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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 1-10767
VALUE CITY DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
OHIO NO. 31-1322832
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 WESTERVILLE ROAD, COLUMBUS, OHIO 43224
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 471-4722
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,490,447 Common Shares, based on the $7.69 closing sale price on April 16,
2001, was $96,051,537.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 34,338,212 Common Shares were
outstanding at April 16, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for Annual Meeting of Shareholders to be held in July
2001 in part, as indicated.
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TABLE OF CONTENTS
FORM
10-K
REPORT
ITEM NO. PAGE
- -------- ----
PART I
1. Business............................................................................................3
2. Properties.........................................................................................16
3. Legal Proceedings..................................................................................17
4. Submission of Matters to a Vote of Security Holders................................................17
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..........................18
6. Selected Financial Data............................................................................19
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............20
7A. Quantitative and Qualitative Disclosures about Market Risk ........................................26
8. Financial Statements and Supplementary Data........................................................27
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............27
PART III
10. Directors and Executive Officers of the Registrant.................................................28
11. Executive Officer Compensation.....................................................................28
12. Security Ownership of Certain Beneficial Owners and Management.....................................28
13. Certain Relationships and Related Transactions.....................................................28
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................29
Signatures.........................................................................................30
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report...............................................................................F-1
Consolidated Balance Sheets................................................................................F-2
Consolidated Statements of Operations......................................................................F-3
Consolidated Statements of Shareholders' Equity............................................................F-4
Consolidated Statements of Cash Flows......................................................................F-5
Notes to Consolidated Financial Statements.................................................................F-6
SCHEDULES
- ---------
II - Valuation and Qualifying Accounts.....................................................................S-1
Index to Exhibits..........................................................................................E-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Value City Department Stores, Inc. currently operates a chain of 119
department stores located in Ohio, Pennsylvania and 13 other Midwestern, Eastern
and Southern states, principally under the name Value City, as well as 81 DSW
Shoe Warehouse Stores located throughout the United States. In addition, we
operate 19 Filene's Basement stores ("Filene's") located principally in the New
England states. For over 80 years, our strategy has been to provide exceptional
value by offering a broad selection of brand name merchandise at prices
substantially below conventional retail prices. Our department stores carry
men's, women's and children's apparel, housewares, giftware, home furnishings,
toys, sporting goods, jewelry, shoes and health and beauty care items, with
apparel comprising over 60% of total sales. Our department stores average 87,000
square feet which allow us to offer over 100,000 different items of merchandise
similar to the items found in traditional department, specialty and discount
stores. Our DSW stores are a chain of upscale shoe stores offering a wide
selection of dress and casual footwear below traditional retail prices. These
stores average 25,000 square feet with up to 45,000 pairs of women's and men's
designer brand shoes and athletic footwear per store. Our Filene's stores
average 27,000 square feet and specialize in high-end brand name merchandise of
men's and women's apparel, accessories and home goods.
Our pricing strategy is supported by our ability to purchase large
quantities of goods in a variety of special buying opportunities. For many
years, we have had a reputation in the marketplace as a purchaser of buy-outs
and manufacturers' closeouts.
HISTORY OF OUR BUSINESS
We opened our first department store in Columbus, Ohio in 1917. The
Value City department stores operated as a division of Schottenstein Stores
Corporation ("SSC") until we went public on June 18, 1991. SSC still owns 53.0%
of our stock. We have a number of ongoing related party agreements with SSC that
are described in Item 13 of this report.
In July 1997, we entered into agreements with Mazel Stores, Inc. to
create VCM, Ltd., a 50/50 joint venture. VCM operates the health and beauty
care, toy and sporting goods departments and; beginning in fiscal 2000, the food
department, as licensed departments. We account for our fifty percent interest
in the joint venture under the equity method. See "Licensed Departments."
Effective May 3, 1998, we purchased 99.9% of the common stock of Shonac
Corporation from Nacht Management, Inc. and SSC. In September 2000, we purchased
the remaining 0.1% to give us 100% ownership. Shonac had been the shoe licensee
in all of the Value City stores since its inception in 1969 and also operated
the DSW chain of retail shoe stores. Also effective May 3, 1998, we acquired the
store operations of Valley Fair Corporation from SSC. Valley Fair operated two
department stores located in New Jersey. Prior to their acquisition, we had been
a licensee of certain departments in these two stores for eighteen years.
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On November 19, 1999, we purchased 100% of the common stock of Gramex
Retail Stores, Inc. ("Gramex") from Gramex Corporation pursuant to a Stock
Purchase Agreement, dated as of November 8, 1999. Gramex operated a chain of 15
discount stores under the name "Grandpa's" in the greater St. Louis metropolitan
area. Of the 15 stores acquired and after liquidation of the existing Grandpa's
inventory, 13 stores were converted to the Value City format. Six stores
received only minor improvements and were reopened in March 2000. The other 7
stores were remodeled based on our current Value City format and were reopened
in April 2000.
On March 17, 2000, we completed the acquisition of substantially all of
the assets and the assumption of certain liabilities of Filene's Basement Corp.,
a Massachusetts corporation, and Filene's Basement, Inc., a wholly owned
subsidiary of Filene's Basement Corp. through our wholly owned subsidiary, Base
Acquisition Corp., pursuant to the closing of an asset purchase agreement, dated
February 2, 2000. Filene's was operating as debtor-in-possession under Chapter
11 of the Bankruptcy Code. We continue to operate the 14 Filene's stores
acquired on March 17 and have reopened 3 other Filene's stores in the Washington
D.C. area. During fiscal 2000, 2 new Filene's stores were opened.
We and our wholly owned subsidiaries are sometimes referred to
collectively in this report as the "Company" or as "VCDS."
CHANGE IN FISCAL YEAR-END
On June 10, 1998, we determined to change our fiscal year from a 52/53
week year that ended on the Saturday nearest to July 31 to a 52/53 week year
that ends on the Saturday nearest to January 31. The six-month transition period
of August 2, 1998 through January 30, 1999 (the "Transition Period") preceded
the start of the 1999 fiscal year which ended January 29, 2000. Fiscal 2000
contains 53 weeks.
OPERATING SEGMENTS
See Note 12 of Notes to Consolidated Financial Statements beginning on
page F-21 of this annual report for information regarding our Company's
segments.
BUSINESS STRATEGIES
Our strategy is to provide brand name merchandise substantially below
conventional retail prices. The strategy is reflected in our name, "Value City,"
and our motto, "It's your money, get more for it." We believe that the size of
our Value City department stores facilitates a full-line merchandise offering
and range of brands that differentiates us from other off-price retailers.
Our DSW stores' mission is to be each customers' favorite retailer of
branded footwear by satisfying customer expectations for selection, convenience
and value.
Filene's strategy is similar to Value City's focus on providing the
best brand names at everyday low prices for men's and women's apparel,
accessories and home goods. The principal elements of Value City's, DSW's and
Filene's business strategies are discussed below.
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MERCHANDISING
Selection
Value City is a full-line, off-price retailer carrying men's, women's
and children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes and health and beauty care items. Off-price retailing, as
distinguished from traditional full-price retailing and discount or off-brand
merchandising, is characterized by the purchase of primarily high quality brand
name merchandise, at prices below normal cost to most retailers. A portion of
the cost savings is then passed on to customers through lower prices. Our Value
City stores strive to offer customers one-stop-shopping in terms of categories
of merchandise carried. The large size of our stores facilitates the offering of
a wide range of merchandise categories with broad, deep selections of goods
within each category. Our stores carry over 100,000 different items of
merchandise similar to the items found in traditional department, specialty and
discount stores. To improve store profitability and meet the changing needs of
our customers, we continually refine the Value City merchandise mix eliminating
less productive departments and introducing new merchandise categories.
We believe customers are attracted to Value City stores because of
continuous new offerings of value-priced merchandise acquired in special
purchases. At the same time, Value City maintains a broad and consistent range
of goods, it purchases continuing lines of merchandise and draws upon its vendor
contacts to ensure constant availability of certain basic categories of
merchandise as well as current fashion trends.
DSW stores attract customers because of their wide assortment of top
quality name brand dress, casual and athletic footwear for men and women
together with a regularly changing selection of more fashion-oriented footwear.
Our DSW stores are large, contemporary, upscale warehouses, averaging 25,000
square feet and allow us to sell a large selection of branded footwear in a
clean and simple environment.
Filene's stores average 27,000 square feet and offer branded apparel,
home goods, accessories and retail stocks purchased directly from major upscale
retailers. The branded merchandise represents a focused assortment of
fashionable, nationally-recognized men's and women's apparel, accessories and
home goods bearing prominent designers' and manufacturers' names. Branded
merchandise constitutes most of the product line and is obtained through
opportunistic purchases from a diverse group of quality manufacturers and
vendors.
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The following table sets forth relative contributions of each major
merchandise category to total sales.
Fiscal Year Fiscal Year 6 Months Fiscal Year
Ended Ended Ended Ended
2/3/01 1/29/00 1/30/99 8/1/98
------ ------- ------- ------
Apparel and Ready-to-Wear - Includes: Men's, Women's
and Children's outerwear, suits, dresses, sportswear,
sleepwear, underwear and accessories; and department
store shoe sales from May 3, 1998 to February 3, 2001................... 61.9% 62.7% 62.8% 62.2%
Hard goods and Home Furnishings - Includes: domestics;
jewelry; housewares; giftware; and small appliances .................... 14.7 17.2 18.8 19.0
Licensed Departments - Includes: shoes through May 2, 1998;
health and beauty care; food; toys and sporting goods and
other incidental departments............................................ 6.0 6.3 7.5 15.2
DSW Stores................................................................. 17.4 13.8 10.9 3.6
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Value Pricing
Value City stores offer quality brand name merchandise at prices
typically 50% to 70% below prices charged by traditional department stores for
similar items and at prices comparable to or lower than prices charged by other
off-price retailers. We can offer exceptional values because our buyers purchase
merchandise directly from manufacturers and other vendors generally at prices
substantially below those paid by conventional retailers. This allows us to pass
on the savings directly to our customers. See "Supplier Relationships and
Purchasing."
DSW price points are targeted to be up to 50% lower than the regular
prices of other specialty retailers and traditional department stores. DSW
continually strives to improve its merchandise sourcing to maintain quality,
lower costs and shortened delivery cycles. Identifying and building
relationships with cost-efficient manufacturers and suppliers of quality
merchandise is essential to DSW's merchandising strategy.
Well known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City and Filene's stores. Many items
carry labels and/or original price tags showing brand names identifiable with
major designers, manufacturers and retail stores, as well as tags showing
original retail, comparable or "nationally advertised" prices. In certain cases
suppliers may require removal of labels or original retail price tags as a
condition to a special purchase arrangement. See "Supplier Relationships and
Purchasing."
Our Filene's stores' merchandise assortment is typically priced at
levels 30%-60% below regular prices at traditional department and specialty
stores. These discounts are achieved by buying in-season
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overruns and end-of-season surplus at advantageous prices and offering them for
sale at lower markups than those of traditional department stores. We are also
able to keep the cost of merchandise low because we do not require markdown or
advertisement allowances, or anticipation of returns from vendors, all of which
are typical in the department store industry.
Licensed Departments
We operate all departments in the Value City stores except for the
health and beauty care, toy and sporting goods, food and certain other
incidental departments. These departments are licensed to others, including
affiliated parties, for a percentage of net sales, generally ranging from 5% to
11%, for initial periods of up to 10 years with, in some instances, an option to
renew. In addition, we receive a fee from some licensees for general and
administrative expenses. The aggregate annual license fees received from
licensees for fiscal year ended February 3, 2001 were $11,323,000.
SSC owned a controlling interest in L. F. Widmann, Inc., the licensee
that operated the health and beauty care departments in our stores. In July
1997, we entered into agreements with Mazel to create VCM, a 50/50 joint
venture. Effective August 3, 1997, VCM purchased 100% of Widmann's capital stock
and purchased the assets of Value City's toys and sporting goods departments.
VCM operates the health and beauty care and toys and sporting goods departments
in our stores as licensed departments. The license agreements provide for fees
based on a percentage of sales, as defined, for license fees, advertising fees
and credit and administrative charges. We provide certain personnel,
administrative and service functions for which we receive a monthly fee from VCM
to cover the related costs. The license and joint venture agreements are for a
term of ten years ending in 2007 and contain certain provisions whereby either
business partner can initiate renegotiation of terms if certain minimum
requirements are not met.
SSC also owned 49.9% of the outstanding stock of Shonac, the licensee
that operated the shoe departments in all of the Value City stores until May
1998 when we purchased 99.9% of the common stock of Shonac.
Licensees supply their own merchandise and generally supply their own
store fixtures but in most instances utilize our associates to operate their
departments. The licensees reimburse us for all costs associated with such
associates. Licensees operate their departments under our general supervision
and are required to abide by our policies with regard to pricing, quality of
merchandise, refunds and store hours. Licensed departments complement the
operations of our stores and are considered an integral part of our store
operations. The common ownership interest in licensees facilitates the
uniformity of merchandising strategy in the stores, including the overall
emphasis on values resulting from special purchase opportunities.
SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in our growth has been our many years of experience
in purchasing merchandise directly from manufacturers and other vendors at
prices substantially below those generally paid by conventional retailers. We
believe that over the years our buyers have established excellent relationships
with suppliers and have established a reputation for our willingness and ability
to purchase entire lots of merchandise and make prompt payment. We continuously
seek to find and negotiate special purchase opportunities. As a result of our
relationships, experience and reputation for prompt payment,
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many suppliers offer us special purchase opportunities prior to attempting to
dispose of merchandise through other channels. Many manufacturers of brand name
merchandise are reluctant to sell merchandise for resale at discounted prices
through their normal channels of distribution or to retailers which may be
considered competitors in their regular distribution channels. By selling such
merchandise through our own retail stores, we are able to assure suppliers that
the merchandise will be sold without disturbing the suppliers' regular channels
of distribution.
Although we cannot quantify the amount by which the prices we pay for
special purchases are lower, if any, than the prices paid by our competitors for
similar purchases, we believe that such special purchases are made at prices
sufficiently favorable to enable us to offer merchandise to our customers at
prices significantly lower than those prices offered by many of our competitors.
We purchase merchandise from more than 4,700 suppliers, none of which
accounted for a material percentage of purchases during the past fiscal year. We
do not maintain any long-term or exclusive commitments to purchase merchandise
from any one supplier. We regularly purchase overstocked or overproduced items
from manufacturers and other retailers, including end-of-season, out-of-season
and end-of-run merchandise and manufacturers' slight irregulars. From time to
time, we purchase all or substantially all of the inventories of financially
distressed retailers and make other special purchases. Also, we have started to
more aggressively seek advantageous buying opportunities overseas, particularly
in non-apparel categories.
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we have
devoted warehouse space to out-of-season goods for our department stores. We
strive to hold this merchandise until the most opportune time to offer it in the
Value City stores, which in most cases is the next season. This ability to
purchase and quickly distribute or hold merchandise in substantial quantities
has enabled us to offer high-quality merchandise to customers at prices
significantly below usual retail prices. We believe that this ability
distinguishes us from the typical discount or department store and provides us
with a competitive advantage in making purchases as favorable opportunities
arise.
The relatively large size of the Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
DSW's merchandising group constantly monitors current fashion trends as
well as historical sales trends to identify popular styles and styles that may
become popular in the upcoming season. Once our buyer determines the styles and
merchandise mix for any upcoming season, they focus on purchasing the
appropriate quantities of each category at the lowest cost and the highest
quality available.
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. DSW believes
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that, consistent with the retail footwear industry as a whole, most of its
domestic vendors import a large portion of their merchandise from abroad. We
have implemented quality control programs under which buyers inspect incoming
merchandise for fit, color and material, as well as for overall quality of
manufacturing. As the number of DSW locations increase, we believe there will be
adequate sources available to acquire and/or produce a sufficient supply of
quality goods in a timely manner and on satisfactory economic terms.
We believe that the acquisition of Filene's, a well-known institution
in Boston since 1908, is a good fit with our `deal driven' merchandise strategy.
Because of the longstanding relationships Filene's has with vendors, it receives
quality buying opportunities at competitive prices. These longstanding
relationships make Filene's a prime choice for vendors with overruns, department
store cancellations and unmet volume objectives. From time to time, Filene's
commits to the future purchase of branded merchandise from vendors at
advantageous prices. These forward purchases allow for timely, fashionable
assortments. Based on our experience, we believe that the current supply of
branded merchandise is adequate for our needs.
DISTRIBUTION
We use a regionalized distribution strategy with 11 distribution
centers located in Columbus, Ohio, a distribution facility in St. Louis,
Missouri and one distribution facility in Auburn, Massachusetts. The aggregate
area of the distribution facilities is approximately 3,000,000 square feet;
however, use of multi-tier processing levels in some of the distribution centers
substantially increases their operating capacity. In addition, to expedite the
flow of merchandise to certain clusters of stores, we use third party processors
located in New Jersey, Chicago and Detroit.
Our distribution facilities utilize material handling equipment,
including mechanized conveyor systems to separate and collate shipments to the
stores. Our distribution facilities are designed to allow priority delivery of
late season purchases and fast-moving merchandise to have it in our stores
quickly to take full advantage of the remaining selling season. We continue to
focus on improving inventory turns by implementing changes which will expedite
the flow of merchandise to our selling floors.
Merchandise is processed, ticketed and consolidated prior to shipment
to the stores to ensure full-truck loads to minimize shipping costs. We lease
our fleet of road tractors and approximately 70% of our semi-rig trailers with
the remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
To support the planned growth of our DSW Shoe Warehouse operation, we
recently consolidated and relocated DSW's principal offices and distribution
center operations to a new 625,000 square feet facility located in Columbus,
Ohio. We have entered into a 15-year lease with three five-year option periods
with an affiliate of SSC.
Our new distribution center facility uses a warehouse management system
by Retek and modern material handling equipment, including new Rapistan/Demag
conveyor systems, to separate and collate shipments to our stores. The design of
the distribution center facilitates the prompt delivery of priority purchases
and fast selling footwear to stores so that we can take full advantage of each
selling season. We continue to focus on improving inventory controls and turns
by implementing changes which will expedite the flow of footwear and related
accessories to our stores.
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For Filene's merchandise we currently lease a 457,000 square foot
distribution facility situated on 32.8 acres with adjacent rail service in
Auburn, Massachusetts.
ADVERTISING AND PROMOTION
We commit substantial resources to advertising and believe that our
marketing strategy is one of the keys to our success. Value City advertises
frequently in print, including newspapers, circulars and flyers, and on
television and radio. The promotional strategy is carefully planned and budgeted
to include not only institutional and seasonal promotions, but also weekly
storewide sales events highlighting recent buy-outs and other specially
purchased brand name merchandise designed to maximize customer interest. In some
cases, a supplier may prohibit the advertising or non-store promotion of its
brand name.
Our DSW stores currently use a broadcast campaign, primarily radio,
focusing on the slogan "The Shoes of the Moment. The Deal of a Lifetime." This
campaign is supplemented by print promotions and, increasingly, television. In
addition, a valuable marketing tool for DSW is the "Reward Your Style" loyal
customer program. Customers are asked to join the program during the checkout
procedure. By analyzing the member database, as well as the sales transactions
of those members, we are able to direct the advertising to encourage repeat
shopping and to reach targeted customers.
Filene's employs a multi-media approach, using print, broadcast and
direct mail. The communication strategy is designed to target customer segments
and generate increased store trips and cross shopping opportunities.
STORES
Store Location and Design
Our Value City stores average approximately 87,000 square feet, with
approximately 70% of the total area of each store representing selling space.
The stores are generally laid out on a single level, with central traffic aisles
providing access to major departments. Each department strives to display and
stock large quantities and assortments of merchandise, giving the store a full
appearance. The stores are generally open from 9:30 am until 9:30 pm Monday
through Saturday and 11:00 am until 6:00 pm on Sunday. All of the stores are
located in leased facilities.
We believe that customers are attracted to our stores principally by
the wide assortment of quality items at substantial savings. Of the 119
department stores open as of April 16, 2001, 27 are free-standing and 92 are in
shopping centers, 25 of which are enclosed malls in which they serve as an
anchor. Of the 81 shoe stores open as of April 17, 2001, 11 are free-standing
and 70 are in shopping centers. Most of our stores are located in suburban
areas, near large residential neighborhoods and away from downtown commercial
centers.
Our DSW stores average approximately 25,000 square feet, with about 87%
of the total area of each store representing selling space. The stores'
exteriors feature black and white color schemes and in many cases, windows with
striped awnings. The store interiors are well lit and feature a unique display
concept, a simple case presentation which groups the shoes together by style.
Interior signage is tasteful and kept to a
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minimum. The shoe stores are generally laid out on a single level, with the
cases of shoes forming the aisles in the stores. This allows customers to view
the entire store when they enter. The stores are generally open from 10:00 a.m.
until 9:00 p.m. Monday through Saturday and 12:00 p.m. until 6:00 p.m. on
Sunday. The stores are located in leased facilities.
The Filene's Boston store is a landmark institution recognized by
generations of New England families and visitors as a source of quality
off-price men's and women's merchandise. The downtown location is famous for a
unique marketing concept - the Automatic Markdown Plan - whereby certain
merchandise is automatically discounted based on the number of days the
merchandise has been on the sales floor. Filene's believes that the Automatic
Markdown Plan generates a sense of shopping urgency and creates customer
excitement and loyalty. Filene's subleases 178,000 square feet (approximately
65,300 square feet of selling space) on four floors. The sublease terminates in
2009 with rights on behalf of Filene's to extend until 2024. The Boston store
generated over $1,061 in sales per square foot of selling space during fiscal
2000.
In addition to the downtown Boston store, Filene's operates 18 branch
stores in four states and Washington, D.C. with an average of approximately
27,000 square feet of selling space per store. Generally, the branch store's
selling space is on a single level and uses a prototypical "racetrack" aisle
layout for merchandise presentation. The branch stores are designed to be
convenient and attractive in their merchandise presentation, dressing rooms,
checkouts and customer service areas. Filene's branch stores that were opened
from the date of acquisition generated $463 in sales per square foot of selling
space.
The branch stores that were opened from the date of acquisition
averaged $12,827 million in sales volume per store in fiscal 2000. Their
merchandise mix is similar to that of the Boston flagship store. Because of the
operational complexities associated with transferring the Automatic Markdown
Plan to the branch stores, the branch stores do not operate under the Automatic
Markdown Plan, although markdowns are taken as required.
Store Operations
We are committed to offering customers a convenient, pleasurable
shopping experience and a high level of satisfaction. At Value City, a training
program is utilized to assure that every associate maintains the highest level
of professionalism and places customer service at the forefront. At DSW, all
associates receive Retail Results University training in both product knowledge
and sales/service. This in-house training program emphasizes acknowledgment of
all customers, customized levels of service, and realization of sales
opportunities at all moments of customer contact.
Our stores are designed for self-service shopping, although sales
personnel are available to help customers locate merchandise and to assist in
the selection and fitting of apparel and footwear. In all stores, a customer
service desk is conveniently located generally adjacent to the central check-out
area. We pride ourselves on ease of checkout and have invested in point of sale
scanning systems which expedite the checkout process by providing automated
check and credit approval and price lookup. Sales associates are trained to
create a "customer-friendly" environment. We accept all major credit cards, and
also provide a private label credit card program at the department stores.
Private label and other credit card sales are nonrecourse to us, with the
servicing agent assuming all of the credit risk. Value City offers a convenient
layaway program in its department stores and maintains a liberal return policy.
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Our stores are organized into separate geographic regions and
districts, each with a regional or district manager. Regional and district
managers are headquartered in their region and spend the majority of their time
in their stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a Value City store consists of a store manager,
an operations manager, two assistant managers, a human resource administrator, a
customer service manager, a receiving manager, and full and part-time hourly
associates. Each store manager reports directly to one of the regional or
district managers, and each of the regional or district managers reports to a
Regional Vice President who in turn reports to the Vice President of Operations.
The typical staff for a DSW store consists of a store manager and two
assistant managers who supervise 20 to 25 full and part-time hourly associates.
Each store manager reports directly to one of 13 district managers who in turn
report to a regional manager who in turn report to the Vice President of
Operations.
Our Filene's stores' typical staff consists of a general manager, an
assistant store manager, merchandising group managers and full and part-time
associates. Each general manager reports to the group store manager who in turn
reports to the Senior Vice President, Director of Stores.
Our store managers function both as administrators and merchants. All
managers are responsible on a day-to-day basis for maintenance of displays and
inventories in all departments, for the overall condition of their stores, for
customer relations, personnel hiring and scheduling, and for all other
operational matters arising in the stores. Each store manager is compensated, in
part, based on the performance of his or her store. Our store managers are an
important source of information concerning local market conditions, trends and
customer preferences.
We prefer to fill management positions through promotion of existing
associates. A store management training program is maintained to develop the
management skills of associates and to provide a source of management personnel
for future store expansion.
Expansion
We have increased our department store base from 74 stores at the start
of fiscal 1994 to 119 stores at the end of fiscal 2000. We have expanded both by
leasing newly constructed locations and by acquiring existing locations from
other retailers. No new stores are planned for fiscal 2001.
We plan to open 25 to 30 new DSW shoe stores during fiscal 2001. We
intend to open new DSW stores in both existing and new markets with an emphasis
on locating stores in highly visible sites on high traffic streets in relatively
affluent trade areas. Factors considered in evaluating new store sites include
store size, configuration, demographics and lease terms. We seek to cluster
stores in targeted metropolitan areas to enhance name recognition, share
advertising costs and achieve economies of scale in management and distribution.
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The table below sets forth certain information relating to the
Company's stores during each of the last five fiscal years:
Fiscal Year Ended 6 Months Fiscal Year Ended
-------------------- Ended -----------------------------
2/3/01 1/29/00 1/30/99 8/1/98 8/2/97 8/3/96
------ ------- ------- ------ ------ ------
Beginning of Year(1) ........ 167 145 142 95 86 79
Opened(2).................. 55 22 4 49 9 7
Closed ................... 1 - 1 2 0 0
---- ---- ---- ---- --- ---
End of Year ................. 221 167 145 142 95 86
=== === === === == ==
(1) Excludes apparel, domestics and housewares departments operated by the
Company in two Valley Fair department stores prior to May 3, 1998.
(2) Fiscal year ended February 3, 2001 includes 14 Filene's Basement stores
acquired on March 17, 2000. Fiscal year ended August 1, 1998 includes 2
department stores obtained in the purchase of Valley Fair and the 43 shoe
stores obtained in the purchase of Shonac.
Based upon our experience, we estimate that the average cost of opening
a new department store ranges from approximately $4.5 million to $6.5 million
and the cost of opening a new DSW shoe store ranges from approximately $1.0
million to $2.0 million, including leasehold improvements, fixtures, inventory,
pre-opening expenses and other costs. Similar costs for a Filene's store are in
the $2.5 million to $3.5 million range. Preparations for opening a department
store generally take eight to twelve weeks and preparations for opening a DSW
shoe store or a Filene's store generally take eight to ten weeks. We charge
pre-opening expenses to operations as incurred. It has been our experience that
new stores generally achieve profitability and contribute to net income
following the first year of operations.
We continually refurbish our stores by updating the merchandise
displays and in-store signage. The costs of refurbishing on a per store basis
are generally not substantial. On an annual basis, we select stores to be
remodeled, which generally involves more significant changes to the interior or
exterior of the store. We maintain our own architectural design staff,
construction crews and carpentry shop to assist in refurbishing and remodeling
store interiors and to build in-store display tables and racks.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe that a high level of automation is essential to maintaining
and improving our competitive position. We rely upon computerized data systems
to provide information at all levels, including warehouse operations, store
billing, inventory control, merchandising and automated accounting. Value City
utilizes two IBM AS/400 computer systems, and Shonac utilizes one additional
AS400 computer system.
We utilize point of sale ("POS") registers with full scanning
capabilities to increase speed and accuracy at customer check-outs and
facilitate inventory restocking. Since layaways represent an important part of
our department store business, an automated system to capture and control
layaways is integrated into the POS system.
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ASSOCIATES
As of April 2001, we had approximately 19,300 associates of which 9,900
were full-time and 9,400 were part-time. Approximately 1,400 of these associates
in 21 stores are covered by collective bargaining agreements.
Group hospitalization, surgical, medical, vision, dental, disability
and life insurance benefits and a 401(k) plan are provided to full-time
non-union associates. The Company is a co-sponsor with SSC in these plans. The
Company also sponsors an associate stock purchase plan and a stock option plan
for salaried associates.
We believe that, in general, we have satisfactory relations with all of
our associates.
COMPETITION
The retail industry is highly competitive. We compete with a variety of
conventional and discount retail stores, including national, regional and local
independent department and specialty stores, as well as with catalog operations,
on-line providers, factory outlet stores and other off-price stores.
In the discount or off-price retailing segment, we differentiate
ourselves through our store format and breadth of product offering. Our large
stores differ from most other off-price retailers which tend to operate
substantially smaller stores focusing predominantly on either hard or soft
goods. Our large stores facilitate our merchandise offering and broad range of
brands and products.
In addition, because we purchase much of our inventory
opportunistically, we compete for merchandise with other national and regional
off-price apparel and discount outlets. Many of our competitors handle identical
or similar lines of merchandise and have comparable locations, and some have
greater financial resources than we do.
Competitive factors important to our customers include fashion, value,
merchandise selection, brand name recognition and, to a lesser degree, store
location. We compete primarily on the basis of value, merchandise quality and
selection. We believe our competitive advantages include our reputation in the
marketplace for being able to purchase and promptly pay for entire lots of
merchandise, together with our ability to either quickly distribute or hold the
merchandise for sale at the most opportune time, as well as our full-line
merchandise offering and range of brand names.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S.
Patent and Trademark Office. Our four department stores in Columbus operate
under the tradename "Schottenstein's," which has been registered in the State of
Ohio. We are entitled to use such names for the sole purpose of operating
department stores on an exclusive basis pursuant to a perpetual license from
SSC. SSC also operates a chain of furniture stores under the name "Value City
Furniture." We have also registered in the U.S. Patent and Trademark Office
various trademarks used in our marketing program.
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Through the acquisition of Shonac, we registered in the U.S. Patent and
Trademark Office a number of trademarks and service marks, including: DSW; DSW
Shoe Warehouse; Coach and Four; Crown Shoes; Reward Your Style; Flites; Jonathan
Victor; Kristi G; Lakota Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia
Cristie.
Filene's has an exclusive, perpetual, world-wide, royalty-free license
to use the name Filene's Basement and Filene's Basement of Boston trademark and
service mark registrations as well as certain other tradenames. Filene's
Basement's exclusive licensee status with respect to these registered marks has
been recorded with the United States Patent and Trademark Office and relevant
state offices.
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ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated
by the Company as of February 3, 2001:
VCDS,
DSW
Value City DSW &
Department Shoe Filene's
Stores Warehouse Filene's Total
----------- ------------ ------------- -----------
Arizona - 1 - 1
California - 3 - 3
Colorado - 2 - 2
Delaware 3 - - 3
Florida - 4 - 4
Georgia 4 2 - 6
Illinois 16 6 2 24
Indiana 7 2 - 9
Kansas - 2 - 2
Kentucky 4 - - 4
Maryland 7 3 - 10
Massachusetts - 3 9 12
Michigan 9 4 - 13
Minnesota - 2 - 2
Missouri 9 1 - 10
New Hampshire - 1 - 1
New Jersey 7 2 - 9
New York - 10 4 14
North Carolina 1 1 - 2
Ohio 23 7 1 31
Oklahoma - 1 - 1
Pennsylvania 19 5 - 24
Tennessee 1 2 - 3
Texas - 9 - 9
Virginia 4 4 - 8
Washington D.C. 1 - 3 4
West Virginia 4 - - 4
Wisconsin - 1 - 1
---- --- --- ----
119 78 19 216
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts;
and Los Angeles, California. We operate 11 warehouse/distribution complexes
located in Columbus, Ohio, a distribution facility in St. Louis, Missouri and a
distribution facility in Auburn, Massachusetts. In addition, to expedite the
flow of merchandise to certain clusters of stores, we use third party processors
located in New Jersey, Chicago and Detroit. Our executive offices occupy
approximately 45,000 square feet in a building which
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includes a store and also serves as one of our apparel distribution centers.
Shonac occupies approximately 70,000 square feet in a building which also serves
as the shoe division's distribution center.
The stores and all of the warehouse, buying and executive office
facilities are leased or subleased except for one owned shoe store location. As
of February 3, 2001 we leased or subleased 22 stores and 3 warehouse facilities
from SSC or entities affiliated with SSC. The remaining stores and warehouses
are leased from unrelated entities. Most of the store leases provide for an
annual rent based upon a percentage of gross sales, with a specified minimum
rent.
Our office, warehouse and distribution facilities for our department
store business are adequate for our current needs and we believe that such
facilities, with certain modifications and additional equipment will be adequate
for our foreseeable future demands.
To support the planned growth of our DSW shoe warehouse business, we
have consolidated and relocated the related back office and distribution
operations of our shoe business to a new 625,000 square foot facility located in
Columbus, Ohio. We recently entered into a 15 year lease with 3 five-year option
periods. The lease is with an affiliate of SSC and is at current market rate
rents.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that are incidental to the
conduct of our business. In the opinion of management, the amount of any
liability with respect to these proceedings individually or in the aggregate,
will not be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the high and low sales prices of the Common
Shares as reported on the NYSE Composite Tape during the periods indicated. As
of April 25, 2001, there were 540 shareholders of record.
HIGH LOW
Six Months Ended January 30, 1999:
First Quarter ..................................... $19.25 $7.75
Second Quarter ..................................... 14.375 8.25
Fiscal 1999:
First Quarter ..................................... $12.00 $8.625
Second Quarter ..................................... 15.375 8.3125
Third Quarter ..................................... 15.9375 12.0625
Fourth Quarter ..................................... 19.50 13.875
Fiscal 2000:
First Quarter ..................................... $16.50 $9.375
Second Quarter ..................................... 11.375 8.00
Third Quarter ..................................... 9.9375 6.875
Fourth Quarter ..................................... 8.125 4.625
Fiscal 2001:
First Quarter (through April 25, 2001) ................ $9.03 $6.85
We have paid no dividends and presently anticipate that all of our future
earnings will be retained for development of our businesses and we do not
anticipate paying cash dividends on our common shares during fiscal 2001. The
payment of any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. The payment of dividends under our long-term credit facility is
restricted to the greater of $5.0 million or 10% of consolidated net income.
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ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands, except per share and per square foot amounts)
The following table sets forth for the periods indicated selected financial data
included in our consolidated financial statements and our underlying books and
records. The 12 month period ended January 30, 1999 is presented for comparative
purposes.
Transition
12 Months Period
For the Fiscal Year Ended Ended 6 Months For the Year Ended
------------------------- 1/30/99 Ended ------------------------------------
2/3/01(1) 1/29/00 (unaudited) 1/30/99(1)(2) 8/1/98(2) 8/2/97 8/3/96(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales(3) $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379 $1,073,399 $954,308
Operating (Loss) Profit $(135,585) $65,642 $51,226 $40,799 $36,921 $10,513 $36,213
Net (Loss) Income $(101,791) $33,468 $24,871 $20,256 $20,359 $3,951 $21,718
Basic (Loss) Earnings per Share $(3.03) $1.03 $0.77 $0.63 $0.64 $0.12 $0.68
Diluted (Loss) Earnings per Share $(3.03) $1.02 $0.76 $0.62 $0.63 $0.12 $0.68
Total Assets $908,009 $744,181 $574,427 $574,427 $684,078 $457,973 $437,010
Working Capital $211,402 $205,011 $165,527 $165,527 $204,784 $158,476 $161,397
Current Ratio 1.66 1.82 1.98 1.98 1.88 2.14 2.21
Long-term Obligations $326,449 $144,168 $101,447 $101,447 $165,648 $57,763 $46,942
Number of(4):
Department Stores 119 105 97 97 95 95 86
Shoe Stores 78 58 44 44 43 - -
Filene's Basement Stores 19 - - - - - -
Net Sales per
Selling Sq. Ft.(5) $256 $249 $235 $126 $229 $217 $221
Comp Sales Change(6) (1.1)% 7.2% 6.0% 3.3% 5.9% 0.1% (0.1)%
(1) Fiscal 2000 and 1996 include 53 weeks; all other years contain 52
weeks. The six month period includes 26 weeks.
(2) The operations of Shonac and Valley Fair are included from the date of
acquisition, May 3, 1998.
(3) Excludes sales of licensed departments. Prior to fiscal 1998, sales
from our toys and sporting goods departments were included in Net
Sales. At the start of fiscal 1998 these departments became licensed
departments operated by VCM, Ltd., a 50/50 joint venture with Mazel
Stores, Inc.
(4) Includes all stores operating at the end of the fiscal year. Years
prior to 1998 exclude the apparel, domestic and housewares departments
operated by us in two affiliated department stores which were acquired
effective May 3, 1998.
(5) Excludes licensed departments and stores not operated during the entire
fiscal period.
(6) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable in its second full fiscal year of
operation. For fiscal years 2000 and 1996, comparable store sales are
computed using like 52-week periods.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in our Consolidated
Statements of Operations, except for the 12 month period ended January 30, 1999,
which is presented here for comparative purposes.
- ---------------------------------------------------------------------------------------------------------------------------
For the Year For the Year For the 12 Months For the 6 Months For the Year
Ended Ended Ended Ended Ended
2/3/01 1/29/00 1/30/99 1/30/99 8/1/98
53 Weeks 52 Weeks 52 Weeks 26 Weeks 52 Weeks
- ---------------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales
licensed departments 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (67.5) (62.2) ( 62.2) (62.0) ( 63.1)
----- ----- ------ ----- ------
Gross profit 32.5 37.8 37.8 38.0 36.9
Selling, general and
administrative expenses (39.3) (34.7) (35.2) (33.9) (35.8)
License fees from affiliates
and other operating income 0.7 0.8 1.2 1.1 2.1
------- ------- ------- ------- -------
Operating (loss) profit (6.1) 3.9 3.8 5.2 3.2
Gain on disposal of assets - - - - 0.1
Interest expense, net (1.3) (0.6) (0.8) (0.8) (0.5)
Amortization of excess
net assets over cost - - - - 0.1
Equity in (loss) income
of joint venture (0.1) 0.1 - - (0.1)
------ ------ ------- ------- ----
(Loss) income before income taxes (7.5) 3.4 3.0 4.4 2.8
Benefit (provision) for income taxes 2.9 (1.4) (1.2) (1.8) (1.0)
------ ------- ------- ------- -------
Net (loss) income (4.6)% 2.0% 1.8% 2.6% 1.8%
====== ======= ======= ======= =======
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FISCAL YEAR ENDED FEBRUARY 3, 2001 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
2000
Our net sales increased $542.8 million, or 32.5%, from $1,670.2 million
to $2,213.0 million. Fiscal 2000's sales included $249.1 million net owned sales
of the Filene's stores acquired effective March 17, 2000. Comparable store sales
decreased 1.1%. Net sales for the department stores ("Value City") increased
$130.3 million, or 9.2%, from $1,423.6 million to $1,553.9 million. Value City's
comparable store sales decreased 4.3%, or $60.7 million. Non-apparel sales
increased 7.2% and apparel sales increased 6.4%. On a comparable store basis,
apparel and non-apparel sales decreased 5.1% and 5.4%, respectively. DSW Shoe
Warehouse achieved sales of $410.0 million with a 19.1% comparable stores sales
increase.
Gross profit increased $89.1 million from $631.0 million to $720.1
million, and decreased to 32.5% as a percentage of net sales, compared to 37.8%
as a percentage of net sales in the prior year. The decrease in the gross margin
percentage is due primarily to a $105.4 million charge for the realignment of
excess inventory quantities.
Selling, general and administrative expenses ("SG&A") increased $290.7
million from $579.5 million to $870.2 million, and increased as a percentage of
net sales from 34.7% to 39.3%, an increase of 4.6%. New DSW and Value City
stores accounted for $102.5 million of the SG&A increase; the Filene's stores
added $84.8 million. Comparable store SG&A increased $37.0 million, primarily in
the areas of payroll, benefits and occupancy costs. Distribution and
transportation costs were up $41.1 million. Overhead increased $14.1 million to
support expansion of our shoe business and the relocation of its distribution
complex. SG&A also includes $4.6 million of non-recurring severance and asset
impairment charges. All other expenses as a group were up approximately $6.6
million.
Based upon our experience, we estimate the average cost of opening a new
department store to range from approximately $4.5 million to $6.5 million and
the cost of opening a new shoe store to range from approximately $1.0 million to
$2.0 million including leasehold improvements, fixtures, inventory, pre-opening
expense and other costs. Similar costs for a Filene's store are in the $2.5
million to $3.5 million range. Preparations for opening a department store
generally take between 8 and 12 weeks and preparations for a shoe store or a
Filene's store generally take 8 to 10 weeks. Pre-opening costs are expensed as
incurred. It has been our experience that new stores generally achieve
profitability and contribute to net income after the first full year of
operations. Twenty-three department stores opened less than 12 months as of the
beginning of fiscal 2000 had a pre-tax net operating loss of $22.8 million,
including $4.5 million of pre-opening expense amortization. Ten department
stores opened less than 12 months during fiscal 1999 had pre-tax operating
losses of $1.6 million in 1999, including $3.8 million of pre-opening expense.
Twenty DSW stores opened less than 12 months in fiscal 2000 had a pre-tax net
operating loss of $6.5 million, including $4.6 million of pre-opening expenses.
Twenty-two DSW stores opened less than 12 months during fiscal 1999 had a
pre-tax net operating loss of $3.7 million after recognizing $3.3 million of
pre-opening expenses.
License fees from affiliates increased $2.9 million, or 34.0%, from $8.5
million to $11.3 million, and remained at 0.5% as a percentage of net sales.
Other operating income decreased $2.4 million, or 42.0%, from $5.6
million to $3.3 million and decreased as a percentage of net sales from 0.34% to
0.15%.
Operating (loss) profit decreased $201.2 million from $65.6 million to a
loss of $135.6 million, and decreased as a percentage of net sales from 3.9% to
a 6.1% loss as a result of the above factors.
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Interest expense, net of interest income, increased from $10.7 million to
$30.5 million due to increased borrowing.
Equity in income (loss) of joint venture decreased $2.7 million from
income of $1.3 million to a loss of $1.3 million due primarily to markdowns
taken to liquidate inventory.
Income (loss) before provision for income taxes decreased $223.8 million
from income of $56.4 million to a loss of $167.4 million, and decreased as a
percentage of sales from 3.4% to a 7.5% loss as a result of the above factors.
FISCAL YEAR ENDED JANUARY 29, 2000 COMPARED TO THE TWELVE MONTH PERIOD ENDED
JANUARY 30, 1999
Our net sales increased $306.2 million, or 22.4%, from $1,364.0 million
to $1,670.2 million. Comparable store sales increased 7.2%. Net sales for the
department stores increased $148.3 million, or 13.5%, from $1,106.8 million to
$1,255.1 million. Value City's comparable store sales increased 6.5%, or $69.7
million. The shoe departments in Value City's stores contributed net sales of
$168.5 million. Non-apparel sales increased 9.0% and apparel sales increased
15.0%. On a comparable store basis, apparel and non-apparel sales increased 7.9%
and 2.1%, respectively. DSW achieved sales of $246.6 million with a 19.5%
comparable stores sales increase.
Gross profit increased $115.9 million from $515.1 million to $631.0
million, and remained at 37.8% as a percentage of net sales.
SG&A increased $98.9 million from $480.6 million to $579.5 million, but
decreased as a percentage of net sales from 35.2% to 34.7%, a reduction of 0.5%,
due primarily to the leveraging effect of higher sales volume partially offset
by increased pre-opening costs in fiscal 1999 of approximately $7.6 million.
Ten department stores opened less than 12 months as of the beginning of
fiscal 1999 had a pre-tax net operating loss of $1.6 million, including $3.8
million of pre-opening expense amortization. Four department stores opened less
than 12 months during fiscal 1998 had pre-tax operating losses of $2.0 million
in 1998, including $1.5 million of pre-opening expense. 22 DSW stores opened
less than 12 months in fiscal 1999 had a pre-tax net operating loss of $3.7
million, including $3.3 million of pre-opening expenses. 12 DSW stores opened
less than 12 months during fiscal 1998 had a pre-tax net operating loss of $0.4
million after recognizing $0.9 million of pre-opening expenses.
License fees from affiliates decreased $3.5 million, or 29.2%, from $12.0
million to $8.5 million, and decreased as a percentage of net sales from 0.9% to
0.5%. The decrease is attributable to the consolidation of Shonac, which was
previously treated as a licensee.
Other operating income increased $0.9 million, or 18.1%, from $4.8
million to $5.6 million and remained at 0.3% as a percentage of net sales.
Operating profit increased $14.4 million from $51.2 million to $65.6
million, and increased as a percentage of net sales from 3.8% to 3.9% as a
result of the above factors.
Interest expense, net of interest income, increased from $10.5 million to
$10.7 million.
Equity in income of joint venture increased $1.8 million from a loss of
$0.5 million to income of $1.3 million.
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Income before provision for income taxes increased $16.1 million from
$40.3 million to $56.4 million, and increased as a percentage of sales from 3.0%
to 3.4% as a result of the above factors.
SEASONALITY
Our business is affected by the pattern of seasonality common to most
retail businesses. Historically, the majority of our sales and operating profit
have been generated during the back-to-school and Christmas selling seasons.
FISCAL YEAR
In June 1998, we decided to change our fiscal year to a 52/53 week year
that ends on the Saturday nearest to January 31. This change was made to reflect
the reporting period common to most retailers. Fiscal 2000 contained 53 weeks.
INCOME TAXES
The effective tax rate for fiscal 2000 was 39.2% versus 40.7% for fiscal
1999.
The effective tax rate for fiscal 2001 is expected to be approximately
41.5% due primarily to the effect of non-deductible goodwill amortization
related to the Shonac acquisition.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of our fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, is effective for all fiscal
years beginning after June 15, 2000. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative. The Company will adopt SFAS 133
effective February 4, 2001. Management does not expect the adoption of SFAS 133
to have a significant impact on the financial position, results of operations,
or cash flows of the Company.
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INFLATION
The results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $211.4 million and $205.0 million at February 3,
2001 and January 29, 2000, respectively. Current ratios at those dates were 1.7
and 1.8, respectively.
Net cash used in operating activities totaled $114.7 million in fiscal
2000. Net cash provided by operating activities was $27.5 million, $93.2 million
and $43.3 million for the fiscal year 1999, the Transition Period 1998 and
fiscal 1998, respectively. Net loss, adjusted for depreciation and amortization,
used $54.3 million of operating cash flow for the fiscal year 2000. This was
reduced by $54.1 million representing a decrease in inventories and an increase
in accounts payable. Increases in accounts receivable, deferred income taxes and
prepaid expenses and other assets used $89.4 million. Other changes in working
capital assets and liabilities used $25.1 million.
During the twelve months ended January 29, 2000, net income adjusted for
depreciation and amortization, provided $67.7 million of operating cash flow.
This was decreased by $67.0 million representing an increase in inventories net
of a decrease in accounts payable. Other changes in working capital assets and
liabilities provided $26.8 million.
Net cash used for investing activities totaled $70.1 million, $49.7
million, $18.2 million and $127.5 million for fiscal years 2000, 1999,
Transition 1998 and fiscal 1998, respectively.
Net cash used for capital expenditures was $70.2 million, $37.3 million,
$17.3 million and $27.2 million for fiscal years 2000, 1999, Transition 1998 and
fiscal 1998, respectively. During fiscal 2000, capital expenditures included
$30.5 million for new stores, $10.8 million for improvements in existing stores,
$16.7 million for relocation of office, warehousing and operations of our shoe
business, $5.9 million for MIS equipment upgrades and new systems. All other
capital expenditures aggregated $6.3 million.
At February 3, 2001, we had a $300 million Amended and Restated Credit
Agreement (Credit Agreement), dated as of March 15, 2000. The Credit Agreement,
which expires on March 15, 2003, provides for revolving and overnight loans and
issuance of letters of credit. Outstanding advances are secured by a lien on
assets and are subject to a monthly borrowing base of eligible inventories and
receivables, as defined. Terms of the Credit Agreement require compliance with
certain restrictive covenants, including limitations on dividends, the
incurrence of additional debt and financial ratio tests. Additionally, the
Company has provided an unconditional guarantee of 50% of amounts outstanding on
VCM's $25.0 million revolving line of credit. At February 3, 2001, $77.7 million
was available under the Credit Agreement. Borrowings aggregated $200.0 million,
plus $16.0 million of letters of credit were issued and outstanding and the VCM
loan guarantee totaled $6.2 million. The Credit Agreement provides for various
borrowing rates, currently equal to 275 basis points over LIBOR. The LIBOR rate
on $40.0 million has been locked in at a fixed annual rate of 5.895% through May
2001 under a swap agreement. In addition, the LIBOR rate on $35 million has been
locked in at a fixed annual rate of 6.99% through April 2002 under a swap
agreement.
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To supplement operating cash requirements the Company has a $50.0 million
subordinated secured credit facility with SSC. Outstanding advances under the
agreement are subordinated to the bank credit facility and are subject to a
junior lien on assets securing the bank credit facility. At February 3, 2001,
$20.0 million was outstanding. The interest rate and terms of the $50.0 million
facility are generally the same as the Credit Agreement.
The Company entered into a $75.0 million Senior Subordinated Convertible
Loan Agreement (Senior Facility), dated as of March 15, 2000. The Senior
Facility bears interest at various rates, currently equal to 250 basis points
over LIBOR. The interest rate increases an additional 50 basis points every 90
days after the first anniversary date. The Senior Facility is due in September
2003. In December 2000, pursuant to terms of the Senior Facility, SSC purchased
the outstanding balance under the same continuing terms. The terms provide that
if prior to March 17, 2001, the balance outstanding thereunder is not repaid
from the proceeds of an equity offering or other subordinated debt acceptable to
lenders under the Credit Agreement, then after that date SSC, as the lender, has
the right to convert the debt into our common stock at a price equal to 95% of
the 20-day average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. As of March 17, 2001, the Senior Facility
was not repaid. We paid SSC a one time fee of 200 basis points, or $1.5 million,
at the initial closing in consideration for entering into a Put Agreement
associated with the Senior Facility.
Although we believe that cash generated by operations, along with the
available proceeds from the Credit Agreement, SSC subordinated secured credit
facility and other sources of financing will be sufficient to meet our
obligations for working capital, capital expenditures, and debt service
requirements there is no assurance that we will be able to meet our
projections. Further, there is no assurance that extended financing will be
available to us in the future if we fail to meet our projections.
Our sales results in the first two fiscal months of 2001 were below
plan, we believe principally as a result of severe weather in many of our
markets. This condition, along with the effect of increased heating and fuel
prices affected the retail industry in general. Achievement of expected cash
flows from operations and compliance with our Credit Agreement covenants (see
Note 5 to the Consolidated Financial Statements) are dependent upon a number of
factors, including the attainment of sales, gross profit, expense levels,
vendor relations, and flow of merchandise that are consistent with our
financial projections, particularly for the balance of the Spring season.
A recent discussion with a major factor indicated they intend to reduce
our future availability of credit and that we need to strengthen our liquidity
and increase our credit availability from other sources.
ACQUISITION
On March 17, 2000, we, through our wholly-owned subsidiary, Base
Acquisition Corp, completed the acquisition of substantially all of the assets
and assumed certain liabilities of Filene's Basement Corp., a Massachusetts
corporation, and Filene's Basement Inc., a wholly owned subsidiary of Filene's
Basement Corp. pursuant to the closing of the asset purchase agreement, dated
February 2, 2000.
The purchase price included cash of $3.5 million paid at closing, $1.2
million to be paid over a period not to exceed three years, 403,208 shares of
our common stock with an agreed value of $5.5 million and the assumption of
specified liabilities. The assumed liabilities included the payment of amounts
outstanding under Filene's debtor-in-possession financing facility of
approximately $22.5 million and certain trade payable and other obligations
which will be paid in the ordinary course. Allocation of the purchase price has
been determined based on fair market valuation of the net assets acquired
subject to resolution of several outstanding matters.
The acquisition was funded by cash from operations and a portion of the
proceeds from the Credit Agreement.
25
26
RISK FACTORS AND SAFE HARBOR STATEMENT
We caution that any forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) contained in this
Report, other filings with the Securities and Exchange Commission or made by our
management involve risks and uncertainties, and are subject to change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect our financial performance and
actual results and could cause actual results for 2001 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: decline in demand for our merchandise, the ability to repay the
$75.0 million Senior Facility through an equity offering or refinancing, our
ability to attain our fiscal 2001 business plan, expected cash flows from
operations, vendor and their factor relations, flow of merchandise,
compliance with the credit agreement, our ability to strengthen our liquidity
and increase our credit availability, the availability of desirable store
locations on suitable terms, changes in consumer spending patterns, consumer
preferences and overall economic conditions, the impact of competition and
pricing, changes in weather patterns, changes in existing or potential duties,
tariffs or quotas, paper and printing costs, and the ability to hire and train
associates.
Historically, our operations have been seasonal, with a disproportionate
amount of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates which may
adversely affect our financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. We do
not use financial instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings
under our revolving credit facility. At February 3, 2001, direct borrowings
aggregated $200.0 million. The facility, as amended and restated effective March
17, 2000, permits debt commitments up to $300.0 million, has a March 15, 2003
maturity date and generally bears interest at a floating rate of LIBOR plus
2.0%. We have swap agreements to help manage the exposure to interest rate
movements and reduce borrowing costs. As of February 3, 2001 the interest rate
on $40.0 million has been locked in at a fixed rate of 7.395% until May 2001 and
has a fair market value of $402,000. After January 29, 2000 the interest rate on
an additional $35.0 million was locked in at a fixed rate of 8.99% until April
2003.
At February 3, 2001, we performed a sensitivity analysis assuming an
average outstanding principal amount of $247.6 million subject to variable
interest rates. A 10% increase in LIBOR would result in approximately $1.0
million of additional interest expense annually.
26
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule and the
Independent Auditors' Report thereon are filed pursuant to this Item 8 and are
included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item appears under the captions
"Nominees for Election as Directors," "Officers and Key Employees," and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in our
Proxy Statement relating to our Annual Meeting of Shareholders to be held in
July 2001 and is incorporated herein by reference.
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The information required by this item appears under the captions
"Executive Officer Compensation," "Information Concerning Board of Directors,"
and "Compensation Committee Interlocks and Insider Participation" in our Proxy
Statement relating to our Annual Meeting of Shareholders to be held in July 2001
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item appears under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement relating to our Annual Meeting of Shareholders to be held in July 2001
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears under the caption
"Relationship with SSC and its Affiliates" in our Proxy Statement relating to
our Annual Meeting of Shareholders to be held in July 2001 and is incorporated
herein by reference.
28
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
14(a)(1) FINANCIAL STATEMENTS
The documents listed below are filed as part of this Form 10-K:
Form 10-K
---------
Independent Auditors' Report F - 1
Consolidated Balance Sheets at February 3, 2001
and January 29, 2000 F - 2
Consolidated Statements of Operations for the years ended
February 3, 2001, January 29, 2000, 12 months ended January
30, 1999 (unaudited), 6 months ended
January 30, 1999 and for the year ended August 1, 1998 F - 3
Consolidated Statements of Shareholders' Equity for the years
ended February 3, 2001, January 29, 2000, 6 months ended
January 30, 1999 and for the year ended August 1, 1998 F - 4
Consolidated Statements of Cash Flows for the years ended
February 3, 2001, January 29, 2000, 12 months ended January
30, 1999 (unaudited), for 6 months ended
January 30, 1999 and for the year ended August 1, 1998 F - 5
Notes to Consolidated Financial Statements F - 6
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K:
Schedule II. Valuation and Qualifying Accounts S - 1
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or the notes thereto.
14(a)(3) EXHIBITS:
See Index to Exhibits which begins on Page E-1.
14(b) REPORTS ON FORM 8-K
During the fourth quarter, we filed a Form 8-K on January 8, 2001, Item 5 -
"Other Items" relating to the Amendment No. 2 and Waiver to Credit Agreement
for our $300 million bank credit facility with its existing lenders.
29
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
Date: April 27, 2001 By: *
---------------------------
(George Kolber, Vice Chairman and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board of Directors 4/27/01
- --------------------------------- and Chief Executive Officer
(Jay L. Schottenstein)
* Vice Chairman and 4/27/01
- --------------------------------- Chief Executive Officer
(George Kolber) (Principal Executive Officer)
* Vice Chairman of the Board of Directors 4/27/01
- ---------------------------------
(Saul Schottenstein)
* Vice Chairman of the Board of Directors 4/27/01
- ---------------------------------
(Martin P. Doolan)
* Chief Financial Officer and Treasurer 4/27/01
- --------------------------------- (Principal Financial and Accounting Officer)
(James A. McGrady)
* Director 4/27/01
- ---------------------------------
(Henry L. Aaron)
* Director 4/27/01
- ---------------------------------
(Ari Deshe)
* Director 4/27/01
- ---------------------------------
(Jon P. Diamond)
* Director 4/27/01
- ---------------------------------
(Richard Gurian)
* Director 4/27/01
- ---------------------------------
(Norman Lamm)
* Director 4/27/01
- ---------------------------------
(Geraldine Schottenstein)
* Director 4/27/01
- ---------------------------------
(Robert L. Shook)
*By:/s/ George Kolber
-----------------
George Kolber, (Attorney-in-Fact)
30
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Value City
Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets
of Value City Department Stores, Inc. (a majority owned subsidiary of
Schottenstein Stores Corporation) and its wholly owned subsidiaries (the
"Company") as of February 3, 2001 and January 29, 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years ended February 3, 2001, January 29, 2000 and August 1, 1998
and the six months ended January 30, 1999. Our audits also included the
financial statement schedule listed in the Index as Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Value City
Department Stores, Inc. and its wholly owned subsidiaries as of February 3, 2001
and January 29, 2000, and the results of their operations and cash flows for the
years ended February 3, 2001, January 29, 2000, August 1, 1998 and the six
months ended January 30, 1999 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Columbus, Ohio
April 30, 2001
F-1
32
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
at February 3, 2001 and January 29, 2000
(in thousands, except share amounts)
- --------------------------------------------------------------------------------------------------
ASSETS
2/3/01 1/29/00
- --------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and equivalents $10,562 $6,027
Accounts receivable, net 44,927 10,131
Receivables from affiliates 9,452 299
Inventories 393,577 412,479
Prepaid expenses and other assets 22,290 8,544
Deferred income taxes 51,732 18,052
-------- --------
TOTAL CURRENT ASSETS 532,540 455,532
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 223,675 192,207
Leasehold improvements 176,318 142,066
Land and building 801 801
Capital leases 38,348 42,328
-------- --------
439,142 377,402
Accumulated depreciation and amortization (190,103) (169,907)
-------- --------
PROPERTY AND EQUIPMENT, NET 249,039 207,495
INVESTMENT IN JOINT VENTURE 8,292 9,679
GOODWILL AND TRADENAMES, NET 67,056 45,566
OTHER ASSETS 51,082 25,909
-------- --------
TOTAL ASSETS $908,009 $744,181
======== ========
- --------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $180,736 $164,196
Accounts payable to affiliates 13,655 4,532
Accrued expenses:
Compensation 19,662 17,118
Taxes 31,255 22,604
Other 75,227 41,611
Current maturities of long-term obligations 603 460
-------- --------
TOTAL CURRENT LIABILITIES 321,138 250,521
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 326,449 144,168
DEFERRED INCOME TAXES AND
OTHER NONCURRENT LIABILITIES 10,115 7,131
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 34,330,863 shares and
32,992,122 shares, respectively 145,659 132,601
Retained earnings 111,155 212,946
Deferred compensation expense, net (6,448) (2,513)
Treasury shares, at cost, 7,651 and 87,651, respectively (59) (673)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 250,307 342,361
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $908,009 $744,181
======== ========
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
33
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 3, 2001 and January 29, 2000,
Twelve Months Ended January 30, 1999 (Unaudited),
Six Months Ended January 30, 1999 and Year Ended August 1, 1998
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------
For
For For the 12 Months For For
the Year the Year Ended the 6 Months the Year
Ended Ended 1/30/99 Ended Ended
2/3/01 1/29/00 (Unaudited) 1/30/99 8/1/98
53 Weeks 52 Weeks 52 Weeks 26 Weeks 52 Weeks
- --------------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379
Cost of sales (1,492,947) (1,039,145) (848,964) (483,502) (732,902)
----------- ------------ ------------ --------- ---------
GROSS PROFIT 720,070 631,031 515,066 296,761 428,477
Selling, general and
administrative expenses (870,237) (579,460) (480,584) (264,590) (416,218)
License fees from affiliates 11,323 8,451 11,987 4,880 20,674
Other operating income 3,259 5,620 4,757 3,748 3,988
----------- ------------ ------------ --------- ---------
OPERATING (LOSS) PROFIT (135,585) 65,642 51,226 40,799 36,921
Interest expense, net (30,480) (10,728) (10,532) (6,702) (5,267)
(Loss) gain on disposal of assets, net (16) 146 40 16 1,623
----------- ------------ ------------ --------- ---------
(LOSS) INCOME BEFORE EQUITY IN (LOSS)
INCOME OF JOINT VENTURE AND BENEFIT
(PROVISION) FOR INCOME TAXES (166,081) 55,060 40,734 34,113 33,277
Equity in (loss) income of joint venture (1,340) 1,340 (464) 131 (1,377)
----------- ------------ ------------ --------- ---------
(LOSS) INCOME BEFORE BENEFIT
(PROVISION) FOR INCOME TAXES (167,421) 56,400 40,270 34,244 31,900
Benefit (provision) for income taxes 65,630 (22,932) (15,399) (13,988) (11,541)
----------- ------------ ------------ --------- ---------
NET (LOSS) INCOME $(101,791) $33,468 $24,871 $20,256 $20,359
=========== ============ ============ ========= =========
BASIC (LOSS) EARNINGS PER SHARE $(3.03) $1.03 $0.77 $0.63 $0.64
=========== ============ ============ ========= =========
DILUTED (LOSS) EARNINGS PER SHARE $(3.03) $1.02 $0.76 $0.62 $0.63
=========== ============ ============ ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
34
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Years Ended February 3, 2001 and January 29,
2000, Six Months Ended January 30, 1999 and the Year
Ended August 1, 1998
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
--------------------
Common Deferred
Common Shares Common Retained Compensation Treasury
Shares in Treasury Shares Earnings Expense Shares Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT AUGUST 2, 1997 32,259 369 120,796 138,863 (982) (2,829) 255,848
Net income 20,359 20,359
Exercise of stock options 331 3,602 3,602
Tax benefit realized on
vested restricted shares 120 120
Grant of restricted shares 30 328 (328)
Amortization of deferred
compensation expense 230 230
-----------------------------------------------------------------------------------------------------
BALANCE, AUGUST 1, 1998 32,620 369 124,846 159,222 (1,080) (2,829) 280,159
Net income 20,256 20,256
Sale of treasury shares (25) 119 192 311
Exercise of stock options 41 324 324
Tax benefit realized on
vested restricted shares 145 145
Forfeiture of restricted shares (23) (278) 278
Amortization of deferred
compensation expense 131 131
-----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 30, 1999 32,638 344 125,156 179,478 (671) (2,637) 301,326
Net income 33,468 33,468
Exercise of stock options 198 1,660 1,660
Tax benefit on stock options
and restricted shares 1,548 1,548
Grant of restricted shares 156 2,201 (2,201)
Amortization of deferred 359 359
compensation expense
Acquisitions (256) 2,036 1,964 4,000
-----------------------------------------------------------------------------------------------------
BALANCE, JANUARY 29, 2000 32,992 88 132,601 212,946 (2,513) (673) 342,361
Net loss (101,791) (101,791)
Sales of treasury shares (80) 466 614 1,080
Exercise of stock options 182 1,431 1,431
Tax benefit on stock options
and restricted shares 228 228
Grant of restricted shares,
net of forfeitures 754 5,433 (4,703) 730
Amortization of deferred
compensation expense 768 768
Acquisitions 403 5,500 5,500
-----------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 3, 2001 34,331 8 $145,659 $111,155 $(6,448) $(59) $250,307
=====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
35
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 3, 2001 and January 29, 2000,
Twelve Months Ended January 30, 1999 (Unaudited),
Six Months Ended January 30, 1999 and Year ended August 1, 1998
(in thousands)
12 Months
Year Year Ended 6 Months Year
Ended Ended 1/30/99 Ended Ended
2/3/01 1/29/00 (Unaudited) 1/30/99 8/1/98
53 Weeks 52 Weeks 52 Weeks 26 Weeks 52 Weeks
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(101,791) $33,468 $24,871 $20,256 $20,359
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 47,495 34,230 31,012 16,299 27,773
Deferred income taxes and other noncurrent liabilities (35,058) (68) (696) 1,990 (1,920)
Equity in (income) loss of joint venture 1,340 (1,340) 464 (131) 1,377
Loss (gain) on disposal of assets 16 (146) (39) (16) (1,623)
Change in working capital, assets and liabilities,
excluding effects of acquisitions:
Receivables (42,657) 4,317 669 (1,490) 1,504
Inventories 44,194 (126,284) 11,027 87,146 (39,223)
Prepaid expenses and other assets (11,675) (3,178) 2,028 3,808 6,383
Accounts payable 7,271 59,265 (1,425) (26,775) 16,269
Accrued expenses (23,852) 27,263 3,884 (7,908) 12,358
--------- --------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (114,717) 27,527 71,795 93,179 43,257
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (70,226) (37,317) (36,889) (17,305) (27,165)
Investment in joint venture - - - - (9,637)
Proceeds from sale of assets 326 167 60 24 22,388
Acquisitions (3,506) (8,000) (108,473) - (108,473)
Notes receivable - - - - 1,906
Other assets 3,355 (4,580) (7,301) (963) (6,532)
--------- --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (70,051) (49,730) (152,603) (18,244) (127,513)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 1,431 1,660 2,912 324 2,681
Net payments under demand note facility - - - - (12,000)
Net proceeds from issuance of debt 187,872 15,000 137,225 - 137,225
Net principal payments under long-term obligations - (9,325) (107,402) (87,166) (22,462)
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 189,303 7,335 32,735 (86,842) 105,444
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 4,535 (14,868) (48,073) (11,907) 21,188
CASH AND EQUIVALENTS, BEGINNING OF YEAR 6,027 20,895 68,968 32,802 11,614
--------- --------- --------- --------- ---------
CASH AND EQUIVALENTS, END OF YEAR $10,562 $6,027 $20,895 $20,895 $32,802
========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BUSINESS OPERATIONS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Value City Department Stores, Inc. (VCDS) and its wholly owned
subsidiaries. These entities are herein referred to collectively as the
Company. The Company operates a chain of full-line, off-price
department stores, principally under the name Value City, as well as
better-branded off-price shoe stores, under the name "DSW Shoe
Warehouse." As of February 3, 2001 a total of 216 stores were open,
including 119 Value City stores located principally in Ohio (23 stores)
and Pennsylvania (19 stores) with the remaining stores dispersed
throughout the Midwest, East and South and 78 shoe stores located