July 1997, we entered agreements with Mazel Stores, Inc. ("Mazel") to
create VCM, Ltd. ("VCM"), a 50/50 joint venture. VCM operated the licensed
health and beauty care, toy and sporting goods departments in our Value City
stores and beginning in fiscal 2000, the food department was added. We accounted
for our fifty percent interest in the joint venture under the equity method.
Effective at the close of business February 2, 2002, we purchased Mazel's
interest in the partnership.
Effective May 3, 1998, we purchased 99.9% of the common stock of Shonac
Corporation from Nacht Management, Inc. and SSC. In September 2000, we purchased
the remaining shares to give Value City 100% ownership. Shonac had been the shoe
licensee in principally all of the Value City stores since its inception in 1969
and has operated the DSW chain of retail shoe stores since the opening of the
first store in 1991.
On November 19, 1999, we acquired 100% of the common stock of Gramex
Retail Stores, Inc. ("Gramex"), a chain of 15 discount stores operating in the
greater St. Louis metropolitan area. Of the 15 stores acquired and after
liquidation of the existing inventory, 13 stores were converted to the Value
City format. Six stores received only minor improvements and were reopened in
March 2000. The other 7 stores were remodeled based on our current Value City
format and were reopened in April 2000.
On March 17, 2000, we acquired substantially all of the assets and the
assumption of certain liabilities of Filene's Basement Corp., a Massachusetts
corporation, and Filene's Basement, Inc., a wholly owned subsidiary of Filene's
Basement Corp. We continue to operate the 14 Filene's Basement stores acquired
on March 17, 2000 and reopened the 3 Filene's Basement stores previously closed
in the Washington D.C. area.
VALUE CITY DEPARTMENT STORES
We operate a chain of 116 department stores located in Ohio,
Pennsylvania and 13 other Midwestern, Eastern and Southern states, principally
under the name Value City. For over 80 years, our strategy has been to provide
exceptional value by offering a broad selection of brand name merchandise at
prices substantially below conventional retail prices.
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,
jewelry, shoes, health, beauty care items and commodities. Value City is
de-emphasizing departments such as automotive, hardware and sporting goods to
focus more area to its predominately female customer. 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 customer we generally attract with these items and price points are budget
minded and moderate-income customers. Our Value City stores strive to offer
customers one-stop-shopping for the categories of merchandise we carry. The
large size of our Value City stores facilitates the offering of a wide range of
merchandise categories with broad, deep selections of goods within each
category. Value City stores average 87,000 square feet and carry over 100,000
different items of merchandise similar to the items found in traditional
department, specialty and discount stores. We continually refine the Value City
merchandise mix eliminating less productive departments and introducing new
merchandise categories to improve store profitability and meet the changing
needs of our customers.
We believe our customers are attracted to Value City stores. We
recognize the need of continuous new offerings and flow of value-priced
merchandise acquired in special purchases. At the same time, Value City
maintains a broad and consistent range of goods, it purchases continuing lines
of merchandise and draws upon its vendor contacts to ensure constant
availability of certain basic categories of merchandise as well as current
fashion trends.
Value Pricing. Value City stores offer quality brand name merchandise at
prices typically 50% to 70% below initial prices charged by traditional
department stores for similar items and at prices comparable to or lower than
prices charged by other off-price retailers. We can offer exceptional values
because our buyers purchase merchandise directly from manufacturers and other
vendors generally at prices substantially below those paid by conventional
retailers. This allows us to pass on the savings directly to our budget minded
and moderate-income customers. See "Supplier Relationships and Purchasing" on
page 5 of this annual report for more information.
Well known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City stores. Many items carry labels
and/or original price tags showing brand names identifiable with major
designers, manufacturers and retail stores, as well as tags showing original
retail, comparable or "nationally advertised" prices. In certain cases,
suppliers may require removal of labels or original retail price tags as a
condition to a special purchase arrangement. See "Supplier Relationships and
Purchasing" on page 5 of this annual report for more information.
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SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in our operations has been the relationships we have
developed with our various suppliers and our many years of experience in
purchasing merchandise directly from manufacturers and other vendors at prices
substantially below those generally paid by conventional retailers. Over the
years, our buyers have established excellent relationships with suppliers
including a reputation for the ability to purchase entire lots of merchandise.
Continuously, we seek to find and negotiate special purchase opportunities.
Dynamics of the markets continue to change and as a result of our relationships
and experience many suppliers offer special purchase opportunities to us prior
to attempting to dispose of merchandise through other channels. Manufacturers of
brand name merchandise are not reluctant to sell merchandise to Value City for
resale at our discounted prices. By selling their merchandise through our retail
stores, we are able to assure suppliers the merchandise will be sold without
disturbing the suppliers' regular channels of distribution.
Although we cannot quantify the reduction in price we pay for special
purchases compared to the prices paid by our competitors for similar purchases,
we believe that such special purchases are made at prices sufficiently favorable
to enable us to offer merchandise to our customers at very competitive price
points.
We purchase merchandise from more than 4,700 suppliers, none of which
accounted for a material percentage of purchases during the past fiscal year. We
do not maintain any long-term or exclusive commitments to purchase merchandise
from any one supplier, except for greeting cards. We regularly purchase
overstocked or overproduced items from manufacturers and other retailers,
including end-of-season, out-of-season and end-of-run merchandise and
manufacturers' slight irregulars. From time to time, but less frequently from
our historical practice, we purchase all or substantially all of the inventories
of financially distressed retailers and make other special purchases. We also
have started to more aggressively seek advantageous buying opportunities and
sourcing overseas, particularly in non-apparel categories.
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we are
capable of devoting warehouse space to out-of-season goods for our Value City
stores. This merchandise is generally warehoused until the most opportune time
to offer it in our Value City stores, which in most cases is the next season.
This ability to purchase and quickly distribute or hold merchandise in
substantial quantities has enabled us to offer high-quality merchandise to
customers at prices significantly below usual retail prices. We believe that
this ability distinguishes us from the typical discount or department store and
provides us with a competitive advantage in making purchases as favorable
opportunities arise.
The relatively large size of our Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
ADVERTISING AND PROMOTION
We commit substantial resources to advertising and believe our marketing
strategy is one of the keys to our future success. Value City advertises
frequently in print, including newspapers, circulars and flyers, and on
television and radio. The promotional strategy is carefully planned and budgeted
to include not only institutional and seasonal promotions, but also weekly
storewide sales events highlighting recent buy-outs and other specially
purchased brand name merchandise designed to maximize customer interest. In some
cases, a supplier may prohibit the advertising or non-store promotion of its
brand name. We are continually trying to improve our place in the market and
have begun to utilize more outside third party resources to accomplish this by
developing a better brand recognition.
STORES
Store Location and Design. We believe our budget and moderate-income
customers are attracted to our stores principally by the wide assortment of
quality items at substantial savings.
Our Value City stores average approximately 87,000 square feet, with
approximately 70% of the total area of each store representing selling space.
The stores are generally laid out on a single level, with central traffic aisles
providing access to major departments. Each department strives to display and
stock large quantities and assortments of merchandise, giving the store a full
appearance. We are taking steps to improve the shopping experience of our
customers. We look at the signage, store layout, including aisles and
5
department locations within the store, to place fashion forward and into view
and to provide convenience to the hurried customer.
Our Value City stores are generally open from 9:30 a.m. until 9:30 p.m.
Monday through Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. All of the
stores are located in leased facilities. Of the 116 Value City stores open as of
April 2, 2003, 33 are freestanding, 56 are in shopping centers and 27 are in
enclosed malls.
Store Operations. We offer customers a convenient, pleasurable shopping
experience and a high level of satisfaction. Value City's training program is
utilized to assure every associate maintains the highest level of
professionalism and places customer service at the forefront.
All of our Value City 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
checkout area. To promote the ease of checkout we have invested in point of sale
scanning systems that expedite the checkout process by providing automated check
and credit approval and price lookup. Sales associates are trained to create a
"customer-friendly" environment. We accept all major credit cards, and also
provide a private label credit card program at Value City stores. Private label
and other credit card sales are nonrecourse to us, with the servicing agent
assuming all of the credit risk. Value City offers a layaway program in most of
its stores for our budget and moderate-income customers and maintains a
reasonable return policy.
Our stores are organized into separate geographic regions and districts,
each with a territory or district manager. Territory and district managers are
headquartered in their region and spend the majority of their time in their
stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a Value City store consists of a store manager
and several assistants, and full and part-time hourly associates. Each store
manager reports directly to one of the territory or district managers, and each
of the territory or district managers reports to a Regional Vice President who
in turn reports to the Vice President of Operations.
Our store managers function both as administrators and merchants. All
managers are responsible on a day-to-day basis for maintenance of displays and
inventories in all departments, the overall condition of their stores, customer
relations, personnel hiring and scheduling, and all other operational matters
arising in the stores. Each store manager is compensated, in part, based on the
performance of his or her store. Our store managers are an important source of
information concerning local market conditions, trends and customer preferences.
We prefer to fill management positions through promotion of existing
associates. A store management training program is maintained to develop the
management skills of associates and to provide a source of management personnel
for future store expansion.
Expansion. We have increased our department store base from 74 stores at
the start of fiscal 1994 to 116 stores at the end of fiscal 2002. No new
department stores were added in Fiscal 2002 or Fiscal 2001 and none are planned
for Fiscal 2003, however we will continue to explore exceptional real estate
opportunities. Our past expansion has been accomplished by leasing newly
constructed locations or by acquiring existing locations from other retailers.
We continually refurbish our stores by updating the merchandise
displays, department locations and in-store signage. The costs of refurbishing
on a per store basis are generally not substantial. On an annual basis, we
select stores to be remodeled, which generally involves more significant changes
to the interior than the exterior of the store. We have in the past utilized our
own internal 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.
DISTRIBUTION
We use a regionalized distribution strategy with 6 distribution centers
located in Columbus, Ohio. The aggregate area of the distribution facilities is
approximately 2,300,000 square feet; however, use of multi-tier processing
levels in some of the distribution centers substantially increases their
operating capacity. In addition, to expedite the flow of merchandise to certain
clusters of stores, we use a third party processor located in New Jersey.
Our distribution facilities utilize material handling equipment,
including mechanized conveyor systems to separate and collate shipments to the
stores. Our distribution facilities are designed to allow priority delivery of
late season purchases and fast-moving merchandise to have it in our stores
quickly to take full advantage of the remaining selling season.
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Merchandise is processed, ticketed and consolidated prior to shipment to
the stores to ensure full-truck loads to minimize shipping costs. We lease our
fleet of road tractors and approximately 70% of our semi-rig trailers, with the
remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
LICENSE AGREEMENT
Value City uses the Shonac Corporation, the parent company of DSW, to
operate the shoe departments in principally all the Value City stores. The
inter-company activity is eliminated in our consolidated financial statements.
In a few stores, Value City licenses space to third party licensees. Licensees
supply their own merchandise and generally supply their own store fixtures.
Licensed departments complement the operations of our stores and facilitate the
uniformity of the in-store merchandising strategy, including the overall
emphasis on value.
SEGMENT SEASONALITY
Value City customer traffic increases in the early Spring, back to
school and the Christmas holiday season. These seasonal periods in operations
are critical to Value City's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S.
Patent and Trademark Office. Our four department stores in Columbus operate
under the tradename "Schottenstein's," which has been registered in the State of
Ohio. We are entitled to use such names for the sole purpose of operating
department stores on an exclusive basis pursuant to a perpetual license from
SSC. SSC also operates a chain of furniture stores under the name "Value City
Furniture." We have also registered in the U.S. Patent and Trademark Office
various trademarks used in our marketing program.
DSW SHOE WAREHOUSE
Our DSW stores' mission is to be each customer's favorite retailer of
branded footwear by satisfying customer expectations for selection, convenience
and value. We use the tagline "The Shoes of the Moment. The Deal of a Lifetime."
and offer a "Reward Your Style" program to reward frequent shoppers.
MERCHANDISING
Selection. DSW stores attract customers because of their wide assortment
of top quality name brand dress, casual and athletic footwear for men and women
together with a regularly changing selection of more fashion-oriented footwear.
Our DSW stores are large, contemporary, warehouse formats, that average 25,000
square feet and allow us to sell a large selection of branded footwear in a
clean and simple environment.
Value Pricing. DSW price points are targeted to be up to 50% lower than
the regular prices of other specialty retailers and traditional department
stores. DSW continually strives to improve its merchandise sourcing to maintain
quality, lower costs and shortened delivery cycles. Identifying and building
relationships with cost-efficient manufacturers and suppliers of quality
merchandise is essential to DSW's merchandising strategy.
SUPPLIER RELATIONSHIPS AND PURCHASING
DSW's merchandising group constantly monitors current fashion trends as
well as historical sales trends to identify popular styles and styles that may
become popular in the upcoming season. Once our buyers determine the styles and
merchandise mix for any upcoming season, they focus on purchasing the
appropriate quantities of each category at the lowest cost and the highest
quality available.
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. DSW believes that, consistent with
the retail footwear industry as a whole, most of its domestic vendors import a
large portion of their merchandise from abroad. We have implemented quality
control programs under which buyers inspect incoming merchandise for fit, color
and material, as well as for overall quality of manufacturing. As the number of
DSW locations increase, we believe there will be adequate sources available to
acquire and/or produce a sufficient supply of quality goods in a timely manner
and on satisfactory economic terms.
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ADVERTISING AND PROMOTION
Our DSW stores currently use a broadcast campaign, primarily radio and
television, focusing on the slogan "The Shoes of the Moment. The Deal of a
Lifetime." This campaign is supplemented by print promotions and, increasingly,
television. In addition, a valuable marketing tool for DSW is the "Reward Your
Style" loyal customer program. Customers are asked to join the program during
the checkout procedure. By analyzing the member database, as well as the sales
transactions of those members, we are able to direct the advertising to
encourage repeat shopping and to reach targeted customers. DSW also sponsors
certain LPGA events.
STORES
Store Location and Design. Our DSW stores average approximately 25,000
square feet, with about 87% of the total area of each store representing selling
space. The stores' exteriors feature black and white color schemes and in many
cases, windows with striped awnings. The store interiors are well lighted and
feature a unique display concept, a simple case presentation which groups the
shoes together by style. Interior signage is tasteful and kept to a minimum. The
shoe stores are generally laid out on a single level, with the cases of shoes
forming the aisles in the stores. This allows customers to view the entire store
when they enter. Of the 128 DSW stores open as of April 2, 2003, 13 are
freestanding, 93 are in shopping centers and 22 are in enclosed malls. 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 location.
Store Operations. 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.
All of our DSW 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 footwear. In all stores, a customer service desk
is conveniently located generally adjacent to the central checkout area. To
promote the ease of checkout we have invested in point of sale scanning systems
that expedite the checkout process by providing automated check and credit
approval and price lookup. Sales associates are trained to create a
"customer-friendly" environment. DSW accepts all major credit cards.
Our stores are organized into separate geographic regions and districts,
each with a territory or district manager. Territory and district managers are
headquartered in their region and spend the majority of their time in their
stores to ensure adherence to merchandising, operational and personnel
standards.
The typical staff for a DSW store consists of a store manager and two
assistant managers who supervise 20 to 25 full and part-time hourly associates.
Each store manager reports directly to one of 17 district managers who in turn
report to one of 2 regional managers who in turn report to the head of
operations.
Our store managers function both as administrators and merchants. All
managers are responsible on a day-to-day basis for maintenance of displays and
inventories in all departments, the overall condition of their stores, customer
relations, personnel hiring and scheduling, and all other operational matters
arising in the stores. Each store manager is compensated, in part, based on the
performance of his or her store. Our store managers are an important source of
information concerning local market conditions, trends and customer preferences.
We prefer to fill management positions through promotion of existing
associates. A store management training program is maintained to develop the
management skills of associates and to provide a source of management personnel
for future store expansion.
Expansion. We plan to open 25 to 30 new DSW shoe stores during fiscal
2003. We intend to open new DSW stores in both existing and new markets with an
emphasis on locating stores in highly visible sites on high traffic streets in
relatively affluent trade areas. Factors considered in evaluating new store
sites include store size, configuration, demographics and lease terms. We seek
to cluster stores in targeted metropolitan areas to enhance name recognition,
share advertising costs and achieve economies of scale in management and
distribution.
Based upon our experience, we estimate the average cost of opening a new
DSW shoe store ranges from approximately $1.0 million to $2.0 million, including
leasehold improvements, fixtures, inventory, pre-opening expenses and other
costs. Preparations for opening a DSW shoe store generally take eight to ten
weeks. We charge pre-opening expenses to operations as incurred. It has been our
experience that new stores generally achieve profitability and contribute to net
income following the first year of operations. It is not uncommon to receive
lease incentives for our DSW store openings.
We continually refurbish our stores by updating the merchandise displays
and in-store signage. The costs of refurbishing on a per store basis are
generally not substantial. On an annual basis, we select stores to be remodeled,
8
which generally involves more significant changes to the interior than the
exterior of the store. We maintain our own architectural design staff,
construction crews and carpentry shop to assist in refurbishing and remodeling
store interiors and to build in-store display tables and racks.
DISTRIBUTION
Shonac and DSW's principal offices and distribution center operations
were relocated in Spring 2001 to a new 700,000 square foot facility located in
Columbus, Ohio. This distribution center facility uses a modern warehouse
management system and material handling equipment, including new conveyor
systems, to separate and collate shipments to our stores. The design of the
distribution center facilitates the prompt delivery of priority purchases and
fast selling footwear to stores so we can take full advantage of each selling
season. We have entered a 15-year lease with 3 five-year option periods with an
affiliate of SSC for this facility.
LICENSE AGREEMENTS WITH VALUE CITY AND FILENE'S BASEMENT
Shonac Corporation, the parent company of DSW, operates the shoe
departments in principally all Value City and Filene's Basement stores. The
results of operations for the licensed shoe departments are included with Value
City and Filene's Basement.
In July 2002, Shonac entered into a Supply Agreement with Stein Mart to
supply merchandise to some of Stein Mart's shoe departments. As of April 2,
2003, Shonac was supplying merchandise to 160 Stein Mart stores.
SEGMENT SEASONALITY
The shoe business experiences increased sales in both early Spring and
Fall seasons in relationship to the change in footwear desired by the DSW
customer. These seasonal factors are critical to DSW's operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
We have registered in the U.S. Patent and Trademark Office a number of
trademarks and service marks, including: DSW; DSW Shoe Warehouse; Coach and
Four; Crown Shoes; Reward Your Style; Flites; Jonathan Victor; Kristi G; Lakota
Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia Cristie.
FILENE'S BASEMENT
Filene's Basement strategy focuses on providing the top teir brand names
at everyday low prices for men's and women's apparel, jewelry, shoes,
accessories and home goods.
MERCHANDISING
Selection. Filene's Basement stores average 40,000 square feet and offer
branded apparel, home goods, accessories and retail stocks purchased directly
from major upscale retailers. The branded merchandise represents a focused
assortment of fashionable, nationally recognized men's and women's apparel,
shoes, accessories and home goods bearing prominent designers' and
manufacturers' names. Branded merchandise constitutes most of the product line
and is often obtained through opportunistic purchases from a diverse group of
quality manufacturers and vendors, including direct imports from some of the
most prominent European designers.
Value Pricing. Our Filene's Basement stores' merchandise assortment is
typically priced at levels 30%-60% below regular prices at traditional
department and specialty stores. These discounts are achieved by buying
in-season closeouts and values at advantageous prices and offering them for sale
at lower markups than those of traditional department stores. We are also able
to keep the cost of merchandise low because we do not require markdown or
advertisement allowances, or anticipation of returns from vendors, all of which
are typical in the department store industry.
SUPPLIER RELATIONSHIPS AND PURCHASING
We believe the acquisition of Filene's Basement in March 2000, a
well-known institution in Boston since 1908, parallels our merchandising
philosophy of delivering value-priced merchandise to our customers. Because of
the longstanding relationships Filene's Basement has with vendors, it receives
quality buying opportunities at competitive prices. These longstanding
relationships make Filene's Basement a prime choice for vendors with overruns,
department store cancellations and unmet volume objectives.
9
ADVERTISING AND PROMOTION
Filene's Basement employs a multi-media approach, using print, broadcast
and direct mail. The communication strategy is designed to target customer
segments and generate increased store trips and cross shopping opportunities.
STORES
Store Location and Design. Our Filene's Basement Boston store is a
landmark institution recognized by generations of New England families and
visitors as a source of quality off-price men's and women's merchandise. The
downtown location is famous for a unique marketing concept - the Automatic
Markdown Plan - whereby certain merchandise is automatically discounted based on
the number of days the merchandise has been on the sales floor. Filene's
Basement believes the Automatic Markdown Plan, found only in the downtown Boston
location, generates a sense of shopping urgency and creates customer excitement
and loyalty. Filene's Basement subleases 178,000 square feet (approximately
65,300 square feet of selling space) on four floors. The sublease terminates in
2009 with rights on behalf of Filene's Basement to extend until 2024. The Boston
store generated approximately 20% of Filene's Basement's total sales.
Most of our Filene's Basement stores are located in suburban areas, near
large residential neighborhoods, and average approximately 40,000 square feet of
selling space per store. The downtown Boston location and stores in New York,
Chicago and Washington D.C. are located in urban areas. Filene's Basement
operates 19 branch stores in six states and the District of Columbia. Generally,
the branch store's selling space uses a prototypical "racetrack" aisle layout
for merchandise presentation. The branch stores are designed to be convenient
and attractive in their merchandise presentation, dressing rooms, checkouts and
customer service areas. Their merchandise mix is similar to that of the Boston
flagship store. Because of the operational complexities associated with
transferring the Automatic Markdown Plan to the branch stores, the branch stores
do not operate under the Automatic Markdown Plan, although markdowns are taken
as required.
Store Operations. All of our Filene's Basement 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 checkout area. To promote the ease of checkout
we have invested in point of sale scanning systems that expedite the checkout
process by providing automated check and credit approval and price lookup. Sales
associates are trained to create a "customer-friendly" environment. Filene's
Basement accepts all major credit cards, and also provides a private label
credit card program. Private label and other credit card sales are nonrecourse
to us, with the servicing agent assuming all of the credit risk. Filene's
Basement maintains a reasonable return policy.
Our Filene's Basement stores' typical staff consists of a general
manager, an assistant store manager, merchandising group managers and full and
part-time associates. Each general manager reports to the group store manager
who in turn reports to the Senior Vice President, Director of Stores.
Our store managers function both as administrators and merchants. All
managers are responsible on a day-to-day basis for maintenance of displays and
inventories in all departments, the overall condition of their stores, customer
relations, personnel hiring and scheduling, and all other operational matters
arising in the stores. Each store manager is compensated, in part, based on the
performance of his or her store. Our store managers are an important source of
information concerning local market conditions, trends and customer preferences.
We prefer to fill management positions through promotion of existing
associates.
Expansion. We plan to open 1 to 3 new Filene's Basement stores during
fiscal 2003. Based upon our experience, we estimate the average cost of opening
a new Filene's Basement store is between $2.0 million to $3.0 million.
Preparations for opening a Filene's Basement store generally take eight to ten
weeks. We charge pre-opening expenses to operations as incurred. It has been our
experience that new stores generally achieve profitability and contribute to net
income following the first full year of operations.
We continually update our stores by changing the merchandise displays
and in-store signage. The annual cost of refurbishing on a per store basis is
generally not substantial and is treated as maintenance. We utilize our own
architectural design staff, construction crews and carpentry shop as needed to
assist in the refurbishing and remodeling of a store or to build in-store
display tables and racks.
DISTRIBUTION
Filene's Basement's merchandise is processed and distributed from a
457,000 square foot leased distribution facility situated on 32.8 acres with
adjacent rail service in Auburn, Massachusetts, outside of metropolitan Boston,
Massachusetts.
10
LICENSE AGREEMENT
Filene's Basement licenses cosmetics and certain other incidental
departments to independent third parties. The aggregate annual license fees for
fiscal year ended February 1, 2003 were approximately $120,000. Filene's
Basement also uses Shonac Corporation, the parent company of DSW, to manage the
in-store shoe departments on a lease department basis. The inter-company
activity is eliminated in our consolidated financial statements.
Licensees supply their own merchandise and generally supply their own
store fixtures. In most instances, licensees utilize our associates to operate
their departments. The licensees reimburse us for all costs associated with such
associates. Licensed departments are operated under our general supervision and
licensees are required to abide by our policies with regard to pricing, quality
of merchandise, refunds and store hours. Licensed departments complement the
operations of our stores and facilitate the uniformity of the in store
merchandising strategy including the overall emphasis on values.
SEGMENT SEASONALITY
Filene's Basement customer traffic increases in the early Spring and the
Christmas holiday seasons. These seasonal periods are critical to Filene's
Basement's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
Filene's Basement has an exclusive, perpetual, worldwide, royalty-free
license to use the name Filene's Basement and Filene's Basement of Boston
trademark and service mark registrations as well as certain other tradenames.
Filene's Basement's exclusive licensee status with respect to these registered
marks has been recorded with the United States Patent and Trademark Office and
relevant state offices.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe a high level of automation is essential to maintaining and
improving our competitive position. We rely upon computerized systems to provide
information at all levels, including warehouse operations, store billing,
inventory control, merchandising and automated accounting.
We utilize point of sale ("POS") registers with full scanning
capabilities to increase speed and accuracy at customer checkouts and facilitate
inventory restocking. An automated system to capture and control layaways is
integrated into the POS system.
We utilize automated distribution center systems to track and control
the receipt, processing, storage and shipping of product to the stores.
Value City has embarked on major projects to replace its legacy systems
with industry leading solutions from JDA, Manhattan Associates and Cornel Mayo
Associates. JDA's planning, allocation, merchandise management and retail data
warehouse systems will provide improved inventory productivity and merchandise
assortments for our stores. Manhattan Associates' warehouse management system
will improve the efficiency of our distribution centers and speed the flow of
merchandise to our stores. The Cornel Mayo Associates' POS software will be
implemented in all Value City stores and all POS registers will be replaced to
improve the customer transaction experience and drive back office efficiency. A
new wireless hand held computer will be implemented in conjunction with the POS
system for markdown and inventory processing and can be used for "queue busting"
during very busy shopping periods. Value City is automating its corporate
environment with a document management system to move toward an efficient,
paperless environment. Value City systems run on two AS/400's and open systems
computers.
DSW has undertaken several major initiatives to build upon the Essentus
merchandise management system and Retek warehouse management systems that
support the company. An EDI (electronic data interchange) project is underway
to utilize product UPC barcodes and electronic exchange of purchase orders,
shipping notifications and invoices with our top vendors. At this time, 70% of
DSW's product is processed using the UPC bar code which has reduced processing
costs and improved flow of goods through the distribution center to the stores.
New, state-of-the-art, completely wireless NCR POS system has been rolled out
to all DSW stores resulting in a faster, easier customer checkout and a more
efficient back office operation. A completely wireless store supports fast and
easy new store openings. In order to support the continued growth of DSW, JDA's
planning and allocation systems will be implemented to improve inventory
productivity and store assortments. Business Intelligence tools in conjunction
with Datamarts are used for business analysis and decision support. DSW systems
run on UNIX computer systems.
Filene's Basement installed new wireless hand held computers and
printers in all stores to improve efficiency and accuracy of ticketing. Filene's
Basement plans to implement JDA's planning, allocation and retail data warehouse
systems in the future to augment the capabilities of its JDA merchandise
management system and its JDA Windss POS system. Filene's
11
Basement also intends to replace its legacy warehouse management system with
Manhattan Associates' warehouse management system in the future. Filene's
Basement shares an AS/400 with Value City.
A focus of IT (information technology) is to leverage our technology
infrastructure and systems whenever appropriate to simplify and become more
efficient. All companies are now supported by enterprise financial, human
resource and e-mail systems.
ASSOCIATES
We employ experienced Human Resource professionals to provided
leadership and direction to us and our management team. The mission of the Human
Resource department includes optimizing associate effectiveness to improve
quality of work products, superior customer service, shareholder value and our
profits.
As of April 2, 2003, we had approximately 17,400 associates of which
8,800 were full-time and the balance were part-time. Approximately 2,000 of
these associates in 21 stores are covered by collective bargaining agreements.
Group hospitalization, surgical, medical, vision, dental, disability and
life insurance benefits and a 401(k) plan are provided to full-time non-union
associates. We are a co-sponsor with SSC in these plans. We also sponsor an
associate stock purchase plan and a stock option plan for salaried associates.
We believe that, in general, we have satisfactory relations with all of
our associates.
COMPETITION
The retail industry is highly competitive. We compete with a variety of
conventional and discount retail stores, including national, regional and local
independent department and specialty stores, as well as with catalog operations,
on-line providers, factory outlet stores and other off-price stores. We compete
with other retailers for real estate opportunities with other department store
and specialty store operators.
In the discount or off-price retailing segment, we differentiate
ourselves through our store format and the breadth of value product offering.
Our large stores differ from most other off-price retailers that tend to operate
substantially smaller stores focusing predominantly on either hard or soft
goods. Our large stores facilitate our merchandise offering and broad range of
brands and products.
In addition, because we purchase much of our inventory
opportunistically, we compete for merchandise with other national and regional
off-price apparel and discount outlets. Many of our competitors handle identical
or similar lines of merchandise and have comparable locations, and some have
greater financial resources than we do.
Competitive factors important to our customers include fashion, value,
merchandise selection, brand name recognition and, to a lesser degree, store
location. We compete primarily on the basis of value, merchandise quality and
selection. We believe our competitive advantages include: our reputation in the
marketplace for being able to purchase entire lots of merchandise; our ability
to either quickly distribute or hold the merchandise for sale at the most
opportune time; our full-line merchandise and style offerings; and our range of
brand names.
12
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores we operated
as of February 1, 2003:
Filene's
Value City DSW Basement Total
---------- ---------- ---------- -----------
Arizona - 1 - 1
California - 9 - 9
Colorado - 4 - 4
Connecticut - 2 - 2
Delaware 3 - - 3
Florida - 7 - 7
Georgia 4 4 - 8
Illinois 16 6 2 24
Indiana 7 3 - 10
Kansas - 3 - 3
Kentucky 4 - - 4
Maryland 8 4 - 12
Massachusetts - 5 8 13
Michigan 9 8 - 17
Minnesota - 3 - 3
Missouri 7 2 - 9
Nevada - 2 - 2
New Hampshire - 1 - 1
New Jersey 7 6 1 14
New York - 11 4 15
North Carolina 1 1 - 2
Ohio 23 11 1 35
Oklahoma - 1 - 1
Pennsylvania 18 9 1 28
Tennessee 1 3 - 4
Texas - 11 - 11
Virginia 4 7 - 11
Washington D.C. - - 3 3
West Virginia 4 - - 4
Wisconsin - 2 - 2
---------- ---------- ---------- -----------
116 126 20 262
----------- ---------- ----------- -----------
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts; New
York, New York and Los Angeles, California. We operate 7 warehouse/distribution
complexes located in Columbus, Ohio and one distribution facility in Auburn,
Massachusetts. In addition, to expedite the flow of merchandise to certain
clusters of stores, we use third party processors located principally in New
Jersey. Our executive offices occupy approximately 45,000 square feet in a
building which includes a store and also serves as one of our apparel
distribution centers.
The stores and all of the warehouse, buying and executive office
facilities are leased or subleased except for one owned shoe store location. As
of February 1, 2003, we leased or subleased 32 stores and 6 warehouse facilities
and a parcel of land from SSC or entities affiliated with SSC. The remaining
stores and warehouses are leased from unrelated entities. Most of the store
leases provide for an annual rent based upon a percentage of gross sales, with a
specified minimum rent.
Our office, warehouse and distribution facilities for our Value City,
DSW and Filene's Basement businesses are adequate for our current needs and we
believe that such facilities, with certain modifications and additional
equipment will be adequate for our foreseeable future demands. In Spring 2001,
to support the planned growth of our DSW shoe warehouse business, we
consolidated and relocated the related back office and distribution operations
of our shoe business to a new 700,000 square foot facility located in Columbus,
Ohio. The facility is leased from an affiliate of SSC and has a 15 year base
term with 3 five-year option periods.
13
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that are incidental to the
conduct of our business. We estimate the range of liability related to pending
litigation where the amount and range of loss can be estimated. We record our
best estimate of a loss when the loss is considered probable. Where a liability
is probable and there is a range of estimated loss, we record the minimum
estimated liability related to the claim. In the opinion of management, the
amount of any liability with respect to these proceedings will not be material.
As additional information becomes available, we assess the potential liability
related to our pending litigation and revise our estimates. Revisions in our
estimates and potential liability could materially impact our results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
14
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 our
Common Shares as reported on the NYSE Composite Tape during the periods
indicated. As of April 2, 2003, there were 532 shareholders of record.
HIGH LOW
Fiscal 2001:
First Quarter $9.45 $6.65
Second Quarter 11.50 5.60
Third Quarter 6.30 2.50
Fourth Quarter 6.45 2.98
Fiscal 2002:
First Quarter $4.62 $3.04
Second Quarter 4.40 2.20
Third Quarter 2.68 1.55
Fourth Quarter 3.73 1.50
Fiscal 2003:
First Quarter (through April 2, 2003) 2.05 1.48
We have paid no dividends and presently anticipate that all of our
future earnings will be retained for development of our businesses and we do not
anticipate paying cash dividends on our common shares during fiscal 2003. The
payment of any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. The payment of dividends is restricted under our credit facilities.
In connection with our refinancing, we amended and restated our $75
million convertible loan on June 11, 2002. Pursuant to the terms of the
convertible loan, the lenders may, at their option, convert the convertible loan
into shares of our common stock at a conversion rate of $4.50 per share, subject
to adjustment. We relied on the exemption from registration contained in Section
4(2) of the Securities Act of 1933 for this issuance.
In connection with our refinancing, on September 26, 2002 we issued
warrants to purchase 2,954,792 shares of our common stock at $4.50 per share,
subject to adjustment. We relied on the exemption from registration contained in
Section 4(2) of the Securities Act of 1933 for this issuance.
15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated various
selected financial information. The 12 month period ended January 30, 1999 is
presented for comparative purposes. Such selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements of
Value City Department Stores, Inc. including the notes thereto, set forth in
Item 8 of this Annual Report on Form 10-K and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth in Item 7
of this Annual Report on Form 10-K.
Transition For the
12 Months Period Fiscal
Ended 6 Months Year
For the Fiscal Year Ended (unaudited) Ended Ended
-------------------------------------------------- ----- -----
2/1/03 2/2/02 2/3/01(1) 1/29/00 1/30/99 1/30/99(1) 8/1/98(2)
--------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Net Sales (3) $2,450,719 $2,283,878 $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379
Operating Profit (loss) $33,922 $(16,344) $(135,601) $65,788 $51,266 $40,815 $38,544
Income (loss) before
extraordinary charge
and cumulative effect
of accounting change $485 $(28,723) $(101,791) $33,468 $24,871 $20,256 $29,359
Extraordinary charge $(2,070) -- -- -- -- -- --
Cumulative effect of
accounting change $(2,080) -- -- -- -- -- --
Net (Loss) Income $(3,665) $(28,723) $(101,791) $33,468 $24,871 $20,256 $20,359
Basic earnings (loss)
per share before
extraordinary item and
cumulative effect of
accounting change $0.01 $(0.85) $(3.03) $1.03 $0.77 $0.63 $0.64
Extraordinary charge ($0.06) -- -- -- -- -- --
Cumulative effect of
accounting change $(0.06) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Basic (loss) earnings
per share $(0.11) $(0.85) $(3.03) $1.03 $0.77 $0.63 $0.64
Diluted (loss) Earnings
per Share $(0.11) $(0.85) $(3.03) $1.02 $0.76 $0.62 $0.63
Total Assets $831,799 $880,311 $908,009 $744,181 $574,427 $574,427 $684,078
Working Capital $181,390 $228,775 $211,402 $205,011 $165,527 $165,527 $204,784
Current Ratio 1.60 1.79 1.66 1.82 1.98 1.98 1.88
Long-term Obligations $264,664 $337,199 $326,449 $144,168 $101,447 $101,447 $165,648
Number of (4):
Value City Stores 116 117 119 105 97 97 95
DSW Stores 126 104 78 58 44 44 43
Filene's Basement Stores 20 20 19 -- -- -- --
Net Sales per Selling Sq. Ft. (5) $224 $233 $234 $221 $235 $126 $229
Comparable Sales Change (6) (3.5)% (2.4)% (1.1)% 7.2% 6.0% 3.3% 5.9%
(1) Fiscal 2000 includes 53 weeks; all other years contain 52 weeks. The six
month period includes 26 weeks.
(2) The operations of Shonac and Valley Fair are included from the date of
acquisition, May 3, 1998.
(3) Excludes sales of licensed departments. In fiscal 1998, sales from our
toys and sporting goods departments became licensed departments operated
by VCM, Ltd., a 50/50 joint venture with Mazel Stores, Inc. Effective
February 2, 2002, we acquired Mazel's 50% interest in VCM.
(4) Includes all stores operating at the end of the fiscal year.
(5) Presented in whole dollars and excludes licensed departments and stores
not operated during the entire fiscal period.
(6) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable in its second full fiscal year of operation.
For fiscal year 2000, comparable store sales are computed using like
52-week periods.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, in some cases have affected the
matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations. These same factors could affect our future financial
performance in 2003 and beyond to differ materially from those expressed or
implied in any such forward-looking statements. These factors include: the
decline in demand for our merchandise, productivity and profitability, marketing
strategies, liquidity, vendor and their factor relations, flow of merchandise,
compliance with our credit agreements, the availability of desirable store
locations on suitable terms, changes in consumer spending patterns, consumer
preferences and overall economic conditions, the impact of competition and
pricing, changes in weather patterns, changes in existing or potential duties,
tariffs or quotas, paper and printing costs, the ability to hire and train
associates and development of management information systems.
Our operations have been historically seasonal, with a disproportionate
amount of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons for Value City and Filene's Basement. DSW seasonal
sales occurs both in early Spring and Fall. As a result of seasonality, any
factors negatively affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have
a material adverse effect on our financial condition and results of operations
for the entire year.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of operations
and financial condition as reflected in our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles. As discussed in Note 1 to our Consolidated Financial Statements, the
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
commitments and contingencies at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including, but
not limited to, those related to inventory valuation, depreciation,
amortization, recoverability of long-lived assets including intangible assets,
the calculation of retirement benefits, estimates for self insurance reserves
for health and welfare, workers' compensation and casualty insurance, income
taxes, contingencies, litigation and revenue recognition. Management bases its
estimates and judgments on its historical experience and other relevant factors,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, current and expected
economic conditions, product mix, and in some cases, actuarial and appraisal
techniques. We constantly re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors
considered provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated statements, we cannot guarantee that our
estimates and assumptions will be accurate. As the determination of these
estimates requires the exercise of judgement, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe the following represent the most critical estimates and
assumptions, among others, used in the preparation of our consolidated financial
statements. We have discussed the selection, application and disclosure of the
critical accounting policies with our audit committee.
- Revenue recognition. Revenues from our retail operations are
recognized at the latter of point of sale or the delivery of
goods to the customer. Retail revenues are reduced by a
provision for anticipated returns based on our historical trends
by our customers.
- Cost of sales and merchandise inventories. We use the retail
method of accounting for substantially all of our merchandise
inventories. Merchandise inventories are stated at the lower of
cost, determined using the first-in, first-out basis, or market
using the retail inventory method. The retail method is widely
used in the retail industry due to its practicality. Under the
retail inventory method, the valuation of inventories at cost
and the resulting gross margins are calculated by applying a
calculated cost to retail ratio to the retail value of
inventories. The cost of the inventory reflected on our
consolidated balance sheet is decreased by charges to cost of
sales at the time the retail value of the inventory is lowered
through the use of markdowns. Hence, earnings are negatively
impacted as merchandise is marked down prior to sale. Reserves
to value inventory at the lower of cost or market were $32.5
million and $33.5 million at the end of fiscal 2002 and 2001,
respectively.
17
Inherent in the calculation of inventories are certain
significant management judgements and estimates including,
setting the original merchandise retail value or markon, markups
of initial prices established, reduction of pricing due to
customer's value perception or perceived value known as
markdowns and estimates of losses between physical inventory
counts or shrinkage, which combined with the averaging process
within the retail method, can significantly impact the ending
inventory valuation at cost and the resulting gross margins.
- Long-lived assets. In evaluating the fair value and future
benefits of long-lived assets, we perform an analysis of the
anticipated undiscounted future cash flows of the related
long-lived asset and reduce the carrying value by the excess
where the recorded value exceeds the fair value.
During fiscal 2002, we recorded two different charges related to
long-lived assets. The first charge was for goodwill impairment
as a result of the implementation of SFAS 142 which requires
that goodwill no longer be amortized, but would be subject to
annual fair value based impairment tests. The initial tests for
goodwill impairment, as of February 3, 2002, resulted in a
non-cash charge of $3.4 million, $2.1 million net of taxes,
which is reported in our Consolidated Statement of Operations as
of February 1, 2003 in the caption "Cumulative effect of
accounting change." Substantially all of the charge relates to
goodwill associated with our purchase of Mazel's interest in VCM
and is included in the net loss for the year ended February 1,
2003. At the end of the current fiscal year we have on our books
$37.6 million of goodwill subject to annual testing. The second
charge of $0.6 million related to long-lived assets at store
operating units. The result of reviewing undiscounted cash flows
for stores under SFAS 144, identified stores where the recorded
value of the asset exceeded the fair value.
During fiscal 2001, we recorded a charge of $4.9 million for the
write-down of capitalized development and software costs related
to discontinued information systems and a goodwill write-down of
$1.5 million relating to a previous acquisition.
We believe at this time that the long-lived assets' carrying
values and useful lives continue to be appropriate. To the
extent these future projections or our strategies change, the
conclusion regarding impairment may differ from our current
estimates.
- Self-insurance reserves. We record estimates for certain health
and welfare, workers compensation and casualty insurance costs
that are self-insured programs. These estimates are based on
actuarial assumptions and are subject to change based on actual
results. Should a greater amount of claims occur compared to
what was estimated for costs of certain health and welfare,
workers compensation and casualty insurance increase beyond what
was anticipated, reserves recorded may not be sufficient and
additional costs to the consolidated financial statements could
be required.
- Pension. The obligations and related assets of defined benefit
retirement plans are presented in Note 6 of the Notes to
Consolidated Financial Statements. Plan assets, which consist
primarily of marketable equity and debt instruments, are valued
using market quotations. Plan obligations and the annual pension
expense are determined by independent actuaries and through the
use of a number of assumptions. Key assumptions in measuring the
plan obligations include the discount rate, the rate of salary
increases and the estimarted future return on plan assets. In
determining the discount rate, we utilize the yield on
fixed-income investments currently available with maturities
corresponding to the anticipated timing of the benefit payments.
Salary increase assumptions are based upon historical experience
and anticipated future management actions. Asset returns are
based upon the anticipated average rate of earnings expected on
the invested funds of the plans. At February 1, 2003, the
weighted-average actuarial assumption of our plans were:
discount rate 6.5%, assumed salary increases 4% and long-term
rate of return on plan assets 8% - 9%. To the extent actual
results vary from assumptions, earnings would be impacted.
- Customer loyalty program. We maintain a customer loyalty program
for our DSW operations in which customers receive a future
discount on qualifying purchases. Upon reaching the target
level, customers may redeem these discounts on a future
purchase. Generally, these future discounts must be redeemed in
one year. We accrue the estimated costs of the anticipated
redemptions of the discount earned at the time of the initial
purchase and charge such costs to selling, general and
administrative expense based on historical experience. The
estimates of the costs associated with the loyalty program
require us to make assumptions related to customer purchase
levels and redemption rates. Accrued liability as of February 1,
2003 and February 2, 2002 were $2.2 million and $1.8 million,
respectively. To the extent assumptions of purchases and
redemption rates vary from actual results, earnings would be
impacted.
18
- Income taxes. We do business in numerous jurisdictions that
impose taxes. Management is required to determine the aggregate
amount of income tax expense to accrue and the amount which will
be currently payable based upon tax statutes of each
jurisdiction. The estimation process involves adjusting income
determined by the application of generally accepted accounting
principles for items that are treated differently by the
applicable taxing authorities. Deferred tax assets and
liabilities are reflected on our balance sheet for temporary
differences that will reverse in subsequent years. If different
management judgements had been made, our tax expense, assets and
liabilities could be different. See Note 1 to our Consolidated
Financial Statements on page F-6 of this Annual Report for a
discussion of our significant accounting policies.
RESULTS OF OPERATIONS
We operate three business segments. Value City and Filene's Basement
segments operate full-line, off-price department stores. Our DSW segment sells
better-branded off-price shoes and accessories. As of February 1, 2003, a total
of 116 Value City, 20 Filene's Basement and 126 DSW stores were open. The
following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in our Consolidated
Statements of Operations for each individual segment and our Company in total.
For the Year Ended
-----------------------------------------------------------------------------------
2/1/03 2/2/02 2/3/01
52 Weeks 52 Weeks 53 Weeks
-----------------------------------------------------------------------------------
Net sales, excluding sales
licensed departments 100.0% 100.0% 100.0%
Cost of sales (61.8) (62.6) (67.5)
-----------------------------------------------------------------------------------
Gross profit 38.2 37.4 32.5
Selling, general and
administrative expenses (37.1) (38.9) (39.3)
License fees from affiliates
and other operating income 0.3 0.8 0.7
-----------------------------------------------------------------------------------
Operating Profit (loss) 1.4 (0.7) (6.1)
Interest expense, net (1.3) (1.3) (1.3)
Equity in loss of joint venture - - (0.1)
-----------------------------------------------------------------------------------
Income (loss) before extraordinary
item, cumulative effect of accounting
change and income taxes 0.1 (2.0) (7.5)
(Provision) benefit for income taxes (0.1) 0.7 2.9
-----------------------------------------------------------------------------------
(Loss) income before extraordinary item
and cumulative effect of accounting
change - (1.3) (4.6)
Extraordinary (charge), net of income
taxes and cumulative effect of
accounting change, net of income taxes (0.2) - -
-----------------------------------------------------------------------------------
Net (loss) income (0.2)% (1.3)% (4.6)%
===================================================================================
FISCAL YEAR ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2,
2002
Sales. Sales for the fifty-two weeks ended February 1, 2003(fiscal
2002), increased by 7.3% to $2.45 billion from $2.28 billion in the fifty-two
week period of fiscal year 2001. By segment comparable store sales were:
19
2002 2001
---- ----
Value City Department Stores (5.1)% (3.7)%
DSW (0.1)% 0.0%
Filene's Basement 0.3% 2.2%
------------------------------------------------------------------------------------
Total (3.5)% (2.4)%
====================================================================================
Comparable store sales percentage declines are attributable to highly
competitive and promotional retail environment and the effects of a softening
economy experienced by our segments. Value City's non-apparel comparable sales
decreased 3.8% for the twelve months and apparel comparable sales declined 6.6%
for the year. The apparel divisions of children's, men's and ladies' divisions
had comparable sales declines of 8.4%, 9.9% and 2.7%, respectively in fiscal
2002. DSW reflected a slightly negative comparable store rate as overall sales
rose almost $119.6 million to $629.0 million for the year. The DSW increase
includes a net increase of 22 stores. The Filene's Basement segment's sales rose
$9.8 million to $303.2 million for the fiscal year including a slight increase
in comparative store sale percentage. Filene's Basement total stores opened
remained unchanged due to a single opening and closing during the fiscal year.
Gross profit. Consolidated gross profit increased $81.7 million from
$854.4 million to $936.1 million, and increased as a percentage of net sales
from 37.4% to 38.2%. The Value City segment gross profit improvement is the
result of additional focus on purchase cost and retail pricing. In addition,
Value City increased control over inventory and reduced the loss associated with
shrink from the prior year. Gross profit for our DSW segment improved with
effort towards better initial markup and markdown control. Our Filene's Basement
segment gross profit was negatively affected by early and excess markdowns
required to sell and reduce inventories. Gross profit, as a percent of sales by
segment, were:
2002 2001
---- ----
Value City Department Stores 38.9% 37.6%
DSW 39.4% 38.2%
Filene's Basement 32.2% 35.1%
----------------------------------------------------------------------------
Total 38.2% 37.4%
============================================================================
SG&A. For the year, consolidated SG&A increased $20.8 million to $909.6
million or 37.1% of sales. Our fifty-two week period ended February 1, 2003
includes approximately $0.6 million for FASB 144 write-off, $1.1 million for
store closings, $6.0 million for severance costs related to work force
reductions during the year and the relocation of our Value City merchandising
office from Boston to New York. The relocation of the Value City buyers from
Boston to New York City provide merchants with a closer proximity to our markets
and vendors. In addition, we evaluated stores with negative or inadequate cash
flows to determine if any assets were impaired. New store openings in the period
were limited to our DSW and Filene's Basement segments. Preparations for opening
a DSW store or a Filene's Basement store generally take eight to ten weeks.
Pre-opening costs are expensed as incurred. It has been our experience that new
stores for each of our segments generally achieve profitability and contribute
to net income after the first full year of operations. No Value City stores were
opened less than twelve months during fiscal 2002. Twenty-two DSW stores were
opened less than twelve months in fiscal 2002 and had a pre-tax net operating
loss of $2.6 million, including $2.6 million of pre-opening expenses. Twenty-six
DSW stores were opened less than twelve months during fiscal 2001 and had a
pre-tax net operating loss of $2.5 million, including $0.1 million of
pre-opening expenses. Filene's Basement had one store opened less than twelve
months in fiscal 2002 with a pre-tax net operating loss of $54,000, including
$0.6 million of pre-opening expenses. SG&A as a percent of sales by segment
were:
2002 2001
---- ----
Value City Department Stores 37.8% 40.6%
DSW 37.2% 37.4%
Filene's Basement 33.7% 32.9%
----------------------------------------------------------------------------
Total 37.1% 38.9%
============================================================================
License fees from affiliates. License fees from affiliates and others
decreased $9.6 million, or 78.5%, from $12.2 million to $2.6 million, and
decreased as a percentage of net sales from 0.5% to 0.1%. Fees from the VCM
joint venture of $9.7 million in 2001, did not occur in the current year as the
operations have been included in current year as the joint venture was purchased
at the close of business on February 2, 2002. The current year balance
represents fees received from other unaffiliated licensees.
Other operating income. Other operating income decreased $0.9 million,
or 16.8%, from $5.7 million to $4.8 million and decreased as a percentage of net
sales from 0.3% to 0.2%. Other operating income is comprised of layaway fees and
vending income. These sources of income vary based on customer traffic and
contractual arrangements.
20
Operating profit. Operating profit increased to $33.9 million from a
loss of $16.3 million, and increased as a percentage of net sales from a loss of
0.7% to a profit of 1.4%.
Interest expense. Interest expense, net of interest income, increased
$4.0 million from $28.5 million to $32.5 million due primarily to an increase in
interest rates as a result of new term debt, offset partially by a decrease in
average borrowings. Interest expense also included amortization of debt discount
of $1.3 million.
Equity in loss of joint venture. Equity in loss of joint venture in
fiscal 2001 of $0.4 million was the result of operations in the 50/50 joint
venture with Mazel. We acquired Mazel's interest at the close of business
February 2, 2002 and have included the operations of these departments in the
consolidated statements presented.
Income (loss) before extraordinary item. Income (loss) before
extraordinary item, cumulative affect of accounting change and income taxes
increased $46.7 million from a loss of $45.3 million to income of $1.4 million,
and as a percentage of sales from a loss of 2.0% to income of 0.1% as a result
of the above factors.
Extraordinary charge. During the year, we entered into new term debt
agreements and a revolving line of credit. The resulting write-off of previous
costs associated with the old debt was $2.1 million net of tax, or 0.1% of
sales.
Cumulative effect of accounting change. We also implemented a new
accounting principle during fiscal 2002 resulting in the impairment of goodwill.
The charge for the application of the new principle was $2.1 million net of tax,
or 0.1% of sales. We retained a valuation professional to assist in the
calculation of impairment. Our initial test was performed as of the beginning of
the fiscal year while our annual test occurred in the middle of the fourth
quarter. Goodwill will be subject to annual impairment tests and results of such
tests cannot be predicted.
FISCAL YEAR ENDED FEBRUARY 2, 2002 COMPARED TO FISCAL YEAR ENDED FEBRUARY 3,
2001
Sales. Sales for the fifty-two weeks ended February 2, 2002 (fiscal
2001), increased by 3.2% to $2.28 billion from $2.21 billion in the fifty-three
week period of 2000. Excluding the extra week in fiscal 2000, total sales
increased 5.2% and same store sales declined 2.4%. Fiscal 2001 sales include
$293.4 million attributable to Filene's Basement, which was acquired in March
2000. Filene's Basement sales in the prior year were $249.1 million. By segment
comparable store sales were:
2001 2000
---- ----
Value City Department Stores (3.7)% (4.3)%
DSW 0.0 % 19.1%
Filene's Basement 2.2 % n/a
------------------------------------------------------------------------------------
Total (2.4)% (1.1)%
====================================================================================
Sales from the Value City segment include the non-apparel comparable
sales that increased 3.3% for the twelve months. The apparel comparable sales
declined 5.9% for the year including a positive comparable of 3.7% for children
while men's and ladies declined 4.7% and 10.7%, respectively. DSW sales
increased almost $100.0 million to $509.4 million for the year to date period,
including a net increase of 26 stores. Comparable stores for DSW were flat.
Gross profit. Consolidated gross profit increased $134.3 million from
$720.1 million to $854.4 million, and increased as a percentage of net sales
from 32.5% to 37.4%. Last year's gross margin included a $105.4 million charge
for the realignment of excess inventory quantities. Excluding the charge the
gross margin percent to sales would have been 37.3% in fiscal 2000.
SG&A. SG&A increased $18.5 million to $888.7 million or 38.9% of sales.
The fifty-two week period ended February 2, 2002 includes approximately $24.7
million, or $0.47 per share, for employee benefit, severance costs, write off of
software development efforts, DSW warehouse relocation and fees associated with
the terminated sale of DSW and Filene's Basement. The fifty-three week period
ended February 3, 2001 included pretax charges of $4.6 million for asset
impairment and severance costs. New DSW stores added approximately $67.0 million
of SG&A expenses.
Based upon our experience, we estimate the average cost of opening a new
department store to range from approximately $4.5 million to $6.5 million and
the cost of opening a new shoe store to range from approximately $1.0 million to
$2.0 million including leasehold improvements, fixtures, inventory, pre-opening
expense and other costs. Similar costs for a Filene's Basement store are in the
$2.0 million to $3.0 million range. Preparations for opening a Value City store
generally take between eight and twelve weeks and preparations for a DSW store
or a Filene's Basement store generally take eight to ten weeks. Pre-opening
costs are expensed as incurred. It has been our experience that new stores
generally achieve profitability and contribute to net income after the first
full year of operations. Twenty-three Value City stores were opened less than
twelve months during fiscal 2000 and had pre-tax operating losses of $22.8
million, including $4.5 million of pre-opening expense. Twenty-six DSW stores
were opened less than twelve months in fiscal 2001 and had a pre-tax net
operating loss of $2.5 million, including $0.1 million of pre-opening expenses.
21
Twenty DSW stores were opened less than twelve months during fiscal 2000 and had
a pre-tax net operating loss of $6.5 million, including $4.6 million of
pre-opening expenses.
License fees from affiliates. License fees from affiliates increased
$0.9 million, or 8.0%, from $11.3 million to $12.2 million, and remained at 0.5%
as a percentage of net sales. License fees are from the VCM joint venture and
unaffiliated third party licensees.
Other operating income. Other operating income increased $2.4 million,
or 76.1%, from $3.3 million to $5.7 million, and increased as a percentage of
net sales from 0.2% to 0.3%. Other operating income is comprised of layaway fees
and vending income. These sources of income vary based on customer traffic and
contractual arrangements.
Operating loss. Operating loss decreased $119.3 million from a loss of
$135.6 million to a loss of $16.3 million, and decreased as a percentage of net
sales from a loss of 6.1% to a 0.7% loss as a result of the above factors.
Interest expense. Interest expense, net of interest income, decreased
$2.0 million from $30.5 million to $28.5 million, due primarily to a decrease in
interest rates, offset partially by slightly higher average borrowings.
Equity in loss of joint venture. Equity in loss of joint venture
decreased $0.9 million from a loss of $1.3 million to a loss of $0.4 million.
Loss before income taxes. Loss before benefit for income taxes decreased
$122.1 million from a loss of $167.4 million to a loss of $45.3 million, and
decreased as a percentage of sales from a loss of 7.5% to a 2.0% loss as a
result of the above factors.
SEASONALITY
Our business is affected by the pattern of seasonality common to most
retail businesses. Historically, the majority of our sales and operating profit
have been generated during the back-to-school and Christmas selling seasons for
our Value City and more recently the Filene's Basement segments. The shoe
business experiences increased sales in both early Spring and Fall seasons in
relationship to the change in footwear desired by the DSW customer.
FISCAL YEAR
We follow a 52/53-week fiscal year that ends on the Saturday nearest to
January 31. Fiscal 2002 and 2001 contain 52 weeks and fiscal 2000 has 53 weeks.
INCOME TAXES
Our effective tax rate for fiscal 2002 was 66.0% versus 36.5% for fiscal
2001. The overall increase in the effective tax rate was primarily due to the
increase in non-deductible expenses for tax purposes and the fluctuation in
taxable income.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of the fiscal year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under this Statement,
obligations that meet the definition of a liability will be recognized
consistently with the retirement of the associated tangible long-lived assets.
This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We are currently assessing the impact of SFAS No.
143. At this time, we have yet to determine the effect of this pronouncement on
its results of operations and financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The standard rescinds FASB Statements No. 4 and 64 that deal with
issues relating to the extinguishment of debt. The standard also rescinds FASB
Statement No. 44 that deals with intangible assets of motor carriers. The
standard modifies SFAS No. 13, "Accounting for Leases," so that certain capital
lease modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, the standard identifies amendments that should have
been made to previously existing pronouncements and formally amends the
appropriate pronouncements. This Statement is effective for fiscal years
beginning after May 15, 2002. The adoption of SFAS No. 145 will not have a
significant effect on our results of operations or our financial position. For
fiscal year 2003, we will be required to reclassify the loss on the
extinguishment of debt from extraordinary to interest expense, in the condensed
consolidated statements of operations, under the provisions of SFAS No. 145.
22
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure provisions of FIN 45 are effective
for the current fiscal year. However, the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of a guarantor's year-end. We
have no guarantees as of February 1, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation." The statement amends the disclosure requirements of
FASB Statement No. 123 "Accounting for Stock-Based Compensation." The standard
as implemented by us requires additional disclosure in the "Summary of
Significant Accounting Policies" and the affect on earnings and earnings per
share both basic and diluted.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 requires a variable interest entity to be consolidated by a company, if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003
and to existing entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. We have no variable interest entities
as of February 1, 2003.
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 $181.4 million and $228.8 million at February 1,
2003 and February 2, 2002, respectively. Current ratios at those dates were 1.6
and 1.8, respectively. Net cash provided by operating activities totaled $90.3
million and $48.7 million in fiscal 2002 and 2001, respectively.
Net cash used for capital expenditures was $41.8 million and $40.2
million for fiscal 2002 and 2001, respectively. During fiscal 2002, capital
expenditures included $11.1 million for new stores, $13.7 million for
improvements in existing stores, $10.0 million for office, warehousing and
operations of our shoe business and $7.0 million for MIS equipment upgrades and
new systems. Proceeds from lease incentives are amortized as a reduction of rent
expense over the life of the lease.
On June 11, 2002, we, together with our principal subsidiaries, entered
into a $525.0 million refinancing that consists of three separate credit
facilities: (i) a new three-year $350.0 million revolving credit facility (the
"Revolving Credit Facility"), (ii) two $50.0 million term loan facilities
provided equally by Cerberus Partners, L.P. and Schottenstein Stores Corporation
(the "Term Loans"), and (iii) an amended and restated $75.0 million senior
convertible loan, initially entered into by us on March 15, 2000, which is held
equally by Cerberus Partners, L.P. and SSC (the "Convertible Loan").
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is
structured in a manner that allows us and our subsidiaries availability based on
the value of inventories and receivables. Primary security for the Revolving
Credit Facility is provided by a first priority lien on all of our inventory and
accounts receivable, as well as certain intercompany notes and payment
intangibles. The Revolving Credit Facility also has a second priority perfected
interest in all of the collateral securing the Term Loans. Interest on
borrowings is calculated at the bank's base rate or Eurodollar rate plus 2.00%
to 2.75%, depending upon the level of average excess availability we maintain.
$100 Million Term Loans
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt,
ranking pari passu with the Revolving Credit Facility and the Convertible Loan.
We and our principal subsidiaries are obligated on the Term Loans.
23
The Term Loans stated rate of interest per annum during the initial two
years of the agreement is 14% if paid in cash and 15% if we elect a paid-in-kind
("PIK") option. During the first two years of the Term Loans, we may pay all
interest by PIK. During the final year of the Term Loans, the stated rate of
interest is 15.0% if paid in cash or 15.5% by PIK and the PIK option is limited
to 50% of the interest due.
We issued on September 26, 2002, 2,954,792 warrants ("Warrants") to
purchase shares of common stock, at an initial exercise price of $4.50 per
share, to the Term Loan C Lenders. The number of shares issuable upon the
exercise of the Warrants and the per share exercise price are subject to
adjustment upon the occurrence of specified events. The Warrants are exercisable
at any time prior to June 11, 2012. We have granted the Term Loan C Lenders
registration rights with respect to the shares issuable upon exercise of the
Warrants. The value placed on the Warrants was $6.1 million and the related debt
discount is amortized into interest expense over the life of the debt.
$75 Million Senior Convertible Loan
We have amended and restated our $75.0 million Convertible Loan dated
March 15, 2000. As amended, borrowings under the Convertible Loan will bear
interest at 10% per annum. At our option, interest may be PIK during the first
two years, and thereafter, at our option, up to 50% of the interest due may be
PIK until maturity. The Convertible Loan is guaranteed by all principal
subsidiaries and is secured by a lien on assets junior to liens granted in favor
of the Revolving Credit Facility and Term Loans. The Convertible Loan is not
prepayable until June 11, 2007. The agent has the right to designate two
observers to our Board of Directors for so long as the agent is the beneficial
owner of at least 50% of the advances initially made by it and has the right to
designate two individuals to our Board of Directors for so long as the agent is
the beneficial owner of at least 50% of the conversion shares issued upon
conversion of the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into
shares of our common stock at an initial conversion price of $4.50. The
conversion price is subject to adjustment upon the occurrence of specified
events.
Achievement of expected cash flows from operations and compliance with
the covenants of our credit agreements (see Note 4 to the Consolidated Financial
Statements) are dependent upon a number of factors, including the attainment of
sales, gross profit, expense levels, vendor relations, and flow of merchandise
that are consistent with our financial projections. Future limitations of credit
availability by Factor organizations and/or vendors will restrict our ability to
obtain merchandise and services and may impair operating results. Although
operating results for fiscal 2002 were below plan, we believe that cash
generated by operations, along with the available proceeds from our credit
agreements and other sources of financing will be sufficient to meet our
obligations for working capital, capital expenditures, and debt service
requirements. However, there is no assurance that we will be able to meet our
projections. Further, there is no assurance that extended financing will be
available in the future if we fail to meet our projections or on terms
acceptable to us.
ACQUISITIONS
Effective with the close of business on February 2, 2002 by acquisition
of our partner's interest in VCM for $8.4 million, we now own 100% of VCM and
operate the health and beauty care, toy, sporting goods and food departments in
our Value City stores.
On March 17, 2000, we completed the acquisition of substantially all of
the assets and assumed certain liabilities of Filene's Basement Corp., a
Massachusetts corporation, and Filene's Basement, Inc., a wholly owned
subsidiary of Filene's Basement Corp. The purchase price included cash of $3.5
million paid at closing, $1.2 million to be paid over a period not to exceed
three years, 403,208 shares of our common stock with an agreed value of $5.5
million and the assumption of specified liabilities. The assumed liabilities
included the payment of amounts outstanding under Filene's Basement
debtor-in-possession financing facility of approximately $22.5 million and
certain trade payable and other obligations which were paid in the ordinary
course of business. Allocation of the purchase price has been determined based
on fair market valuation of the net assets acquired. The acquisition was funded
by cash from operations and a portion of the proceeds from the credit agreement.
In April 2003, we paid the remaining balance of the purchase obligation of
approximately $6.0 million.
These acquisitions were funded by cash from operations and a portion of
the proceeds from the Credit Agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates, which may
adversely affect our financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. We do
not use financial instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
24
We are exposed to interest rate risk primarily through our borrowings
under our Revolving Credit Facility. At February 1, 2003, direct borrowings
aggregated $64.0 million. The Revolving Credit Facility permits debt commitments
up to $350.0 million, matures on June 11, 2005 and generally bears interest at a
floating rate of LIBOR plus 2.0% to 2.75% based on the average excess
availability during the previous quarter. We utilize interest rate swap
agreements to effectively establish long-term fixed rates on borrowings under
the Revolving Credit Facility, thus reducing a portion of our interest rate
risk. These swap agreements, which are designated as cash flow hedges, involve
the receipt of variable rate amounts in exchange for fixed rate interest
payments over the life of the agreements. At February 1, 2003, we had
outstanding swap agreements with notional amounts totaling $75.0 million, for
which the interest rate has been locked at a fixed rate of 6.99% until April
2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule and the
Independent Auditors' Report thereon are filed pursuant to this Item 8 and are
included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The members of our Board of Directors (the "Board") are elected at the
Annual Meeting. The number of members of our Board has been fixed at fourteen by
action of the Board pursuant to the Code of Regulations (By-laws). Board members
serve until the Annual Meeting following their election or until their
successors are duly elected and qualified.
Set forth below is certain information relating to the directors.
Name Age Principal Occupation
---------------------- --- ------------------------------------------------------------------------------
Jay L. Schottenstein 48 Director of our Company since June 1991. Chairman of our
Company, American Eagle Outfitters, Inc. and SSC since March
1992 and Chief Executive Officer from April 1991 to July 1997
and from July 1999 to December 2000. Mr. Schottenstein served
as Vice Chairman of SSC from 1986 until March 1992 and a
director of SSC since 1982. He served SSC as President of the
Furniture Division from 1985 through June 1993 and in various
other executive capacities since 1976. Mr. Schottenstein is
also a director of American Eagle Outfitters, Inc., which is a
company with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934. (1)
Henry L. Aaron 68 Director of our Company since January 2000. Mr. Aaron
presently serves as Senior Vice President of the Atlanta
National League Baseball Club, Inc. and as Vice President of
Business Development for the CNN Airport Network, along with a
number of other private business interests.
Ari Deshe 52 Director of our Company since October 1997. Chairman and Chief
Executive Officer since 1996 and President and Chief Executive
Officer from 1993 to 1996 of Safe Auto Insurance Company, a
property and casualty insurance company. Prior to that, Mr.
Deshe served as President of Safe Auto Insurance Agency from
1992 to 1993 and President of Employee Benefit Systems, Inc.
from 1982 to 1992. Mr. Deshe is also a director of American
Eagle Outfitters, Inc., which is a company with a class of
securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934. (1)
Jon P. Diamond 45 Director of our Company since June 1991. President and Chief
Operating Officer since 1996 and Executive Vice President and
Chief Operating Officer from 1993 to 1996 of Safe Auto
Insurance Company. Mr. Diamond served as Vice President of
SSC from March 1987 to March 1993 and served SSC in various
management positions since 1983. Mr. Diamond is also a
director of American Eagle Outfitters, Inc., which is a
company with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934. (1)
Elizabeth M. Eveillard 56 Director of our Company since August 2001. Ms. Eveillard is
an independent financial consultant and serves as a financial
consultant to Bear, Sterns & Co. Ms. Eveillard served as
Senior Managing Director, Retailing and Apparel Group, Bear,
Stearns & Co., Inc. from 2000 until her retirement in April
2002. Prior to that time, Ms. Eveillard served as the
Managing Director, Head of Retailing Industry Group, Paine
Webber Corporation from 1988 to 2000. From 1972 to 1988, Ms.
Eveillard held various executive positions including Managing
Director in the Merchandising Group with Lehman Brothers. Ms.
Eveillard is also a director of Too, Inc., Lillian Vernon
Corporation and Mayor's Jewelers, Inc. which are companies
with a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934.
Harvey L. Sonnenberg 61 Director of our Company since August 2001. Partner in the CPA
and consulting firm, M.R. Weiser & Co., LLP, since November
1994. Mr. Sonnenberg is active in a number of professional
organizations including the American Institute of CPA's and
the New York State Society of CPA's and has long been involved
in rendering professional services to the retail and apparel
industry.
James L. Weisman 64 Director of our Company since August 2001. President and a
member of the Weisman Goldman Bowen & Gross, LLP, a
Pittsburgh, Pennsylvania law firm. He has been practicing law
for 39 years and has extensive experience in working with
retail clients. His primary areas of practice have been in
banking transactions and overseeing and directing litigation.
--------------------------------------------------------------------------------
(1) SSC is a controlling shareholder of our Company. For information with
respect to the beneficial ownership of the voting stock of SSC by our Board
and beneficial ownership of our Common Shares by such persons and officers,
see "Security Ownership of Certain Beneficial Owners and Management."
26
INFORMATION CONCERNING BOARD OF DIRECTORS
Our Board of Directors and 4 committees of the Board govern our Company.
During fiscal 2002, the Board met 5 times. Directors discharge their
responsibilities throughout the year at Board and committee meetings and also
through considerable telephone contact and other communications with the
Chairman and other key executives, as well as with external advisors such as
legal counsel, outside auditors and investment bankers.
The average attendance at Board and committee meetings was approximately
95% in fiscal 2002. No director attended fewer than 75% of the meetings of the
Board and of the committees to which the director was a member in fiscal 2002.
The following table identifies the current membership of Board
committees and states the number of committee meetings held during fiscal 2002.
A summary of each committee's functions follows the table.
Nominating and
Director Audit Compensation Governance Executive
------------------------- ----------------- ---------------- ------------------- --------------
Jay L. Schottenstein X*
Henry L. Aaron X
Ari Deshe X
Jon P. Diamond X
Elizabeth M. Eveillard X X*
Harvey L. Sonnenberg X* X
James L. Weisman X X
# of Meetings in 2002 9 2 0 0
* Committee Chair
Each of Messrs. Aaron, Sonnenberg and Weisman and Ms. Eveillard are paid an
annual retainer of $30,000 and, along with Messrs. Deshe and Diamond receive a
quarterly board meeting fee of $5,000 so long as they attend at least one board
meeting during that quarter. Additionally, each of Messrs. Aaron, Sonnenberg and
Weisman and Ms. Eveillard receive $20,000 annually for each committee which they
serve and are automatically granted options each quarter to purchase 2,500 of
our Common Shares under our 2000 Stock Incentive Plan.
27
AUDIT COMMITTEE
Assists the Board in monitoring:
- The integrity of our financial statements.
- Our system of internal control.
- The independence and performance of our independent public
accountants.
- The compliance by our Company with legal and regulatory
requirements.
The Committee also reviews and approves, related party transactions.
All members of the Audit Committee are independent as defined in the
applicable New York Stock Exchange listing standards.
COMPENSATION COMMITTEE
- Establishes, reviews, and recommends an executive compensation
package for our Chief Executive Officer and other officers of the
Company.
- Makes recommendations to our Board for the number and terms of any
stock options to be granted under our stock option plan.
- Administers our Incentive Compensation Plan, the 1991 Stock Option
Plan and the 2000 Stock Incentive Plan.
NOMINATING AND GOVERNANCE COMMITTEE
- Evaluates the performance of our Board of Directors.
- Reviews our management organization and succession plans for the
Chairman and Chief Executive Officer.
- Makes recommendations to the Board concerning the composition of the
Board, the compensation of directors, the election of executive
officers, the appointment of the Chairman for each committee of the
Board and the procedures for shareholder voting.
- Reviews our corporate governance guidelines.
EXECUTIVE COMMITTEE
- Assists management with store operations and other management
issues.
28
EXECUTIVE OFFICERS
The following persons are executive officers of the Company. Our
officers of the Company are elected annually by our Board and serve at the
pleasure of the Board.
JOHN C. ROSSLER, age 55, was elected our President in February 2002. In
March 2002, Mr. Rossler became our President and Chief Executive Officer. Mr.
Rossler has served as President of Shonac Corporation and DSW Shoe Warehouse
since December 2000. Mr. Rossler has held various positions with DSW and Shonac
since 1982, including Chief Operating Officer, Executive Vice President and
Chief Financial Officer. Prior to joining Shonac/DSW, Mr. Rossler was the
managing partner of the Columbus office of Alexander Grant/Grant Thornton
International where he was employed for 16 years.
EDWIN J. KOZLOWSKI, age 54, was elected our Executive Vice President and
Chief Operating Officer in February 2002. Mr. Kozlowski was elected Chief
Financial Officer of Shonac Corporation and DSW Shoe Warehouse in May 2001.
Prior to that time Mr. Kozlowski served in various positions with General
Nutrition Companies, Inc. since 1978, including Chief Operating Officer of the
retail division of General Nutrition Centers, Executive Vice President and Chief
Financial Officer, Treasurer and Controller of GNCI and GNI.
JAMES A. MCGRADY, age 52, became our Chief Financial Officer, Treasurer
and Secretary in July 2000. Prior to that time, Mr. McGrady served as Vice
President and Treasurer of Consolidated Stores Corporation beginning in 1986.
From 1979 through 1986, Mr. McGrady was in the practice of public accounting
with KPMG Main Hurdman.
JULIA A. DAVIS, age 42, became our Executive Vice President and General
Counsel in January 2003. Prior to that time, Ms. Davis was a partner in the
Columbus office of Vorys, Sater, Seymour and Pease LLP. Ms. Davis has 17 years
of private legal practice primarily representing and advising national and
regional retailers in a wide variety of employment matters.
STEVEN E. MILLER, age 44, became our Vice President Controller in
September 2000. Prior to that time, Mr. Miller served as Chief Financial Officer
of Spitzer Management, Inc. beginning in 1998. From 1993 through 1998, Mr.
Miller held various positions with Consolidated Stores Corporation including
Director, Assistant Treasurer and Assistant Controller.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who are beneficial owners of more than
ten percent of our Common Shares ("reporting persons") to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Reporting persons are required by Securities and Exchange Commission regulations
to furnish us with copies of all Section 16(a) forms filed by them. Based on its
review of the copies of Section 16(a) forms received by us, we believe that,
during fiscal year 2002, all filing requirements applicable to reporting persons
were complied with, except for one late Form 4 filing for Schottenstein Stores
Corporation and Mr. Schottenstein.
29
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The following table sets forth certain information regarding
compensation paid during each of our last three full fiscal years to our Chief
Executive Officer(s) and to each of our four most highly compensated executive
officers serving at the end of the current fiscal year.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ------------------------------
Restricted Stock Options All Other
Name and Principal Fiscal Salary (1) Bonus Award (2) SARs Compensation (3)
Position Year ($) ($) ($) (#) ($)
------------------------ -------- ------------ ------------- ---------------- ------------ ----------------
Jay L. Schottenstein 2002 $250,000 None None None None
Chairman 2001 $250,000 None None None None
2000 $250,000 None None None None
John C. Rossler 2002 $694,344 $985,000 None 2,430,000 $62,607
President and Chief 2001 $404,181 $497,058 $21,200 5,000 $31,927
Executive Officer 2000 $395,995 $621,323 None None $25,068
Edwin J. Kozlowski 2002 $496,154 $525,000 None 1,720,000 $96,784
Executive Vice President 2001 $223,846 $225,000 None None $84,724
and Chief Operating 2000 None None None None None
Officer
James A. McGrady 2002 $397,436 $210,000 None 540,000 $35,057
Chief Financial Officer, 2001 $325,000 $140,000 $21,200 5,000 $31,014
Treasurer and Secretary 2000 $155,769 None None 30,000 $13,497
Steven E. Miller 2002 $202,019 $86,100 None 20,000 $11,487
Vice President Controller 2001 $176,250 $51,480 $8,480 2,000 $69,542
2000 $67,019 None None 10,000 $29,638
Raymond L. Blanton (4) 2002 $398,002 $323,723 None None $389,950
Former Senior Vice 2001 $294,895 $525,426 None None $45,963
President and General 2000 $288,922 $525,426 None 2,000 $18,864
Merchandise Manager
George Kolber (5) 2002 $685,897 None None None $1,978,639
Former Vice Chairman and 2001 $900,000 None None None $207,548
Chief Executive Officer 2000 $112,500 None $3,450,000 500,000 $9,676
(1) Includes amounts deferred by the executive officer pursuant to the Deferred
Compensation Plan established in 1998.
(2) The value of the restricted stock is determined by multiplying the total
shares held by each named executive by the closing price on the NYSE on
January 31, 2003.
(3) See Table below for All Other Compensation.
(4) Mr. Blanton's employment ended on September 24, 2002.
(5) Mr. Kolber resigned from the Company effective April 6, 2002.
ALL OTHER COMPENSATION
Jay L. John C. Edwin J. James A. Steven E. Raymond L. George
Schottenstein Rossler Kozlowski McGrady Miller Blanton Kolber
------------- ----------- ----------- ----------- ----------- ----------- -----------
401(k) Plan and
Associate Stock Purchase
Plan Company
Contributions -- $8,458 -- $6,324 $5,220 $6,526 $4,176
30
Company paid relocation
expenses -- -- $5,884 -- -- -- --
Severance -- -- -- -- -- 219,231 1,950,000
Auto Reimbursement -- 36,597 11,076 25,937 3,448 78,731 4,421
Company paid Life,
Medical and Indemnity
Insurance -- 4,687 440 952 140 1,256 --
Sec 79 Cafeteria Health
Care Plan -- 1,734 710 1,844 2,679 2,548 383
Personal Living Expenses -- -- -- -- -- -- 19,659
Loan Forgiveness -- -- 60,000 -- -- -- --
Gift Certificates -- 125 30 -- -- -- --
Country Club Dues
and Membership -- 11,006 18,644 -- -- 81,658 --
------------ ------------ ------------ ----------- ----------- --------- ----------
Total All Other
Compensation -- $62,607 $96,784 $35,057 $11,487 $389,950 $1,978,639
------------ ------------ ------------ ----------- ----------- --------- ----------
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR TABLE
The following table provides certain information on option grants during
fiscal year 2002 by us to our Chief Executive Officer and each of our other
executive officers included in the above compensation table.
Potential Realized Value at
% of Total Assumed Annual Rates of
Options Options/SARs Stock Price Appreciation
SARs Granted to Exercise or for Option Term (2)
Granted Employees in Base Price Expiration ---------------------------
Name (#) Fiscal Year ($/Sh) Date (1) 5% 10%
----------------------- ----------- ---------------- --------------- --------------- ---- ----
Jay L. Schottenstein None N/A N/A N/A N/A N/A
John C. Rossler 2,430,000 37% $4.50 2/3/2012 $6,876,963 $17,427,574
Edwin J. Kozlowski 1,720,000 26% $4.50 2/3/2012 $4,867,644 $12,335,567
James A. McGrady 540,000 8% $4.50 2/3/2012 $1,528,214 $3,872,794
Steven E. Miller 20,000 (3) $2.35 7/3/2012 $29,558 $74,906
Raymond L. Blanton 570,000 9% $4.50 2/3/2012 $1,613,115 $4,087,949
George Kolber None N/A N/A N/A N/A N/A
(1) Except as described below, all options are exercisable 20% per year,
beginning on the first anniversary of the original grant date, on a
cumulative basis and expire ten years from the original grant date.
1,590,000 options granted to Mr. Rossler and 1,130,000 options granted to
Mr. Kozlowski vest on January 30, 2010 or, if earlier, (2) the later of (A)
January 31, 2004 if, for each day of 60-consecutive day period that ends on
or before January 31, 2004, the closing price of our common stock is at
least $12.00 per share or (B) the last day of (i) any 60-consecutive trading
day period that ends after January 31, 2004 and before January 30, 2010 and
on each day of which the closing price of our common stock is at least
$12.00 per share or (ii) we have achieved at least 95 percent of the EBIT
goal that the Board set for us for each of any three consecutive fiscal
years ending after the effective date of this Agreement and on and before
January 30, 2010.
(2) Represents the potential realizable value of each grant of options assuming
that the market price of the Common Shares appreciates in value from the
date of grant to the end of the option term at either a 5% or 10% annualized
rate, based on the difference between the assumed per share value and the
per share option exercise price, multiplied by the total number of option
shares.
(3) Represents less than 1% of total options granted during fiscal 2002.
31
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides certain information on the number and value
of stock options held by our executive officers named in the Summary
Compensation Table at February 1, 2003.
Potential Realized Value at
Shares Number of Unexercised Assumed Annual Rates of
Acquired Value Options at Fiscal Year End Stock Price Appreciation
on Exercise Realized (#) for Option Term ($) (1)
------------ ------------ --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
-------------------- ------------ ------------ ----------- ------------- ----------- --------------
Jay L. Schottenstein -- -- 56,000 -- -- --
John C. Rossler -- -- 13,000 2,432,000 -- --
Edwin J. Kozlowski -- -- -- 1,720,000 -- --
James A. McGrady -- -- 17,000 558,000 -- --
Steven E. Miller -- -- 6,000 26,000 -- --
Raymond L. Blanton -- -- -- -- -- --
George Kolber (2) -- -- -- -- -- --
--------------------------------------------------------------------------------
(1) Represents the total gain which would be realized if all in-the-money
options held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the per share fair market value at year end
of $1.95. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
(2) Pursuant to an Addendum to the December 7, 2000 Executive Employment
Agreement and Restricted Stock Agreement, Mr. Kolber forfeited rights to
200,000 options which were not vested on April 6, 2002.
EQUITY COMPENSATION PLAN TABLE
The following table sets forth additional information as of February 1,
2003, about shares of our common stock that may be issued upon the exercise of
options and other rights under our existing equity compensation plans and
arrangements, divided between plans approved by our shareholders and plans or
arrangements not submitted to our shareholders for approval. The information
includes the number of shares covered by, and the weighted average exercise
price of, outstanding options and other rights and the number of shares
remaining available for future grants excluding the shares to be issued upon
exercise of outstanding options, warrants, and other rights.
NUMBER OF SECURI-
TIES REMAINING
NUMBER OF SECURI- AVAILABLE FOR ISSU-
TIES TO BE ISSUED ANCE UNDER EQUITY
UPON EXERCISE OF WEIGHTED-AVERAGE COMPENSATION PLANS
OUTSTANDING OP- EXERCISE PRICE OF OUT- (EXCLUDING SECURI-
TIONS, WARRANTS AND STANDING OPTIONS, TIES REFLECTED IN
RIGHTS WARRANTS AND RIGHTS COLUMN (a)
------------------- ---------------------- -------------------
Equity compensation plans
approved by security holders (1) 8,921,047 $8.98 4,091,683
Equity compensation plans not
approved by security holders N/A N/A N/A
--------- ---------
Total 8,921,047 $8.98 4,091,683
(1) Equity compensation plans approved by shareholders include the 1991
Stock Option Plan, as amended, and the 2000 Stock Incentive Plan.
32
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee is comprised of Elizabeth Eveillard
(Chairperson), Henry L. Aaron and Harvey L. Sonnenberg. The Compensation
Committee establishes, reviews, and recommends an executive compensation package
for our Chief Executive Officer and our other executive officers. Additionally,
our Compensation Committee administers and grants options under our 1991 Stock
Option Plan, as amended, and our 2000 Incentive Stock Plan and administers our
Incentive Compensation Plan. None of the members of the Compensation Committee
are present or former officers of our Company or are themselves or any of their
affiliates, if any, parties to agreements with us.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF COMMON SHARES
The following table sets forth, as of April 2, 2003, certain information
with regard to the beneficial ownership of our common stock by each holder of 5%
of such shares, each director individually, each executive officer named in the
Summary Compensation Table and all executive officers and directors as a group.
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Outstanding Shares (2)
----------------------------------------------- ------------------------ ----------------------
Henry L. Aaron 9,000 *
Raymond Blanton (10)
Ari Deshe (4)(5)(7) 24,972 *
Jon P. Diamond (4)(5) 11,700 *
Elizabeth M. Eveillard (1) 3,000 *
George Kolber (10)
Edwin J. Kozlowski (3) 198,000 *
James A. McGrady 131,000 *
Steven E. Miller 8,000 *
John C. Rossler (3) 296,000 *
Jay L. Schottenstein (4)(5)(6) 230,000 *
Harvey L. Sonnenberg (7) 23,000 *
James L. Weisman (7) 4,300 *
All directors and executive officers as a group
(12 persons) (3)(4)(5)(6)(7)(10)(11) 938,972 2.8%
Dimensional Fund Advisors Inc. (8) 2,037,800 6.0%
Schottenstein Stores Corporation (5) 27,668,851 63.4%
Cerberus Partner, L.P.(9) 9,722,085 22.3%
--------------------------------------------------------------------------------
* Represents less than 1% of outstanding shares of common stock, net of
treasury shares.
(1) Except as otherwise noted, the persons named in this table have sole power
to vote and dispose of the shares listed and includes the following number
of shares of common stock as to which the named person has the right to
acquire beneficial ownership upon the exercise of stock options within 60
days of April 15, 2003: Mr. Aaron, 9,000; Mr. Deshe, 10,000; Mr. Diamond,
10,000; Ms. Eveillard, 3,000 shares; Mr. Kozlowski, 118,000; Mr. McGrady,
125,000; Mr. Miller, 6,000; Mr. Rossler, 181,000; Mr. J. Schottenstein,
56,000; Mr. Sonnenberg, 3,000; Mr. Weisman, 3,000 and all directors and
executive officers as a group, 524,000.
(2) The percent is based upon the 33,923,374 shares of common stock
outstanding, net of treasury shares.
(3) Includes 110,000 shares for Mr. Rossler, 80,000 shares for Mr. Kozlowski,
and 190,000 shares for all directors and executive officers as a group,
which are owned subject to a risk of forfeiture on termination of
employment with vesting over a period of years pursuant to the terms of
Restricted Stock Agreements.
(4) Does not include the 17,946,766 shares of common stock owned by SSC of 1800
Moler Road, Columbus, Ohio 43207. Jay L. Schottenstein is the Chairman and
Chief Executive Officer of SSC. Jay L. Schottenstein, Ari Deshe and Jon P.
Diamond are members of the Board of Directors of SSC. See "Ownership of
SSC," below.
(5) Does not include 123,372 shares owned by the Jay and Jean Schottenstein
Foundation, 67,944 shares held by the Ann and Ari Deshe Foundation, 67,944
shares held by the Jon and Susan Diamond Family Foundation and 40,740
shares held by the Lori Schottenstein Foundation, all being private
charitable foundations, and 1,312,500 Common Shares owned by GB Stores, a
Pennsylvania limited partnership. Combined, the shares owned by the
foundations and GB Stores represent approximately 5.0% of our outstanding
shares of common stock. SSC owns a 96% limited partnership interest in GB
Stores and its corporate general partner is an affiliate of SSC. The sole
trustees and officers of the Jay and Jean Schottenstein Foundation are
Saul, Geraldine and Jay Schottenstein. The remaining foundations' trustees
and officers consist of at least one of the following per-
33
sons: Geraldine Schottenstein, Jay Schottenstein, Jon Diamond and/or Ari
Deshe; in conjunction with other Schottenstein family members.
(6) Includes 30,000 shares as to which Jay L. Schottenstein shares voting and
investment power as trustees of a trust which owns the shares.
(7) Includes 10,000 shares held by Mr. Deshe's minor children; 15,000 shares
held by Mr. Sonnenberg's spouse and 500 shares held by Mr. Weisman's
spouse.
(8) Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940,
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the "funds." In its role as
investment adviser or manager, Dimensional possesses voting and/or
investment power over our securities described in this schedule that are
owned by the funds and may be deemed to be the beneficial owner of the
shares of the issuer held by the Funds. Dimensional disclaims beneficial
ownership of such securities. The address for Dimensional is 1299 Ocean
Avenue, 11th Floor, Santa Monica, CA 90401. Based on information contained
in a Schedule 13G/A filed by Dimensional on February 10, 2003.
(9) Cerberus Partners, L.P., a Delaware limited partnership ("Cerberus"), is
the holder of Senior Subordinated Convertible Loans in the principal amount
of 37,500,000 (the "Convertible Loan"). The Convertible Loan is convertible
at any time to the extent any portion of the loan remains outstanding at
the option of the holder thereof into shares of our common stock. The
conversion price of the Convertible Loan is $4.50 per share, subject to
conversion price adjustments. Further, Cerberus is the holder of a warrant
to purchase 1,388,752 Shares (subject to certain conversion price
adjustments) in connection with an additional loan made to us. Stephen
Feinberg possesses sole power to vote and direct the disposition of all of
our securities held by Cerberus. The address for Cerberus is 450 Park
Avenue, 28th Floor, New York, New York 10022. Based on information
contained in a Schedule 13D/A filed by Stephen Feinberg on October 9, 2002
and a Form 4 filed by Stephen Feinberg on October 10, 2002.
(10) Mr. Kolber and Mr. Blanton are no longer affiliated with our Company. As a
consequence, we are unable to determine their beneficial ownership of
shares or the percentage of outstanding shares held.
(11) The percent is based upon the 33,923,374 shares of common stock
outstanding, net of treasury shares, and the exercise of 524,000 stock
options at April 2, 2003.
OWNERSHIP OF SSC
The following table indicates the shares of SSC common stock
beneficially owned by certain of our Directors and other Schottenstein family
members, as of April 2, 2003:
Shares of SSC Percent
Common Stock of Class
------------ --------
Jay L. Schottenstein (1) 299.38139 78.4%
Geraldine Schottenstein (2) 27.41707 7.2%
Jon P. Diamond (3) 27.41707 7.2%
Ari Deshe (4) 27.41707 7.2%
Directors and officers as a group 381.63260 100.0%
--------------------------------------------------------------------------------
(1) Represents sole voting and investment power over 299.38139 shares held in
irrevocable trusts for family members as to which Jay L. Schottenstein is
trustee and as to which shares Mr. Schottenstein may be deemed to be the
beneficial owner.
(2) Represents sole voting and investment power over 27.41707 shares held by
Geraldine Schottenstein as trustee of an irrevocable trust for family
members as to which shares Geraldine Schottenstein may be deemed to be the
beneficial owner.
(3) Represents sole voting and investment power over 27.41707 shares held by
Susan Schottenstein Diamond, the wife of Jon Diamond, as trustee of an
irrevocable trust for family members, as to which shares Mr. Diamond may be
deemed to be the beneficial owner.
(4) Represents sole voting and investment power over 27.41707 shares held by
Ann Schottenstein Deshe, the wife of Ari Deshe, as trustee of an
irrevocable trust for family members, as to which shares Mr. Deshe may be
deemed to be the beneficial owner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Prior to the completion of our initial public offering on June 18, 1991,
we were operated as the Department Store Division of SSC. On that date, SSC
transferred substantially all of the net assets of the Division to us in
exchange for 22,500,000 of our Common Shares. At April 2, 2003, SSC beneficially
owned approximately 53% of our outstanding Common Shares. So long as SSC
34
owns more than 50% of our voting shares, it will continue to have the power
acting alone to approve any action requiring a vote of the majority of our
common stock of our Company and to elect all of our directors. For information
with respect to the beneficial ownership of the voting stock of SSC by certain
of our directors and beneficial ownership of our common stock by such persons
and our officers, see "Security Ownership of Certain Beneficial Owners and
Management."
REAL ESTATE LEASES AND SUBLEASES
We lease stores and warehouses under various arrangements with related
parties. Such leases expire through 2024 and in most cases provide for renewal
options. Generally, we are required to pay real estate taxes, maintenance,
insurance and contingent rentals based on sales in excess of specified levels.
We have several leasing agreements with SSC and affiliates. Under a
Master Lease Agreement, as amended, we lease five store locations owned by SSC.
Additionally, we lease or sublease from SSC or affiliates of SSC, 27 store
locations, 6 warehouse facilities and a parcel of land. The minimum rent for
these leaseholds is set forth below with additional contingent rents based on
aggregate sales in excess of specified sales trends 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 us to
pay real estate taxes, maintenance and insurance.
Each lease entered into with SSC or its affiliates is on terms at least
as favorable to us as could be obtained in an arm's-length transaction with an
unaffiliated third party, and in certain instances, we are given preferential
terms. We have also adopted a policy that requires our audit committee to review
and approve all affiliated leases prior to consummation.
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at February 1,
2003 are as follows (in thousands):
Fiscal Year Minimum Payments
----------- ----------------
2003 $20,522
2004 20,597
2005 20,750
2006 20,333
2007 19,470
Future Years 110,075
-------
Total $211,747
The composition of related party lease expense (in thousands):
Year Ended
-----------------------------------------
2/1/03 2/2/02 2/3/01
---------------------------------------------------------------------------------------
Minimum rentals:
Related parties $19,539 $15,363 $10,553
Contingent rentals:
Related parties 208 2,128 2,386
---------- --------- ---------
Total $19,747 $17,491 $12,939
SSC operates a chain of furniture stores, five of which operate in
separate space subleased from us at five of its store locations. Three of these
furniture store subleases (the "Furniture Subleases") are for a term concurrent
with the respective lease between us and a third party landlord. These Furniture
Subleases provide for the payment by SSC of base rent and other charges in
amounts at least equal to its pro rata share based on square footage and its pro
rata share of any percentage rent based on its gross sales. Two additional
furniture store subleases are for periods shorter than our lease. For fiscal
2002, SSC paid to us an aggregate of $1.3 million pursuant to these subleases.
LICENSE AGREEMENTS WITH AFFILIATES
In July 1997, we entered into agreements to form a 50/50 joint venture
with Mazel Stores, Inc. to create VCM, Ltd. to operate the health and beauty
care and toys and sporting goods departments in our Value City stores as
licensed departments. Beginning
35
in fiscal 2000 VCM also operated the food department. Pursuant to operating
agreements between VCM and Value City, VCM paid annual license fees to us based
on 5% and 11% of net sales and reimbursed us 2% and 4% of its sales for
advertising and 2.9% and 1% of its sales for administrative expenses for the
health and beauty care and the toys and sporting goods departments,
respectively. The aggregate license fees paid by VCM to us for fiscal 2001 were
$9.7 million. Effective with the close of business on February 2, 2002, we
acquired Mazel's 50% interest in VCM for $8.4 million and we now own 100% of
VCM.
MERCHANDISE TRANSACTIONS WITH AFFILIATES
We, from time to time, purchase merchandise from affiliates of SSC. Some
of such affiliates manufacture, import and wholesale apparel as their principal
business. The members of our merchandising staff use these sources and make
their purchasing decisions in the same manner as with unaffiliated sources. Any
merchandise purchased from such sources is on terms at least as favorable to us
as could be obtained in an arm's-length transaction with an unaffiliated third
party, and in certain instances, we are given terms preferential to those
available to unaffiliated customers. Total purchases by us from SSC and
affiliates for fiscal 2002 were $13.2 million, representing 0.9% of our total
purchases during the fiscal year, while in fiscal 2001 purchases were $16.4
million, representing 1.3% of our total purchases during the fiscal year.
In May 2001, SSC and Value City entered into a deferred purchase
arrangement for the sale of Bugle Boy products that SSC purchased for
approximately $11.9 million. As part of the agreement, Value City agreed to
purchase at SSC's cost plus a handling fee any unsold Bugle Boy merchandise
owned by SSC on February 2, 2002. On February 6, 2002, the final payment was
made to SSC.
In October 2001, SSC and Filene's Basement entered into a deferred
purchase arrangement for the sale of products that SSC purchased for
approximately $2.9 million. As part of the agreement, Filene's Basement agreed
to purchase goods at SSC's cost plus a handling fee. On May 13, 2002, the final
payment was made to SSC.
SERVICES AGREEMENTS
We share with SSC and its affiliates certain incidental support
personnel and services for the purpose of achieving economies of scale and cost
savings. These shared services include certain architectural, legal, advertising
and administrative services. We have entered into a Corporate Services Agreement
with SSC that sets forth the terms for payment of the costs of these shared
services. We believe that we are able to obtain such services at a cost, which
is equal to or below the cost of providing such services internally or obtaining
such services from unaffiliated third parties. For fiscal 2002, we paid SSC or
its affiliates $1.7 million for such services. The Corporate Services Agreement
also provides for participation by us in the self-insurance program maintained
by SSC. Under that program, we are self-insured for purposes of personal injury
and property damage, motor vehicle and Ohio workers' compensation claims up to
various specified amounts, and for casualty losses up to $100,000. Claims and
losses in excess of the specified amounts are covered by stop-loss or excess
liability policies maintained by SSC, which include us as a named insured. SSC
maintains reserves and pays claims for self-insured amounts under the program
and will continue to do so with respect to our participation in the program. SSC
charges its affiliates, divisions and our Company premiums based, among other
factors, on loss experience and its actual payroll and related costs for
administering the program. For fiscal 2002, we paid SSC $11.9 million for
participation in the program.
DEBT AGREEMENTS
On June 11, 2002, we entered into two separate credit facilities equally
held by Cerberus Partners, L.P. and SSC, and amended and restated our $75.0
million senior convertible loan, initially entered into on March 15, 2000, which
is held equally by Cerberus Partners, L.P. and SSC.
$100 Million Term Loans
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt,
ranking pari passu with the Revolving Credit Facility and the Convertible Loan.
We and our principal subsidiaries are obligated on the Term Loans. The maturity
date is June 11, 2005.
The Term Loans stated rate of interest per annum during the initial two
years of the agreement is 14% if paid in cash and 15% if we elect a paid-in-kind
("PIK") option. During the first two years of the Term Loans, we may elect to
pay all interest in PIK. During the final year of the Term Loans, the stated
rate of interest is 15.0% if paid in cash or 15.5% by PIK. The PIK option is
limited to 50% of the interest due.
We issued to the Term Loan C Lenders 2,954,792 Warrants with an initial
exercise price of $4.50 per share. The number of shares issuable upon the
exercise of the Warrants and the per share exercise price are subject to
adjustment upon the occurrence of specified events. The Warrants are exercisable
at any time prior to June 11, 2012. We have granted the Term Loan C Lenders
registration rights with respect to the shares issuable upon exercise of the
Warrants.
$75 Million Senior Convertible Loan
36
We have amended and restated our $75.0 million Convertible Loan. As
amended, borrowings under the Convertible Loan bear interest at 10% per annum.
At our option, interest may be PIK for the first two years, and thereafter, at
our option, up to 50% of the interest due may be PIK until maturity. The
Convertible Loan is guaranteed by all of our principal subsidiaries and is
secured by a lien on assets junior to liens granted in favor of the lenders on
the Revolving Credit Facility and Term Loans. The Convertible Loan is not
subject to prepayment until June 11, 2007. The agent has the right to designate
two observers to our Board for so long as the agent is the beneficial owner of
at least 50% of the advances initially made by it and has the right to designate
two individuals to our Board for so long as the agent is the beneficial owner of
at least 50% of the conversion shares issued upon conversion of the advances
initially made by it.
The Convertible Loan is convertible at the option of the holders into
shares of our common stock at an initial conversion price of $4.50. The maturity
date is June 10, 2009.
We recorded $9.5 million in interest expense and $3.9 million fees
related to our credit agreements in fiscal 2002 of which $15.5 million was paid.
Included in payments during 2002 was $3.7 million of PIK interest. We also
repaid an SSC loan in the amount of $20.0 million in conjunction with the debt
financing.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer along with our Chief
Financial Officer of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon the evaluation, our President and Chief Executive Officer along with our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to our
Company (including its consolidated subsidiaries) required to be included in our
periodic SEC filings. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
37
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
15(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 February 1, 2003 and February 2, 2002 F-2
Consolidated Statements of Operations for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001 F-3
Consolidated Statements of Shareholders' Equity for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001 F-4
Consolidated Statements of Cash Flows for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001 F-5
Notes to Consolidated Financial Statements F-6
15(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K:
Schedule II. Valuation and Qualifying Accounts S-1
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
15(a)(3) EXHIBITS:
See Index to Exhibits which begins on Page E-1.
15(b) REPORTS ON FORM 8-K
None.
38
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: May 1, 2003 By: *
----------------------------------------------------------
(James A. McGrady, Executive Vice President, Chief Financial
Officer, Treasurer and Secretary)
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 Board of Directors May 1, 2003
-----------------------------
Jay L. Schottenstein
* President and Chief Executive Officer May 1, 2003
----------------------------- (Principal Executive Officer)
John C. Rossler
* Executive Vice President, Chief Financial May 1, 2003
----------------------------- Officer, Treasurer and Secretary
James A. McGrady (Principal Financial and Accounting Officer)
* Director May 1, 2003
-----------------------------
Henry L. Aaron
* Director May 1, 2003
-----------------------------
Ari Deshe
* Director May 1, 2003
-----------------------------
Jon P. Diamond
* Director May 1, 2003
-----------------------------
Elizabeth M. Eveillard
* Director May 1, 2003
-----------------------------
Harvey L. Sonnenberg
* Director May 1, 2003
-----------------------------
James L. Weisman
*By: /s/ James A. McGrady
------------------------------
James A. McGrady, (Attorney-in-Fact)
39
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John C. Rossler, certify that:
1. I have reviewed this annual report on Form 10-K of Value City
Department Stores, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ John C. Rossler
--------------------------------------------------
John C. Rossler, President and Chief Executive Officer
40
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. McGrady, certify that:
1. I have reviewed this annual report on Form 10-K of Value City
Department Stores, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
(c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ James A. McGrady
--------------------------------------------------
James A. McGrady, Executive Vice President, Chief
Financial Officer and Treasurer
41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Value City Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Value City
Department Stores, Inc. (a majority owned subsidiary of Schottenstein Stores
Corporation) and its wholly owned subsidiaries (the "Company") as of February 1,
2003 and February 2, 2002 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended February 1, 2003,
February 2, 2002 and February 3, 2001. Our audits also included the financial
statement schedule listed in the Index as Item 15(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Value City Department Stores, Inc.
and its wholly owned subsidiaries as of February 1, 2003 and February 2, 2002,
and the results of their operations and their cash flows for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
As discussed in the notes to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective February 3, 2002.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
Columbus, Ohio
March 19, 2003
F-1
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
February 1, 2003 and February 2, 2002
(in thousands, except share amounts)
------------------------------------------------------------------------------------------------------
ASSETS
2/1/03 2/2/02
------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and equivalents $11,059 $35,915
Accounts receivable, net 10,666 6,650
Receivables from affiliates 933 905
Inventories 389,825 396,830
Prepaid expenses and other assets 19,354 15,741
Deferred income taxes 51,317 63,102
---------- ----------
TOTAL CURRENT ASSETS 483,154 519,143
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 254,467 246,358
Leasehold improvements 210,825 184,854
Land and building 801 801
Capital leases 37,423 37,413
---------- ----------
503,516 469,426
Accumulated depreciation and amortization (270,064) (224,782)
---------- ----------
PROPERTY AND EQUIPMENT, NET 233,452 244,644
GOODWILL 37,619 40,974
TRADENAMES AND OTHER INTANGIBLES, NET 47,583 51,654
OTHER ASSETS 29,991 23,896
---------- ----------
TOTAL ASSETS $831,799 $880,311
========== ==========
------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $160,809 $149,864
Accounts payable to affiliates 4,228 8,909
Accrued expenses:
Compensation 29,173 22,410
Taxes 42,401 39,224
Other 64,344 69,296
Current maturities of long-term obligations 809 665
---------- ----------
TOTAL CURRENT LIABILITIES 301,764 290,368
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 264,664 337,199
OTHER NONCURRENT LIABILITIES 44,207 32,315
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 33,913,374 shares and
34,227,540 shares, respectively 143,183 145,772
Warrants 6,074 -
Retained earnings 78,767 82,432
Deferred compensation expense, net (981) (4,150)
Treasury shares at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (5,820) (3,566)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 221,164 220,429
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $831,799 $880,311
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 1, 2003, February 2, 2002 and February 3, 2001
(in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------
For For For
the Year the Year the Year
Ended Ended Ended
2/1/03 2/2/02 2/3/01
52 Weeks 52 Weeks 53 Weeks
-----------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $2,450,719 $2,283,878 $2,213,017
Cost of sales (1,514,629) (1,429,455) (1,492,947)
-----------------------------------------------------------------------------------------------------
Gross profit 936,090 854,423 720,070
Selling, general and
administrative expenses (909,573) (888,734) (870,253)
License fees from affiliates 2,628 12,228 11,323
Other operating income 4,777 5,739 3,259
-----------------------------------------------------------------------------------------------------
Operating profit (loss) 33,922 (16,344) (135,601)
Interest expense, net (32,493) (28,510) (30,480)
-----------------------------------------------------------------------------------------------------
Income (loss) before equity in loss of
joint venture, extraordinary item,
cumulative effect of accounting
change and income taxes 1,429 (44,854) (166,081)
Equity in loss of joint venture - (406) (1,340)
-----------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item,
cumulative effect of accounting
change and income taxes 1,429 (45,260) (167,421)
(Provision) benefit for income taxes (944) 16,537 65,630
-----------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item
and cumulative effect of accounting
change 485 (28,723) (101,791)
Extraordinary (charge), net of income taxes (2,070) - -
Cumulative effect of accounting
change, net of income taxes (2,080) - -
-----------------------------------------------------------------------------------------------------
Net loss $(3,665) $ (28,723) $ (101,791)
=====================================================================================================
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and
cumulative effect of accounting change $0.01 $(0.85) $(3.03)
Extraordinary (charge), net of income taxes (0.06) - -
Cumulative effect of accounting change,
net of income taxes (0.06) - -
-----------------------------------------------------------------------------------------------------
Net loss $(0.11) $(0.85) $(3.03)
=====================================================================================================
Shares used in per share calculations:
Basic 33,665 33,610 33,567
Diluted 33,673 33,610 33,567
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Years Ended February 1, 2003, February 2, 2002 and February 3, 2001
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Number of Shares
-------------------- Accumulated
Common Deferred Other
Common Shares Common Retained Compensation Treasury Comprehensive
Shares in Treasury Shares Warrants Earnings Expense Shares Loss Total
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 29, 2000 32,992 88 $132,601 $212,946 $(2,513) $(673) $342,361
Net loss (101,791) (101,791)
Sales of treasury shares (80) 466 614 1,080
Exercise of stock options 182 1,431 1,431
Tax benefit on stock options
and restricted shares 228 228
Grant of restricted shares,
net of forfeitures 754 5,433 (4,703) 730
Amortization of deferred
compensation expense 768 768
Acquisitions 403 5,500 5,500
----------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 3, 2001 34,331 8 145,659 111,155 (6,448) (59) 250,307
Net loss (28,723) (28,723)
Net unrealized loss
on derivative financial
instruments, net of income
tax benefit of $1,731 $(2,595) (2,595)
Minimum pension liability,
net of income tax benefit
of $647 (971) (971)
----
Total comprehensive
loss (32,289)
-------
Exercise of stock options 108 782 782
Forfeitures of restricted
shares, net of grants (211) (669) (517) (1,186)
Amortization of deferred
compensation expense 2,815 2,815
----------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 2, 2002 34,228 8 145,772 82,432 (4,150) (59) (3,566) 220,429
Net loss (3,665) (3,665)
Net unrealized gain
on derivative financial
instruments, net of income
tax provision of $1,316 1,974 1,974
Minimum pension liability,
net of income tax benefit
of $2,819 (4,228) (4,228)
------
Total comprehensive
loss (5,919)
------
Warrants issued $6,074 6,074
Forfeitures of restricted
shares, net of grants (315) (2,589) 2,589
Amortization of deferred
compensation expense 580 580
----------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 1, 2003 33,913 8 $143,183 $6,074 $78,767 $(981) $(59) $(5,820) $221,164
====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 1, 2003, February 2, 2002 and February 3, 2001
(in thousands)
Year Year Year
Ended Ended Ended
2/1/03 2/2/02 2/3/01
52 Weeks 52 Weeks 53 Weeks
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,665) $(28,723) $(101,791)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Extraordinary charge 2,070 - -
Cumulative effect of accounting change 2,080 - -
Amortization of discount on debt 1,266 - -
Amortization of deferred compensation 580 2,815 768
Depreciation and amortization 56,962 54,267 46,727
Deferred income taxes and other noncurrent liabilities 16,199 (19,362) (34,568)
Equity in loss of joint venture - 406 1,340
Loss on disposal of assets 3,603 4,937 16
Change in working capital, assets and liabilities:
Receivables (4,044) 54,228 (42,657)
Inventories 7,005 18,790 44,194
Prepaid expenses and other assets (3,581) 6,075 17,242
Accounts payable 6,264 (45,832) 7,271
Accrued expenses 5,547 1,116 (23,853)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 90,286 48,717 (85,311)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (41,784) (40,244) (70,226)
Proceeds from sale of assets 184 73 326
Acquisitions, net of cash received - (8,375) (3,506)
Other assets and acquisitions - - (26,051)
Proceeds from lease incentives 7,246 14,248 -
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (34,354) (34,298) (99,457)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term
Obligations and warrants 164,000 10,000 75,000
Proceeds from issuance of common shares - 782 1,431
Net principal payments under long-term
obligations (20,000) - (36,571)
Debt issuance costs (13,205) - -
Net (decrease) increase in:
Revolving credit facility (211,000) - 150,000
Capital leases and other debt (583) 152 (557)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (80,788) 10,934 189,303
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (24,856) 25,353 4,535
CASH AND EQUIVALENTS, BEGINNING OF YEAR 35,915 10,562 6,027
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $11,059 $35,915 $10,562
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
Value City Department Stores, Inc. and its wholly owned subsidiaries are
herein referred to collectively as the Company. The Company operates three
segments. Value City and Filene's Basement segments operate full-line,
off-price department stores. The DSW operational segment sells
better-branded off-price shoes and accessories. As of February 1, 2003, a
total of 116 Value City, 20 Filene's Basement and 126 DSW stores were
open. The Company's stores are principally located in the Midwest, East,
South and Northeast parts of the country.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Value City
Department Stores, Inc. and its wholly subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation. To
facilitate comparisons with the current year, certain reclassifications
have been made to prior year financial statements and notes to conform
with current year presentation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to January 31.
Fiscal year 2002 and 2001 contain 52 weeks and Fiscal 2000 contain 53
weeks. Unless otherwise stated, references to years in this report relate
to fiscal years rather than calendar years.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Significant estimates are required as a part of
inventory valuation, depreciation, amortization, recoverability of
long-lived assets, establishing reserves for insurance and calculating
retirement benefits. 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.
CASH AND EQUIVALENTS
Cash and equivalents represent cash and highly liquid investments with
original maturities of three months or less at the date of purchase to be
cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable is classified as current as the collection period is
generally less than one year. The allowance for doubtful accounts was $0.9
million and $1.8 million for fiscal years 2002 and 2001, respectively.
INVENTORIES
Merchandise inventories are stated at the lower of cost, determined using
the first-in, first-out basis, or market using the retail inventory
method. The retail method is widely used in the retail industry due to its
practicality. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins are calculated by
applying a calculated cost to retail ratio to the retail value of
inventories. The cost of the inventory reflected on the consolidated
balance sheet is decreased by charges to cost of sales at the time the
retail value of the inventory is lowered through the use of markdowns.
Hence, earnings are negatively impacted as the merchandise is marked down
prior to sale. Reserves to value inventory at the lower of cost or market
were $32.5 million and $33.5 million at the end of fiscal 2002 and 2001,
respectively.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRE-OPENING EXPENSES
Pre-opening costs associated with the opening of new stores are expensed
as incurred. Pre-opening costs expensed were $3.2 million, $4.4 million
and $10.9 million for fiscal 2002, 2001 and 2000, respectively.
INVESTMENT IN JOINT VENTURE
Effective at the close of business on February 2, 2002, the Company
acquired Mazel's interest in VCM, Ltd. ("VCM") for $8.4 million. The
balance sheet for VCM has been consolidated in these statements for the
balance sheets presented. VCM operated the health and beauty care, food,
toy, and sporting goods departments in the Company's stores as licensed
departments. VCM was a 50/50 joint venture with Mazel. The Company
accounted for its fifty percent interest in the joint venture under the
equity method. The equity in loss of joint venture was $0.4 million and
$1.3 million, respectively.
PROPERTY AND EQUIPMENT
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
ASSET IMPAIRMENT AND LONG-LIVED ASSETS
The Company must periodically evaluate the carrying amount of its
long-lived assets, primarily property and equipment, and finite life
intangible assets when events and circumstances warrant such a review to
ascertain if any assets have been impaired. The carrying amount of a
long-lived asset is considered impaired when the carrying value of the
asset exceeds the expected future cash flows (undiscounted and without
interest) from the asset. The Company reviews are conducted down at the
lowest identifiable level, which include a store. The impairment loss
recognized is the excess of the carrying value, based on discounted future
cash flows, of the asset over its fair value. The impairment loss is
included in selling, general and administrative expense. Based on recent
analysis, the Company expensed in the year ended February 1, 2003 $0.6
million of identified stores assets where the recorded value could not be
supported by cash flows. The balance of goodwill associated with the
Gramex acquisition in November 1999 of $1.5 million was charged to
selling, general and administrative expense in the year ended February 2,
2002.
GOODWILL
Goodwill represents the excess cost over the estimated fair values of net
assets including identifiable intangible assets of businesses acquired.
The Company, as a result of adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, will no longer record goodwill amortization.
The initial result of testing for goodwill for impairment in accordance
with SFAS 142, as of February 3, 2002, was a non-cash charge of $3.4
million, $2.1 million net of taxes, which is reported in Consolidated
Statement of Operations as of February 1, 2003 in the caption "Cumulative
effect of accounting change." Substantially all of the charge relates to
goodwill associated with the Company's purchase of Mazel's interest in VCM
and is included in the net loss for the year ended February 1, 2003. At
February 1, 2003, the Company had $37.6 million of goodwill subject to
annual testing.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proforma effect of ceasing amortization of goodwill under SFAS 142 is
as follows (in thousands, except per share amounts):
Year ended
-------------------------------------------
2/1/03 2/2/02 2/3/01
--------------------------------------------------------------------------------
Reported net loss $ (3,665) $ (28,723) $ (101,791)
Add back goodwill amortization -- 3,283 3,339
--------------------------------------------------------------------------------
Adjusted net loss $ (3,665) $ (25,440) $ (98,452)
--------------------------------------------------------------------------------
Basic and diluted loss per share $ (0.11) $ (0.76) $ (2.93)
TRADENAMES AND OTHER INTANGIBLE ASSETS
Tradenames and other intangibles assets are comprised of values assigned
to names the Company acquired and leases acquired. The accumulated
amortization for these assets is $13.8 million and $11.7 million at
February 1, 2003 and February 2, 2002, respectively. The asset value and
accumulated amortization of intangible assets is as follows (in
thousands):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
As of February 1, 2003 Tradenames:
Gross amount $ 1,120 $ 12,750 $ 9,900 $ 23,770
Accumulated amortization (355) (4,038) (1,925) (6,318)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 $ 140 $ 23,057 $ 37,614
Accumulated amortization (3,908) (51) (3,524) (7,483)
Average useful life (in years) 25 14 20
As of February 2, 2002 Tradenames:
Gross amount $ 1,120 $ 12,750 $ 9,900 $ 23,770
Accumulated amortization (280) (3,187) (1,265) (4,732)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $ 14,417 $ 140 $ 24,993 $ 39,550
Accumulated amortization (3,295) (37) (3,602) (6,934)
Average useful life (in years) 25 14 20
Aggregate amortization expense for the current and each of the five
succeeding years is as follows (in thousands):
Filene's
Fiscal Year Value City DSW Basement Total
----------- ---------- --- -------- -----
2002 $ 688 $ 863 $ 2,058 $ 3,609
2003 681 863 2,428 3,972
2004 676 863 2,428 3,967
2005 676 863 2,428 3,967
2006 676 855 2,428 3,959
2007 676 854 2,428 3,958
F-8
NOTES TO 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 when the merchandise has
been paid for in full.
CUSTOMER LOYALTY PROGRAM
The Company maintains a customer loyalty program for its DSW operations in
which customers receive a future discount on qualifying purchases. Upon
reaching the target level, customers may redeem these discounts on a
future purchase. Generally these future discounts must be redeemed within
one year. The Company accrues the estimated costs of the anticipated
redemptions of the discount earned at the time of the initial purchase and
charges such costs to selling, general and administrative expense based on
historical experience. The estimates of the costs associated with the
loyalty program require the Company to make assumptions related to
customer purchase levels and redemption rates. The accrued liability as of
February 1, 2003 and February 2, 2002 are $2.2 million and $1.8 million,
respectively.
VALUATION ACCOUNTS
Reserves established and used for the realignment of excess inventory
quantities, severance and asset impairment cost for the periods ended
February 1, 2003, and February 2, 2002, are as follows (in thousands):
Excess Asset
Inventory Severance Impairment
-----------------------------------------------------------------------------------------
Balance, February 3, 2001 $ 43,700 $ 3,397 $ 623
Provisions to establish reserves -- 5,600 --
Charges/payments (43,700) (3,640) (623)
-----------------------------------------------------------------------------------------
Balance, February 2, 2002 -- 5,357 --
Provisions to establish reserves 5,950
Charges/payments (7,311)
-----------------------------------------------------------------------------------------
Balance, February 1, 2003 $ -- $ 3,996 $ --
-----------------------------------------------------------------------------------------
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. During fiscal year 2002,
2001 and 2000, advertising expense was $94.1 million, $83.2 million and
$78.2 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest rate swap agreements to establish long-term
fixed rates associated with borrowings. The Company does not hold or issue
derivative financial instruments for trading purposes. The Company does
not have derivative financial instruments that are held or issued and
accounted for as hedges of anticipated transactions. Amounts currently due
to or from interest swap counter parties are recorded in interest expense
in the period in which they accrue.
EARNINGS PER SHARE
Basic earnings per share is based on a simple weighted average of common
shares outstanding. Diluted earnings per share reflects the potential
dilution of common shares, related to both outstanding stock options and
warrants, calculated using the treasury stock method and convertible debt
calculated using the if-converted method. The numerator for the
calculation of basic and diluted earnings per share is net (loss) income.
The denominator is summarized as follows (in thousands):
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended
-----------------------------------------
2/1/03 2/2/02 2/3/01
------------------------------------------------------------------------------------------
Weighted average shares outstanding 33,665 33,610 33,567
Assumed exercise of dilutive stock options 8 -- --
------------------------------------------------------------------------------------------
Number of shares for computation of
diluted earnings per share 33,673 33,610 33,567
------------------------------------------------------------------------------------------
Options to purchase 8,921,047 shares of stock at prices ranging from $1.87
to $21.44 per share were outstanding at February 1, 2003, of which 8,736
options were included in the calculation of diluted loss per share.
Warrants to purchase 2,954,792 shares of stock at $4.50 were outstanding
at February 1, 2003, none of which were included in the calculation of
diluted loss per share. Convertible debt to purchase 16,666,667 shares of
stock was outstanding at February 1, 2003, none of which was included in
the calculation of diluted loss per share. Options to purchase 3,693,180
shares of stock at prices ranging from $3.57 to $21.44 per share were
outstanding at February 2, 2002, and were not included in the computation
of diluted earnings per share as they were anti dilutive. Options to
purchase 2,615,550 shares of stock at prices ranging from $5.56 to $21.44
per share were outstanding during the year ended February 3, 2001 and were
not included in the computation of diluted earnings per share as they were
anti-dilutive.
STOCK-BASED COMPENSATION
At February 1, 2003, the Company has various stock-based employee
compensations plans that are described more fully in Note 8. The Company
accounts for those plans in accordance with APB No.25. "Accounting For
Stock Issued to Employees," and related Interpretations. No stock based
employee compensation cost is reflected in net loss, as no options
granted under those plans had an exercise price less that the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition of SFAS 123, "Accounting for
Stock-Based Compensation."
Year Ended
------------------------------------------------
2/1/03 2/2/02 2/3/01
------ ------ ------
Net loss, as reported $(3,665) $(28,723) $(101,791)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards $(4,999) $(1,508) $(162)
--------------------------------------------------------------------------------------------------
Pro forma net loss $(8,664) $(30,231) $(101,953)
--------------------------------------------------------------------------------------------------
Earnings per share:
Basic and diluted as reported $(0.11) $(0.85) $(3.03)
Basic and diluted pro forma $(0.26) $(0.90) $(3.04)
To determine the pro forma amounts, the fair value of each stock option
has been estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in the fiscal year 2002, 2001 and 2000, respectively: expected
volatility of 83.4%, 100.4% and 55.4%; dividend yield of 0%; risk-free
interest rates of 2.6%, 4.7% and 4.8%; and, expected lives of 7.6, 7.3 and
6.5 years. The weighted average fair value of options granted in the
fiscal year 2002, 2001 and 2000 was $2.54, $6.32 and $4.91, respectively.
Consistent with SFAS No. 123, pro-forma net (loss) income and (loss)
earnings per share have not been calculated for options granted prior to
July 30, 1995. Pro forma disclosures may not be representative of that to
be expected in future years.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The difference between net (loss) earnings for
fiscal year 2002 and 2001 relate to the change in minimum pension
liability and the net unrealized gain (loss) on derivative financial
instruments for cash flow hedges. The Company presents other comprehensive
income (loss) in its consolidated statements of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which
require implementation by a date falling within or after the close of the
fiscal year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Under this
Statement, obligations that meet the definition of a liability will be
recognized consistently with the retirement of the associated tangible
long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of SFAS No. 143. At this time, the Company
has yet to determine the effect of this pronouncement on its results of
operations and financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." The standard rescinds FASB Statements No. 4 and 64
that deal with issues relating to the extinguishment of debt. The standard
also rescinds FASB Statement No. 44 that deals with intangible assets of
motor carriers. The standard modifies SFAS No. 13, "Accounting for
Leases," so that certain capital lease modifications must be accounted for
by lessees as sale-leaseback transactions. Additionally, the standard
identifies amendments that should have been made to previously existing
pronouncements and formally amends the appropriate pronouncements. This
Statement is effective for fiscal years beginning after May 15, 2002. The
adoption of SFAS No. 145 will not have a significant effect on the
Company's results of operations or its financial position. For fiscal year
2003, the Company will be required to reclassify the loss on the
extinguishment of debt from extraordinary to interest expense, in the
condensed consolidated statements of operations, under the provisions of
SFAS No. 145.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation
No. 34." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies," relating to the guarantor's accounting for, and disclosure
of, the issuance of certain types of guarantees. The disclosure provisions
of FIN 45 are effective for the current fiscal year. However, the
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantor's year-end. The Company has
no guarantees as of February 1, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation." The statement amends the disclosure
requirements of FASB Statement No. 123 "Accounting for Stock-Based
Compensation." The standard as implemented by the Company requires
additional disclosure in the "Summary of Significant Accounting Policies"
and the affect on earnings and earnings per share both basic and diluted.
In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial
support from other parties. FIN 46 requires a variable interest entity to
be consolidated by a company, if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities that a
company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003
and to existing entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements
apply to all financial statements issued after January 31, 2003,
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
regardless of when the variable interest entity was established. The
Company has no variable interest entities as of February 1, 2003.
2. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from and sells merchandise to affiliates
of Schottenstein Stores Corporation ("SSC"), direct owner of approximately
53.0% of the Company's common shares, and VCM prior to February 2, 2002.
The related party transactions are as follows (in thousands):
Year Ended
-----------------------------------
2/1/03 2/2/02 2/3/01
------------------------------------------------------------------------------------------
Purchases of merchandise
from affiliates $13,238 $16,396 $24,787
Merchandise sold to affiliates at cost,
including handling charges -- -- 14,300
------------------------------------------------------------------------------------------
Sales by licensed departments and the related license fees earned are as
follows (in thousands):
Year Ended
-------------------------------------
2/1/03 2/2/02 2/3/01
------------------------------------------------------------------------------------------
VCM
Sales -- $136,153 $140,240
License fees -- 9,698 9,144
------------------------------------------------------------------------------------------
The Company also leases certain store and warehouse locations owned by SSC
as described in Note 3.
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 certain state workers' compensation programs.
The Company expensed $11.9 million, $12.3 million and $16.6 million in
fiscal years 2002, 2001 and 2000, respectively, for such coverage.
The Company also makes contributions to a private charitable foundation
controlled by SSC. During 2002 and 2000, the Company expensed $1.7 million
and $2.2 million of contributions. During 2001 no contributions were
recorded. See Footnotes 3, 4 and 5 for additional related party
disclosures.
3. LEASES
The Company leases stores and warehouses under various arrangements with
related and unrelated parties. Such leases expire through 2024 and in most
cases provide for renewal options. Generally, the Company is required to
pay real estate taxes, maintenance, insurance and contingent rentals based
on sales in excess of specified levels.
The Company has several leasing agreements with SSC and affiliates. Under
a Master Lease Agreement, as amended, the Company leases five store
locations owned by SSC, and also leased or subleased from SSC or
affiliates of SSC 32 store locations, 6 warehouse facilities and a parcel
of land for an annual minimum rent of $19.7 million and additional
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contingent rents based on aggregate sales in excess of specified sales
trends 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.
The Company incurred no new capital lease obligations in 2002 and 2001 to
obtain store facilities. The total cost of assets held under capital
leases at February 1, 2003 and February 2, 2002 was $37.4 million. Assets
held under capital leases are amortized over the terms of the related
leases. The accumulated amortization for these assets was $5.8 million and
$4.2 million at February 1, 2003 and February 2, 2002, respectively.
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at
February 1, 2003 are as follows (in thousands):
Operating Leases
-------------------------------------------
Fiscal Unrelated Related Capital
Year Total Party Party Leases
----------------------------------------------------------------------------------------
2003 $ 122,615 $102,093 $ 20,522 $ 3,512
2004 121,782 101,185 20,597 3,441
2005 116,970 96,220 20,750 3,438
2006 110,198 89,865 20,333 3,438
2007 102,059 82,589 19,470 3,515
Future Years 525,512 415,437 110,075 51,893
----------------------------------------------------------------------------------------
Total minimum
lease payments $1,099,136 $887,389 $211,747 $69,237
----------------------------------------------------------------------
Less amount representing interest (38,386)
----------------------------------------------------------------------------------------
Present value of minimum lease payments 30,851
Less current portion (580)
----------------------------------------------------------------------------------------
Total long-term portion $30,271
----------------------------------------------------------------------------------------
The composition of rental expense (in thousands):
Year Ended
--------------------------------------
2/1/03 2/2/02 2/3/01
-----------------------------------------------------------------------------------------
Minimum rentals:
Unrelated parties $101,221 $90,569 $76,835
Related parties 19,539 15,363 10,553
Contingent rentals:
Unrelated parties 3,975 4,414 4,529
Related parties 208 2,128 2,386
-----------------------------------------------------------------------------------------
Total $124,943 $112,474 $94,303
-----------------------------------------------------------------------------------------
Many of the Company's leases contain fixed escalations of the minimum
annual lease payments during the original term of the lease. For these
leases, the Company recognizes rental expense on a straight-line basis and
records the difference between the average rental amount charged to
expense and the amount payable under the lease as deferred rent. At the
end of fiscal 2002 and 2001, the balance of deferred rent was $13.3
million and $10.0 million, respectively, and is included in other
noncurrent liabilities. Certain store and warehouse leases provided
landlord incentives totaling $22.4 million and $14.2 million in fiscal
2002 and 2001, respectively. These incentives are recorded as long
term-liabilities in the accompanying consolidated balance sheet and are
amortized as a reduction of rent expense over the remaining minimum lease
term.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
--------------------------------------------------------------------------
2/1/03 2/2/02
Credit facilities:
Revolving credit facility $64,000 $211,000
Term loans 100,000 --
Discount on loan (4,809) --
Senior convertible loans 75,000 75,000
SSC loan -- 20,000
--------------------------------------------------------------------------
234,191 306,000
Capital lease obligations 30,851 31,281
Other 431 583
--------------------------------------------------------------------------
265,473 337,864
Less current maturities (809) (665)
--------------------------------------------------------------------------
$264,664 $337,199
--------------------------------------------------------------------------
Letters of Credit Outstanding $19,163 $16,597
--------------------------------------------------------------------------
At February 1, 2003, the Company had a $525.0 million of financing that
consists of three separate credit facilities: (i) a new three-year $350.0
million revolving credit facility, (ii) two $50.0 million term loan
facilities provided equally by Cerberus Partners, L.P. and Schottenstein
Stores Corporation ("SSC"), and (iii) an amended and restated $75.0
million senior convertible loan, initially entered into by the Company on
March 15, 2000, which is held equally by Cerberus Partners, L.P. and SSC.
The Company recorded an extraordinary loss on debt extinguishment of $3.3
million, $2.1 million net of taxes, as a result of the debt financing.
This loss represents the balance of unamortized deferred loan fees as of
June 11, 2002.
AS OF FEBRUARY 1, 2003
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is
structured in a manner that allows the Company and its subsidiaries
availability based on the value of their inventories and receivables.
Primary security for the facility is provided by a first priority lien on
all of the inventory and accounts receivable of the Company, as well as
certain intercompany notes and payment intangibles. The facility also has
a second priority perfected interest in all of the collateral securing the
Term Loans. Interest on borrowings is calculated at the bank's base rate
or Eurodollar rate plus 2.00% to 2.75%, depending upon the level of
average excess availability the Company maintains. The maturity date is
June 11, 2005. At February 1, 2003, $193.6 million was available under the
Revolving Credit Facility. Direct borrowings aggregated $64.0 million,
plus $19.2 million of letters of credit were issued and outstanding.
$100 Million Term Loans
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt,
ranking pari passu with the Revolving Credit Facility and the Senior
Convertible Facility. The Company and its principal subsidiaries are
obligated on the facility. The maturity date is June 11, 2005.
The Term Loans stated rate of interest per annum through June 11, 2004 of
the agreement is 14% if paid in cash and 15% if the Company elects a
paid-in-kind ("PIK") option. During the first two years of this facility,
the Company may elect to pay all interest in PIK. During the final year of
the Term Loans, the stated rate of interest is 15.0% if paid in cash or
15.5% by PIK. The PIK option is limited to 50% of the interest due.
The Company issued to the Term Loan C Lenders warrants ("Warrants") to
purchase 2,954,792 shares of common stock at an initial exercise price of
$4.50 per share with a fair value of $6.1 million. The number of shares
issuable
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
upon the exercise of the Warrants and the per share exercise price are
subject to adjustment upon the occurrence of specified events. The
Warrants are exercisable at any time prior to June 11, 2012. The Company
has granted the Term Loan C Lenders registration rights with respect to
the shares issuable upon exercise of the Warrants.
$75 Million Senior Convertible Loan
The Company has amended and restated its $75.0 million Senior Subordinated
Convertible Loan Agreement on June 11, 2002 ("the "Convertible Loan"). As
amended, borrowings under the convertible loan will bear interest at 10%
per annum. At the Company's option, interest may be PIK from the closing
date to the second anniversary thereof, and thereafter, at the option of
the Company, up to 50% of the interest due may be PIK until maturity. The
convertible loan is guaranteed by all principal subsidiaries and is
secured by a lien on assets junior to liens granted in favor of the
Lenders on the Revolving Credit Agreement and Term Loans. The Convertible
Loan is not subject to prepayment for five years from the closing date.
The agent has the right to designate two observers to the Board of
Directors for so long as the agent is the beneficial owner of at least 50%
of the advances initially made by it and has the right to designate two
individuals to the Board of Directors for so long as the agent is the
beneficial owner of at least 50% of the conversion shares issued upon
conversion of the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into
shares of Value City Department Stores, Inc. common stock has a conversion
price of $4.50. The maturity date is June 10, 2009.
AS OF FEBRUARY 2, 2002
At February 2, 2002, the Company had a $300 million Amended and Restated
Credit Agreement ("Credit Agreement"), dated as of March 15, 2000. The
Credit Agreement, which would have expired on March 15, 2003, provided for
revolving and overnight loans and issuance of letters of credit.
Outstanding advances were secured by a lien on assets and was subject to a
monthly borrowing base of eligible inventories and receivables, as
defined. Terms of the Credit Agreement required compliance with certain
restrictive covenants, including limitations on dividends, the incurrence
of additional debt and financial ratio tests. At February 2, 2002, $11.8
million was available under the Credit Agreement. Borrowings aggregated
$211.0 million, plus $17.0 million of letters of credit were issued and
outstanding. The Credit Agreement provided for various borrowing rates,
equal to 275 basis points over LIBOR at February 1, 2002.
The Company has a $75.0 million Senior Subordinated Convertible Loan
Agreement ("Senior Facility"), dated as of March 15, 2000. The Senior
Facility bore interest at various rates, equal to 325 basis points over
LIBOR at February 2, 2002. The interest rate increased an additional 50
basis points every 90 days after the first anniversary date. The Senior
Facility was due in September 2003, and is due to SSC. The terms, as
amended, provided that if prior to February 4, 2002, the balance
outstanding thereunder is not repaid from the proceeds of an equity
offering or other subordinated debt acceptable to lenders under the Credit
Agreement, then after that date SSC, as the lender, had the right to
convert the debt into common stock at a price equal to 95% of the 20-day
average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. SSC was paid a one-time fee of 200
basis points, or $1.5 million, in December 2000 as consideration for
allowing the Company to transfer the holder of debt from an unrelated
third party to SSC.
The Company had a $100.0 million subordinated secured credit facility with
SSC to supplement operating cash requirements. The interest rate and terms
of the $100.0 million facility were generally the same as the Credit
Agreement. Outstanding advances under the agreement were subordinated to
the Credit Agreement and were subject to a junior lien on assets securing
the Credit Agreement. At February 2, 2002, $20.0 million was outstanding.
OTHER DEBT ITEMS
Effective February 4, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. Under SFAS
No. 133, all derivative instruments are required to be recorded on the
balance sheet as assets or liabilities, measured at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portion of the change in the fair value of the
derivative is recorded in other comprehensive income (loss) and is
recognized in the income statement when the hedge item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges and
financial instruments not designated as hedges are recognized in earnings.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company utilizes an interest rate swap agreement to effectively
establish long-term fixed rates on borrowings under the Credit Agreement,
thus reducing the impact of interest rate changes on future income. These
swap agreements, which are designated as cash flow hedges, involve the
receipt of variable rate amounts in exchange for fixed rate interest
payments over the life of the agreements. The fair value of the Company's
interest rate swap agreements in the Company's consolidated balance sheet
is a $1.4 million current liability at February 1, 2003, and $4.3 million
other non-current liability at February 2, 2002. The Company had
outstanding swap agreements with notional amounts totaling $75.0 million
for the fiscal years ended 2002 and 2001, respectively. The Company's
current swap agreements have a fixed interest rate of 6.99% and expire
April 2003.
The weighted average interest rate on borrowings under the Company's
credit facilities during fiscal year 2002, 2001 and 2000 was 7.8%, 8.6%
and 10.7%, respectively.
The book value of notes payable and long-term debt approximates fair value
at February 1, 2003.
5. BENEFIT PLANS
The Company participates in the SSC sponsored 401(k) Plan (the "Plan").
Employees who attained age twenty-one and completed one year of service
could contribute up to thirty percent of their compensation to the Plan on
a pre-tax basis, subject to IRS limitations. The Company matches employee
deferrals into the Plan - 100% on the first 3% of eligible compensation
deferred and 50% on the next 3% of eligible compensation deferred.
Eligibility to defer begins after 60 days of employment and matching
begins after one year of qualified service. Additionally, the Company may
contribute a discretionary profit sharing amount to the Plan each year.
The Company incurred costs associated with the 401(k) Plan of $5.8
million, $3.5 million and $5.7 million for fiscal years 2002, 2001 and
2000, respectively.
The Company provides an Associate Stock Purchase Plan. Eligibility
requirements are similar to the 401(k) Plan. Eligible employees can
purchase common shares of the Company through payroll deductions. The
Company will match 15% of employee investments up to a maximum investment
level. Plan costs to the Company for all fiscal periods presented are not
material to the consolidated financial statements.
Certain employees of the Company are covered by union-sponsored,
collectively bargained, multi-employer pension plans, the costs of which
are not material to the consolidated financial statements.
Certain employees of the Company participate in the Schottenstein Stores
Corporation Deferred Compensation Plan which is a non-qualified, pre-tax,
income deferral plan. The cost of the plan is not material to the
consolidated financial statements.
6. PENSION BENEFITS
The Company has three qualified defined benefit pension plans assumed at
the time of acquisition of three separate companies. The Company's funding
policy is to contribute annually the amount required to meet ERISA funding
standards and to provide not only for benefits attributed to service to
date but also for those anticipated to be earned in the future.
The following provides a reconciliation of projected benefit obligations,
plan assets and funded status of all plans as of February 1, 2003 and
February 2, 2002 (in thousands):
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year Ended
-----------------------------
2/1/03 2/2/02
-----------------------------------------------------------------------------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $18,662 $16,990
Service cost 29 35
Interest cost 1,280 1,233
Benefits paid (941) (754)
Actuarial loss 1,808 1,158
Other (147) --
-----------------------------------------------------------------------------------------
Projected benefit obligation at end of year 20,691 18,662
-----------------------------------------------------------------------------------------
Change in plan assets:
Fair market value at beginning of year 17,681 18,702
Actual (loss) return on plan assets (1,306) (403)
Employer contributions 350 135
Benefits paid (941) (753)
Other (515) --
-----------------------------------------------------------------------------------------
Fair market value at end of year 15,269 17,681
-----------------------------------------------------------------------------------------
Funded status (5,422) (981)
Unrecognized actuarial loss 9,094 4,425
Unrecognized transition obligation (334) (471)
Adjustment to recognize minimum liability (8,666) (488)
Unrecognized prior service cost -- (29)
-----------------------------------------------------------------------------------------
(Accrued) prepaid benefit cost $(5,328) $2,456
-----------------------------------------------------------------------------------------
Assumptions used in each year of the actuarial computations were:
Year Ended
--------------------------
2/1/03 2/2/02
-----------------------------------------------------------------------------------------
Discount rate 6.5% 6.5% - 7.25%
Rate of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return 8.0% - 9.0% 8.0% - 9.0%
The components of net periodic pension cost are comprised of the following
(in thousands):
Year Ended
------------------------
2/1/03 2/2/02
------------------------------------------------------------------------------------------
Service cost - benefits earned in the period $ 35 $ 32
Interest cost on projected benefit obligation 1,285 1,244
Expected investment return on plan assets (1,441) (1,573)
Net loss recognition 64 --
Net amortization and deferral 105 (42)
------------------------------------------------------------------------------------------
Net periodic pension cost (income) $ 48 $(339)
------------------------------------------------------------------------------------------
7. SHAREHOLDERS' EQUITY
The Company issued common shares to certain key employees pursuant to
individual employment agreements and certain other grants from time to
time, which are approved by the Board of Directors. The market value of
the shares at the date of grant is recorded as deferred compensation
expense. The agreements condition the vesting of the shares generally upon
continued employment with the Company with such restrictions expiring over
various periods ranging
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from three to five years. Deferred compensation is charged to income on a
straight-line basis during the period that the restrictions lapse.
8. STOCK OPTION PLANS
The Company has a 2000 Stock Incentive Plan that provides for the issuance
of options to purchase up to 13,000,000 common shares or the issuance of
restricted stock to management, key employees of the Company and
affiliates, consultants as defined, and directors of the Company. Options
generally vest 20% per year on a cumulative basis. Options granted under
the 2000 Stock Plan remain exercisable for a period of ten years from the
date of grant.
An option to purchase 2,500 common shares is automatically granted to each
non-employee director on the first New York Stock Exchange trading day in
each calendar quarter. The exercise price for each option is the fair
market value of the common shares on the date of grant. All options become
exercisable one year after the grant date and remain exercisable for a
period of ten years from the grant date, subject to continuation of the
option-holders' service as directors of the Company.
The Company has a 1991 Stock Option Plan that provided for the grant of
options to purchase up to 4,000,000 common shares. Such options are
exercisable 20% per year on a cumulative basis and remain exercisable for
a period of ten years from the date of grant.
The following table summarizes the Company's stock option plans and
related Weighted Average Exercise Prices ("WAEP") (shares in thousands):
Year Ended
--------------------------------------------------------
2/1/03 2/2/02 2/3/01
------ ------ ------
Shares WAEP Shares WAEP Shares WAEP
------ ---- ------ ---- ------ ----
Outstanding beginning of year 3,693 $8.07 2,616 $9.32 2,460 $10.12
Granted 6,664 4.30 1,307 8.41 961 9.24
Exercised -- -- (108) 8.10 (176) 8.12
Canceled (1,436) 7.38 (122) 9.48 (629) 9.83
-----------------------------------------------------------------------------------------------------
Outstanding end of year 8,921 5.36 3,693 8.07 2,616 9.32
-----------------------------------------------------------------------------------------------------
Options exercisable end of year 1,651 $8.98 1,595 $9.29 1,100 $9.63
Shares available for additional grants 7,821 3,049 1,233
The following table summarizes information about stock options outstanding
as of February 1, 2003 (shares in thousands):
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted
Average
ange of exercise Remaining
prices Shares Contract Life WAEP Shares WAEP
---------------------------------------------------------------------------------------------
$ 1.87 - $ 4.49 928 9 yrs $2.68 70 $3.59
$ 4.50 - $10.00 7,501 8 yrs $5.15 1,196 $7.71
$ 10.01 - $21.44 492 6 yrs $13.77 386 $13.86
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental
to the conduct of its business. The Company estimates the range of
liability related to pending litigation where the amount and range of loss
can be estimated. The Company records its best estimate of a loss when the
loss is considered probable. Where a liability is probable and there is a
range of estimated loss, the Company records the minimum estimated
liability related to the claim. In the
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
opinion of management, the amount of any liability with respect to these
proceedings will not be material. As additional information becomes
available, the Company assesses the potential liability related to its
pending litigation and revises the estimates. Revisions in the Company's
estimates and potential liability could materially impact its results of
operations.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended
---------------------------------------
2/1/03 2/2/02 2/3/01
-------------------------------------------------------------------------------------------
Current:
Federal $3,523 -- $(29,092)
State and local 503 $2,833 (5,847)
-------------------------------------------------------------------------------------------
4,026 2,833 (34,939)
-------------------------------------------------------------------------------------------
Deferred:
Federal (2,697) (16,948) (25,818)
State and local (385) (2,422) (4,873)
-------------------------------------------------------------------------------------------
(3,082) (19,370) (30,691)
-------------------------------------------------------------------------------------------
Income tax (benefit) expense $944 $(16,537) $(65,630)
-------------------------------------------------------------------------------------------
A reconciliation of the expected income taxes based upon the statutory
rate is as follows (in thousands):
Year Ended
--------------------------------------
2/1/03 2/2/02 2/3/01
------------------------------------------------------------------------------------------
Income tax expense (benefit) at
federal statutory rate $500 $(13,376) $(58,597)
Jobs credit (926) (1,439) (822)
State and local taxes, net 641 (2,449) (7,668)
Non-deductible interest - 370 1,885 1,080
Other 359 (1,158) 377
------------------------------------------------------------------------------------------
$944 $(16,537) $(65,630)
------------------------------------------------------------------------------------------
The income benefit related to the extraordinary item and cumulative effect
of accounting change was $1.3 million and $1.3 million, respectively for
the year ended February 1, 2003.
The components of the net deferred tax asset as of February 1, 2003 and
February 2, 2002 are (in thousands):
Year Ended
-----------------------
2/1/03 2/2/02
-----------------------------------------------------------------------------------------
Deferred tax assets:
Basis differences in inventory $30,184 $23,320
Basis differences in property and equipment 5,891 6,277
Deferred compensation 1,695 1,928
Amortization of lease acquisition costs 1,634 (985)
Acquired assets 2,036 --
Net operating loss 9,106 21,223
Federal tax credit 1,439 6,744
Contribution carry forward 1,467 480
Tenant allowance 401 5,699
Capital leases 1,812 1,347
Other comprehensive loss 3,881 2,378
Other 9,500 13,888
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------------------------------------
69,046 82,299
-----------------------------------------------------------------------------------------
Deferred tax liabilities:
Gain/loss (1,128) (4,776)
State and local taxes (3,401) (2,337)
-----------------------------------------------------------------------------------------
(4,529) (7,113)
-----------------------------------------------------------------------------------------
Total net $64,517 $75,186
-----------------------------------------------------------------------------------------
The net deferred tax asset is recorded in the Company's consolidated
balance sheet as follows (in thousands):
Year Ended
------------------------
2/1/03 2/2/02
---------------------------------------------------------------------------------------
Current deferred tax asset $51,317 $63,102
Non-current deferred tax asset 13,200 12,084
---------------------------------------------------------------------------------------
Net deferred tax asset $64,517 $75,186
---------------------------------------------------------------------------------------
The state net operating loss carry forward is approximately $189.8 million
and is available to reduce state taxable income from 2006 to 2021. The
federal general business tax credit carry forward is approximately $1.4
million which will expire in 2022. The Company filed amended tax returns
for prior years, which allowed for the recognition of $15.3 million of
deferred tax assets, related primarily to net operating losses.
11. ACQUISITIONS
On March 17, 2000, the Company completed the acquisition of substantially
all of the assets and assumed certain liabilities of Filene's Basement
Corp., a Massachusetts corporation, and Filene's Basement, Inc., a wholly
owned subsidiary of Filene's Basement Corp. (collectively, "Filene's
Basement").
The operating results of Filene's Basement have been included in the
consolidated results of the Company from the date of acquisition. The
following unaudited proforma consolidated financial results for the fiscal
year ended February 3, 2001 are presented as if the acquisition had taken
place at the beginning of fiscal 2000 (in thousands, except per share
amounts):
Year Ended
2/3/01
----------------------------------------------------------------------------
Net sales $2,248,605
Net loss $(108,888)
Basic loss per share $(3.24)
Diluted loss per share $(3.24)
The purchase price included cash of $3.5 million paid at closing, $1.2
million to be paid over a period not to exceed three years, 403,208 shares
of the Company's common stock with an agreed value of $5.5 million and the
assumption of specified liabilities. The assumed liabilities included the
payment of amounts outstanding under Filene's Basement
debtor-in-possession financing facility of approximately $22.5 million and
certain trade payable and other obligations which were paid in the
ordinary course of business. Allocation of the purchase price has been
determined based on fair market valuation of the net assets acquired. The
acquisition was funded by cash from operations and a portion of the
proceeds from the Credit Agreement. In April 2003, the Company paid its
remaining balance of the purchase obligation of approximately $6.0
million.
12. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW Shoe Warehouse and Filene's Basement Stores. All of the
operations are located in the United States. The Company has identified
such segments based on management responsibility and measures segment
profit as operating (loss) profit, which is defined as income before
interest expense and income taxes. Corporate assets include goodwill and
loan costs.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED FEBRUARY 1, 2003 (IN THOUSANDS):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
Net sales $1,518,595 $628,964 $303,160 $2,450,719
Operating profit (loss) 22,362 14,078 (2,518) 33,922
Identifiable assets 547,538 183,190 101,071 831,799
Capital expenditures 26,136 12,260 3,388 41,784
Depreciation and
Amortization 43,728 6,383 6,851 56,962
YEAR ENDED FEBRUARY 2, 2002 (IN THOUSANDS):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
Net sales $1,481,151 $509,375 $293,352 $2,283,878
Operating (loss) profit (29,553) 4,621 8,588 (16,344)
Identifiable assets 613,897 232,274 34,140 880,311
Capital expenditures 14,788 24,542 914 40,244
Depreciation and
Amortization 43,141 4,099 7,027 54,267
YEAR ENDED FEBRUARY 3, 2001 (IN THOUSANDS):
Filene's
Value City DSW Basement Total
---------- --- -------- -----
Net sales $1,553,902 $409,968 $249,147 $2,213,017
Operating (loss) profit (150,526) 13,348 1,577 (135,601)
Identifiable assets 688,308 132,397 87,304 908,009
Capital expenditures 51,829 12,649 5,748 70,226
Depreciation and
Amortization 38,042 3,510 5,175 46,727
The following sets forth sales by each major merchandise category (in
thousands):
Year Ended
----------------------------------------
2/1/03 2/2/02 2/3/01
-----------------------------------------------------------------------------------------
Apparel and ready to wear $1,144,024 $1,189,938 $1,266,479
Hard goods and home furnishings 466,759 376,060 332,039
Shoes and other footwear 839,936 717,880 614,499
-----------------------------------------------------------------------------------------
Total $2,450,719 $2,283,878 $2,213,017
-----------------------------------------------------------------------------------------
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except per share amounts)
YEAR ENDED FEBRUARY 1, 2003
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
05/04/02 08/03/02 11/02/02 02/01/03
13 Weeks 13 Weeks 13 Weeks(1) 13 Weeks(1)
------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $585,912 $569,062 $616,990 $678,755
Cost of sales (362,725) (345,463) (383,921) (422,520)
------------------------------------------------------------------------------------------------------------
Gross profit 223,187 223,599 233,069 256,235
Selling, general and
administrative expenses (223,270) (216,005) (231,241) (239,057)
License fees from affiliates 889 792 309 638
Other operating income 1,273 1,639 948 917
------------------------------------------------------------------------------------------------------------
Operating profit 2,079 10,025 3,085 18,733
Interest expense, net (6,338) (7,863) (8,765) (9,527)
------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary
item, cumulative effect of accounting
change and income taxes (4,259) 2,162 (5,680) 9,206
Benefit (provision) for income taxes 1,564 (818) 2,184 (3,874)
------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary item
and cumulative effect of accounting
change (2,695) 1,344 (3,496) 5,332
Extraordinary (charge), net of income
taxes -- (2,070) -- --
Cumulative effect of accounting change,
net of income taxes (2,080) -- -- --
------------------------------------------------------------------------------------------------------------
Net (loss) income $(4,775) $(726) $(3,496) $5,332
------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings per share:
Basic
-----
(Loss) income before extraordinary item and
cumulative effect of accounting change $(0.08) $0.04 $(0.10) $0.16
Extraordinary (charge), net of income taxes -- (0.06) -- --
Cumulative effect of accounting change,
net of income taxes (0.06) -- -- --
------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per share (2) $(0.14) $(0.02) $(0.10) $0.16
------------------------------------------------------------------------------------------------------------
Diluted
-------
(Loss) income before extraordinary item and
cumulative effect of accounting change $(0.08) $0.04 $(0.10) $0.12
Extraordinary (charge), net of income taxes -- (0.06) -- --
Cumulative effect of accounting change,
net of income taxes (0.06) -- -- --
------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per share (2) $(0.14) $(0.02) $(0.10) $0.12
------------------------------------------------------------------------------------------------------------
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED FEBRUARY 2, 2002
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
05/05/01 08/04/01 11/03/01 02/02/02
13 Weeks 13 Weeks 13 Weeks(3) 13 Weeks(3)
-----------------------------------------------------------------------------------------------------------
Net sales $530,114 $536,477 $584,403 $632,884
Cost of sales (328,221) (330,877) (360,943) (409,414)
-----------------------------------------------------------------------------------------------------------
Gross profit 201,893 205,600 223,460 223,470
Selling, general and
administrative expenses (208,512) (211,284) (229,185) (239,753)
License fees from affiliates 2,112 2,139 2,592 5,385
Other operating income 495 2,094 1,658 1,492
-----------------------------------------------------------------------------------------------------------
Operating loss (4,012) (1,451) (1,475) (9,406)
Interest expense, net (8,436) (8,058) (7,406) (4,610)
-----------------------------------------------------------------------------------------------------------
Loss before equity in (loss)
of joint venture and
benefit for income taxes (12,448) (9,509) (8,881) (14,016)
Equity in (loss) of
joint venture (884) (327) (1,242) 2,047
-----------------------------------------------------------------------------------------------------------
Loss before
benefit for income taxes (13,332) (9,836) (10,123) (11,969)
Benefit for income taxes 5,533 4,065 3,645 3,294
-----------------------------------------------------------------------------------------------------------
Net loss $(7,799) $(5,771) $(6,478) $(8,675)
-----------------------------------------------------------------------------------------------------------
Basic and diluted loss per share(2) $(0.23) $(0.17) $(0.19) $(0.26)
-----------------------------------------------------------------------------------------------------------
(1) The results of operations for the quarters ended 5/4/02, 11/2/02 and
2/1/03 include charges for employee severance of $1.7 million, $1.4
million and $2.8 million, respectively. The quarter ended 02/01/03
includes the full period amortization of the debt discount of $1.1
million.
(2) (Loss) earnings per share calculations for each quarter are based on
the applicable weighted average shares outstanding for each period
and may not necessarily be equal to the full year per share amount.
(3) The results of operations for the quarter ended 11/3/01 and 2/2/02
include charges for employee benefit, severance, write-off of
software development costs, DSW warehouse relocation and fees
associated with terminated sale of certain assets of $10.1 million
and $14.6 million, respectively.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
A supplemental schedule of non-cash investing and financing activities is
presented below:
Year Ended
---------------------------------------
2/1/03 2/2/02 2/3/01
------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $32,850 $26,788 $29,723
Income taxes $7,324 $ 2,757 $ 4,700
Issuance of warrants $6,074 -- --
In June 2002, the Company issued warrants with a fair market value of
$6,074,000 to the holders of to the Term Loan C Lenders to purchase
2,954,792 shares of common stock at the initial exercise price of $4.50
per share, subject to adjustment. The Warrants are exercisable at any time
prior to June 11, 2012. The Company has granted the Term Loan C Lenders
registration rights with respect to the shares issuable upon exercise of
the Warrants.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the Company issued 403,208 common shares with a market
value of $5.5 million for the acquisition of Filene's Basement. Also in
March 2000, the Company contributed 80,000 common shares with a market
value of $1.1 million to a private charitable foundation controlled by the
Schottenstein family, principal of SSC.
Amounts of $14,248,000, $779,000 and $756,000 were recorded under the
captions of property and equipment and accounts payable for real estate
improvements and construction at new stores as of February 2, 2002 and
February 3, 2001, respectively.
F-24
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:
2/3/01 $1,025 $351 $1 $385 $992
2/2/02 992 4,829 165 4,193 1,793
2/1/03 1,793 10 -- 907 896
ALLOWANCE FOR MARKDOWNS:
Year Ended:
2/3/01 17,229 127,343 2,941 93,431 54,082
2/2/02 54,082 22,698 3,451 46,691 33,540
2/1/03 33,540 8,594 -- 9,659 32,475
ALLOWANCE FOR SALES RETURNS:
Year Ended:
2/3/01 1,386 521 127 168 1,866
2/2/02 1,866 1,676 78 1,272 2,348
2/1/03 2,348 528 -- 614 2,262
STORE CLOSING RESERVE:
Year ended:
2/3/01 73 -- 970 -- 1,043
2/2/02 1,043 -- -- 428 615
2/1/03 615 1,099 -- 1,190 524
(1) The charges to other accounts represent balances resulting from the
acquisitions of Filene's Basement in fiscal 2000 and VCM in fiscal
2001.
(2) The deductions in Column D are amounts written off against the
respective reserve.
S-1
INDEX TO EXHIBITS
Exhibits marked with an asterisk (*) are filed herewith.
Exhibit
No. Description
-------- ----------------------------------------------------------------------------------------
3.1 First Amended and Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3.2 to Registration Statement
on Form S-1 (file no. 33-40214) filed April 29, 1991.
3.2 Code of Regulations of the Company. Incorporated by reference to
Exhibit 3.3 to Registration Statement on Form S-1 (file no.
33-40214) filed April 29, 1991.
10.1 Corporate Services Agreement, dated June 12, 2002, between the
Company and SSC. Incorporated by reference to Exhibit 10.6 to Form
10-Q (file no. 1-10767) filed June 18, 2002.
10.2 License Agreement, dated June 5, 1991, between the Company and SSC
re Service Marks. Incorporated by reference to Exhibit 10.2 to
Amendment No. 1 to Form S-1 Registration Statement (file no.
33-40214) filed June 6, 1991.
10.3 Form of Indemnification Agreement, dated 1991, between the Company
and its directors and executive officers. Incorporated by reference
to Exhibit 10.7 to Amendment No. 1 to Form S-1 Registration
Statement (file no. 33-40214) filed June 6, 1991.
10.4 Form of Company's 1991 Stock Option Plan. Incorporated by reference
to Exhibit 10.8 to Amendment No. 1 to Form S-1 Registration
Statement (file no. 33-40214) filed June 6, 1991.
10.5 Master Warehouse Lease, dated April 25, 1991, between the Company,
as lessee, and SSC, as lessor, re three warehouses, office, and shop
locations. Incorporated by reference to Exhibit 10.10 to
Registration Statement on Form S-1 (file no. 33-40214) filed April
29, 1991.
10.5.1 First Amendment to Master Warehouse Lease, dated February 1992,
between the Company, as lessee, and SSC, as lessor, re three
warehouse, office, and shop locations. Incorporated by reference to
Exhibit 10.10.1 to Form S-1 Registration Statement (file no.
33-47252) filed April 16, 1992.
10.5.2 Second Amendment to Master Warehouse Lease, dated June 1993, between
the Company, as lessee, and SSC, as lessor, re three warehouse,
office, and shop locations. Incorporated by reference to Exhibit
10.10.2 to Form 10-K (file no. 1-10767) filed October 26, 1993.
10.6 Master Sublease, dated April 25, 1991, between the Company, as
sublessee, and SSC, as sublessor, re two stores. Incorporated by
reference to Exhibit 10.11 to Registration Statement on Form S-1
(file no. 33-40214) filed April 29, 1991.
10.7 Sublease, dated April 25, 1991, between the Company, as sublessor,
and SSC, as sublessee, re one warehouse, with underlying Lease,
dated July 15, 1981, between SSC, as lessee, and J.A.L. Realty Co.,
an affiliate of SSC, as lessor. Incorporated by reference to Exhibit
10.12 to Registration Statement on Form S-1 (file no. 33-40214)
filed April 29, 1991.
10.8 Lease, dated July 7, 1987, between the Company, by assignment from
SSC, as lessee, and Schottenstein Trustees, an affiliate of SSC, as
lessor, re one store. Incorporated by reference to Exhibit 10.13 to
Amendment No. 1 to Form S-1 Registration Statement (file no.
33-40214) filed June 6, 1991.
10.9 Lease, dated June 28, 1989, between the Company and South End
Industrial Park Realty Company as lessor, re one warehouse.
Incorporated by reference to Exhibit 10.14.1 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
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10.10 Lease, dated October 27, 1989, between the Company, by assignment
from SSC, as lessee, and Southeast Industrial Park Realty Company,
an affiliate of SSC, as lessor, re one warehouse. Incorporated by
reference to Exhibit 10.14.2 to Registration Statement on Form S-1
(file no. 33-40214) filed April 29, 1991.
10.11 Sublease, dated April 25, 1991, between the Company, as sublessor,
and SSC, as sublessee, re Baltimore, MD (Eastpoint) furniture store
location. Incorporated by reference to Exhibit 10.15.1 to
Registration Statement on Form S-1 (file no. 33-40214) filed April
29, 1991.
10.12 Sublease, dated April 25, 1991, between the Company, as sublessor,
and SSC, as sublessee, re Baltimore, MD (Westview) furniture store
location. Incorporated by reference to Exhibit 10.15.2 to
Registration Statement on Form S-1 (file no. 33-40214) filed April
29, 1991.
10.13 Sublease, dated April 25, 1991, between the Company, as sublessor,
and SSC, as sublessee, re Lansing, MI furniture store location.
Incorporated by reference to Exhibit 10.15.3 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
10.14 Sublease, dated April 25, 1991, between the Company, as sublessor,
and SSC, as sublessee, re Louisville, KY (Preston Highway) furniture
store location. Incorporated by reference to Exhibit 10.15.4 to
Registration Statement on Form S-1 (file no. 33-40214) filed April
29, 1991.
10.15 Form of Assignment and Assumption Agreement between the Company, as
assignee, and SSC, as assignor, re separate assignments of leases
for 31 stores. Incorporated by reference to Exhibit 10.16 to
Registration Statement on Form S-1 (file no. 33-40214) filed April
29, 1991.
10.16 Lease Agreement, dated as of July 1, 1988, between SSC as sublessor
and the Company as sublessee, by assignment dated April 25, 1991, re
Benwood, W.V. store location. Incorporated by reference to Exhibit
10.19 to Form 10-K (file no.1-10767) filed October 24, 1991.
10.17 Form of Restricted Stock Agreement, dated 1992, between the Company
and certain employees. Incorporated by reference to Exhibit 10.27 to
Amendment No. 1 to Form S-1 Registration Statement (file no.
33-47252) filed April 27, 1992.
10.18 The Company's Non-employee Director Stock Option Plan. Incorporated
by reference to Exhibit 10.28 to Form 10-K (file no.1-10767) filed
October 22, 1992.
10.19 Lease, dated September 1, 1992, between the Company, as lessee, and
SSC, as lessor, re South Bend, IN store. Incorporated by reference
to Exhibit 10.29 to Form 10-K (file no.1-10767) filed October 22,
1992.
10.20 Lease, dated September 2, 1997, between the Company, as lessee, and
SSC Alum Creek LLC, as Landlord, re 3080 Alum Creek warehouse.
Incorporated by reference to Exhibit 10.30 to Form 10-K (file
no.1-10767) filed October 22, 1992.
10.21 Exercise of the first five-year renewal option commencing February
1, 1997 under lease, dated January 27, 1992, as amended, between the
Company, as lessor, re 3080 Alum Creek warehouse. Incorporated by
reference to Exhibit 10.30.1 to Form 10-Q (file no. 1-10767) filed
March 19, 1996.
10.22 Lease, dated September 2, 1997, between the Company, as lessee, and
J.A.L. Realty Company, as lessor, re 3232 Alum Creek warehouse.
Incorporated by reference to Exhibit 10.31 to Form 10-K (file
no.1-10767) filed October 22, 1992.
10.23 Lease, dated October 26, 1993 between the Company, as lessee, and
J.A.L. Realty Company, as lessor. re 2560 Valueway, Columbus, OH
43224. Incorporated by reference to Exhibit 10.33 to Form 10-K (file
no.1-10767) filed March 14, 1994.
10.23.1 Lease Modification Agreement dated June 16, 1995 to Lease, dated
October 26 1993, between the Company, as lessee, and J.A.L. Realty
Company, as lessor, re 2560 Valueway, Columbus, Ohio 43224.
Incorporated by reference to Exhibit 10.33.1 to Form 10-K (file
no.1-10767) filed October 27, 1995.
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10.24 Ground lease, dated April 15, 1994, between the Company, as lessee,
and J.A.L. Realty Company, as lessor, re 19 acres. Incorporated by
reference to Exhibit 10.35 to Form 10-K (file no. 1-10767) filed
October 26, 1994.
10.25 Agreement of Lease dated September 1, 1994, between Company, as
tenant, Jubilee Limited Partnership, as landlord, re Carol Stream,
IL store. Incorporated by reference to Exhibit 10.36 to Form 10-Q
(file no. 1-10767) filed December 12, 1994.
10.26 Agreement of Lease, dated March 1, 1994, between the Company, as
tenant, and Jubilee Limited Partnership, as landlord, re Hobart, IN
store. Incorporated by reference to Exhibit 10.37 to Form 10-Q (file
no. 1-10767) filed December 12, 1994.
10.27 Agreement of Lease, date February 10, 1995, between the Company, as
tenant, and Jubilee Limited Partnership, re Gurnee Mills, IL store.
Incorporated by reference to Exhibit 10.38 to Form 10-Q, (file no.
1-10767) filed March 14, 1995.
10.28 Agreement of Lease, dated January 13, 1995, between the Company, as
tenant, and Westland Partners, as landlord, re Westland, MI store.
Incorporated by reference to Exhibit 10.39 to Form 10-Q, (file no.
1-10767) filed March 14, 1995.
10.29 Agreement of Lease, dated January 31, 1995, between the Company, as
tenant, and Taylor Partners, as landlord, re Taylor, MI store.
Incorporated by reference to Exhibit 10.40 to Form 10-Q, (file no.
1-10767) filed March 14, 1995.
10.30 Sublease, dated December 28, 1994, between the Company, as
subtenant, and Shonac Corporation, as sublandlord, re Alum Creek
Drive warehouse space. Incorporated by reference to Exhibit 10.41 to
Form 10-Q, (file no. 1-10767) filed March 14, 1995.
10.31 Lease, dated September 2, 1997, between the Company, as lessee, and
SSC Fort Wayne LLC, as landlord. Incorporated by reference to
Exhibit 10.33.1 to Form 10-K (file no. 1-10767) filed April 29,
2002.
10.32 Agreement of Lease, dated April 10, 1995, between the Company as
tenant, and Independence Limited Liability Company, as landlord, re
Charlotte, North Carolina Store. Incorporated by reference to
Exhibit 10.45 to Form 10-Q (file no. 1-10767) filed December 12,
1995.
10.33 Sublease and Occupancy Agreement, dated December 15, 1995, between
the Company, SSC and SSC dba Value City Furniture, re Louisville,
Kentucky (Preston Highway) store. Incorporated by reference to
Exhibit 10.46 to Form 10-Q (file no. 1-10767) filed March 19, 1996.
10.34 Agreement of Lease, dated March 13, 1996, between the Company as
tenant, and Jubilee Limited Partnership, as landlord, re Saginaw,
Michigan store. Incorporated by reference to Exhibit 10.47 to Form
10-Q (file no. 1-10767) filed March 19, 1996.
10.35 Agreement of lease, dated 1996 between the Company, as tenant, and
SSC, as landlord, re the Melrose Park, IL store. Incorporated by
reference to Exhibit 10.49 to Form 10-K (file no. 1-10767) filed
November 1, 1997.
10.36 Agreement of Lease, dated October 4, 1996, between the Company, as
tenant, and Hickory Ridge Pavilion, Ltd., as landlord, re the
Memphis, TN store. Incorporated by reference to Exhibit 10.50 to
Form 10-K (file no. 1-10767) filed November 1, 1997.
10.37 Lease, dated September 2, 1997 between the Company, as lessee, and
JLP River Oaks West LLC, as lessor, re River Oaks West Shopping
Center, Calumet City, Illinois. Incorporated by reference to Exhibit
10.56 to Form 10-K (file no. 1-10767) filed April 30, 1999.
10.38 Lease, dated September 29, 1998 between the Company, as tenant, and
Valley Fair Irvington LLC, as landlord, re Irvington, NJ.
Incorporated by reference to Exhibit 10.57 to Form 10-K (file no.
1-10767) filed April 30, 1999.
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10.39 Lease, dated March 22, 2000 between East Fifth Avenue, LLC, an
affiliate of SSC, and Shonac Corporation. Incorporated by reference
to Exhibit 10.60 to Form 10-K (file no. 1-10767) filed April 28,
2000.
10.40 Employment Agreement, dated June 21, 2000, between James A. McGrady
and the Company. Incorporated by reference to Exhibit 10.46 to Form
10-K (file no. 1-10767) filed May 4, 2001.
10.41 Employment Agreement, dated December 4, 2000, between George Kolber
and the Company. Incorporated by reference to Exhibit 10.46 to Form
10-K (file no. 1-10767) filed May 4, 2001.
10.41.1 Addendum to the December 7, 2000 Executive Employment Agreement and
Restricted Stock Agreement By and Between George Kolber and Value
City Department Stores. Incorporated by reference to Exhibit 10.44.1
to Form 10-K (file no. 1-10767) filed April 29, 2002.
10.42 Employment Agreement dated February 3, 2002 between John C. Rossler
and the Company. Incorporated by reference to Exhibit 10 to Form
10-Q (file no. 1-10767) filed September 12, 2002.
10.43* Employment Agreement, dated February 3, 2002, between Edwin J.
Kozlowski and the Company.
10.44 Loan and Security Agreement, dated as of June 11, 2002, between the
Company, as Borrowers, and National City Commercial Finance, Inc.,
as Administrative Agent for the ratable benefit of the Revolving
Credit Lenders. Incorporated by reference to Exhibit 10.1 to Form
10-Q (file no. 1-10767) filed June 18, 2002.
10.45 Financing Agreement, dated as of June 11, 2002, by and among the
Company,. as Borrowers and Cerberus Partners, L.P. and the Lenders
from time to time party hereto. Incorporated by reference to Exhibit
10.2 to Form 10-Q (file no. 1-10767) filed June 18, 2002.
10.46 Amended and Restated Senior Convertible Loan Agreement, dated as of
June 11, 2002 by and among Value City Department Stores, Inc., as
Borrower, Shonac Corporation, DSW Shoe Warehouse, Inc., Gramex
Retail Stores, Inc., VCM, Ltd., Filene's Basement, Inc., GB
Retailers, Inc., J.S. Overland Delivery, Inc., Value City Department
Stores Services, Inc., Value City Limited Partnership, Value City of
Michigan, Inc., Westerville Road GP, Inc. and Westerville Road LP,
Inc., as guarantors, the Lenders from time to time party hereto, as
Lenders, and Schottenstein Stores Corporation, as Agent.
Incorporated by reference to Exhibit 10.3 to Form 10-Q (file no.
1-10767) filed June 18, 2002.
10.47 Amendment No. 1 to Amended and Restated Senior Convertible Loan
Agreement, dated June 11, 2002 by and among Value City Department
Stores, Inc., as Borrower, Shonac Corporation, DSW Shoe Warehouse,
Inc. Gramex Retail Stores, Inc., VCM, Ltd., Filene's Basement, Inc.,
GB Retailers, Inc., J.S. Overland Delivery, Inc., Value City
Department Stores Services, Inc., Value City Limited Partnership,
Value City of Michigan, Inc., Westerville Road GP, Inc. and
Westerville Road LP, Inc., as Guarantors, the Lenders from time to
time party hereto, as Lenders, and Schottenstein Stores Corporation,
as Agent. Incorporated by reference to Exhibit 10.3.1 to Form 10-Q
(file no. 1-10767) filed June 18, 2002.
10.48 Amended and Restated Registration Right Agreement, dated as of June
11, 2002 by and among Value City Department Stores, Inc. and
Cerberus Partners, L.P. and Schottenstein Stores Corporation.
Incorporated by reference to Exhibit 10.4 to Form 10-Q (file no.
1-10767) filed June 18, 2002.
10.49 Form of Common Stock Purchase Warrants issued to Cerberus Partners,
L.P. and Schottenstein Stores Corporation. Incorporated by reference
to Exhibit 10.5 to Form 10-Q (file no. 1-10767) filed June 18, 2002.
21* List of Subsidiaries Page E-20.
23* Consent of Deloitte & Touche LLP Page E-21.
24* Power of Attorney Page E-22.
99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the
Chief Executive Officer.
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99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the
Chief Financial Officer.
* Filed herewith.
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