UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-10767
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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. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,840,124 Common Shares, based on the $3.89 closing sale price on April 15,
2002, was $49,948,082.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 33,977,707 Common Shares were
outstanding at April 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
FORM
10-K
REPORT
ITEM NO. PAGE
-------- ----
PART I
1. Business............................................................................................3
2. Properties.........................................................................................15
3. Legal Proceedings..................................................................................16
4. Submission of Matters to a Vote of Security Holders................................................16
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..........................17
6. Selected Financial Data............................................................................18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................19
7A. Quantitative and Qualitative Disclosures about Market Risk ........................................28
8. Financial Statements and Supplementary Data........................................................28
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................................28
PART III
10. Directors and Executive Officers of the Registrant.................................................29
11. Executive Officer Compensation.....................................................................34
12. Security Ownership of Certain Beneficial Owners and Management.....................................39
13. Certain Relationships and Related Transactions.....................................................41
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................45
Signatures.........................................................................................46
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
2
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
stockholders 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 statement 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
Value City Department Stores, Inc. operates a chain of 117 department stores
located in Ohio, Pennsylvania and 13 other Midwestern, Eastern and Southern
states and the District of Columbia, principally under the name Value City, 108
DSW Shoe Warehouse ("DSW") stores located throughout the United States, and 21
Filene's Basement stores located principally in the Northeast United States. For
over 80 years, our strategy has been to provide exceptional value by offering a
broad selection of brand name merchandise at prices substantially below
conventional retail prices. Our Value City stores carry men's, women's and
children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes and health and beauty care items, with apparel comprising
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
DSW stores are a chain of upscale shoe stores offering a wide selection of dress
and casual footwear below traditional retail prices. These stores average 25,000
square feet with up to 45,000 pairs of women's and men's designer brand shoes
and athletic footwear per store. Our Filene's Basement stores average 27,000
square feet and specialize in top tier brand name merchandise of men's and
women's apparel, jewelry, shoes, accessories and home goods. Our pricing
strategy is supported by our ability to purchase large quantities of goods in a
variety of special buying opportunities. For many years, we have had a
reputation in the marketplace as a purchaser of buy-outs and manufacturers'
closeouts.
3
HISTORY OF OUR BUSINESS
We opened our first 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 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.
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 the 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. See
"Licensed Departments." Effective at the close of business February 2, 2002, we
purchased the Mazel partners' 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 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. The DSW chain of stores has grown to over 108 stores operating
across the country. Shonac operates the license shoe departments in all Value
City stores and 17 Filene's Basement stores. DSW operates licensed shoe
departments in two Filene's Basement stores.
Effective May 3, 1998, we acquired the store operations of Valley Fair
Corporation from SSC. Valley Fair operated two department stores located in New
Jersey. Prior to their acquisition, we had been a licensee of certain
departments in these two stores for eighteen years.
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, from Gramex Corporation. Of the 15 stores acquired
and after liquidation of the existing Grandpa's inventory, 13 stores were
converted to the Value City format. Six stores received only minor improvements
and were reopened in March 2000. The other 7 stores were remodeled based on our
current Value City format and were reopened in April 2000.
On March 17, 2000, we completed the acquisition of substantially all of the
assets and the assumption of certain liabilities of Filene's Basement Corp., a
Massachusetts corporation, and Filene's Basement, Inc., a wholly owned
subsidiary of Filene's Basement Corp. through our wholly owned subsidiary, Base
Acquisition Corp. Filene's Basement was operating as debtor-in-possession under
Chapter 11 of the Bankruptcy Code. We continue to operate the 14 Filene's
Basement stores acquired on March 17, 2000 and have reopened 3 other Filene's
Basement stores in the Washington D.C. area. We opened 1 new Filene's Basement
store in fiscal 2001 and, during fiscal 2000, we opened 2 new Filene's Basement
stores.
CHANGE IN FISCAL YEAR-END
On June 10, 1998, we changed our fiscal year from a 52/53-week year that ended
on the Saturday nearest to July 31 to a 52/53-week year that ends on the
Saturday nearest to January 31. The six-month transition period of August 2,
1998 through January 30, 1999 (the "Transition Period") preceded the start of
the 1999 fiscal year that ended January 29, 2000.
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OPERATING SEGMENTS
We are managed in three operating segments, Value City Department Stores, DSW
Shoe Warehouse and Filene's Basement. See Note 14 of Notes to Consolidated
Financial Statements beginning on page F-21 of this annual report for
information regarding our segments.
BUSINESS STRATEGIES
Our strategy is to provide brand name merchandise at competitive retail prices.
We believe that the size of our Value City department stores facilitates a
full-line merchandise offering and range of brands which differentiates us from
other off-price retailers.
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.
Filene's Basement strategy is similar to Value City's focus on providing the
best brand names at everyday low prices for men's and women's apparel, jewelry,
shoes, accessories and home goods.
The principal elements of Value City's, DSW's and Filene's Basement business
strategies are discussed below.
MERCHANDISING
Selection
Value City is a full-line, off-price retailer carrying men's, women's and
children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes, health, and beauty care items. Off-price retailing, as
distinguished from traditional full-price retailing and discount or off-brand
merchandising, is characterized by the purchase of primarily high quality brand
name merchandise, at prices below normal cost to most retailers. A portion of
the cost savings is then passed on to customers through lower prices. Our Value
City stores strive to offer customers one-stop-shopping 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. To improve store
profitability and meet the changing needs of our customers, we continually
refine the Value City merchandise mix eliminating less productive departments
and introducing new merchandise categories.
We believe customers are attracted to Value City stores because of continuous
new offerings of value-priced merchandise acquired in special purchases. At the
same time, Value City maintains a broad and consistent range of goods, it
purchases continuing lines of merchandise and draws upon its vendor contacts to
ensure constant availability of certain basic categories of merchandise as well
as current fashion trends.
DSW stores attract customers because of their wide assortment of top quality
name brand dress, casual and athletic footwear for men and women together with a
regularly changing selection of more fashion-oriented footwear. Our DSW stores
are large, contemporary, 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.
5
Filene's Basement stores average 27,000 square feet and offer branded apparel,
home goods, accessories and retail stocks purchased directly from major upscale
retailers. The branded merchandise represents a focused assortment of
fashionable, nationally recognized men's and women's apparel accessories and
home goods bearing prominent designers `and manufacturers' names. Branded
merchandise constitutes most of the product line and is 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.
The following table sets forth the relative contributions of each major
merchandise category to total sales.
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
2/2/02 2/3/01 1/29/00
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Apparel and Ready-to-Wear - Includes: Men's, Women's
and Children's outerwear, suits, dresses, sportswear,
sleepwear, underwear and accessories, and department
store shoe sales........................................................ 57.8% 61.9% 62.7%
Hard goods and Home Furnishings - Includes: domestics;
jewelry; housewares; giftware; and small appliances .................... 15.5 14.7 17.2
Licensed Departments - Includes: health and beauty care;
food; toys and sporting goods and other incidental
departments............................................................. 5.6 6.0 6.3
DSW Stores................................................................. 21.1 17.4 13.8
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100.0% 100.0% 100.0%
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Value Pricing
Value City stores offer quality brand name merchandise at prices typically 50%
to 70% below prices charged by traditional department stores for similar items
and at prices comparable to or lower than prices charged by other off-price
retailers. We can offer exceptional values because our buyers purchase
merchandise directly from manufacturers and other vendors generally at prices
substantially below those paid by conventional retailers. This allows us to pass
on the savings directly to our customers. See "Supplier Relationships and
Purchasing."
DSW price points are targeted to be up to 50% lower than the regular prices of
other specialty retailers and traditional department stores. DSW continually
strives to improve its merchandise sourcing to maintain quality, lower costs and
shortened delivery cycles. Identifying and building relationships with
cost-efficient manufacturers and suppliers of quality merchandise is essential
to DSW's merchandising strategy.
Well known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City and Filene's Basement 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."
6
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.
Licensed Departments
We operate all departments in the Value City stores except for the health and
beauty care, toy and sporting goods, food and certain other incidental
departments. Effective with the close of business on February 2, 2002 by
acquisition of our partner's interest in VCM for $8,375,000, we now operate the
health and beauty care, toy, sporting goods and food departments in the Value
City stores. These departments are licensed to others, including affiliated
parties, for a percentage of net sales, generally ranging from 5% to 11%, for
initial periods of up to 10 years with, in some instances, an option to renew.
In addition, we receive a fee from some licensees for general and administrative
expenses. The aggregate annual license fees received from licensees for fiscal
year ended February 2, 2002 were $11,340,000, including $9,698,000 from VCM, and
for fiscal year ended February 3, 2001 were $11,323,000, including $9,144,000
from VCM. For fiscal years 2002 and beyond, the results of operations of
departments previously licensed by VCM will be consolidated in future financial
statements.
SSC owned 49.9% of the outstanding stock of Shonac until May 1998 when we
purchased it. Shonac operates the shoe departments within all the Value City
stores and 17 Filene's Basement stores. DSW operates the shoe departments in 2
Filene's Basement stores. Intercompany license fees and expenses are eliminated
in the consolidated financial statements.
Filene's Basement licenses the fragrance for cosmetics and certain other
incidental departments to independent third parties. The aggregate annual
license fees for fiscal year ended February 2, 2002 were approximately $888,000.
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.
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.
Continuously, we seek to find and negotiate special purchase opportunities. Over
the years, our buyers have established excellent relationships with suppliers
including a reputation for the ability to purchase entire lots of merchandise.
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. Many manufacturers of brand name merchandise are
reluctant to sell merchandise for resale at discounted prices through their
normal channels of distribution or to retailers that may be considered
competitors in their regular distribution channels. We believe we fill that
need. By
7
selling such merchandise through our own retail stores, we are able to assure
suppliers that the merchandise will be sold without disturbing the suppliers'
regular channels of distribution.
Although we cannot quantify the amount by which the prices we pay for special
purchases are lower, if any, than the prices paid by our competitors for similar
purchases, we believe that such special purchases are made at prices
sufficiently favorable to enable us to offer merchandise to our customers at
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. We regularly purchase overstocked or overproduced items from
manufacturers and other retailers, including end-of-season, out-of-season and
end-of-run merchandise and manufacturers' slight irregulars. From time to time,
we purchase all or substantially all of the inventories of financially
distressed retailers and make other special purchases. We also have started to
more aggressively seek advantageous buying opportunities overseas, particularly
in non-apparel categories.
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we 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 the Value City stores, which in most cases is the next season.
This ability to purchase and quickly distribute or hold merchandise in
substantial quantities has enabled us to offer high-quality merchandise to
customers at prices significantly below usual retail prices. We believe that
this ability distinguishes us from the typical discount or department store and
provides us with a competitive advantage in making purchases as favorable
opportunities arise.
The relatively large size of the Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
DSW's merchandising group constantly monitors current fashion trends as well as
historical sales trends to identify popular styles and styles that may become
popular in the upcoming season. Once our 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.
8
We believe the acquisition of Filene's Basement in March 2000, a well-known
institution in Boston since 1908, parallels the Value City `Value Driven'
merchandising philosophy. Because of the longstanding relationships Filene's
Basement has with vendors, it receives quality buying opportunities at
competitive prices similar to that of Value City. These longstanding
relationships make Filene's Basement a prime choice for vendors with overruns,
department store cancellations and unmet volume objectives.
DISTRIBUTION
We use a regionalized distribution strategy with 10 distribution centers located
in Columbus, Ohio and a distribution facility in Auburn, Massachusetts for
Filene's Basement. The aggregate area of the distribution facilities is
approximately 3,000,000 square feet; however, use of multi-tier processing
levels in some of the distribution centers substantially increases their
operating capacity. In addition, to expedite the flow of merchandise to certain
clusters of stores, we use 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.
Merchandise is processed, ticketed and consolidated prior to shipment to the
stores to ensure full-truck loads to minimize shipping costs. We lease our fleet
of road tractors and approximately 70% of our semi-rig trailers with the
remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
To support the planned growth of our shoe operations, we consolidated and
relocated Shonac and DSW's principal offices and distribution center operations
in 2001 to a new 700,000 square foot facility located in Columbus, Ohio. We have
entered a 15-year lease with three five-year option periods with an affiliate of
SSC for this facility.
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.
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.
ADVERTISING AND PROMOTION
We commit substantial resources to advertising and believe our marketing
strategy is one of the keys to our success. Value City advertises frequently in
print, including newspapers, circulars and flyers, and on television and radio.
The promotional strategy is carefully planned and budgeted to include not only
institutional and seasonal promotions, but also weekly storewide sales events
highlighting recent buy-outs and other specially purchased brand name
merchandise designed to maximize customer interest. In some cases, a supplier
may prohibit the advertising or non-store promotion of its brand name.
Our DSW stores currently use a broadcast campaign, primarily radio, focusing on
the slogan "The Shoes of the Moment. The Deal of a Lifetime." This campaign is
supplemented by print promotions and, increasingly, television. In addition, a
valuable marketing tool for DSW is the "Reward Your Style" loyal customer
9
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.
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
We believe 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. The 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 117 Value City stores open as of March 15,
2002, 25 are freestanding and 92 are in shopping centers, of which 25 are
enclosed malls in which they serve as an anchor.
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 108 DSW stores open as of March 29, 2002, 12 are freestanding, 77 are in
shopping centers and 19 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.
The 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
over $1,014 in sales per square foot of selling space during fiscal 2001 and
represents approximately 23% of total sales.
Excluding the downtown Boston location, most of our Filene's Basement stores are
located in suburban areas, near large residential neighborhoods away from
downtown commercial centers and average approximately 27,000 square feet of
selling space per store. Filene's Basement operates 20 branch stores in six
states and the District of Columbia. Generally, the branch store's selling space
is on a single level and uses a prototypical "racetrack" aisle layout for
merchandise presentation. The branch stores are designed to be convenient and
10
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
We offer customers a convenient, pleasurable shopping experience and a high
level of satisfaction. At Value City, a training program is utilized to assure
every associate maintains the highest level of professionalism and places
customer service at the forefront. At DSW, all associates receive Retail Results
University training in both product knowledge and sales/service. This in-house
training program emphasizes acknowledgment of all customers, customized levels
of service, and realization of sales opportunities at all moments of customer
contact.
All of our stores are designed for self-service shopping, although sales
personnel are available to help customers locate merchandise and to assist in
the selection and fitting of apparel and footwear. In all stores, a customer
service desk is conveniently located generally adjacent to the central 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 the Value City and Filene's
Basement 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 its stores and maintains a liberal 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.
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 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, for the overall condition of their stores, for
customer relations, personnel hiring and scheduling, and for all other
operational matters arising in the stores. Each store manager is compensated, in
part, based on the performance of his or her store. Our store managers are an
important source of information concerning local market conditions, trends and
customer preferences.
We prefer to fill management positions through promotion of existing associates.
A store management training program is maintained to develop the management
skills of associates and to provide a source of management personnel for future
store expansion.
11
Expansion
We have increased our department store base from 74 stores at the start of
fiscal 1994 to 117 stores at the end of fiscal 2001. No new department stores
were added in Fiscal 2001 and none are planned for Fiscal 2002. Our past
expansion has been accomplished by leasing newly constructed locations or by
acquiring existing locations from other retailers.
We plan to open 25 to 30 new DSW shoe stores during fiscal 2002. 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.
The table below sets forth certain information relating to the Company's stores
during each of the last five fiscal years:
6 Months
Year Ended Ended Year Ended
---------------------------------- ----- --------------------
2/2/02 2/3/01 1/29/00 1/30/99 8/1/98 8/2/97
------ ------ ------- ------- ------ ------
Beginning of Year(1) 221 167 145 142 95 86
Opened(2)(3) 27 55 22 4 49 9
Closed 2 1 -- 1 2 --
-----------------------------------------------------------------------------------------------------------------------------
End of Year(3) 246 221 167 145 142 95
-----------------------------------------------------------------------------------------------------------------------------
(1) Excludes apparel, domestics and housewares departments operated by
the Company in two Valley Fair department stores prior to May 3,
1998.
(2) Fiscal year ended February 3, 2001 includes 14 Filene's Basement
stores acquired on March 17, 2000. Fiscal year ended August 1,
1998 includes 2 department stores obtained in the purchase of
Valley Fair and the 43 shoe stores obtained in the purchase of
Shonac.
(3) Includes Crown Shoe Stores which are combined with Value City
Department Stores sales, but are not reflected in individual store
counts due to immateriality. Total number of Crown stores were 5
in fiscal years ended February 2, 2002 and February 3, 2001 and 4
in the earlier periods.
Based upon our experience, we estimate the average cost of opening a new
department store ranges from approximately $4.5 million to $6.5 million and the
cost of opening a new DSW shoe store ranges from approximately $1.0 million to
$2.0 million, including leasehold improvements, fixtures, inventory, pre-opening
expenses and other costs. Similar costs for a Filene's Basement store are in the
$2.0 million to $3.0 million range. Preparations for opening a department store
generally take eight to twelve weeks and preparations for opening a DSW shoe
store or a Filene's 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 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
12
remodeled, which generally involves more significant changes to the interior or
exterior of the store. We maintain our own architectural design staff,
construction crews and carpentry shop to assist in refurbishing and remodeling
store interiors and to build in-store display tables and racks.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe a high level of automation is essential to maintaining and improving
our competitive position. We rely upon computerized data systems to provide
information at all levels, including warehouse operations, store billing,
inventory control, merchandising and automated accounting. Value City utilizes
two IBM AS/400 computer systems, and Shonac utilizes a Unix computer system for
all of its processing needs.
We utilize point of sale ("POS") registers with full scanning capabilities to
increase speed and accuracy at customer checkouts and facilitate inventory
restocking. Since layaways represent an important part of our department store
business, an automated system to capture and control layaways is integrated into
the POS system.
We utilize automated distribution center systems to track and control the
receipt, processing, storage and shipping of product to the stores.
ASSOCIATES
As of March 15, 2002, we had approximately 17,000 associates of which 9,200 were
full-time and the balance were part-time. Approximately 1,500 of these
associates in 21 stores are covered by collective bargaining agreements.
Group hospitalization, surgical, medical, vision, dental, disability and life
insurance benefits and a 401(k) plan are provided to full-time non-union
associates. The Company is a co-sponsor with SSC in these plans. The Company
also sponsors an associate stock purchase plan and a stock option plan for
salaried associates.
We believe that, in general, we have satisfactory relations with all of our
associates.
COMPETITION
The retail industry is highly competitive. We compete with a variety of
conventional and discount retail stores, including national, regional and local
independent department and specialty stores, as well as with catalog operations,
on-line providers, factory outlet stores and other off-price stores.
In the discount or off-price retailing segment, we differentiate ourselves
through our store format and the breadth of value product offering. Our large
stores differ from most other off-price retailers which tend to operate
substantially smaller stores focusing predominantly on either hard or soft
goods. Our large stores facilitate our merchandise offering and broad range of
brands and products.
In addition, because we purchase much of our inventory opportunistically, we
compete for merchandise with other national and regional off-price apparel and
discount outlets. Many of our competitors handle identical or similar lines of
merchandise and have comparable locations, and some have greater financial
resources than we do.
Competitive factors important to our customers include fashion, value,
merchandise selection, brand name recognition and, to a lesser degree, store
location. We compete primarily on the basis of value, merchandise quality and
selection. We believe our competitive advantages include; our reputation in the
marketplace for
13
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.
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.
Through the acquisition of Shonac, we registered in the U.S. Patent and
Trademark Office a number of trademarks and service marks, including: DSW; DSW
Shoe Warehouse; Coach and Four; Crown Shoes; Reward Your Style; Flites; Jonathan
Victor; Kristi G; Lakota Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia
Cristie.
Filene's 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.
14
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated by the
Company as of February 2, 2002:
Filene's
Value City DSW Basement Total
------------- ------------- ------------- -------------
Arizona - 1 - 1
California - 4 - 4
Colorado - 3 - 3
Connecticut - 1 - 1
Delaware 3 - - 3
Florida - 6 - 6
Georgia 4 2 - 6
Illinois 16 6 2 24
Indiana 7 2 - 9
Kansas - 2 - 2
Kentucky 4 - - 4
Maryland 7 4 - 11
Massachusetts - 5 8 13
Michigan 9 6 - 15
Minnesota - 3 - 3
Missouri 8 1 - 9
New Hampshire - 1 - 1
New Jersey 7 6 1 14
New York - 11 4 15
North Carolina 1 1 - 2
Ohio 23 9 1 33
Oklahoma - 1 - 1
Pennsylvania 18 9 1 28
Tennessee 1 2 - 3
Texas - 11 - 11
Virginia 4 6 - 10
Washington D.C. 1 - 3 4
West Virginia 4 - - 4
Wisconsin - 1 - 1
------------ ------------- ------------ -------------
117 104 20 241
------------- ------------- ------------- -------------
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts; and Los
Angeles, California. We operate 10 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 2,
2002, we leased or subleased 28 stores and 7 warehouse facilities and a parcel
of land from SSC or entities affiliated with SSC. The remaining stores and
warehouses are
15
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 and
Filene's Basement department store business are adequate for our current needs
and we believe that such facilities, with certain modifications and additional
equipment will be adequate for our foreseeable future demands.
To support the planned growth of our DSW shoe warehouse business, we have
consolidated and relocated the related back office and distribution operations
of our shoe business in Spring 2001, 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.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that are incidental to the conduct
of our business. In the opinion of management, the amount of any liability with
respect to these proceedings individually or in the aggregate, will not be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the high and low sales prices of the Common
Shares as reported on the NYSE Composite Tape during the periods indicated. As
of April 15, 2002, there were 550 shareholders of record.
HIGH LOW
Fiscal 2000:
First Quarter $16.50 $9.375
Second Quarter 11.375 8.00
Third Quarter 9.9375 6.875
Fourth Quarter 8.125 4.625
Fiscal 2001:
First Quarter $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 (through April 15, 2002) $4.60 $3.04
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 2002. The
payment of any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. The payment of dividends under our long-term credit facility is
restricted to the greater of $5.0 million or 10% of consolidated net income.
17
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated selected financial data
included in our consolidated financial statements and our underlying books and
records. The 12 month period ended January 30, 1999 is presented for comparative
purposes. 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 Form 10-K
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth in Item 7 of this Form 10-K.
Transition
12 Months Period
Ended 6 Months
For the Fiscal Year Ended (Unaudited) Ended For the Year Ended
---------------------------------- ----- -----------------------
2/2/02 2/3/01(1) 1/29/00 1/30/99) 1/30/99(1) 8/1/98(2) 8/2/97
---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Net Sales (3) $2,283,878 $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379 $1,073,399
Operating (Loss) Profit $(16,344) $(135,601) $65,788 $51,266 $40,815 $38,544 $10,674
Net (Loss) Income $(28,723) $(101,791) $33,468 $24,871 $20,256 $20,359 $3,951
Basic (Loss) Earnings
per Share $(0.85) $(3.03) $1.03 $0.77 $0.63 $0.64 $0.12
Diluted (Loss) Earnings
per Share $(0.85) $(3.03) $1.02 $0.76 $0.62 $0.63 $0.12
Total Assets $880,311 $908,009 $744,181 $574,427 $574,427 $684,078 $457,973
Working Capital $228,775 $211,402 $205,011 $165,527 $165,527 $204,784 $158,476
Current Ratio 1.79 1.66 1.82 1.98 1.98 1.88 2.14
Long-term Obligations $337,199 $326,449 $144,168 $101,447 $101,447 $165,648 $57,763
Number of (4):
Department Stores 117 119 105 97 97 95 95
Shoe Stores 104 78 58 44 44 43 --
Filene's Basement Stores 20 19 -- -- -- -- --
Net Sales per
Selling Sq. Ft. (5) $233 $234 $221 $235 $126 $229 $217
Comp Sales Change (6) (2.4)% (1.1)% 7.2% 6.0% 3.3% 5.9% 0.1%
(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. Prior to fiscal 1998, sales
from our toys and sporting goods departments were included in Net
Sales. At the start of fiscal 1998 these departments became licensed
departments operated by VCM, Ltd., a 50/50 joint venture with Mazel
Stores, Inc.
(4) Includes all stores operating at the end of the fiscal year. Years
prior to 1998 exclude the apparel, domestic and housewares departments
operated by us in two affiliated department stores which were acquired
effective May 3, 1998.
(5) Excludes licensed departments and stores not operated during the
entire fiscal period.
(6) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable in its second full fiscal year of
operation. For fiscal year 2000, comparable store sales are computed
using like 52-week periods.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in our Consolidated
Statements of Operations.
For the Year Ended
--------------------------------------------
2/2/02 2/3/01 1/29/00
52 Weeks 53 Weeks 52 Weeks
--------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales
licensed departments 100.0% 100.0% 100.0%
Cost of sales (62.6) (67.5) (62.2)
------------------------------------------------------------------------------------------------------------------
Gross profit 37.4 32.5 37.8
Selling, general and
administrative expenses (38.9) (39.3) (34.7)
License fees from affiliates
and other operating income 0.8 0.7 0.8
------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (0.7) (6.1) 3.9
Interest expense, net (1.3) (1.3) (0.6)
Equity in (loss) income of joint venture - (0.1) 0.1
------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (2.0) (7.5) 3.4
Benefit (provision) for income taxes 0.7 2.9 (1.4)
------------------------------------------------------------------------------------------------------------------
Net (loss) income (1.3)% (4.6)% 2.0%
------------------------------------------------------------------------------------------------------------------
19
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of operations and
financial condition as reflected in the Company's consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. As discussed in Note 2 to the Company's 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 techniques. The Company constantly re-evaluates these significant
factors and makes adjustments where facts and circumstances dictate.
While the Company believes that the historical experience and other factors
considered provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated statements, the Company cannot guarantee that
its 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
used in the preparation of our consolidated financial statements. We have
discussed the selection, application and disclosure of the critical accounting
policies with the audit committee of the board of directors.
- Inventory. Our merchandise inventory is carried at the lower of cost
or market on a first-in, first-out basis using the retail inventory
method. 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. This is an averaging method that has been widely used in
the retail industry due to its practicality. It is recognized that the
use of this method results in valuing inventories at lower of cost or
market if markdowns are currently taken as a reduction of the retail
value of inventories. Inherent in the calculation are certain
significant management judgements and estimates including, merchandise
markon, markups, markdowns and shrinkage, which significantly impact
the ending inventory valuation at cost and the resulting gross
margins. These significant estimates, coupled with the fact that this
method is an averaging process, can, under certain circumstances,
produce distorted or inaccurate cost figures. Additionally, these
significant estimates may change as a result of further markdowns
based on our sales performance. Reserves to value inventory at the
lower of cost or market were $33.5 million and $54.1 million at the
end of fiscal 2002 and 2001, respectively.
20
- 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, if any, of the result of such
calculation. We believe at this time that the long-lived assets'
carrying values and useful lives continue to be appropriate. 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.
Effective February 3, 2002, the beginning of the new fiscal year, SFAS
142 will be adopted. SFAS 142 requires that goodwill will no longer be
amortized, but will be subject to annual fair value based impairment
tests. In addition, a transitional impairment test is required upon
the adoption date. These impairment tests are conducted on each
business of the Company where goodwill is recorded, and may require
two steps. The initial step is designed to identify potential goodwill
impairment by comparing an estimate of the fair value for each
applicable business to its respective carrying value. For those
businesses where the carrying amount exceeds its estimated fair value,
a second step is performed to measure the amount of goodwill
impairment, if any. We are in the process of determining if existing
goodwill is impaired. Goodwill impairment, if any, will be recognized
in accordance with SFAS 142 and will be classified as a cumulative
effect of a change in accounting principle.
- 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 or
costs of the medical profession increase beyond what was anticipated,
reserves recorded may not be sufficient and additional costs to the
consolidated financial statements could be required. During fiscal
2001, 2000 and 1999, we recorded charges of $8.1 million, $8.6 million
and $0, respectively, for self-insurance liabilities associated with
employee health and welfare plans, workers compensation and casualty
insurance programs.
See Note 2 to the Company's Consolidated Financial Statements for a discussion
of our significant accounting policies.
FISCAL YEAR ENDED FEBRUARY 2, 2002 COMPARED TO FISCAL YEAR ENDED FEBRUARY 3,
2001
Sales for the fifty-two weeks ended February 2, 2002, 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)%
---------------------------------------------------------------------
21
Department Store non-apparel comparable sales increased 3.3% for the twelve
months. Apparel comparable sales declined 5.9% for the year to date period
including a positive comparable of 3.7% for children while men's and ladies
declined 4.7% and 10.7%, respectively.
Including a flat twelve-month comparable store growth rate, DSW sales rose
almost $100.0 million to $509.4 million for the year to date period. This
includes a net increase of 26 stores.
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. Gross profit, as a percent of sales by segment, were:
2001 2000
------- ------
Value City Department Stores 37.6% 30.7%
DSW 38.2% 38.3%
Filene's Basement 35.1% 34.4%
---------------------------------------------------------------------
Total 37.4% 32.5%
---------------------------------------------------------------------
For the year to date period, 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. SG&A as a percent of sales by
segment were:
2001 2000
------- ------
Value City Department Stores 40.4% 40.8%
DSW 38.0% 36.7%
Filene's Basement 32.9% 34.4%
---------------------------------------------------------------------
Total 38.9% 39.3%
---------------------------------------------------------------------
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 department 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 department stores opened less than twelve
months during fiscal 2000 had pre-tax operating losses of $22.8 million,
including $4.5 million of pre-opening expense. Twenty-six DSW stores opened less
than twelve months in fiscal 2001 had a pre-tax net operating loss of $2.5
million, including $0.1 million of pre-opening expenses. Twenty DSW stores
opened less than twelve months during fiscal 2000 had a pre-tax net operating
loss of $6.5 million, including $4.6 million of pre-opening expenses.
22
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.
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 0.15% to 0.25%.
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, 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 decreased $0.9 million from a loss of $1.3
million to a loss of $0.4 million.
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.
FISCAL YEAR ENDED FEBRUARY 3, 2001 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
2000
Our net sales increased $542.8 million, or 32.5%, from $1,670.2 million to
$2,213.0 million. Fiscal 2000's sales included $249.1 million net owned sales of
the Filene's Basement stores acquired effective March 17, 2000. Comparable store
sales decreased 1.1%. Net sales for the department stores ("Value City")
increased $130.3 million, or 9.2%, from $1,423.6 million to $1,553.9 million.
Value City's comparable store sales decreased 4.3%, or $60.7 million.
Non-apparel sales increased 7.2% and apparel sales increased 6.4%. On a
comparable store basis, apparel and non-apparel sales decreased 5.1% and 5.4%,
respectively. DSW Shoe Warehouse achieved sales of $410.0 million with a 19.1%
comparable stores sales increase.
Gross profit increased $89.1 million from $631.0 million to $720.1 million, and
decreased to 32.5% as a percentage of net sales, compared to 37.8% as a
percentage of net sales in the prior year. The decrease in the gross margin
percentage is due primarily to a $105.4 million charge for the realignment of
excess inventory quantities.
Selling, general and administrative expenses ("SG&A") increased $290.7 million
from $579.5 million to $870.2 million, and increased as a percentage of net
sales from 34.7% to 39.3%, an increase of 4.6%. New DSW and Value City stores
accounted for $102.5 million of the SG&A increase; the Filene's Basement stores
added $86.0 million. Comparable store SG&A increased $37.0 million, primarily in
the areas of payroll, benefits and occupancy costs. Distribution and
transportation costs were up $41.1 million. Overhead increased $14.1 million to
support expansion of our shoe business and the relocation of its distribution
complex. SG&A also include $4.6 million of non-recurring severance and asset
impairment charges. All other expenses as a group were up approximately $6.6
million.
Based upon our experience, we estimate the average cost of opening a new
department store to range from approximately $4.5 million to $6.5 million and
the cost of opening a new shoe store to range from approximately $1.0 million to
$2.0 million including leasehold improvements, fixtures, inventory, pre-opening
expense and other costs. Similar costs for a Filene's Basement store are in the
$2.5 million to $3.5 million range. Preparations for opening a department store
generally take between 8 and 12 weeks and preparations for a shoe store or a
Filene's Basement store generally take 8 to 10 weeks. Pre-opening costs are
expensed as incurred. It has been our experience that new stores generally
achieve profitability and contribute to net income after the first
23
full year of operations. Twenty-three department stores opened less than 12
months as of the beginning of fiscal 2000 had a pre-tax net operating loss of
$22.8 million, including $4.5 million of pre-opening expense amortization. Ten
department stores opened less than 12 months during fiscal 1999 had pre-tax
operating losses of $1.6 million in 1999, including $3.8 million of pre-opening
expense. Twenty DSW stores opened less than 12 months in fiscal 2000 had a
pre-tax net operating loss of $6.5 million, including $4.6 million of
pre-opening expenses. Twenty-two DSW stores opened less than 12 months during
fiscal 1999 had a pre-tax net operating loss of $3.7 million after recognizing
$3.3 million of pre-opening expenses.
License fees from affiliates increased $2.9 million, or 34.0%, from $8.5 million
to $11.3 million, and remained at 0.5% as a percentage of net sales.
Other operating income decreased $2.4 million, or 42.0%, from $5.6 million to
$3.3 million and decreased as a percentage of net sales from 0.34% to 0.15%.
Operating (loss) profit decreased $201.2 million from $65.6 million to a loss of
$135.6 million, and decreased as a percentage of net sales from 3.9% to a 6.1%
loss as a result of the above factors.
Interest expense, net of interest income, increased from $10.7 million to $30.5
million due to increased borrowing.
Equity in income (loss) of joint venture decreased $2.7 million from income of
$1.3 million to a loss of $1.3 million due primarily to markdowns taken to
liquidate inventory.
Income (loss) before provision for income taxes decreased $223.8 million from
income of $56.4 million to a loss of $167.4 million, and decreased as a
percentage of sales from 3.4% to a 7.5% loss as a result of the above factors.
SEASONALITY
Our business is affected by the pattern of seasonality common to most retail
businesses. Historically, the majority of our sales and operating profit have
been generated during the back-to-school and Christmas selling seasons.
FISCAL YEAR
The Company follows a 52/53-week fiscal year that ends on the Saturday nearest
to January 31. Fiscal 2001 and 1999 contain 52 weeks and fiscal 2000 has 53
weeks.
INCOME TAXES
The effective tax rate for fiscal 2001 was 36.5% versus 39.2% for fiscal 2000.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues Statements
of Financial Accounting Standards ("SFAS"), some of which require implementation
by a date falling within or after the close of our fiscal year.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for de-
24
rivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. Our adoption of SFAS 133 effective February 4, 2001 did not have a
significant impact our financial position, results of operations, or cash flows.
We utilize interest rate swap agreements to manage our interest rate risks on
borrowings under the $300 million variable rate credit agreement. We do not hold
or issue derivative financial instruments for trading purposes. We do not have
derivative financial instruments that are held or issued and accounted for as
hedges of anticipated transactions.
In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets". The guidance in SFAS No. 141
supersedes APB 16 and is applicable to business combinations initiated after
June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to be
amortized and will instead be subject to at least an annual assessment for
impairment as set forth in the new standard. We have approximately $41.0 million
in goodwill recorded in our consolidated balance sheet as of February 2, 2002.
Amortization of the goodwill is generally not deductible for tax purposes. We
recorded approximately $4.9 million in amortization expense related to goodwill
for the twelve months ended February 2, 2002 and we intend to adopt SFAS No. 142
for the 2002 fiscal year. We are in the process of determining if existing
goodwill is impaired. Goodwill impairment, if any, will be recognized in
accordance with SFAS No. 142 and will be classified as a cumulative effect of a
change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addressed 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under Opinion 30, two accounting models existed for long-lived assets
to be disposed of. The FASB decided to establish a single accounting model,
based on the framework established in Statement 121, for long-lived assets to be
disposed of by sale. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years.
We are currently assessing the impact of SFAS No. 143 and 144. At this time, we
have not yet determined the effect of these pronouncements on our results of
operations and financial position.
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.
25
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $228.8 million and $211.4 million at February 2, 2002
and February 3, 2001, respectively. Current ratios at those dates were 1.8 and
1.7, respectively.
Net cash provided by operating activities totaled $58.4 million in fiscal 2001.
Net cash used in operating activities was $114.7 million for the fiscal year
2000. Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $40.3 million versus a loss of $89.4 million last year.
Net cash used for capital expenditures was $40.2 million and $70.2 million for
fiscal 2001 and 2000, respectively. During fiscal 2001, capital expenditures
included $11.6 million for new stores, $8.9 million for improvements in existing
stores, $11.6 million for relocation of office, warehousing and operations of
our shoe business, $4.6 million for MIS equipment upgrades and new systems. All
other capital expenditures aggregated $3.5 million. Proceeds from lease
incentives totaled $14.2 million in fiscal 2002 and are amortized as a reduction
of rent expense over the life of the lease.
At February 2, 2002, we had a $300 million Amended and Restated Credit Agreement
(Credit Agreement), dated as of March 15, 2000. The Credit Agreement, which
expires on March 15, 2003, provides for revolving and overnight loans and
issuance of letters of credit. Outstanding advances are secured by a lien on
assets and are subject to a monthly borrowing base of eligible inventories and
receivables, as defined. Terms of the Credit Agreement require compliance with
certain restrictive covenants, including limitations on dividends, the
incurrence of additional debt and financial ratio tests. 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 provides for various borrowing rates,
currently equal to 275 basis points over LIBOR. The LIBOR rate on $75.0 million
has been locked in at a fixed annual rate of 6.99% through April 2003 under a
swap agreement.
To supplement operating cash requirements, we have a $100.0 million subordinated
secured credit facility with SSC. Outstanding advances under the agreement are
subordinated to the Credit Agreement and are subject to a junior lien on assets
securing the Credit Agreement. At February 2, 2002, $20.0 million was
outstanding. The interest rate and terms of the $100.0 million facility are
generally the same as the Credit Agreement.
We entered a $75.0 million Senior Subordinated Convertible Loan Agreement
(Senior Facility), dated as of March 15, 2000. The Senior Facility bears
interest at various rates, currently equal to 250 basis points over LIBOR. The
interest rate increases an additional 50 basis points every 90 days after the
first anniversary date. The Senior Facility is due in September 2003. In
December 2000, pursuant to terms of the Senior Facility, SSC purchased the
outstanding balance under the same continuing terms. The terms provide that if
prior to 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, has
the right to convert the debt into our common stock at a price equal to 95% of
the 20-day average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. A one time fee of 200 basis points, or $1.5
million, was paid to SSC at the initial closing in consideration for entering
into a Put Agreement associated with the Senior Facility.
Achievement of expected cash flows from operations and compliance with our
Credit Agreement covenants (see Note 5 to the Consolidated Financial Statements)
are dependent upon a number of factors, including the attainment of sales, gross
profit, expense levels, vendor relations, and flow of merchandise that are
consistent
26
with our financial projections. In the first quarter of fiscal 2001, a major
Factor organization reduced our availability of credit and indicated that we
needed to strengthen our liquidity and increase our credit availability from
other sources. 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 2001 were
below plan, we believe that cash generated by operations, along with the
available proceeds from our Credit Agreement, SSC Facility and other sources of
financing will be sufficient to meet our obligations for working capital,
capital expenditures, and debt service requirements. 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 to us 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 $8,375,000, we now own 100% of VCM and operate the
health and beauty care, toy, sporting goods and food departments in the Value
City stores.
On March 17, 2000, we, through our wholly-owned subsidiary, Base Acquisition
Corp, completed the acquisition of substantially all of the assets and assumed
certain liabilities of Filene's Basement Corp., a Massachusetts corporation, and
Filene's Basement, Inc., a wholly owned subsidiary of Filene's Basement Corp.
pursuant to the closing of the asset purchase agreement, dated February 2, 2000.
The purchase price included cash of $3.5 million paid at closing, $1.2 million
to be paid over a period not to exceed three years, 403,208 shares of our common
stock with an agreed value of $5.5 million and the assumption of specified
liabilities. The assumed liabilities included the payment of amounts outstanding
under Filene's Basement debtor-in-possession financing facility of approximately
$22.5 million and certain trade payable and other obligations which will be paid
in the ordinary course. Allocation of the purchase price has been determined
based on fair market valuation of the net assets acquired subject to resolution
of several outstanding matters.
These acquisitions were funded by cash from operations and a portion of the
proceeds from the Credit Agreement.
RISK FACTORS
The following factors, among others, in some cases have affected and in the
future could affect our financial performance and actual results and could cause
actual results for 2002 and beyond to differ materially from those expressed or
implied in any such forward-looking statements: decline in demand for our
merchandise, the ability to repay the $75.0 million Senior Facility through an
equity offering or refinancing, our ability to attain our fiscal 2002 business
plan, expected cash from operations, vendor and their factor relations, flow of
merchandise, compliance with the credit agreement, our ability to strengthen our
liquidity and increase our credit availability, the availability of desirable
store locations on suitable terms, changes in consumer spending patterns,
consumer preferences and overall economic conditions, the impact of competition
and pricing, changes in weather patterns, changes in existing or potential
duties, tariffs or quotas, paper and printing costs, and the ability to hire and
train associates.
Historically, our operations have been seasonal, with a disproportionate amount
of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns
27
or unfavorable economic conditions, could have a material adverse effect on our
financial condition and results of operations for the entire year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates which may adversely
affect our financial position, results of operations and cash flows. In seeking
to minimize the risks from interest rate fluctuations, we manage exposures
through our regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. We do not use
financial instruments for trading or other speculative purposes and are not
party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under our
revolving credit facility. At February 2, 2002, direct borrowings aggregated
$211.0 million. The Credit Agreement, as amended and restated effective March
17, 2000, permits debt commitments up to $300.0 million, has a March 15, 2003
maturity date and generally bears interest at a floating rate of LIBOR plus
2.75%. We utilize interest rate swap agreements to effectively establish
long-term fixed rates on borrowings under the Credit Agreement, 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 2,
2002, 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.
At February 2, 2002, we performed a sensitivity analysis assuming an average
outstanding principal amount of $320.0 million subject to variable interest
rates. A 10% increase in LIBOR would result in approximately $1.0 million of
additional interest expense annually.
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.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The members of the Board of Directors (the "Board") of the Company are elected
at the Annual Meeting. The number of members of the Board has been fixed at
fourteen by action of the Board pursuant to the Code of Regulations (By-laws) of
the Company. 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 47 Director of the Company since June 1991. Chairman of the Company, American Eagle
Outfitters, Inc. and SSC since March 1992 and Chief Executive Officer of the
Company 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. (1) (2)
Henry L. Aaron 67 Director of the Company since January 2000. He 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 51 Director of the 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. (1)
Jon P. Diamond 44 Director of the 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. (1)
Elizabeth M. Eveillard 55 Director of the Company since August 2001. Senior Managing Director, Retailing
and Apparel Group, Bear, Stearns & Co., Inc. since 2000. Prior to that time,
Mrs. Eveillard served as the Managing Director, Head of Retailing Industry
Group, Paine Webber Corporation from 1988 to 2000. From 1972 to 1988, Mrs.
Eveillard held various executive positions including Managing Director in the
Merchandising Group with Lehman Brothers.
29
Marvin W. Goldstein 58 Director of the Company since August 2001. Private investor from 1997 to
present. Prior to that time, Mr. Goldstein was the Chairman, CEO and President
of Pet Food Warehouse from 1995 to 1997. From 1988 through 1994, Mr. Goldstein
served as Executive Vice President and General Merchandise Manager, Chairman and
CEO, and President and COO of the Department Store Division of Dayton Hudson.
Prior to that time, Mr. Goldstein held various senior merchandise positions with
R. N. Macy, Carter Hawley Hale and Dayton's. Mr. Goldstein presently serves on
the Boards of Directors of Ali-Mac, ARCA, Greenspring Company, KB Gear, Paper
Warehouse Inc., Red Tag.com and Wilsons the Leather Experts.
Richard Gurian 84 Director of the Company since June 1991. Managing Director of Natural Forms
Limited since 1995 and President of Richard Gurian Consultants, Inc., formerly
Venture Horizons, Inc., since 1980. Prior to 1980, Mr. Gurian served as Board
member and Senior Vice President - General Merchandise Manager at Lazarus
Department Stores.
Dr. Norman Lamm 74 Director of the Company since June 1991. President of Yeshiva University,
New York, New York, since 1976.
Geraldine Schottenstein 69 Director of the Company and SSC since April 1992. She has served as a volunteer
and Board member for a variety of charitable and community organizations
for more than the past five years.
Robert L. Shook 64 Director of the Company since June 1991. Author of business-related books
since 1978.
Harvey L. Sonnenberg 60 Director of the 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 63 Director of the 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 37 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 the Company. For information with
respect to the beneficial ownership of the voting stock of SSC by nominees
for election to the Board of the Company and beneficial ownership of
Common Shares of the Company by such persons and officers of the Company,
see "Security Ownership of Certain Beneficial Owners and Management."
Geraldine Schottenstein is the mother of Jay L. Schottenstein, and the
mother-in-law of Ari Deshe and Jon P. Diamond.
(2) Jay L. Schottenstein is 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.
30
INFORMATION CONCERNING BOARD OF DIRECTORS
The Board of Directors and five committees of the Board govern Value City
Department Stores, Inc. During fiscal 2001, the Board met eight 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 75% in 2001. No
director, except for Geraldine Schottenstein, Elizabeth Eveillard and Henry
Aaron, attended fewer than 75% of the meetings of the Board and of the
committees to which the director was a member in 2001.
The following table identifies the current membership of Board committees and
states the number of committee meetings held during 2001. A summary of each
committee's functions follows the table.
Director Audit Stock Option Nominating(1) (2) Oversight(1) Compensation
-------- ----- ------------ ----------------- ----------- ------------
Jay L. Schottenstein X X*
Henry L. Aaron X
Ari Deshe
Jon P. Diamond X
Elizabeth M. Eveillard X X
Marvin W. Goldstein X X X
Richard Gurian X X X X
Dr. Norman Lamm X X
Geraldine Schottenstein
Robert L. Shook X X* X
Harvey L. Sonnenberg X* X X X
James L. Weisman X X X X
# of Meetings in 2001 6 4 0 0 0
* Committee Chair
(1) Until his resignation, George Kolber served on the Nominating Committee.
He also served on the Oversight Committee, for which he was the Committee
Chair.
(2) Since the inception of the Nominating Committee, a Chairman has never
been appointed.
Directors who are not employees are paid $2,000 for each Board and Committee
meeting attended, with a minimum annual compensation of $8,000, and are
automatically granted options each quarter to purchase 1,000 Common Shares of
the Company pursuant to the 2000 Stock Incentive Plan. Directors who are also
employees of the Company do not receive additional compensation for serving as
directors.
31
AUDIT COMMITTEE
Assists the Board in monitoring:
- The integrity of the financial statements of the Company.
- The Company's system of internal control.
- The independence and performance of the Company's independent
public accountants.
- The compliance by the Company with legal and regulatory
requirements.
All members of the Audit Committee are independent as defined in the applicable
New York Stock Exchange ("NYSE") listing standards. The members of the Audit
Committee have been reviewed by the Board and determined to be independent as
defined in Sections 303.01 (B) (2) (a) and (3) of the NYSE's listing standards.
STOCK OPTION COMMITTEE
- Make recommendations to the Board the number and terms of any
stock options to be granted under the Company's stock option plan.
- Administers the Company's Incentive Compensation Plan, the 1991
Stock Option Plan and the 2000 Stock Incentive Plan.
NOMINATING COMMITTEE
- Evaluates the performance of the Board of Directors.
- Reviews the management organization of the Company 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 the Company's corporate governance guidelines.
(Established in June 2001 and did not meet in 2001.)
OVERSIGHT COMMITTEE
- Oversees, monitors, and evaluates the performance of the Chief
Executive Officer and other officers of the Company. (Established
in January 2002.)
COMPENSATION COMMITTEE
- Establishes, reviews, and recommends an executive compensation
package for the Chief Executive Officer and other officers of
the Company. (Established in January 2002.)
32
EXECUTIVE OFFICERS
The following persons are executive officers of the Company. For information
regarding executive officers that are also directors, see "DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT." The officers of the Company are elected
annually by the Board and serve at the pleasure of the Board.
RAYMOND L. BLANTON, age 52, effective February 2002, was elected Senior Vice
President and General Merchandise Manager of the Company. Mr. Blanton was Sr.
Vice President - Chief Merchandising Officer of Shonac Corporation since 1993.
Prior to Shonac, he was with Bee Gee Shoe Corporation for 20 years holding
several positions including President and Chief Executive Officer.
EDWIN J. KOZLOWSKI, age 53, effective February 2002, was elected Executive Vice
President and Chief Operating Officer of the Company. Mr. Kozlowski joined the
Company in May 2001 as Chief Financial Officer of Shonac Corporation and DSW
Shoe Warehouse. Prior to that time he served 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 51, joined the Company in July 2000 as Chief Financial
Officer, Treasurer and Secretary. Prior to that time, he 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.
STEVEN E. MILLER, age 43, joined the Company in September 2000 as Vice President
/ Controller. Prior to that time, he 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.
JOHN C. ROSSLER, age 54, effective February 2002, was elected President of the
Company. In March 2002, he became President and Chief Executive Officer of the
Company. Mr. Rossler was 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 Shonac/DSW, he was the managing partner of the
Columbus office of Alexander Grant/Grant Thorton International where he was
employed for 16 years.
ALAN SCHLESINGER, age 59, joined the Company in June 2000 as President and Chief
Executive Officer of Filene's Basement, Inc. In October 2000, Mr. Schlesinger
became President and Chief Merchandising Officer of the Company. Effective
January 2002, Mr. Schlesinger devotes his full attention as President and Chief
Executive Officer of Filene's Basement, Inc. Mr. Schlesinger has more than 36
years of experience as a retail merchant. From 1994 to June 2000, he served as
Chairman of the Board of Lamonts Apparel, Inc. Prior to that Mr. Schlesinger was
with May Company as Senior Vice President of Famous Barr in St. Louis and
Robinson May in California. In the late 1980's, he was with Ross Stores as
Executive Vice president of Merchandising and Marketing.
33
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who are beneficial owners of more than
ten percent of the Company's 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 the Company 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
it, the Company believes that, during fiscal year 2001, all filing requirements
applicable to reporting persons were complied with.
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The following table sets forth certain information regarding compensation paid
during each of the Company's last three full fiscal years to the Company's Chief
Executive Officer(s) and to each of the Company's 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 2001 $250,000 None None None None
Chairman 2000 $250,000 None None None None
1999 $250,000 None None None None
John C. Rossler (4) 2001 $404,181 $497,058 $21,650 5,000 $31,927
President and Chief 2000 $395,995 $621,323 None None $25,068
Executive Officer 1999 $393,766 $501,272 None None $18,486
Alan R. Schlesinger 2001 $816,346 $500,000 $216,500 None $226,840
President and Chief 2000 $753,216 $228,846 $345,000 250,000 $285,689
Executive Officer of 1999 None None None None None
Filene's Basement, Inc.
James A. McGrady (5) 2001 $325,000 None $21,650 5,000 $31,014
Chief Financial Officer, 2000 $155,769 None None 30,000 $13,497
Treasurer and Secretary 1999 None None None None None
Edwin J. Kozlowski (6) 2001 $223,846 $225,000 None None $84,724
Executive Vice President and 2000 None None None None None
Chief Operating Officer 1999 None None None None None
Raymond L. Blanton (7) 2001 $294,895 $525,426 None None $45,963
Senior Vice President and 2000 $288,922 $525,426 None 2,000 $18,864
General Merchandise Manager 1999 $287,296 $525,426 None None $17,958
George Kolber (8) 2001 $900,000 None None None $207,548
Former Vice Chairman and 2000 $112,500 None $3,450,000 500,000 $9,676
Chief Executive Officer 1999 None None None None None
34
(1) Includes amounts deferred by the executive officer pursuant to the
Deferred Compensation Plan established in 1998, SSC's Associate Profit
Sharing and 401(k) Plan (the "401(k) Plan"), which was adopted effective
as of August 1, 1989, and in which associates of the Company are eligible
to participate. The 401(k) Plan is a prototype defined contribution plan
that qualifies for favorable tax treatment under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan
permits eligible associates of the Company to contribute a percentage of
their pre-tax wages to the plan and the Company will match the
contributions up to a maximum of 3% of covered wages. Effective January 1,
2001, the Company matches up to 4.5% of participants' eligible
contributions. The Company also may contribute up to an additional 1.5% of
covered wages as a profit sharing contribution. In addition, Mr. Blanton
is also a participant in the "Nonqualified Deferred Compensation Plan
Agreement". See footnote (8) for details.
(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 New York
Stock Ex-change on February 1, 2002.
(3) See Table below for All Other Compensation.
(4) Mr. Rossler has entered into an employment agreement with the Company
effective May 1, 1998 with a term originally ending April 30, 2001. The
agreement has been renewed on an annual basis. Effective May 1, 2002, the
agreement has been renewed. The agreement provides for an annual salary of
$376,911 with annual increases of 2.5%. Beginning for the fiscal year
ending February 1, 2003 and in accordance with the Company's Incentive
Compensation Plan, Mr. Rossler will receive an annual cash incentive bonus
based upon a predetermined formula to be approved by the Compensation
Committee of the Board of Directors.
(5) Mr. McGrady has entered into an employment agreement with the Company
effective June 21, 2000 for a term ending June 21, 2003. The agreement
provides for an annual salary of $300,000 and a bonus of at least 40% of
his base salary based upon Board approved, predetermined, performance
measures set annually.
(6) Mr. Kozlowski has entered into an employment agreement with the Company
effective May 1, 2001 for a term ending April 30, 2004. The agreement
provides for an annual salary of $300,000 with minimum annual increases of
2.5%. The contract also provides for guaranteed bonuses and incentive
compensation. Guaranteed bonuses are $225,000 for fiscal year 2001-2002;
$187,500 for fiscal year 2002-2003; $37,500 for fiscal year 2003-2004.
Incentive compensation is intended to provide for an annual maximum 200%
of base salary (reduced by any amount payable under the guaranteed bonus)
based upon Board approved, predetermined, performance measures. After
fiscal year 2003-2004, the Incentive compensation will solely determine
the bonus amount.
(7) Mr. Blanton has entered into an employment agreement with the Company
effective May 1, 1998 with a term originally ending April 30, 2001. The
agreement has been renewed on an annual basis. Effective May 1, 2002, the
agreement has been renewed. The agreement provides for an annual salary of
$275,000 with annual increases of 2.5%. Beginning for the fiscal year
ending February 1, 2003 and in accordance with the Company's Incentive
Compensation Plan, Mr. Blanton will receive an annual cash incentive bonus
based upon a predetermined formula to be approved by the Compensation
Committee of the Board of Directors. In addition, Mr. Blanton is also a
participant in the "Nonqualified Deferred Compensation Plan Agreement".
Under this agreement, an annual lump sum of $75,000 is deposited each
February. After continuous employment with the Company, Mr. Blanton may
elect to retire on or after the first calendar month coinciding with or
immediately following his 60th birthday. Mr. Blanton will be considered
vested if (i) he furnishes to the Company's President with a one year's
prior written notice of resignation after attaining age 60 (ii) he enters
into a confidentially and noncompetition/no solicitation agreement until
he reaches the age of 65. If Mr. Blanton retires on or after his 65th
birthday, he shall be fully vested on the date of retirement.
(8) Mr. Kolber entered into an employment agreement with the Company effective
December 4, 2000 for a term ending January 2004. The agreement provided
for an annual salary of $900,000 with $100,000 increases each year. The
contract also provided for the grant of 500,000 shares of restricted
stock, which vest equally on the last of each fiscal year ending 2002,
2003 and 2004 provided that the Company has positive income before income
taxes. In addition, Mr. Kolber was granted 200,000 options to purchase
shares which vested on December 4, 2000 and was also granted an additional
300,000 options to purchase shares of the Company's common stock which
vest equally on the first, second and third anniversaries of his
employment agreement. Effective April 6, 2002, this agreement was
terminated. The Company paid a separation payment of $2,450,000 and will
pay COBRA premiums through September 30, 2003.
35
ALL OTHER COMPENSATION
Jay L. John C. Alan R. James A. Edwin J. Raymond L. George
Schottenstein Rossler Schlesinger McGrady Kozlowski Blanton Kolber
------------- ------- ----------- ------- --------- --------- ------
401(k) Plan and Associate
Stock Purchase Plan Company
Contributions $ -- $ 8,760 $ 18,350 $ 1,801 $ -- $ 8,722 $ 7,650
Company paid relocation
expenses -- -- 1,672 -- 77,823 -- 18,223
Tax Reimbursement -- -- 54,138 -- -- -- 71,949
Auto Reimbursement -- 11,399 43,208 25,189 2,182 9,208 25,420
Company paid Life, Medical
and indemnity Insurance -- 3,926 5,059 3,966 -- 5,381 4,178
Cost of Living Adjustments -- -- 43,733 -- -- -- --
Sec 79 Cafeteria Health Care
Plan -- 4,270 -- 58 -- 218 --
Personal Living Expenses -- -- 60,680 -- -- -- 80,128
Gift Certificates -- 120 -- -- 25 65 --
Country Club Dues and
Membership -- 3,452 -- -- 4,694 22,369 --
---------- ------- -------- ------- ------- ------- --------
Total All Other Compensation $ -- $31,927 $226,840 $31,014 $84,724 $45,963 $207,548
---------- ------- -------- ------- ------- ------- --------
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR TABLE
The following table provides certain information on option grants during fiscal
year 2001 by the Company to the Chief Executive Officer and each of the
Company's other executive officers included in the above compensation table.
Potential Realized Value at
% of Total Assumed Annual Rates of Stock
Options Options/SARs Price Appreciation for Option
SARs Granted to Exercise or Term (2)
Granted Employees in Base Price Expiration -----------------------------
Name (#) Fiscal Year ($/Sh) Date (1) 5% 10%
---- ------- -------------- ------------ ----------- -- ---
Jay L. Schottenstein None N/A N/A N/A N/A N/A
John C. Rossler 5,000 0.39% $4.48 29-Aug-2011 $14,087 $35,700
Alan R. Schlesinger None N/A N/A N/A N/A N/A
James A. McGrady 5,000 0.39% $4.48 29-Aug-2011 $14,087 $35,700
Edwin J. Kozlowski None N/A N/A N/A N/A N/A
Raymond L. Blanton None N/A N/A N/A N/A N/A
George Kolber None N/A N/A N/A N/A N/A
(1) All options are exercisable 20% per year, beginning on the first
anniversary of the original grant date, on a cumulative basis and expire
ten years from the original grant date.
(2) Represents the potential realizable value of each grant of options assuming
that the market price of the Common Shares appreciates in value from the
date of grant to the end of the option term at either a 5% or 10%
annualized rate, based on the difference between the assumed per share
value and the per share option exercise price, multiplied by the total
number of option shares.
36
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table provides certain information on the number and value of
stock options held by the executive officers named in the Summary Compensation
Table at February 2, 2002.
Potential Realized Value
Number of Unexercised Options at Assumed Annual Rates of
Shares at Fiscal Year End Stock Price Appreciation for
Acquired on Value City (#) Option Term ($) (2)
Exercise Realized ------------------------------ ----------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------- ------------ ----------- ----------- ------------- ----------- ------------
Jay L. Schottenstein -- -- 56,000 -- -- --
John C. Rossler -- -- 6,000 9,000 -- --
Alan R. Schlesinger -- -- 20,000 30,000 -- --
James A. McGrady -- -- 6,000 29,000 -- --
Edwin J. Kozlowski -- -- -- -- -- --
Raymond L. Blanton -- -- 6,400 5,600 -- --
George Kolber (2) -- -- 300,000 -- -- --
---------------------------------------------------------------------------------------------------------------------------------
(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 $4.33. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
(2) Pursuant to an Addendum to the December 7, 2000 Executive Employment
Agreement and Restricted Stock Agreement, Mr. Kolber forfeited rights to
200,000 options which were not vested on April 6, 2002.
TEN-YEAR OPTION / SAR REPRICING TABLE
The following table provides repricing information on the number and value of
stock options held by the executive officers named in the Summary Compensation
Table at February 2, 2002.
Number of Length of
Securities Market Price Original
Underlying of Stock at Option Term
Options/SARs Time of Exercise Remaining at
Repriced or Repricing or Price at Time New Exercise Date of
Amended Amendment of Repricing Price Repricing or
Name Date (#) (1) ($) (2) or Amendment ($) Amendment
------------------- --------- ------------ ------------ -------------- ------------ --------------
Alan R. Schlesinger 02-Feb-02 66,667 $4.28 $7.13 $4.28 9 yrs.
----------------------------------------------------------------------------------------------------------------------------------
(1) Effective December 4, 2000, Mr. Schlesinger was elected President and
Chief Merchandising Officer of the Company and was granted options to
purchase 200,000 shares of common stock. Effective February 3, 2002, Mr.
Schlesinger was elected President and Chief Executive Officer of Filene's
Basement Inc. On February 2, 2002, the 200,000 options were cancelled. A
new grant of 66,667 options were made to Mr. Schlesinger on February 3,
2002.
(2) Represents the average high and low price per share of the Company's
common stock on February 1, 2002.
37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 2002, the Board established a Compensation Committee comprised of Jay
Schottenstein, Elizabeth Eveillard, Richard Gurian, Dr. Norman Lamm, Richard
Shook, Harvey Sonnenberg and James Weisman. The Compensation Committee
establishes, reviews, and recommends an executive compensation package for the
Chief Executive Officer and other officers of the Company. Jay L. Schottenstein
is also Chairman and Chief Executive Officer of SSC. For information regarding
the relationships between the Company and SSC, see "Relationship with SSC and
Its Affiliates" below.
The Stock Option Committee administers and grants options under the Company's
1991 Stock Option Plan, as amended, and the Company's 2000 Incentive Stock Plan
and administers the Company's Incentive Compensation Plan. The members are Henry
L. Aaron, Elizabeth L. Eveillard, Marvin W. Goldstein, Richard Gurian, Dr.
Norman Lamm, Robert L. Shook, Harvey L. Sonnenberg and James L. Weisman. None of
the members of the Committee are present or former officers of the Company or
are themselves or any of their affiliates, if any, parties to agreements with
the Company.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF COMMON SHARES
The following table sets forth, as of April 26, 2002, certain information with
regard to the beneficial ownership of the Company's Common Shares 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 (1) 5,000 *
Raymond L. Blanton (1) 6,961 *
Ari Deshe (1)(4)(5)(7) 24,972 *
Jon P. Diamond (1)(4)(5) 21,700 *
Elizabeth M. Eveillard --
Marvin Goldstein --
Richard Gurian (1) 31,300 *
George Kolber (10)
Edwin J. Kozlowski --
Dr. Norman Lamm (1) 32,400 *
James A. McGrady (1)(3) 12,000 *
Steven E. Miller (1)(3) 4,000 *
John C. Rossler (1)(3) 11,000 *
Alan Schlesinger (1)(3) 203,334 *
Geraldine Schottenstein (1)(4)(5)(6) 61,000 *
Jay L. Schottenstein (1)(4)(5)(6) 230,000 *
Robert L. Shook (1)(7) 43,500 *
Harvey L. Sonnenberg (7) 20,000 *
James L. Weisman (7) 1,300 *
All directors and executive officers as a group 678,467 1.99%
(18 persons) (1)(3)(4)(5)(6)(7)
Tweedy, Browne Company LLC (8) 3,338,736 9.77%
Dimensional Fund Advisors Inc. (9) 2,115,500 6.19%
Schottenstein Stores Corporation (5) 17,946,766 52.53%
---------------------------------------------------------------------------------------------------------------------------
* Represents less than 1% of outstanding Common Shares, 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 Common Shares as to which the named person has the
right to acquire beneficial ownership upon the exercise of stock
options within 60 days of April 26, 2002: Mr. Aaron, 5,000; Mr.
Blanton, 6,400; Mr. Deshe, 10,000; Mr. Diamond, 20,000; Mr. Gurian,
31,000; Dr. Lamm, 30,000; Mr. McGrady, 6,000; Mr. Miller, 2,000; Mr.
Rossler, 6,000; Mr. Schlesinger, 86,667; Mrs. Schottenstein, 31,000;
Mr. J. Schottenstein, 56,000; Mr. Shook, 31,000; and all directors and
officers as a group, 321,067.
(2) The percent is based upon the 33,846,874 Common Shares outstanding, net of
treasury shares and the exercise of 321,067 stock options at April 26,
2002.
39
(3) Includes 5,000 shares for Mr. McGrady, 2,000 shares for Mr. Miller, 5,000
shares for Mr. Rossler, 116,667 shares for Mr. Schlesinger and 128,667
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 with the Company.
(4) Does not include the 17,946,766 Common Shares owned by Schottenstein
Stores Corporation ("SSC") of 1800 Moler Road, Columbus, Ohio 43207. Jay
L. Schottenstein is the Chairman and Chief Executive Officer of SSC. Jay
L. Schottenstein, Geraldine 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 5.0% of the Company's outstanding
Common Shares. 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 persons: 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 Geraldine Schottenstein and Jay L.
Schottenstein share voting and investment power as trustees of a trust
which owns the shares. Geraldine Schottenstein is also a beneficiary of
the trust.
(7) Includes 10,000 shares held by Mr. Deshe's minor children; 3,000 shares
held by Mr. Shook's spouse and 1,500 shares held by Shook Associates,
Inc. of which Mr. Shook is a 50% shareholder; 15,000 shares held by Mr.
Sonnenberg's spouse and 500 shares held by Mr. Weisman's spouse.
(8) By reason of their positions as such, the members of Tweedy, Browne
Company LLC ("TBC") may be deemed to control TBC and the general partners
of TBK and Vanderbilt may be deemed to control TBK and Vanderbilt,
respectively. The address for TBC is 350 Park Avenue, New York, NY 10022.
Based on information contained in a Schedule 13G filed by TBC on January
28, 2002.
(9) 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 the securities of the Company described in this
schedule that are owned 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 12, 2002.
(10) Mr. Kolber is no longer with the Company. As a consequence, the Company is
unable to determine his beneficial ownership of shares or the percentage
of outstanding shares held.
OWNERSHIP OF SSC
The following table indicates the shares of SSC common stock beneficially owned
by each nominee for election to the Board of Directors of the Company and by all
directors and officers of the Company as a group, as of April 26, 2002:
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%
40
--------------------------------------------------------------------------------
(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 its initial public offering on June 18, 1991, the
Company was operated as the Department Store Division of SSC. On that date, SSC
transferred substantially all of the net assets of the Division to the Company
in exchange for 22,500,000 Common Shares of the Company. At April 26, 2002, SSC
owned 52.5% of the Company's outstanding Common Shares. So long as SSC owns more
than 50% of the Company's voting shares, it will continue to have the power
acting alone to approve any action requiring a vote of the majority of the
voting shares of the Company and to elect all of the Company's directors. For
information with respect to the beneficial ownership of the voting stock of SSC
by nominees for election to the Board of the Company and beneficial ownership of
Common Shares of the Company by such persons and officers of the Company, see
"Security Ownership of Certain Beneficial Owners and Management."
REAL ESTATE LEASES AND SUBLEASES
The Company leases or subleases from SSC or affiliates of SSC twenty-eight store
locations, seven warehouses and a parcel of land. Generally, the agreements
require the Company to pay for insurance, taxes, common area maintenance and
other costs associated with the properties on a "triple net" basis for
freestanding locations, and on a pro rata share basis for locations that are
part of a larger parcel.
SSC leases to the Company five store locations under the terms of a Master Store
Lease Agreement. The Master Store Lease, as amended, provides for certain base
rentals, including a guaranteed amount, which approximate $3.46 per square foot.
The Master Store Lease also provides for the payment of percentage rent equal to
2% of gross total sales in excess of the base rent. For fiscal 2001, the Company
recorded rent expense to SSC, including contingent rent, of $1,684,560 pursuant
to the Master Store Lease.
SSC subleases to the Company two store locations that are owned by affiliates of
SSC under a Master Sublease. The Master Sublease provides for an annual base
rent of the greater of 2% of gross sales or minimum rent of $2.39 and $2.29 per
square foot. For fiscal 2001, the Company recorded rent expense to SSC,
including contingent rent, of $688,794 pursuant to the Master Sublease.
Both the Master Lease and the Master Sublease have a term of five years that
began in June 2001, and are renewable thereafter, by individual location, at the
option of the Company, for four additional renewal terms of five years each.
Each renewal term in the aforementioned leases and subleases will be on the same
terms as the initial term, except for rent. The Master store lease and Master
Sublease provide for an increase in minimum percentage rent of $0.50 per square
foot in each succeeding five-year renewal term. In no event, commencing fiscal
1997, shall total rent be less than 2% of total sales.
41
The Company also leases or subleases seven warehouse facilities and a trailer
yard from SSC or affiliates of SSC. The warehouse facilities consist of
approximately 1,998,000 square feet for base rentals of $1.75 to $3.11 per
square foot with lease terms ranging from 2004 through 2037. Generally, the
lease renewal terms are at the same terms and conditions as the original term
except rent, which increases by $0.25 to $0.50 per square foot for each renewal
term. The Company also leases, from an affiliate of SSC, a trailer yard of
approximately 19 acres with lease control through April 2009 having rents that
range from $25,000 to $30,000 per year during the period of lease control.
During fiscal 2001, the Company recorded net rent expenses to SSC and affiliates
of SSC of $4,077,850 pursuant to these leases and assignments.
Additionally, the Company leases nineteen store locations from SSC or affiliates
of SSC. Generally, the leases provide for percentage rent equal to 2% of total
sales in excess of a specified sales level or base rent with base rents ranging
from $2.36 to $20.00 per square foot for the initial term and provide lease
terms ranging from 2007 through 2040. Generally, the renewal terms are at the
same terms and conditions as the original term except rent, which may increase
for the renewal terms. During fiscal 2001, the Company recorded rent expenses in
the aggregate to SSC and affiliates of SSC of $10,346,478 pursuant to these
leases.
In addition to the foregoing, SSC subleases one store location to the Company
under an agreement that provides for the payment of additional rent to SSC in
order for SSC to recover the costs of the initial acquisition of the leasehold
interest. The sublease has a term expiring in fiscal 2004 and provides for rent
in the amount of 2% of total sales, with a minimum rent equal to $2.00 per
square foot and provides four additional five-year renewal terms. During fiscal
2001, the Company recorded rent expenses in the aggregate to SSC of $196,560
pursuant to this sublease.
The Company also subleases from SSC a store location. The sublease expires
December 31, 2007 and provides for percentage rent equal to 2% of total sales in
excess of a minimum base rent of $4.69 per square foot with three additional
renewal terms of five years each. During fiscal 2001, the Company recorded rent
expenses to SSC of $496,966 for this sublease.
SSC operates a chain of furniture stores, five of which operate in separate
space subleased from the Company 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 the Company 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 the Company's
lease. For fiscal 2001, SSC paid to the Company an aggregate of $1,308,671
pursuant to these subleases.
LICENSE AGREEMENTS WITH AFFILIATES
In July 1997, the Company entered into agreements to form a 50/50 joint venture
with Mazel Stores, Inc. to create VCM, Ltd. ("VCM") to operate the Company's
health and beauty care and toys and sporting goods departments as licensed
departments. Beginning in fiscal 2000 VCM also operated the food department.
Pursuant to operating agreements between VCM and the Company, VCM paid annual
license fees to the Company based on 5% and 11% of net sales and reimbursed
the Company 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 Company also provides certain
personnel, administrative and service functions for which it will receive a
monthly fee from VCM to cover the related costs. The aggregate license fees paid
by VCM to the Company for fiscal 2001 were $9,698,000. Effective with the close
of business on February 2, 2002 by acquisition of Mazel Stores, Inc.'s interest
in VCM for $8,375,000, the company now
42
owns 100% of VCM and operates the health and beauty care, toy, sporting goods
and food departments in the Value City stores.
MERCHANDISE TRANSACTIONS WITH AFFILIATES
The Company from time to time purchases merchandise from affiliates of SSC. Some
of such affiliates manufacture, import and wholesale apparel as their principal
business. The members of the Company's 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
the Company as could be obtained in an arm's-length transaction with an
unaffiliated third party, and in certain instances, the Company is given terms
preferential to those available to unaffiliated customers. Total purchases by
the Company from SSC and affiliates for fiscal 2001 were $16,396,000,
representing 1.3% of the Company's total purchases during the fiscal year.
VCM and certain affiliates of SSC from time to time purchase merchandise from
the Company, in some instances on a regular basis. Such purchases are generally
made from merchandise in the Company's warehouse inventory at prices equal to
the Company's cost plus a handling fee of up to 15.0%.
The Company will from time to time purchase merchandise on behalf of and ship it
directly to affiliates, at cost plus delivery charges. Most transactions of this
nature are done with VCM. No such purchases were made during fiscal 2001.
In May 2001, SSC and Value City Department Stores 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 Inc. 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 agreed to purchase at SSC's cost
plus a handling fee. On May 13, 2002, the final payment was made to SSC.
SERVICES AGREEMENTS
The Company shares 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. The Company and SSC have entered into a Corporate
Services Agreement that sets forth the terms for payment of the costs of these
shared services. The Company believes that it is able to obtain such services at
a cost, which is equal to or below the cost of providing such services by itself
or obtaining such services from unaffiliated third parties. For fiscal 2001, the
Company paid SSC or its affiliates $1,444,392 for such services. The Corporate
Services Agreement also provides for participation by the Company in the
self-insurance program maintained by SSC. Under that program, the Company is
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 the Company 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 the Company's participation in the program. SSC charges its
affiliates, divisions and the Company premiums based, among other factors, on
loss experience and its actual payroll and related costs for administering the
program. For fiscal 2001, the Company paid SSC $12,326,000 for participation in
the program.
43
The Company also provides certain administrative and service functions for VCM.
These functions include accounting, MIS and merchandise delivery. For fiscal
2001, the Company charged VCM $2,148,341 for these services.
DEBT AGREEMENTS
The Company entered into a $75.0 million Senior Subordinated Convertible Loan
Agreement (Senior Facility), dated as of March 15, 2000. The Senior Facility
bears interest at various rates, currently equal to 250 basis points over LIBOR.
The interest rate increases an additional 50 basis points every 90 days after
the first anniversary date. The Senior Facility is due in September 2003. In
December 2000, pursuant to terms of the Senior Facility, SSC purchased the
outstanding balance under the same continuing terms. The terms provide that if
prior to 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, has
the right to convert the debt into our common stock at a price equal to 95% of
the 20-day average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. A one time fee of 200 basis points, or $1.5
million, was paid to SSC at the initial closing in consideration for entering
into a Put Agreement associated with the Senior Facility.
To supplement operating cash requirements the Company has a $100.0 million
subordinated secured credit facility with SSC. Outstanding advances under the
agreement are subordinated to the Credit Agreement and are subject to a junior
lien on assets securing the Credit Agreement. At February 2, 2002, $20.0 million
was outstanding. The interest rate and terms of the $100.0 million facility are
generally the same as the Credit Agreement.
The Company recorded $7,109,480 in interest expense for these facilities in
fiscal 2001 of which $4,736,720 was paid during 2001.
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
14(a)(1) FINANCIAL STATEMENTS
The documents listed below are filed as part of this Form 10-K:
Page in
Form 10-K
---------
Independent Auditors' Report F-1
Consolidated Balance Sheets at February 2, 2002 and February 3, 2001 F-2
Consolidated Statements of Operations for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 F-3
Consolidated Statements of Shareholders' Equity for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 F-4
Consolidated Statements of Cash Flows for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 F-5
Notes to Consolidated Financial Statements F-6
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K:
Schedule II. Valuation and Qualifying Accounts S-1
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
14(a)(3) EXHIBITS:
See Index to Exhibits which begins on Page E-1.
14(b) REPORTS ON FORM 8-K
On February 5, 2002, we filed a Form 8-K, Item 5 -- "Other Items" relating to
our acquisition of Mazel Stores, Inc. 50% interest in the VCM Ltd. joint
venture. In addition, on February 5, 2002, we also filed a Form 8-K, Item 5 --
"Other Items" relating to the termination by Schottenstein Stores Corporation of
its letter of intent with respect to its purchase of Shonac Corporation, DSW
Shoe Warehouse, Inc. and Filene's Basement, Inc.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
Date: May 22, 2002 By: *
-------------------------------------------
(James A. McGrady, Chief Financial Officer
and Treasurer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
* Chairman of the Board of Directors 5/22/02
------------------------------------
(Jay L. Schottenstein)
* President and Chief Executive Officer 5/22/02
------------------------------------ (Principal Executive Officer)
(John C. Rossler)
* Chief Financial Officer and Treasurer 5/22/02
------------------------------------ (Principal Financial and Accounting Officer)
(James A. McGrady)
* Director 5/22/02
------------------------------------
(Henry L. Aaron)
* Director 5/22/02
------------------------------------
(Ari Deshe)
* Director 5/22/02
------------------------------------
(Jon P. Diamond)
* Director 5/22/02
------------------------------------
(Elizabeth Mugar Eveillard)
* Director 5/22/02
------------------------------------
(Marvin Goldstein)
* Director 5/22/02
------------------------------------
(Richard Gurian)
* Director 5/22/02
------------------------------------
(Norman Lamm)
46
* Director 5/22/02
------------------------------------
(Geraldine H. Schottenstein)
* Director 5/22/02
------------------------------------
(Robert L. Shook)
* Director 5/22/02
------------------------------------
(Harvey L. Sonnenberg)
* Director 5/22/02
------------------------------------
(James L. Weisman)
*By: /s/ James A. Mcgrady
-------------------------------------
James A. McGrady, (Attorney-in-Fact)
47
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 2,
2002 and February 3, 2001 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended February 2, 2002,
February 3, 2001 and January 29, 2000. Our audits also included the financial
statement schedule listed in the Index as Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Value City Department Stores, Inc.
and its wholly owned subsidiaries as of February 2, 2002 and February 3, 2001,
and the results of their operations and their cash flows for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
-------------------------------------
Deloitte & Touche LLP
Columbus, Ohio
March 26, 2002
F-1
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
February 2, 2002 and February 3, 2001
(In Thousands, Except Share Amounts)
-------------------------------------------------------------------------------------------------------
ASSETS
2/2/02 2/3/01
-------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and equivalents $35,915 $10,562
Accounts receivable, net 6,650 44,927
Receivables from affiliates 905 9,452
Inventories 396,830 393,577
Prepaid expenses and other assets 15,741 22,290
Deferred income taxes 63,102 51,732
---------- ----------
TOTAL CURRENT ASSETS 519,143 532,540
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 246,358 223,675
Leasehold improvements 184,854 176,318
Land and building 801 801
Capital leases 37,413 38,348
---------- ----------
469,426 439,142
Accumulated depreciation and amortization (224,782) (190,103)
--------- ---------
PROPERTY AND EQUIPMENT, NET 244,644 249,039
INVESTMENT IN JOINT VENTURE - 8,292
GOODWILL AND TRADENAMES, NET 60,012 67,056
OTHER ASSETS 56,512 51,082
--------- ----------
TOTAL ASSETS $880,311 $908,009
======== ========
-------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $149,864 $180,736
Accounts payable to affiliates 8,909 13,655
Accrued expenses:
Compensation 22,410 19,662
Taxes 39,224 31,255
Other 69,296 75,227
Current maturities of long-term obligations 665 603
------------ ------------
TOTAL CURRENT LIABILITIES 290,368 321,138
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 337,199 326,449
OTHER NONCURRENT LIABILITIES 32,315 10,115
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 34,227,540 shares and
34,330,863 shares, respectively 145,772 145,659
Retained earnings 82,432 111,155
Deferred compensation expense, net (4,150) (6,448)
Treasury shares at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (3,566) -
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 220,429 250,307
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $880,311 $908,009
========= =========
-------------------------------------------------------------------------------------------------------
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 2, 2002,
February 3, 2001 and January 29, 2000
(in thousands, except per share amounts)
-------------------------------------------------------------------------------------------------------------------------
For For For
the Year the Year the Year
Ended Ended Ended
2/2/02 2/3/01 1/29/00
52 Weeks 53 Weeks 52 Weeks
-------------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $2,283,878 $2,213,017 $1,670,176
Cost of sales (1,429,455) (1,492,947) (1,039,145)
-------------------------------------------------------------------------------------------------------------------------
Gross profit 854,423 720,070 631,031
Selling, general and
administrative expenses (888,734) (870,253) (579,314)
License fees 12,228 11,323 8,451
Other operating income 5,739 3,259 5,620
-------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (16,344) (135,601) 65,788
Interest expense, net (28,510) (30,480) (10,728)
-------------------------------------------------------------------------------------------------------------------------
(Loss) income before equity in (loss)
income of joint venture and benefit
(provision) for income taxes (44,854) (166,081) 55,060
Equity in (loss) income of joint venture (406) (1,340) 1,340
-------------------------------------------------------------------------------------------------------------------------
(Loss) income before benefit
(provision) for income taxes (45,260) (167,421) 56,400
Benefit (provision) for income taxes 16,537 65,630 (22,932)
-------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (28,723) $ (101,791) $ 33,468
-------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per share $(0.85) $(3.03) $1.03
Diluted (loss) earnings per share $(0.85) $(3.03) $1.02
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 2, 2002, February 3, 2001 and January 29, 2000
(in thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Number of Shares
-------------------- Accumulated
Common Deferred Other
Common Shares Common Retained Compensation Treasury Comprehensive
Shares in Treasury Shares Earnings Expense Shares Loss Total
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 30, 1999 32,638 344 $125,156 $179,478 $(671) $(2,637) $301,326
Net income 33,468 33,468
Exercise of stock options 198 1,660 1,660
Tax benefit on stock options
and restricted shares 1,548 1,548
Grant of restricted shares 156 2,201 (2,201)
Amortization of deferred 359 359
compensation expense
Acquisitions (256) 2,036 1,964 4,000
------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 29, 2000 32,992 88 132,601 212,946 (2,513) (673) 342,361
Net loss (101,791) (101,791)
Sales of treasury shares (80) 466 614 1,080
Exercise of stock options 182 1,431 1,431
Tax benefit on stock options
and restricted shares 228 228
Grant of restricted shares,
net of forfeitures 754 5,433 (4,703) 730
Amortization of deferred
compensation expense 768 768
Acquisitions 403 5,500 5,500
------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 3, 2001 34,331 8 145,659 111,155 (6,448) (59) 250,307
Net loss (28,723) (28,723)
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
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)
------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 2, 2002 34,228 8 $145,772 $82,432 $(4,150) $(59) $(3,566) $220,429
======================================================================================================
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 2, 2002, February 3,
2001 and January 29, 2000,
(in thousands)
Year Year Year
Ended Ended Ended
2/2/02 2/3/01 1/29/00
52 Weeks 53 Weeks 52 Weeks
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(28,723) $(101,791) $33,468
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation and amortization 57,082 47,495 34,230
Deferred income taxes and other noncurrent liabilities (8,202) (35,058) (68)
Equity in loss (income) of joint venture 406 1,340 (1,340)
Loss (gain) on disposal of assets 4,937 16 (146)
Change in working capital, assets and liabilities,
excluding effects of acquisitions:
Receivables 54,228 (42,657) 4,317
Inventories 18,790 44,194 (126,284)
Prepaid expenses and other assets 4,611 (11,675) (3,178)
Accounts payable (45,832) 7,271 59,265
Accrued expenses 1,116 (23,852) 27,263
---------- ----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 58,413 (114,717) 27,527
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40,244) (70,226) (37,317)
Proceeds from sale of assets 73 326 167
Acquisitions, net of cash received (8,375) (3,506) (8,000)
Other assets (9,696) 3,355 (4,580)
Proceeds from lease incentives 14,248 - -
---------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (43,994) (70,051) (49,730)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 782 1,431 1,660
Net proceeds from issuance of debt 10,533 187,872 15,000
Net principal payments under long-term obligations (381) - (9,325)
---------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,934 189,303 7,335
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 25,353 4,535 (14,868)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 10,562 6,027 20,895
---------- ----------- ----------
CASH AND EQUIVALENTS, END OF YEAR $35,915 $10,562 $6,027
========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Value City Department Stores, Inc. and its wholly owned subsidiaries.
These entities are herein referred to collectively as the Company. The
Company operates a chain of full-line, off-price department stores,
principally under the names Value City and Filene's Basement, as well as
better-branded off-price shoe stores, under the name "DSW Shoe
Warehouse." As of February 2, 2002 a total of 241 stores were open,
including 117 Value City stores located principally in Ohio (23 stores)
and Pennsylvania (18 stores) with the remaining stores dispersed
throughout the Midwest, East and South and 104 shoe stores located
throughout the United States and 20 Filene's Basement stores ("Filene's
Basement") located principally in the Northeast United States.
To facilitate comparisons with the current year, certain amounts in
prior years' and interim period financial statements have been
reclassified to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company follows a 52/53-week fiscal year that ends on the Saturday
nearest to January 31. Fiscal 2001 and 1999 contain 52 weeks and Fiscal
2000 contains 53 weeks.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company after elimination of significant intercompany transactions and
balances.
CASH AND EQUIVALENTS
Cash and equivalents represent cash and highly liquid investments with
maturities when purchased of three months or less.
ACCOUNTS RECEIVABLE, NET
The allowance for doubtful accounts was $1,793,000 and $992,000 for
fiscal years 2001 and 2000, respectively.
INVENTORIES
Merchandise inventories are stated at the lower of cost or market using
the retail method.
PRE-OPENING EXPENSES
Pre-opening expenses are expensed as incurred. Pre-opening costs
expensed were $4,379,000, $10,902,000 and $7,563,000 for fiscal 2001,
2000 and 1999, respectively.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
INVESTMENT IN JOINT VENTURE
VCM, Ltd. ("VCM") operates the health and beauty care, food, toy, and
sporting goods departments in the Company's stores as licensed
departments. VCM is a 50/50 joint venture with Mazel Stores, Inc.
("Mazel"). The Company accounts for its fifty percent interest in the
joint venture under the equity method. (See Note 3, Related Party
Transactions.) Effective at the close of business on February 2, 2002
the Company acquired the Mazel partner's interest in VCM for $8,375,000.
The balance sheet for VCM has been consolidated in these statements for
the current year-end.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are recognized principally on the straight-line method in amounts
adequate to amortize costs over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over the shorter
of their useful lives or lease term. The estimated useful lives by class
of asset are:
Buildings .........................................31 years
Furniture, fixtures and equipment.............3 to 10 years
Leasehold improvements.............................10 years
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
full recoverability is questionable. Annually, or more frequently if
events or circumstances change, a determination is made by management to
ascertain whether property and equipment and other intangibles have been
impaired based on the sum of expected future undiscounted cash flows
from operating activities. If the estimated net cash flows are less than
the carrying amount of such assets, the Company recognizes an impairment
loss in an amount necessary to write down the assets to a fair value as
determined from expected future discounted cash flows. Based upon its
most recent analysis, the Company wrote down in the year ended February
2, 2002 the balance of goodwill associated with the November 1999
purchase of Gramex. The resulting $1,542,000 charge is reflected in
selling, general and administrative expense.
GOODWILL AND TRADENAMES
Goodwill represents the excess cost over the estimated fair values of
net assets and identifiable intangible assets of businesses acquired and
is being amortized over 15 years. Tradenames represent the values
assigned to names that the Company acquired and are being amortized over
15 years. The accumulated amortization for these assets was $15,538,000
and $10,586,000 at February 2, 2002 and February 3, 2001, respectively.
REVENUE RECOGNITION
Sales of merchandise and services are net of returns and allowances and
exclude sales tax. Layaway sales are recognized when the merchandise has
been paid for in full.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
VALUATION ACCOUNTS
Reserves established and used for the realignment of excess inventory
quantities, severance and asset impairment cost for the periods ended
February 3, 2001, and February 2, 2002, are as follows (in thousands):
Excess Asset
Inventory Severance Impairment
---------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2000 $ -- $ -- $ --
Provisions to establish reserves 105,400 4,000 623
Charges/payments (61,700) (603) --
---------------------------------------------------------------------------------------------------------------------------
Balance at 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 $ --
---------------------------------------------------------------------------------------------------------------------------
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. During fiscal year
2001, 2000 and 1999, advertising expense was $83,233,000, $78,224,000
and $59,194,000, respectively.
FINANCIAL INSTRUMENTS
The Company utilizes interest rate swap agreements to manage its
interest rate risk 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 outstanding stock options,
calculated using the treasury stock 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):
Year Ended
---------------------------------------------------
2/2/02 2/3/01 1/29/00
---------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 33,621 33,567 32,495
Assumed exercise of dilutive stock options -- -- 366
---------------------------------------------------------------------------------------------------------------------------
Number of shares for computation of
diluted earnings per share 33,621 33,567 32,861
---------------------------------------------------------------------------------------------------------------------------
Options to purchase 3,693,180 shares of stock at prices ranging from
$3.57 to $21.44 per share were outstanding during the year ended
February 2, 2002, but were not included in the computation of diluted
loss per share. Options to purchase 2,615,550 shares of stock at prices
ranging from
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
$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 because the options' exercise prices were greater
than the average market price of the stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
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. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
applies to all business combinations completed after June 30, 2001, and
requires the use of purchase accounting. SFAS No. 141 also establishes
new criteria for determining whether intangible assets should be
recognized separately from goodwill. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001; however, companies with
fiscal years beginning after March 15, 2001 may elect to adopt the
statement early. SFAS No. 142 provides that goodwill and intangible
assets with indefinite lives will not be amortized, but rather will be
tested for impairment at least on an annual basis. The Company will
adopt SFAS No. 142 effective February 3, 2002, which will require the
Company to cease amortization of its remaining net goodwill balance and
to perform an impairment test of its existing goodwill based on a fair
value concept. The Company is in the process of determining if its
existing goodwill is impaired. Goodwill impairment, if any, will be
recognized in accordance with SFAS No. 142 during 2002 and will be
classified as a cumulative effect of a change in accounting principle.
As of February 2, 2002, the Company has net unamortized goodwill of
$41.0 million and amortization expense of $4.9 million, $3.3 million and
$2.3 million for the years ended February 2, 2002, February 3, 2001 and
January 29, 2000, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addressed 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Because SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation under
Opinion 30, two accounting models existed for long-lived assets to be
disposed of. The Board decided to establish a single accounting model,
based on the framework
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
established in Statement 121, for long-lived assets to be disposed of
by sale. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years.
The Company is currently assessing the impact of SFAS No. 143 and 144.
At this time, the Company has yet to determine the effect of these
pronouncements on its results of operations and financial position.
3. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from and sells merchandise to
affiliates of Schottenstein Stores Corporation ("SSC"), direct owner of
approximately 53.0% of the Company's common shares, and VCM. The related
party transactions are as follows (in thousands):
Year Ended
-------------------------------------------
2/2/02 2/3/01 1/29/00
------------------------------------------------------------------------------------------------------------
Purchases of merchandise
from affiliates $16,396 $24,787 $7,228
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
-------------------------------------------
2/2/02 2/3/01 1/29/00
------------------------------------------------------------------------------------------------------------
VCM
Sales $136,153 $140,240 $112,333
License fees 9,698 9,144 8,451
------------------------------------------------------------------------------------------------------------
The Company also leases certain store and warehouse locations owned by
SSC as described in Note 4.
Accounts receivable from and payable to affiliates principally result
from commercial transactions with entities owned or controlled by SSC or
intercompany transactions with SSC.
The Company shares certain personnel, administrative and service costs
with SSC and its affiliates. The costs of providing these services are
allocated among the Company, SSC and its affiliates without a premium.
The allocated amounts are not significant. SSC does not charge the
Company for general corporate management services. In the opinion of the
Company and SSC management, the aforementioned charges are reasonable.
The Company participates in SSC's self-insurance program for general
liability, casualty loss and Ohio workers' compensation. The Company
expensed $12,326,000, $16,550,000 and $9,564,000 in fiscal years 2001,
2000 and 1999, respectively, for such coverage.
In July 2000, the Company assigned to SSC the future proceeds from a
lease termination agreement with a lessor in exchange for $13.5 million.
This agreement was subsequently canceled in
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
November 2000 and the proceeds were returned to SSC. No gain or loss was
recorded on the transaction.
The Company also makes contributions to a private charitable foundation
controlled by SSC. The fiscal 1999 contribution was made in March 2000
by utilizing 80,000 common shares of the Company held in Treasury.
During 2000, the Company expensed $2.2 million of contributions. During
2001 no contributions were recorded.
See Footnotes 4, 5 and 6 for additional related party disclosures.
4. 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 twenty-three store locations, seven warehouse
facilities and a parcel of land for an annual minimum rent of
$15,363,000 and 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 the
Company to pay real estate taxes, maintenance and insurance.
The Company incurred no new capital lease obligations in 2001 and 2000
to obtain store facilities. The total cost of capital leases at February
2, 2002 and February 3, 2001 was $37,414,000. Assets held under capital
leases are amortized over the terms of the related leases. The
accumulated amortization for these assets was $4,991,000 and $3,208,000
at February 2, 2002 and February 3, 2001, respectively.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at
February 2, 2002 are as follows (in thousands):
Operating Leases
Fiscal -------------------------------------------------
Year Unrelated Related Capital
Ending Total Party Party Leases
-------------------------------------------------------------------------------------------------------------------------
2003 $ 112,050 $ 94,239 $ 17,811 $ 3,456
2004 111,621 93,713 17,908 3,512
2005 104,840 86,903 17,937 3,441
2006 98,856 80,878 17,978 3,438
2007 92,410 74,843 17,567 3,438
Future Years 498,032 385,144 112,888 55,406
-------------------------------------------------------------------------------------------------------------------------
Total minimum
Lease Payments $1,017,809 $815,720 $202,089 $72,691
---------------------------------------------------------------------------------------------
Less amount representing interest (41,410)
-------------------------------------------------------------------------------------------------------------------------
Present value of minimum lease payments 31,281
Less current portion (456)
-------------------------------------------------------------------------------------------------------------------------
Total long-term portion $30,825
-------------------------------------------------------------------------------------------------------------------------
The composition of rental expense (in thousands):
Year Ended
-------------------------------------------------
2/2/02 2/3/01 1/29/00
-------------------------------------------------------------------------------------------------------------------------
Minimum rentals:
Unrelated parties $90,569 $76,835 $47,562
Related parties 15,363 10,553 8,361
Contingent rentals:
Unrelated parties 4,414 4,529 5,648
Related parties 2,128 2,386 2,289
-------------------------------------------------------------------------------------------------------------------------
Total $112,474 $94,303 $63,860
-------------------------------------------------------------------------------------------------------------------------
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 2001 and 2000, the balance of deferred rent was
$10,007,000 and $6,721,000, respectively, and is included in other
noncurrent liabilities. Certain store and warehouse leases provided
landlord incentives totaling $15,300,000 in fiscal 2001. These
incentives are recorded as long term-liabilities in the accompanying
consolidated balance sheet as of February 2, 2002, and are amortized as
a reduction of rent expense over the remaining minimum lease term.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
5. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
Year Ended
--------------------------
2/2/02 2/3/01
------------------------------------------------------------------------
Credit facilities $306,000 $295,000
Capital lease obligations 31,281 31,247
Other 583 805
------------------------------------------------------------------------
337,864 327,052
Less current maturities (665) (603)
------------------------------------------------------------------------
$337,199 $326,449
------------------------------------------------------------------------
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 expires on March 15, 2003, provides for
revolving and overnight loans and issuance of letters of credit.
Outstanding advances are secured by a lien on assets and are subject to
a monthly borrowing base of eligible inventories and receivables, as
defined. Terms of the Credit Agreement require compliance with certain
restrictive covenants, including limitations on dividends, the
incurrence of additional debt and financial ratio tests. 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 provides for various
borrowing rates, currently equal to 275 basis points over LIBOR.
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.
The Company utilizes interest rate swap agreements 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 $4.3 million other noncurrent liability at February
2, 2002. The estimated fair value of the interest rate swap agreements
is a $2.8 million liability and a $0.4 million asset at February 3, 2001
and January 29, 2000, respectively. The Company had outstanding swap
agreements with notional amounts totaling $75.0 million, $75.0 million
and $40.0 million for the fiscal years ended 2001, 2000 and 1999
respectively. The Company's current swap agreements have a fixed
interest rate of 6.99% and expire April 2003.
The Company has a $75.0 million Senior Subordinated Convertible Loan
Agreement ("Senior Facility"), dated as of March 15, 2000. The Senior
Facility bears interest at various rates, currently
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
equal to 325 basis points over LIBOR. The interest rate increases an
additional 50 basis points every 90 days after the first anniversary
date. The Senior Facility is due in September 2003, and is due to
Schottenstein Stores Corp. ("SSC") The terms, as amended, provide 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, has the right to convert the debt into common
stock at a price equal to 95% of the 20-day average of high and low
sales prices reported on the New York Stock Exchange at the time of
conversion. 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.
To supplement operating cash requirements the Company has a $100.0
million subordinated secured credit facility with SSC. The interest rate
and terms of the $100.0 million facility are generally the same as the
Credit Agreement. Outstanding advances under the agreement are
subordinated to the Credit Agreement and are subject to a junior lien on
assets securing the Credit Agreement. At February 2, 2002, $20.0 million
was outstanding.
The weighted average interest rate on borrowings under the Company's
credit facilities during fiscal year 2001, 2000 and 1999 was 8.6%, 10.7%
and 8.8%, respectively.
The book value of notes payable and long-term debt approximates fair
value at February 2, 2002.
The Company believes that the availability under the Credit Agreements
along with its current available cash plus expected cash flows from its
operations, will enable the Company to fund its expected needs for
working capital, capital expenditures, and debt service requirements.
Achievement of expected cash flows from operations, vendors and their
factor relations, flow of merchandise, and compliance with the Credit
Agreements' covenants are dependent upon the Company's attainment of its
Fiscal 2002 business plan.
6. 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
$3,537,000, $5,726,000 and $4,696,000 for fiscal years 2001, 2000 and
1999, 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.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
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.
7. 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 January 31
(in thousands):
Year Ended
-------------------------------------------
2/2/02 2/3/01
-------------------------------------------------------------------------------------------------------------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $16,990 $16,083
Service cost 35 35
Interest cost 1,233 1,197
Benefits paid (754) (986)
Actuarial loss 1,158 2,581
Curtailment -- (1,920)
-------------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year 18,662 16,990
-------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair market value at beginning of year 18,702 19,215
Actual (loss) return on plan assets (403) 473
Employer contributions 135 --
Benefits paid (753) (986)
-------------------------------------------------------------------------------------------------------------------
Fair market value at end of year 17,681 18,702
-------------------------------------------------------------------------------------------------------------------
Funded status (981) 1,712
Unrecognized actuarial loss 4,425 1,333
Unrecognized transition obligation (471) (554)
Adjustment to recognize minimum liability (488) --
Unrecognized prior service cost (29) (49)
-------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ 2,456 $ 2,442
-------------------------------------------------------------------------------------------------------------------
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
Assumptions used in each year of the actuarial computations were:
Year Ended
-------------------------------------------
2/2/02 2/3/01
-------------------------------------------------------------------------------------------------------------------
Discount rate 6.5% - 7.5% 7.0% - 7.5%
Rate of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return 8.0% - 9.0% 7.0% - 9.0%
The components of net periodic pension cost are comprised of the
following (in thousands):
Year Ended
-------------------------------------------
2/2/02 2/3/01
-------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned in the period $ 32 $ 35
Interest cost on projected benefit obligation 1,244 1,203
Expected investment return on plan assets (1,573) (1,649)
Net amortization and deferral (42) (37)
-------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ (339) $ (448)
-------------------------------------------------------------------------------------------------------------------
8. OTHER COMPREHENSIVE (LOSS) INCOME
Comprehensive loss represents net (loss) income plus the results of
certain non-shareowners' equity changes not reflected in the
Consolidated Statement of Operations. The components of comprehensive
(loss) income, net of tax, are as follows (in thousands):
Year Ended
-------------------------------------------
2/2/02 2/3/01 1/29/00
-------------------------------------------------------------------------------------------------------------------
Net (loss) income $(28,723) $(101,791) $33,468
Net unrealized loss on derivative financial
instruments, net of income tax benefit
of $1,731 (2,595) -- --
Minimum pension liability, net of
income tax benefit of $647 (971) -- --
-------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) income $(32,289) $(101,791) $33,468
-------------------------------------------------------------------------------------------------------------------
9. 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 from three to five years. Deferred
compensation is charged to income on a straight-line basis during the
period that the restrictions lapse.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
10. STOCK OPTION PLANS
The Company has a 2000 Stock Incentive Plan that provides for the
issuance of options to purchase up to 3,000,000 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 1,000 common shares is automatically granted to
each non-employee director on the first New York Stock Exchange ("NYSE")
trading day in each calendar quarter. The exercise price for each option
is the fair market value of the common shares on the date of grant. All
options become exercisable one year after the grant date and remain
exercisable for a period of ten years from the grant date, subject to
continuation of the option-holders' service as directors of the Company.
The Company had 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
------------------------------------------------------------------
2/2/02 2/3/01 1/29/00
------ ------ -------
Shares WAEP Shares WAEP Shares WAEP
------ ---- ------ ---- ------ ----
Outstanding beginning of year 2,616 $9.32 2,460 $10.12 2,296 $9.31
Granted 1,307 8.41 961 9.24 526 9.56
Exercised (108) 8.10 (176) 8.12 (201) 8.14
Canceled (122) 9.48 (629) 9.83 (161) 9.07
------------------------------------------------------------------------------------------------------------------
Outstanding end of year 3,693 8.07 2,616 9.32 2,460 10.12
------------------------------------------------------------------------------------------------------------------
Options exercisable end of year 1,595 $9.29 1,100 $9.63 1,171 $9.08
Shares available for additional grants 3,049 1,233 443
The following table summarizes information about stock options
outstanding as of February 2, 2002 (shares in thousands):
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------
Weighted
Average
Range of exercise Remaining
prices Shares Contract Life WAEP Shares WAEP
------------------------------------------------------------------------------------------------------------------
$ 3.57 - $ 6.12 1,163 9 yrs $5.24 170 $5.56
$ 6.56 - $ 11.78 2,082 7 yrs $8.33 1,134 $8.53
$ 12.69 - $ 21.44 448 7 yrs $14.23 291 $14.41
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and accordingly has elected
to retain the intrinsic value method of accounting for stock-based
compensation. Had the compensation cost for the Company's stock-option
plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the methods of SFAS No. 123,
the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands, except per share
data):
Year Ended
-------------------------------------------
2/2/02 2/3/01 1/29/00
-----------------------------------------------------------------------------------------------------------
Net (loss) income:
As reported $(28,723) $(101,791) $33,468
Pro forma $(30,231) $(101,953) $31,877
Basic (loss) earnings per share:
As reported $(0.85) $(3.03) $1.03
Pro forma $(0.90) $(3.04) $0.98
Diluted (loss) earnings per share
As reported $(0.85) $(3.03) $1.02
Pro forma $(0.90) $(3.04) $0.97
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 2001, 2000 and 1999, respectively:
expected volatility of 100.4%, 55.4% and 48.9%; dividend yield of 0%;
risk-free interest rates of 4.7%, 4.8% and 6.7%; and, expected lives of
7.3, 6.5 and 6.8 years. The weighted average fair value of options
granted in the fiscal year 2001, 2000 and 1999 was $6.32, $4.91 and
$7.25, 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.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental
to the conduct of its business. In the opinion of management, the amount
of any liability with respect to these proceedings will not be material.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
12. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended
--------------------------------------------
2/2/02 2/3/01 1/29/00
------------------------------------------------------------------------------------------------------------
Current:
Federal -- $(29,092) $22,852
State and local $2,833 (5,847) 4,071
------------------------------------------------------------------------------------------------------------
2,833 (34,939) 26,923
------------------------------------------------------------------------------------------------------------
Deferred:
Federal (16,948) (25,818) (3,492)
State and local (2,422) (4,873) (499)
------------------------------------------------------------------------------------------------------------
(19,370) (30,691) (3,991)
------------------------------------------------------------------------------------------------------------
Income tax (benefit) expense $(16,537) $(65,630) $22,932
------------------------------------------------------------------------------------------------------------
A reconciliation of the expected income taxes based upon the statutory federal rate is as follows (in thousands):
Year Ended
--------------------------------------------
2/2/02 2/3/01 1/29/00
------------------------------------------------------------------------------------------------------------
Income tax (benefit) expense at
federal statutory rate $(13,376) $(58,597) $19,740
Jobs credit (1,439) (822) (712)
State and local taxes, net (2,449) (7,668) 2,843
Non-deductible goodwill 1,885 1,080 1,080
Other (1,158) 377 (19)
------------------------------------------------------------------------------------------------------------
$(16,537) $(65,630) $22,932
------------------------------------------------------------------------------------------------------------
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
The components of the net deferred tax asset as of February 2, 2002 and
February 3, 2001 are (in thousands):
Year Ended
---------------------------
2/2/02 2/3/01
------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Basis differences in inventory $23,320 $31,558
Basis differences in fixed assets 6,277 3,454
State and local taxes (2,337) 1,580
Deferred compensation 1,928 1,151
Amortization of lease acquisition costs (985) 1,395
Net operating loss 21,223 10,320
Federal tax credit 6,744 5,645
Contribution carry forward 480 --
Tenant allowance 5,699 --
Other comprehensive loss 2,378 --
Other 13,888 7,108
------------------------------------------------------------------------------------------------------------
78,615 62,211
------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (4,776) (5,779)
Capital leases 1,347 (2,995)
------------------------------------------------------------------------------------------------------------
(3,429) (8,774)
------------------------------------------------------------------------------------------------------------
Total net $75,186 $53,437
------------------------------------------------------------------------------------------------------------
The net deferred tax asset is recorded in the Company's consolidated balance sheet as follows (in thousands):
Year Ended
---------------------------
2/2/02 2/3/01
------------------------------------------------------------------------------------------------------------
Current deferred tax asset $63,102 $51,732
Non-current deferred tax asset 12,084 1,705
------------------------------------------------------------------------------------------------------------
Net deferred tax asset $75,186 $53,437
------------------------------------------------------------------------------------------------------------
Pursuant to the Job Creation and Labor Assistance Act of 2002, which was
signed into law on March 9, 2002, the Company will carryback a portion
or all of its net tax operating loss.
13. ACQUISITIONS
On March 17, 2000, the Company completed through its wholly owned
subsidiary, Base Acquisition Corp. ("Base Acquisition"), the acquisition
of substantially all of the assets and assumed certain liabilities of
Filene's Basement Corp., a Massachusetts corporation, and Filene's
Basement, Inc., a wholly owned subsidiary of Filene's Basement Corp.
(collectively, "Filene's Basement") pursuant to the closing of an asset
purchase agreement, dated February 2, 2000.
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
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
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 will be
paid in the ordinary course. The acquisition is accounted for as a
purchase. 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. See Note 5 for further discussion.
14. SEGMENT REPORTING
The Company has adopted FASB Statement No. 131, "Disclosure about
Segments of a Business Enterprise and Related Information." The Company
is managed in three operating segments: Value City Department Stores,
DSW Stores and Filene's Basement Stores. All of the operations are
located in the United States. The Company has identified such segments
based on the management responsibility and measures segment profit as
operating (loss) profit which is defined as income before interest
expense and income taxes. Corporate assets include goodwill and loan
costs.
YEAR ENDED FEBRUARY 2, 2002 (in thousands):
Filene's
Value City DSW Basement Corporate Total
---------- -------- -------- --------- -----
Net sales $1,481,151 $509,375 $293,352 -- $2,283,878
Operating (loss) profit (26,401) 4,621 8,588 $ (3,152) (16,344)
Identifiable assets 613,897 206,354 34,140 25,920 880,311
Capital expenditures 14,788 24,542 914 -- 40,244
Depreciation and
Amortization 42,804 4,099 7,027 3,152 57,082
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
YEAR ENDED FEBRUARY 3, 2001 (in thousands):
Filene's
Value City DSW Basement Corporate Total
---------- --------- -------- --------- ----------
Net sales $1,553,902 $409,968 $249,147 $ -- $2,213,017
Operating (loss) profit (144,222) 10,196 1,577 (3,152) (135,601)
Identifiable assets 688,308 104,172 87,304 28,225 908,009
Capital expenditures 51,829 12,649 5,748 -- 70,226
Depreciation and
Amortization 35,658 3,510 5,175 3,152 47,495
YEAR ENDED JANUARY 29, 2000 (in thousands):
Value City DSW Corporate Total
---------- --- --------- -----
Net sales $1,423,581 $246,595 $ -- $1,670,176
Operating profit 58,128 10,745 (3,085) 65,788
Identifiable assets 656,758 56,893 30,530 744,181
Capital expenditures 32,293 5,024 -- 37,317
Depreciation and amortization 28,308 2,837 3,085 34,230
The following sets forth sales by each major merchandise category (in thousands):
Year Ended
----------------------------------------------
2/2/02 2/3/01 1/29/00
------------------------------------------------------------------------------------------------------------
Apparel and ready to wear $1,189,938 $1,266,479 $ 943,798
Hard goods and home furnishings 376,060 332,039 305,694
Shoes and other footwear 717,880 614,499 420,684
------------------------------------------------------------------------------------------------------------
Total $2,283,878 $2,213,017 $1,670,176
------------------------------------------------------------------------------------------------------------
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(in thousands, except per share amounts)
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(1) 13 Weeks(1)
------------------------------------------------------------------------------------------------------------
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 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 income
(loss) of joint venture and
benefit for income taxes (12,448) (9,509) (8,881) (14,016)
Equity in income (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(3) $ (0.23) $ (0.17) $ (0.19) $ (0.26)
------------------------------------------------------------------------------------------------------------
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
YEAR ENDED FEBRUARY 3, 2001
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
4/29/00 07/29/00 10/28/00 02/03/01
13 Weeks 13 Weeks 13 Weeks(2) 14 Weeks(2)
------------------------------------------------------------------------------------------------------------
Net sales $462,053 $528,246 $559,820 $662,898
Cost of sales (284,322) (327,958) (446,973) (433,694)
------------------------------------------------------------------------------------------------------------
Gross profit 177,731 200,288 112,847 229,204
Selling, general and
administrative expenses (174,212) (196,202) (236,432) (263,407)
License fees 1,919 2,731 1,599 5,074
Other operating income 277 1,156 614 1,212
------------------------------------------------------------------------------------------------------------
Operating profit (loss) 5,715 7,973 (121,372) (27,917)
Interest expense, net (5,354) (7,963) (7,873) (9,290)
------------------------------------------------------------------------------------------------------------
Income (loss) before equity in
income (loss) of joint venture and
provision benefit for income taxes 361 10 (129,245) (37,207)
Equity in income (loss) of
joint venture (269) 107 (551) (627)
------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 92 117 (129,796) (37,834)
(Provision) benefit for income taxes (37) (49) 50,781 14,935
------------------------------------------------------------------------------------------------------------
Net income (loss) $55 $68 $(79,015) $(22,899)
------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share(3) $-- $-- $ (2.35) $ (0.67)
------------------------------------------------------------------------------------------------------------
(1) 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.
(2) The results of operations for the quarters ended 10/28/00 and
2/3/01 include non-recurring pretax charges for inventory
realignment, asset impairment and severance costs of $90.4 million
and $19.6 million, respectively.
(3) Earnings (loss) 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.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
A supplemental schedule of non-cash investing and financing activities
is presented below:
Year Ended
------------------------------------------------------------------------
2/2/02 2/3/01 1/29/00
------------------------------------------------------------------------
Cash paid during the year for:
Interest $26,788 $29,723 $11,756
Income taxes $ 2,757 $ 4,700 $17,101
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------
During 1999, the Company incurred capital lease obligations to obtain
new store facilities. Non-cash amounts of $27,100,000 were capitalized
as of January 29, 2000 under the captions of property and equipment and
long-term obligations in relation to these leases.
In March 2000, the Company issued 403,208 common shares with a market
value of $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.
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,
February 3, 2001 and January 29, 2000, respectively.
In November 1999, the Company exchanged 255,959 of its treasury shares
with a fair market value of $4.0 million as part of its acquisition of
Gramex.
F-25
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 (1)Charges to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts (2)Deductions Of Period
-----------------------------------------------------------------------------------------------------------------------------------
Allowance deducted from asset to which it applies:
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended:
1/29/00 $ 310 $ 3,742 $ 442 $ 3,469 $ 1,025
2/3/01 1,025 351 1 385 992
2/2/02 992 4,829 165 4,193 1,793
ALLOWANCE FOR MARKDOWNS:
Year Ended:
1/29/00 10,392 13,745 -- 6,908 17,229
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
ALLOWANCE FOR SALES RETURNS:
Year Ended:
1/29/00 1,613 -- -- 227 1,386
2/3/01 1,386 521 127 168 1,866
2/2/02 1,866 1,676 78 1,272 2,348
STORE CLOSING RESERVE:
Year ended:
1/29/00 77 -- -- 4 73
2/3/01 73 -- 970 -- 1,043
2/2/02 1,043 -- -- 428 615
(1) The charges to other accounts represent balances resulting from
the acquisition of Gramex Retail Stores, Inc. in fiscal 1999,
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 October 13, 1997, between the
Company and SSC. Incorporated by reference to Exhibit 10.1.4 to
Form 10-Q (file no. 1-10767) filed December 16, 1997.
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 Store Lease, dated April 25, 1991, between the Company, as
lessee, and SSC, as lessor, re fourteen stores. Incorporated by
reference to Exhibit 10.9 to Registration Statement on Form S-1
(file no. 33-40214) filed April 29, 1991.
10.5.1 First Amendment to Master Store Lease, dated February 1991,
between the Company, as lessee, as lessor, re fourteen stores.
Incorporated by reference to Exhibit 10.9.1 to Form S-1
Registration Statement (file no. 33-47252) filed April 16, 1992.
10.5.2 Lease Modification Agreement to Master Store Lease, dated June 5,
1995, between the Company, as lessee, and SSC, as lessor, re
Beckley, West Virginia. Incorporated by reference to Exhibit
10.9.2 to Form 10-K (file no. 1-10767) filed October 27, 1995.
10.5.3 Exercise of the second five-year renewal option commencing August
1, 2001, under Master Store Lease, June 5, 1995, as amended,
between the Company, as lessee, and SSC, as lessor, re five
stores. Incorporated by reference to Exhibit 10.9.3 to Form 10-Q
(file no. 1-10767) filed March 19, 1996.
10.6 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.
E-1
10.6.1 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.
10.6.2 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.
10.6.3 Exercise of the first five-year renewal option commencing August
1, 1996 under Master Store Lease, dated April 25, 1991, as
amended, between the Company, as lessee and SSC, lessor, re three
warehouse locations. Incorporated by reference to Exhibit 10.10.3
to Form 10-Q (file no. 1-10767) filed March 19, 1996.
10.7 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.
10.8 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.
10.8.1 Exercise of five-year renewal option commencing July 16, 1996
under Sublease, dated April 25, 1991 between the Company, as
sublessee, and SSC, as sublessor, re 3681 Westerville Road
warehouse. Incorporated by reference to Exhibit 10.12.1 to Form
10-Q (file no. 1-10767) filed March 19, 1996.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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
E-2
Exhibit 10.15.2 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 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.
10.15 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.
10.16 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.
10.17 Form of Restricted Stock Agreement, dated 1991, among SSC, the
Company and certain officers. 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
E-3
10.25 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.
10.25.1 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 * Lease, dated September 2, 1997, between the Company, as lessee,
and SSC Fort Wayne LLC, as landlord.
10.34 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.
10.35 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.
E-4
10.36 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.
10.37 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.
10.38 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.
10.39 Restricted Stock Agreement dated July 14, 1997 between Martin P.
Doolan and the Company. Incorporated by reference to Exhibit
10.53 to Form 10-K (file no. 1-10767) filed October 31, 1997.
10.40 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.
10.41 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.
10.42 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.
10.43 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. 10.44 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.
10.44 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.
10.44.1 * Addendum to the December 7, 2000 Executive Employment Agreement
and Restricted Stock Agreement By and Between George Kolber and
Value City Department Stores
10.45 Amended and Restated Credit Agreement dated as of March 15, 2000,
among the Company, as borrower, and the lending institutions
named therein as lenders. Incorporated by reference to Exhibit
10.1 to Form 8-K (file no. 1-10767) filed January 8, 2001.
10.45.1 Amendment No. 1, dated as of May 9, 2000, to Amended and Restated
Credit Agreement dated as of March 15, 2000. Incorporated by
reference to Exhibit 10.1.1 to Form 8-K (file no. 1-10767) filed
January 8, 2001.
E-5
10.45.2 Amendment No. 2 and Waiver, dated as of December 11, 2000, to
Amended and Restated Credit Agreement dated as of March 15,
2000. Incorporated by reference to Exhibit 10.1.2 to Form 8-K
(file no. 1-10767) filed January 8, 2001.
10.45.3 Amendment No. 3, dated as of May 21, 2001, to Amended and
Restated Credit Agreement dated, as of March 15, 2000.
Incorporated by reference to Exhibit 10.1.3 to Form 10-Q (file
no. 1-10767) filed September 18, 2001.
10.45.4 Amendment No. 4, dated as of July 23, 2001, to Amended and
Restated Credit Agreement dated as of March 15, 2000.
Incorporated by reference to Exhibit 10.1.4 to Form 10-Q (file
no. 1-10767) filed September 18, 2001.
10.45.5 * Amendment No. 5, dated as of January 31, 2002, to Amended and
Restated Credit Agreement dated as of March 15, 2000.
10.46 Subordinated Credit Agreement dated as of December 11, 2000, by
and between the Company, as borrower, and SSC as lender.
Incorporated by reference to Exhibit 10.2 to Form 8-K (file no.
1-10767) filed January 8, 2001.
10.46.1 First Amendment to Subordinated Credit Agreement (dated as of
December 11, 2000) by and between the Company, as borrower, and
SSC as lender, dated as of September 10, 2001. Incorporated by
reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed
February 5, 2002.
10.46.2 Second Amendment to Subordinated Credit Agreement (dated as of
December 11, 2000) by and between the Company, as borrower, and
SSC as lender, dated as of February 1, 2002. Incorporated by
reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed
February 5, 2002.
10.47 Senior Subordinated Convertible Loan Agreement, dated as of
March 15, 2000, between the Company, as borrower, and Prudential
Securities Credit Corp., LLC, as the initial lender, and as
administrative agent. Incorporated by reference to Exhibit 10.3
to Form 8-K (file no. 1-10767) filed January 8, 2001.
10.47.1 Letter Agreement providing the terms and conditions with respect
to the request for amendment of subordinated debt terms and for
waiver of defaults for the bridge loan facility that SSC
purchased from Prudential Securities Credit Corp., LLC.
Incorporated by reference to Exhibit 10.3.1 to Form 8-K (file
no. 1-10767) filed January 8, 2001.
10.47.2 Waiver and Amendment dated as of December 11, 2000 to Senior
Subordinated Convertible Loan Agreement dated as of March 15,
2001. Incorporated by reference to Exhibit 10.3.2 to Form 10-Q
(file no. 1-10767) filed September, 18 2001.
10.47.3 Second Amendment, dated as of January 1, 2001, to Senior
Subordinated Convertible Loan Agreement dated as of March 15,
2000. Incorporated by reference to Exhibit 10.3.3 to Form 10-Q
(file no. 1-10767) filed September, 18 2001.
E-6
10.47.4 Third Amendment dated as of March 14, 2001, to Senior
Subordinated Convertible Loan Agreement dated as of March 15,
2000. Incorporated by reference to Exhibit 10.3.4 to Form 10-Q
(file no. 1-10767) filed September, 18 2001.
10.47.5 * Fourth Amendment dated as of September 10, 2001, to Senior
Subordinated Convertible Loan Agreement dated as of March 15,
2000. (Note - Document states that it is the Third Amendment).
10.47.6 * Fifth Amendment dated as of November 2, 2001, to Senior
Subordinated Convertible Loan Agreement dated as of March 15,
2000.
10.47.7 * Sixth Amendment dated as of February 1, 2002, to Senior
Subordinated Convertible Loan Agreement dated as of March 15,
2000.
21 List of Subsidiaries Page E-8.
23 Consent of Deloitte & Touche LLP Page E-9.
24 Power of Attorney Page E-10.
E-7
EXHIBIT 21
VALUE CITY DEPARTMENT STORES, INC.
LIST OF SUBSIDIARIES
Ref. State of Parent Co. Parent Pct.
No. Name Incorporation Ref. No. Ownership
---- ---------------------------------------------------- ------------- -------- ----------
1. Value City Department Stores, Inc. Ohio Parent
2. Carlyn Advertising Agency, Inc. Ohio 1. 100.0%
3. J. S. Overland Delivery, Inc. Delaware 1. 100.0%
4. Shonac Corporation Ohio 1. 100.0%
5. Value City of Michigan, Inc. Michigan 1. 100.0%
6. Westerville Road LP, Inc. Delaware 1. 100.0%
7. Westerville Road GP, Inc. Delaware 1. 100.0%
8. Value City Acquisition Corp. Delaware 1. 100.0%
9. VC Acquisition, Inc. Ohio 1. 100.0%
10. Filene's Basement, Inc.(a) Delaware 1. 100.0%
11. Gramex Retail Stores, Inc. Delaware 1. 100.0%
12. DSW Shoe Warehouse, Inc. Missouri 4. 100.0%
13. GB Retailers, Inc. Delaware 5. 100.0%
14. Value City Department Stores Services, Inc. Delaware 5. 100.0%
15. Value City Limited Partnership Ohio(b) 6. 99.0%
7. 1.0%
16. VCM, Ltd. Ohio LLC 13. 100.0%
17. L. F. Widmann Pennsylvania 16. 100.0%
--------------------------------------------------------------------------------
Notes:
(a) Formerly known as Base Acquisition Corp.
(b) This is a limited partnership, not an incorporated entity.
E-8
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Value City Department Stores, Inc. on Form S-8 (File Nos. 33-44207, 33-50198,
33-55348, 33-55350, 33-78586, 33-80588, 33-92966, 333-15957, 333-15961 and
333-66239) of our report dated March 26, 2002, appearing in the Annual Report on
Form 10-K/A of Value City Department Stores, Inc. for the year ended February 2,
2002.
/s/Deloitte & Touche LLP
Columbus, Ohio
May 22, 2002
E-9
EXHIBIT 24
POWER OF ATTORNEY
Each director and/or officer of Value City Department Stores, Inc. (the
"Corporation") whose signature appears below hereby appoints James A. McGrady as
the undersigned's attorney or any of them individually as the undersigned's
attorney, to sign, in the undersigned's name and behalf and in any and all
capacities stated below, and to cause to be filed with the Securities and
Exchange Commission (the "Commission"), the Corporation's Annual Report on Form
10-K (the "Form 10-K") for the fiscal year ended February 2, 2002, and likewise
to sign and file with the Commission any and all amendments to the Form 10-K,
and the Corporation hereby appoints such persons as its attorneys-in-fact and
each of them as its attorney-in-fact with like authority to sign and file the
Form 10-K and any amendments thereto granting to each attorney-in-fact full
power of substitution and revocation, and hereby ratifying all that any such
attorney-in-fact or the undersigned's substitute may do by virtue hereof.
IN WITNESS WHEREOF, we have hereunto set our hands effective as of the 23rd day
of April, 2002.
/s/ Jay L. Schottenstein Chairman of the Board of Directors
--------------------------------------
Jay L. Schottenstein
/s/ John C. Rossler President and Chief Executive Officer
--------------------------------------
John C. Rossler (Principal Executive Officer)
/s/ James A. Mcgrady Chief Financial Officer and Treasurer
-------------------------------------- (Principal Financial and Accounting
James A. McGrady Officer)
/s/ Henry L. Aaron Director
--------------------------------------
Henry L. Aaron
/s/ Ari Deshe Director
--------------------------------------
Ari Deshe
/s/ Jon P. Diamond Director
--------------------------------------
Jon P. Diamond
/s/ Elizabeth Mugar Eveillard Director
--------------------------------------
Elizabeth Mugar Eveillard
/s/ Marvin Goldstein Director
--------------------------------------
Marvin Goldstein
/s/ Richard Gurian Director
--------------------------------------
Richard Gurian
/s/ Dr. Norman Lamm Director
--------------------------------------
Dr. Norman Lamm
E-10
/s/ Geraldine H. Schottenstein Director
--------------------------------------
Geraldine H. Schottenstein
/s/ Robert L. Shook Director
--------------------------------------
Robert L. Shook
/s/ Harvey L. Sonnenberg Director
--------------------------------------
Harvey L. Sonnenberg
/s/ James L. Weisman Director
--------------------------------------
James L. Weisman
E-11