UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10767
RETAIL VENTURES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 20-0090238
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
(614) 471-4722
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K/A. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant computed by reference to the price at which such voting stock was
last sold, as of August 2, 2003, was $26,450,655.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 33,993,156 Common Shares were
outstanding at April 5, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 9, 2004 are incorporated by reference into Parts
II and III.
RETAIL VENTURES, INC. FORM 10-K/A
INTRODUCTORY NOTE
This amendment on Form 10-K/A amends Retail Ventures, Inc.'s annual report on
Form 10-K for the fiscal year ended January 31, 2004, as initially filed with
the Securities and Exchange Commission on April 29, 2004, and is being filed to
reflect the restatement of the consolidated financial statements. The
significant effects of the restatement are presented in Note 15 to the
consolidated financial statements. This amendment does not reflect events after
the filing of the original report and is not intended to update other
information presented in this annual report as originally filed, except as
required to reflect the effects of the restatement.
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TABLE OF CONTENTS
ITEM NO. PAGE
-------- ----
PART I
1. Business.......................................................................................... 4
2. Properties........................................................................................ 14
3. Legal Proceedings................................................................................. 15
4. Submission of Matters to a Vote of Security Holders............................................... 15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters......................... 16
6. Selected Financial Data........................................................................... 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................ 18
7A. Quantitative and Qualitative Disclosures about Market Risk ....................................... 27
8. Financial Statements and Supplementary Data....................................................... 27
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................................ 27
9A. Controls and Procedures .......................................................................... 27
PART III
10. Directors and Executive Officers of the Registrant................................................ 28
11. Executive Compensation............................................................................ 29
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters... 29
13. Certain Relationships and Related Transactions.................................................... 29
14. Principal Accountant Fees and Services............................................................ 29
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.................................... 30
Signatures............................................................................................... 31
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Registered Public Accounting Firm.................................................. 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
As used in this Annual Report on Form 10-K/A and except as the context
otherwise may require, "Company", "we", "us", and "our" refers to Retail
Ventures, Inc. and its wholly owned subsidiaries, including but not limited to,
Value City Department Stores, Inc. ("Value City"), DSW Shoe Warehouse,
Inc.("DSW") and Filene's Basement, Inc.("Filene's Basement").
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects", "intends", "plans", "projects", "believes", "estimates" and
similar expressions. In the normal course of business, we, in an effort to help
keep our shareholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statements on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K/A or
elsewhere, could differ materially from those stated in the forward-looking
statements. Additional information concerning factors that could cause actual
results to differ materially from those in our forward-looking statements is
contained under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
AVAILABLE INFORMATION
We maintain an Internet website at www.valuecity.com (this uniform
resource locator, or URL, is an inactive textual reference only and is not
intended to incorporate the Company's website in this Annual Report on Form
10-K/A). We file our reports with the Securities and Exchange Commission (the
"SEC") and make available free of charge, on or through our website, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports of Form
8-K, proxy and information statements and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.
ITEM 1. BUSINESS.
On October 8, 2003, the Company reorganized its corporate structure into a
holding company form whereby Retail Ventures, Inc., an Ohio corporation, became
the successor issuer to Value City Department Stores, Inc. As a result of the
reorganization, Value City Department Stores, Inc. became a wholly-owned
subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of Value
City became holders of an identical number of common shares of Retail Ventures,
Inc. The reorganization was affected by a merger which was previously approved
by the Company's shareholders. Since October 8, 2003, the Company's common
shares have been listed for trading under the ticker symbol "RVI" on the New
York Stock Exchange.
GENERAL
We are managed in three operating segments: Value City Department Stores
("Value City"), DSW Shoe Warehouse, Inc. ("DSW") and Filene's Basement, Inc.
("Filene's Basement").
VALUE CITY. We operate a chain of 116 off-price department stores located
in the Midwestern, Eastern and Southern states, principally under the name Value
City. For over 80 years, our strategy has been to provide exceptional value by
offering a broad selection of brand name merchandise at prices substantially
below conventional retail prices.
DSW. We also operate a chain of 142 DSW stores located throughout the
United States. The DSW stores are upscale shoe stores offering a wide selection
of branded dress and casual footwear below traditional retail prices.
Additionally, Shonac Corporation, the parent company of DSW, pursuant to license
agreements with Value City and Filene's Basement, operates licensed shoe
departments in most Value City and Filene's Basement stores. Results of
operations of the licensed shoe departments are included with the Value City and
Filene's Basement segments. In July 2002, Shonac Corporation entered into a
Supply Agreement with Stein Mart, Inc. ("Stein Mart") to supply merchandise to
some of Stein Mart's shoe departments. Results of the supply agreement are
included with the DSW segment and represent substantially all of the leased
operations of the segment.
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FILENE'S BASEMENT. Finally, we operate 21 Filene's Basement stores located
primarily in major metropolitan areas such as Boston, New York City, Atlanta,
Chicago and Washington, D.C. Filene's Basement focuses on providing the top tier
brand names at everyday low prices for men's and women's apparel, jewelry,
shoes, accessories and home goods.
See Note 11 of Notes to Consolidated Financial Statements beginning on
page F-22 of this annual report for detailed financial information regarding our
three segments.
HISTORY OF OUR BUSINESS
We opened our first Value City department store in Columbus, Ohio in 1917.
Until our initial public offering on June 18, 1991, Value City department stores
operated as a division of Schottenstein Stores Corporation ("SSC"). SSC owns
approximately 53% of our common shares. We also have a number of ongoing related
party agreements and arrangements with SSC. These are more fully described in
Item 13 of this report beginning on page 29.
In July 1997, we entered into agreements with Mazel Stores, Inc. ("Mazel")
to create VCM, Ltd. ("VCM"), a 50/50 joint venture. Since 1997, VCM has operated
the licensed health and beauty care, toy and sporting goods departments in our
Value City stores and, beginning in fiscal 2000, began operating the food
department. Effective at the close of business February 2, 2002, we purchased
Mazel's interest in the partnership.
In May, 1998, we purchased substantially all of the common shares of
Shonac Corporation, an Ohio corporation, from Nacht Management, Inc. and SSC.
Subsequently we acquired the remaining shares. Shonac had been the shoe licensee
in principally all of the Value City stores since its inception in 1969 and has
operated the DSW chain of retail shoe stores since the opening of the first
store in 1991.
We acquired substantially all of the assets and assumed certain
liabilities of Filene's Basement Corp., a Massachusetts corporation, and
Filene's Basement, Inc., a Delaware corporation, a wholly owned subsidiary of
Filene's Basement Corp, in March 2000.
On October 8, 2003, the Company reorganized its corporate structure into a
holding company form of organizational structure whereby Retail Ventures, Inc.
became the successor issuer to Value City Department Stores, Inc. As a result of
the reorganization, Value City Department Stores, Inc, an Ohio corporation,
became a wholly owned subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of Value
City became holders of an identical number of common shares of Retail Ventures,
Inc. The reorganization was affected by a merger which was previously approved
by the Company's shareholders. Since October 8, 2003, the Company's common
shares have been listed for trading under the ticker symbol "RVI" on the New
York Stock Exchange.
VALUE CITY DEPARTMENT STORES
As an off-price retailer, we take advantage of inventory imbalances along
the retail supply chain. These imbalances occur as a result of cancelled orders,
excess production, and consumer changes in demand which create opportunities for
us. In this role, we offer ourselves as an important alternative to
manufacturers as an additional distribution source for their goods. In addition,
we believe we have a core of customers that have embraced off-price retailing as
an attractive retail concept and we continue to market to those who seek this
alternative concept to traditional retail offerings.
MERCHANDISING
Selection. Value City is a full-line, off-price retailer carrying men's,
women's and children's apparel, housewares, giftware, home furnishings, toys,
jewelry, shoes, health, beauty care items and commodities. Off-price retailing,
as distinguished from traditional full-price retailing and discount or off-brand
merchandising, is characterized by the purchase by the retailer of primarily
high quality brand name merchandise, at prices below normal cost to most
retailers. We accomplish our merchandise content by taking advantage of
imbalances in the inventory supply chain between the manufacturer and other
retailers and these retailers and the ultimate consumer. A portion of the cost
savings is then passed on to our customers through lower prices. The Value City
customer we generally attract with these items and price points are value
seekers, budget minded and/or moderate-income. Our Value City stores strive to
offer customers one-stop-shopping for the categories of merchandise we carry.
The large size of our Value City stores facilitates the offering of a wide range
of merchandise categories with broad, deep selections of goods within each
category. Value City stores carry over 100,000 different items of merchandise,
similar to the items generally found in traditional department, specialty and
discount stores. We continually refine the Value City merchandise mix by
eliminating less productive departments and introducing new merchandise
categories to improve store profitability and meet the changing needs of our
customers.
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We believe our customers are attracted to Value City stores by the
continuous new offerings and flow of value-priced and fashion right merchandise.
At the same time, we purchase continuing lines of merchandise from our vendor
contacts to ensure constant availability and allotment of certain basic
categories of merchandise as well as current fashion trends.
Value Pricing. Value City stores offer quality brand name merchandise at
prices typically 30% to 70% below initial prices charged by traditional
department, discount or specialty stores for similar items and at prices
comparable to or lower than prices charged by other off-price retailers. We can
offer exceptional values because our buyers purchase merchandise directly from
manufacturers and other vendors generally at prices substantially below those
paid by conventional retailers. This allows us to pass on the savings directly
to our budget minded and/or moderate-income customers. See "Supplier
Relationships and Purchasing" on page 6 of this annual report for more
information.
Well-known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City stores. Many items carry labels
and/or original price tags showing brand names identifiable with major
designers, manufacturers and retail stores, as well as tags showing original
retail, comparable or "nationally advertised" prices. In certain cases,
suppliers may require removal of labels or original retail price tags as a
condition to a special purchase arrangement. See "Supplier Relationships and
Purchasing" on page 6 of this annual report for more information.
SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in our operations has been the relationships we have
developed with our various suppliers and our many years of experience in
purchasing merchandise directly from manufacturers and other vendors at prices
substantially below those generally paid by conventional retailers. Over the
years, our buyers have established excellent relationships with suppliers and
have developed a reputation for the ability to purchase entire lots of
merchandise. Continuously, we seek to find and negotiate special purchase
opportunities. The apparel industry is extremely fragmented in terms of
merchandise supply; thus, the dynamics of the markets continue to change, and we
attempt to take advantage of the innumerable disconnects in this supply chain
such as overproduction, other retailers' cancellations and overruns. As a result
of our relationships, reputation and experience, many suppliers offer special
purchase opportunities to us prior to attempting to dispose of merchandise
through other channels. Manufacturers of brand name merchandise are not
reluctant to sell merchandise to Value City for resale at our discounted prices
as we provide a stable and known outlet for manufacturing imbalances. By selling
their merchandise through our retail stores, we are able to assure these
suppliers the merchandise will be sold without disturbing their regular channels
of distribution.
Although we cannot quantify the reduction in prices we pay for special
purchases compared to the prices paid by our competitors for similar purchases,
we believe that such special purchases are made at prices sufficiently favorable
to enable us to offer merchandise to our customers at very competitive price
points.
We purchase merchandise from more than 4,700 suppliers, none of which
accounted for a material percentage of purchases during the past fiscal year.
Except for greeting cards we do not maintain any long-term or exclusive
commitments to purchase merchandise from any one supplier. We employ several
purchasing strategies. We regularly purchase overstocked or overproduced items
from manufacturers and other retailers, including end-of-season, out-of-season
and end-of-run merchandise and manufacturers' slight irregulars. From time to
time, but less frequently from our historical practice, we purchase all or
substantially all of the inventories of financially distressed retailers and
make other special purchases. We also have started more aggressively to seek
advantageous buying opportunities and sourcing overseas, particularly in
non-apparel categories. We make merchandise purchases for these broad purposes:
packaway, opportunistic needs and up-front planned requirements. Packaway
purchases are used as a method of sourcing closeout merchandise found in the
market and warehousing theses goods until the following season. Packaway
merchandise lags the normal retail distribution by approximately one selling
season and generally has a level of risk above other purchases. We purchase
in-season merchandise opportunistically during the selling season when seasonal
merchandise presents itself and the cost of the acquisition allows for
sufficient retail markup. Up-front planned purchases occur in advance of our
season and represent a significant part of some areas of our non-apparel
businesses and a lesser part of our apparel business.
The relatively large size of our Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
ADVERTISING AND PROMOTION
We have committed substantial resources to advertising. 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
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brand name merchandise designed to maximize customer interest. In some cases, a
supplier may prohibit the advertising or non-store promotion of its brand name.
We utilize advertising agencies to assist us in promoting our Value City brand
recognition.
STORES
Store Location, Design and Operations. We believe our customers are
attracted to our stores principally by the wide assortment of quality items at
substantial savings.
Our Value City stores are generally open from 9:30 a.m. until 9:30 p.m.
Monday through Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. All of the
stores are located in leased facilities. Of the 116 Value City stores open as of
April 5, 2004, 33 are freestanding, 56 are located in shopping centers and 27
are located in enclosed malls. 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. Our stores offer customers a
convenient, pleasurable shopping experience and a high level of satisfaction.
All of our Value City stores are designed for self-service shopping,
although sales personnel are available to help customers locate merchandise and
to assist in the selection and fitting of apparel, jewelry, and footwear. Value
City's associate training programs are designed to assure that every associate
maintains the highest level of professionalism and places customer service at
the forefront. In all stores, a customer service desk is conveniently located,
generally adjacent to the central checkout area. To promote the ease of
checkout, we utilize point of sale scanning systems that expedite the checkout
process by providing automated check and credit approval and price lookup. We
accept all major credit cards and also provide a private label credit card
program. Value City offers a layaway program in approximately 60% of its stores
that is widely used by our budget and moderate-income customers, and we also
maintain a reasonable return policy.
Our stores are organized into separate geographic regions and districts,
each with a territory or district manager. Territory and district managers are
headquartered in their region and spend the majority of their time in their
stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a Value City store consists of a store manager,
several assistants and full and part-time hourly associates. Each store manager
reports directly to one of the territory or district managers, and each of the
territory or district managers reports to a Regional Vice President who in turn
reports to the Senior Vice President of Store Operations.
Our store managers are responsible on a day-to-day basis for the overall
condition of their stores, customer relations, personnel hiring and scheduling,
and all other operational matters arising in the stores. Each store manager is
compensated, in part, based on the performance of their 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.
We continually refurbish our stores by updating the merchandise displays,
department locations and in-store signage. The costs of refurbishing on a per
store basis are generally not substantial. On an annual basis, we select stores
to be remodeled, which generally involves more significant changes to the
interior than the exterior of the store. We have in the past utilized our own
internal architectural design staff, construction crews and carpentry shop to
assist in refurbishing and remodeling store interiors and to build in-store
display tables and racks.
Expansion. No new department stores were added in fiscal 2003, 2002 or
2001 and none are currently planned for fiscal 2004. We continue to explore
exceptional real estate opportunities basing any potential future expansions on
site qualities, national economic trends and existing store performance.
DISTRIBUTION
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we are
capable of devoting warehouse space to out-of-season goods for our Value City
stores. Such merchandise is generally warehoused until the most opportune time
to begin a season before closeouts are available. Our ability to purchase and
quickly distribute our warehouse merchandise in substantial quantities has
enabled us to offer high-quality merchandise to customers at prices
significantly below usual
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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.
We use a regionalized distribution strategy with 6 distribution centers
located in Columbus, Ohio. The aggregate area of the distribution facilities is
approximately 2,300,000 square feet; however, use of multi-tier processing
levels in some of the distribution centers increases the operating capacity by
approximately 380,000 square feet. In addition, to expedite the flow of
merchandise, we use third party processors as needed.
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 our stores to take full advantage of
the remaining selling seasons.
Merchandise is processed, ticketed and consolidated prior to shipment to
the stores to ensure full-truck loads and minimize shipping costs. We lease our
fleet of road tractors and approximately 70% of our semi-rig trailers, with the
remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
LICENSE AGREEMENTS
Value City utilizes Shonac Corporation, the parent company of DSW, to
operate the shoe departments in substantially all the Value City stores. The
inter-company activity is eliminated in our consolidated financial statements.
In a few stores, Value City licenses space to third party licensees. Licensees
supply their own merchandise and generally supply their own store fixtures.
Licensed departments complement the operations of our stores and facilitate the
uniformity of the in-store merchandising strategy, including the overall
emphasis on value.
SEGMENT SEASONALITY
Value City customer traffic increases in the early Spring, back-to-school
and Christmas holiday seasons. These seasonal periods are critical to Value
City's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S.
Patent and Trademark Office. Our four department stores in Columbus operate
under the tradename "Schottenstein's," which has been registered by SSC in the
State of Ohio. We are entitled to use such names for the sole purpose of
operating department stores on an exclusive basis pursuant to a perpetual
license from SSC. SSC also operates a chain of furniture stores under the name
"Value City Furniture." We have also registered in the U.S. Patent and Trademark
Office various trademarks used in our marketing program.
DSW
The mission of our DSW stores is to be the retailer of choice for branded
footwear by satisfying customers' expectation for selection, convenience and
value. We use the tagline "The Shoes of the Moment. The Deal of a Lifetime." and
offer a "Reward Your Style" program to frequent shoppers. In July 2002, Shonac
Corporation, the parent of DSW, entered into a Supply Agreement with Stein Mart,
Inc. (Stein Mart) to supply merchandise to some of Stein Mart's shoe
departments. The Stein Mart operations are included with the DSW segment and
represent substantially all of the leased operations of the segment.
MERCHANDISING
Selection. DSW stores attract customers because of their wide assortment
of top quality name brand dress, casual and athletic footwear for men and women.
The product offering is a selection of regularly changing in season and
fashion-oriented footwear, handbags and accessories. Our assortments are
targeted to maximize regional opportunities.
Value Pricing. DSW price points are targeted to be up to 50% lower than
the regular prices of other specialty retailers and traditional department
stores. To enhance our merchandise sourcing strategy, maintain quality, lower
costs and shortened delivery cycles we have identified and established
relationships with cost-efficient manufacturers and suppliers of quality
merchandise.
The DSW leased operations attract customers by having top quality name
brand dress and casual footwear for men and women. The footwear reflects the
fashion statements being made within the total store. The DSW leased department
price points target up to 40% off the regular price points found at traditional
department stores. Our licensed shoe departments also participate in all store
wide promotions and sale events.
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SUPPLIER RELATIONSHIPS AND PURCHASING
DSW's merchandising group constantly monitors current fashion trends as
well as historical sales trends to identify popular styles and styles that may
become popular in the upcoming season. Once our buyers determine the styles and
merchandise mix for any upcoming season, they focus on purchasing the
appropriate quantities of each category at the lowest cost and the highest
quality available.
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others or both. DSW believes that, consistent with
the retail footwear industry as a whole, most of its domestic vendors import a
large portion of their merchandise from abroad. We have implemented quality
control programs under which buyers inspect incoming merchandise for fit, color
and material, as well as for overall quality of manufacturing. As the number of
DSW locations increase, we believe there will be adequate sources available to
acquire and/or produce a sufficient supply of quality goods in a timely manner
and on satisfactory economic terms.
ADVERTISING AND PROMOTION
Our DSW stores currently use a market campaign, primarily radio and
television, focusing on the term "Thrill of the Hunt". This campaign is
supplemented by print promotions, as needed, but our media focus is television.
In addition, a valuable marketing tool for DSW is the "Reward Your Style"
customer loyalty program. Customers are asked to join the program during the
checkout procedure. By analyzing the member database, as well as the sales
transactions of those members, we are able to direct the advertising to
encourage repeat shopping and to reach targeted customers. DSW also sponsors
certain LPGA events and athletes.
STORES
Store Location, Design and Operations. Our DSW stores average
approximately 25,000 square feet, with about 87% of the total area of each store
representing selling space. The stores' exteriors feature black and white color
schemes and in many cases, windows with striped awnings. The store interiors are
well lighted and feature a unique display concept, a simple case presentation
which groups the shoes together by style. Interior signage is tasteful and kept
to a minimum. The shoe stores are primarily located on a single level, with the
cases of shoes forming the aisles in the stores. Customers can see the entire
store and merchandise when they enter. Of the 150 DSW stores open as of April 5,
2004, 14 are freestanding, 115 are in shopping centers and 21 are in enclosed
malls. The stores are generally open from 10:00 a.m. until 9:00 p.m. Monday
through Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. All stores are
located in leased facilities.
All of our DSW stores are designed for self-service shopping. Sales
personnel are available to help customers locate merchandise and to assist as
needed. We utilize point of sale scanning systems to expedite the checkout
process. These systems provide automated checks, credit approval and price
lookup. DSW accepts all major credit cards and promotes gift card purchases.
At DSW, all associates receive training to maximize the customer shopping
experience in our self-service environment. Training components consist of
customer acknowledgement, neat, clean and orderly store conditions for ease of
shopping, efficient checkout process and friendly service. A store management
training program is maintained to develop the skills of management personnel and
to provide an ongoing talent pool for future store expansion. We prefer to fill
store management and field supervisor positions through internal promotions.
This supports our Company culture.
Our stores are organized into two separate geographic regions and several
districts. Each region is supported by a Regional Vice President and District
Managers who are headquartered in their respective region or district. They
spend the majority of their time in their stores to ensure adherence to
merchandising, operational and personnel standards.
The typical staff for a DSW store consists of a store manager and two
assistant managers who supervise 15 to 25 full and part-time hourly associates.
Each store manager reports directly to one of 28 district managers who in turn
report to one of two Regional Vice Presidents who in turn report to the Senior
Vice President of Store Operations.
Our DSW store managers are responsible on a day-to-day basis for customer
relations, personnel hiring and scheduling, and all other operational matters
arising in the stores. Our store managers are an important source of information
concerning local market conditions, trends and customer preferences. Each store
manager is compensated, in part, based on the performance of his store.
Expansion. We plan to open 35 new DSW shoe stores during fiscal 2004 in
both existing and new markets with an emphasis on locating stores in highly
visible sites on high traffic streets in vibrant trade areas. Factors considered
in evaluating new store sites
9
include store size, demographics and lease terms. We seek to cluster stores in
targeted metropolitan areas to enhance name recognition, share in advertising
costs and achieve economies of scale in management, distribution and marketing.
Based upon our experience, we estimate the average cost of opening a new
DSW shoe store ranges from approximately $1.0 million to $2.0 million, including
leasehold improvements, fixtures, inventory, pre-opening expenses and other
costs. Preparations for opening a DSW shoe store generally take eight to ten
weeks. We charge pre-opening expenses to operations as incurred. It has been our
experience that new stores generally achieve profitability and contribute to net
income following the first year of operations. It is not uncommon to receive
lease incentives for our DSW store openings.
We continually refurbish our stores by updating the merchandise displays
and in-store signage. The costs of refurbishing on a per store basis are
generally not substantial. On an annual basis, we select stores to be remodeled,
which generally involves more significant changes to the interior than the
exterior of the store. We maintain our own architectural design staff.
DISTRIBUTION
Shonac Corporation and DSW's principal offices and distribution center
operations are located in a 700,000 square foot facility in Columbus, Ohio. This
distribution center facility uses a modern warehouse management system and
material handling equipment, including conveyor systems, to separate and collate
shipments to our stores. This includes a recently added cross dock conveyor
system that enhances the movement of merchandise, through the distribution
facility, using vendor advance shipment notifications ("ASNs"). This system will
also support the ability of this facility to handle DSW's anticipated growth in
2004. The design of the distribution center facilitates the prompt delivery of
priority purchases and fast selling footwear to stores so we can take full
advantage of each selling season.
LEASED DEPARTMENTS AND SUPPLY AGREEMENTS
Shonac Corporation, the parent company of DSW, operates the shoe
departments in most Value City and Filene's Basement stores. The results of
operations for the licensed shoe departments are included with Value City and
Filene's Basement segments.
DSW has a supply agreement to merchandise shoe departments in Stein Mart
which began in July 2002. The shoe departments in these stores range from 500 to
4,000 square feet. DSW provides the merchandise, fixtures and field supervision
in all leased locations. Stein Mart provides the sales associates per the supply
agreement. As of April 5, 2004, Shonac was supplying merchandise to 151 Stein
Mart stores.
SEGMENT SEASONALITY
The shoe business experiences increased sales in both early Spring and
Fall seasons in relationship to the change in footwear desired by the DSW
customer. These seasonal periods are critical to DSW's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
We have registered in the U.S. Patent and Trademark Office a number of
trademarks and service marks, including: DSW; DSW Shoe Warehouse; Coach and
Four; Crown Shoes; Reward Your Style; Flites; Jonathan Victor; Kristi G; Lakota
Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia Cristie.
FILENE'S BASEMENT
Filene's Basement strategy focuses on providing the top tier brand names
at everyday low prices for men's and women's apparel, jewelry, shoes,
accessories and home goods. We believe Filene's Basement, a well-known
institution in Boston since 1908, parallels our merchandising philosophy of
delivering value-priced merchandise to our customers.
MERCHANDISING
Selection. Filene's Basement stores offer branded apparel, home goods and
accessories. The branded merchandise represents a focused assortment of
fashionable, nationally recognized men's and women's apparel, shoes, accessories
and home goods bearing prominent designers' and manufacturers' names. Branded
merchandise constitutes most of the product line and is often obtained through
opportunistic purchases from a diverse group of quality manufacturers and
vendors, including direct imports from some of the most prominent European
designers.
10
Value Pricing. Filene's Basement stores have changed their purchasing
philosophy over the last year from buying in-season closeouts to more upfront
purchasing. We believe that upfront purchasing will promote a consistent flow of
name brand purchases to our stores. We now place approximately 40% of our
purchases up front. We also have become more aggressive in placing purchases of
make-up goods in Europe, such as sweaters, knits and cold weather goods. We
believe this will ensure a consistent flow of goods into our stores.
We also accelerated our buying end-of-season merchandise and holding it
for the next selling season. This allows us to establish a reliable flow of name
brand goods for opening season assortments in February and August.
SUPPLIER RELATIONSHIPS AND PURCHASING
Because of the longstanding relationships Filene's Basement has with
vendors, it receives quality buying opportunities at competitive prices. These
longstanding relationships make Filene's Basement a prime choice for vendors
with overruns, department store cancellations and unmet volume objectives.
ADVERTISING AND PROMOTION
Filene's Basement employs a multi-media approach, using print, broadcast
and direct mail. Event based marketing and brand awareness have been the main
marketing messages. The communication strategy is designed to target customer
segments and generate increased store trips and cross shopping opportunities.
During fiscal 2003, Filene's Basement introduced a gift card program to its
stores.
STORES
Store Location, Design and Operations. Our Filene's Basement Boston store
is a landmark institution recognized by generations of New England families and
visitors as a source of quality off-price men's and women's merchandise. The
downtown location is famous for a unique marketing concept - the Automatic
Markdown Plan - whereby certain merchandise is automatically discounted based on
the number of days the merchandise has been on the sales floor. Filene's
Basement believes the Automatic Markdown Plan, found only in the downtown Boston
location, generates a sense of shopping urgency and creates customer excitement
and loyalty. Our Filene's Basement downtown Boston store subleases 178,000
square feet (approximately 65,300 square feet of selling space) on four floors.
The sublease terminates in 2009 with rights on behalf of Filene's Basement to
extend until 2024. The Boston store generated approximately 19% of Filene's
Basement's total sales during fiscal 2003.
Most of our Filene's Basement stores are located in suburban areas, near
large residential neighborhoods, and average approximately 40,000 square feet of
selling space per store. The downtown Boston location and stores in New York,
Chicago, Atlanta and Washington D.C. are located in urban areas. As of April 5,
2004, Filene's Basement operates 22 branch stores in eight states and the
District of Columbia. Generally, the branch store's selling space uses a
prototypical "racetrack" aisle layout for merchandise presentation. The branch
stores are designed to be convenient and attractive in their merchandise
presentation, dressing rooms, checkouts and customer service areas. Their
merchandise mix is similar to that of the Boston flagship store. The branch
stores do not operate under the Automatic Markdown Plan, although markdowns are
taken as required.
All of our Filene's Basement stores are designed for self-service
shopping, although sales personnel are available to help customers locate
merchandise and to assist in the selection and fitting of apparel and footwear.
In all stores, a customer service desk is conveniently located generally
adjacent to the central checkout area. To promote the ease of checkout we
utilize point of sale scanning systems that expedite the checkout process by
providing automated check and credit approval and price lookup. Sales associates
are trained to create a "customer-friendly" environment. Filene's Basement
accepts all major credit cards, and also provides a private label credit card
program. Filene's Basement maintains a reasonable return policy.
Our Filene's Basement stores' typical staff consists of a general manager,
an assistant store manager, merchandising group managers and full and part-time
associates. Each general manager reports to a Regional Vice President who in
turn reports to the Senior Vice President, Director of Stores.
Filene's Basement store managers are responsible on a day-to-day basis for
customer relations, personnel hiring and scheduling, and all other operational
matters arising in the stores. Each store manager is compensated, in part, based
on the performance of his 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.
11
Expansion. We plan to open 4 new Filene's Basement stores during fiscal
2004. Based upon our experience, we estimate the average cost of opening a new
Filene's Basement store is between $4.0 million to $5.0 million including
leasehold improvements, fixtures, inventory, pre-opening expenses and other
costs. Preparations for opening a Filene's Basement store generally take eight
to ten weeks. We charge pre-opening expenses to operations as incurred. It has
been our experience that new stores generally achieve profitability and
contribute to net income following the first full year of operations.
We continually update our stores by changing the merchandise displays and
in-store signage. The annual cost of refurbishing on a per store basis is
generally not substantial and is treated as on-going cost of operations. We
utilize our own architectural design staff, construction crews and carpentry
shop as needed to assist in the refurbishing and remodeling of a store or to
build in-store display tables and racks.
DISTRIBUTION
Filene's Basement's merchandise is processed and distributed from a
457,000 square foot leased distribution facility situated on 32.8 acres with
adjacent rail service in Auburn, Massachusetts, outside of metropolitan Boston,
Massachusetts.
LICENSE AGREEMENTS
Filene's Basement licenses cosmetics and certain other incidental
departments to independent third parties. The aggregate annual license fees for
the fiscal year ended January 31, 2004 were approximately $1.5 million. Filene's
Basement also uses Shonac Corporation, the parent company of DSW, to manage the
in-store shoe departments on a lease department basis. The inter-company
activity is eliminated in our consolidated financial statements.
Licensees supply their own merchandise and generally supply their own
store fixtures. In most instances, licensees utilize our associates to operate
their departments. The licensees reimburse us for all costs associated with such
associates. Licensed departments are operated under our general supervision and
licensees are required to abide by our policies with regard to pricing, quality
of merchandise, refunds and store hours. Licensed departments complement the
operations of our stores and facilitate the uniformity of the in store
merchandising strategy including the overall emphasis on value.
SEGMENT SEASONALITY
Filene's Basement customer traffic increases in the early Spring and the
Christmas holiday seasons. These seasonal periods are critical to Filene's
Basement's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
Filene's Basement has an exclusive, perpetual, worldwide, royalty-free
license to use the name Filene's Basement and Filene's Basement of Boston
trademark and service mark registrations as well as certain other tradenames.
Filene's Basement's exclusive licensee status with respect to these registered
marks has been recorded with the United States Patent and Trademark Office and
relevant state offices.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe a high level of automation is essential to maintaining and
improving our competitive position. We rely upon computerized systems to provide
information at all levels, including warehouse operations, store billing,
inventory control, merchandising and automated accounting.
We utilize point of sale ("POS") registers with full scanning capabilities
to increase speed and accuracy at customer checkouts and facilitate inventory
restocking.
We utilize automated distribution center systems to track and control the
receipt, processing, storage and shipping of product to the stores.
Value City has embarked on major projects to replace its legacy systems
with industry leading solutions from various vendors. Value City has implemented
sales audit, accounts payable, allocation, merchandise management and retail
data warehouse systems for its jewelry business during February 2004 that will
enhance inventory productivity and merchandise assortments for our stores. A
warehouse management system was also implemented for the jewelry operations
during February 2004 and will improve the efficiency of our distribution centers
and speed the flow of merchandise to our stores. These types of systems will be
implemented in the future to support hardlines and softlines. A new POS software
was successfully piloted in one store during the fourth quarter of
12
2003 and will be implemented in all Value City stores in fiscal 2004. All POS
registers will be replaced to improve the customer transaction experience and
enhance back office efficiency in fiscal 2004. New wireless hand held scanners
and wireless printers were successfully piloted in one store in the fourth
quarter of 2003 and will be implemented in fiscal 2004 in conjunction with the
POS system for markdown and inventory processing and will be used for reducing
lines "queue busting" during very busy shopping periods. Value City systems run
on two AS/400's and open systems computers. Filene's Basement shares an AS/400
with Value City.
DSW has undertaken several major initiatives to build upon the Essentus
merchandise management system and Retek warehouse management systems that
support the Company. An EDI (electronic data interchange) project is underway to
utilize product UPC barcodes and electronic exchange of purchase orders, ASNs
and invoices with our top vendors. At this time, 70% of DSW's product is
processed using the UPC bar code which has reduced processing costs and improved
flow of goods through the distribution center to the stores. EDI purchase orders
and ASN's were successfully piloted with key vendors in 2003 and will be
implemented for 50% of volume during fiscal 2004. This will speed the flow of
goods from the vendor to the DSW stores. New, state-of-the-art, completely
wireless POS systems have been rolled out to all DSW stores resulting in a
faster, easier customer checkout and a more efficient back office operation. A
completely wireless store supports fast and easy new store openings. Gift cards
are sold at POS starting during the 2003 holiday season. In order to support the
continued growth of DSW, merchandise planning and merchandise allocation systems
were implemented in June and September 2003, respectively, to improve inventory
productivity and store assortments. Business intelligence tools in conjunction
with datamarts are used for business analysis and decision support. DSW systems
run on UNIX computer systems.
We automated our corporate environment with a document management system
in 2003 for invoice processing to move toward an efficient, paperless
environment. In 2003, we implemented financial reporting and analysis and
financial planning systems to augment and streamline these processes. We have
embarked on a data warehouse project to provide capabilities for customer and
advertising analysis as well as to support a new loss prevention system.
A focus of our information technology program is to leverage our
technology infrastructure and systems whenever appropriate to simplify and
become more efficient. All segments are now supported by enterprise financial,
human resource and e-mail systems.
ASSOCIATES
The mission of the Human Resource department includes ensuring the Company
business plans, organization structure, talent development and bench strength
meet the Company's needs for associate effectiveness to improve quality of work
product, superior customer service, shareholder value and our profit.
As of April 5, 2004, we had approximately 18,400 associates of which 9,000
were full-time and the balance were part-time. Approximately 1,400 of these
associates in 21 stores are covered by collective bargaining agreements. We
believe that, in general, we have satisfactory relations with all of our
associates.
Group hospitalization, surgical, medical, vision, dental, disability and
life insurance benefits and a 401(k) plan are provided to full-time non-union
associates. We are a co-sponsor with SSC in these plans. We also sponsor an
associate stock purchase plan and a stock option plan for salaried associates.
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. Our
operating entities - Value City, DSW and Filene's Basement - have different
target customers and different strategies, but each focus on the basic equation:
Value = Quality/Price.
In the discount or off-price retailing segment, we differentiate ourselves
through our Value City store format and the breadth of our product offering. Our
large stores differ from most other off-price retailers that tend to operate
substantially smaller stores focusing predominantly on either hard or soft
goods. Our large stores enable us to offer a 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
13
advantages include: our reputation in the marketplace for being able to purchase
entire lots of merchandise; our ability either to quickly distribute or to hold
the merchandise for sale at the most opportune time; our full-line merchandise
and style offerings; and our broad range of brand names.
Our fastest growing brand, DSW, provides a varied selection of quality
shoes, convenience and value to its customers. The resulting benefits of this
unique selling proposition fuels the high satisfaction index customers attribute
to their DSW shopping experience. Our customers enjoy a friendly, warm shopping
atmosphere with ease of store navigation.
Like Value City, Filene's Basement provides perceived high value by
offering easily recognized brand-name merchandise at surprisingly affordable
prices. Its niche, however, is the top-tier of the off-price retailing category
and its legendary sales events shape its image as having a special "cachet".
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores we operated
as of January 31, 2004:
FILENE'S
VALUE CITY DSW BASEMENT TOTAL
---------- --- -------- -----
Arizona - 2 - 2
California - 12 - 12
Colorado - 4 - 4
Connecticut - 2 - 2
Delaware 3 - - 3
Florida - 8 - 8
Georgia 4 6 - 10
Illinois 16 8 1 25
Indiana 7 3 2 12
Kansas - 3 - 3
Kentucky 4 - - 4
Maryland 8 4 - 12
Massachusetts - 6 - 6
Michigan 9 8 8 25
Minnesota - 4 - 4
Missouri 7 2 - 9
Nevada - 2 - 2
New Hampshire - 1 - 1
New Jersey 7 6 - 13
North Carolina - 12 1 13
Ohio 1 2 4 7
Oklahoma 23 11 - 34
Pennsylvania - 1 1 2
Rhode Island 18 9 - 27
Tennessee - 1 1 2
Texas 1 3 - 4
Virginia - 12 - 12
Washington D.C. 4 7 - 11
West Virginia - - 3 3
Wisconsin 4 - - 4
- 3 - 3
--- --- -- ---
116 142 21 279
=== === == ===
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts; New
York, New York and Los Angeles, California. We operate 7 warehouse/distribution
complexes located in Columbus, Ohio and one distribution facility in Auburn,
Massachusetts. In addition, to expedite the flow of merchandise to certain
clusters of stores, we use third party processors and utilize vendor direct
shipments where such use is advantageous. Our executive offices occupy
approximately 45,000 square feet in a building which includes a store and also
serves as one of our apparel distribution centers.
The stores and all of the warehouse, buying and executive office
facilities are leased or subleased except for one owned shoe store location. As
of January 31, 2004, we leased or subleased 36 stores and 6 warehouse facilities
and a parcel of land from SSC or
14
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 warehouse and distribution facilities for our Value City, DSW and
Filene's Basement businesses are adequate for our current needs and we believe
that such facilities, with certain modifications and additional equipment, will
be adequate for our foreseeable future demands.
We plan to consolidate corporate office functions for our Columbus, Ohio
based associates. Occupancy for the new leased corporate office facility is
scheduled for late 2004.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common shares are listed for trading under the ticker symbol "RVI" on
the New York Stock Exchange. The following table sets forth the high and low
sales prices of our Common Shares as reported on the NYSE Composite Tape during
the periods indicated. As of April 5, 2004, there were 532 holders of record of
our common shares.
HIGH LOW
Fiscal 2002:
First Quarter $4.62 $3.04
Second Quarter 4.40 2.20
Third Quarter 2.68 1.55
Fourth Quarter 3.73 1.50
Fiscal 2003:
First Quarter $2.26 $1.48
Second Quarter 3.25 1.90
Third Quarter 5.88 2.02
Fourth Quarter 6.30 4.10
Fiscal 2004:
First Quarter (through April 5, 2004) $8.09 $5.02
We have paid no dividends and we do not anticipate paying cash dividends
on our common shares during fiscal 2004. Presently we expect that all of our
future earnings will be retained for development of our businesses. 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 Company's credit facility restricts the payment of dividends by the Company
or any affiliate of the borrower or guarantor, other than dividends paid in
stock of the issuer or paid to another affiliate, and cash dividends can only be
paid to the Company by its subsidiaries up to the aggregate amount of $5.0
million less the amount of any borrower advances made to the Company by any
subsidiaries. The Company credit facilities are more fully explained in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 18 of this Annual Report.
In connection with our refinancing, we amended and restated our $75
million convertible loan on June 11, 2002. Pursuant to the terms of the
convertible loan, the lenders may, at their option, convert the convertible loan
into shares of our common stock at a conversion rate of $4.50 per share, subject
to adjustment. We relied on the exemption from registration contained in Section
4(2) of the Securities Act of 1933 for this issuance.
In connection with our refinancing, on September 26, 2002 we issued
warrants to purchase 2,954,792 shares of our common stock at $4.50 per share,
subject to adjustment. We relied on the exemption from registration contained in
Section 4(2) of the Securities Act of 1933 for this issuance.
The information required by this Item, other than the information set
forth above, is incorporated herein by reference from the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
2004.
16
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated various selected
financial information. Such selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements of Retail Ventures,
Inc. including the notes thereto, set forth in Item 8 of this Annual Report on
Form 10-K/A and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" set forth in Item 7 of this Annual Report on Form 10-K/A.
FOR THE FISCAL YEAR ENDED
--------------------------------------------------------------------------------------
1/31/2004 2/1/2003 2/2/2002 2/3/2001(1) 1/29/2000
----------- ---------- ---------- -------------- -----------
(dollars in thousands, except per share amounts)
Net sales(2) $ 2,594,206 $ 2,450,719 $ 2,283,878 $ 2,213,017 $ 1,670,176
Operating profit (loss)(3) $ 32,431 $ 37,478 $ (13,897) $ (132,538) $ 65,964
(Loss) income before cumulative
effect of accounting change $ (4,446) $ (1,585) $ (28,723) $ (101,791) $ 33,468
Cumulative effect of accounting change $ (2,080)
Net (loss) income $ (4,446) $ (3,665) $ (28,723) $ (101,791) $ 33,468
Basic (loss) earnings per share before
cumulative effect of accounting change $ (0.13) $ (0.05) $ (0.85) $ (3.03) $ 1.03
Cumulative effect of accounting change - $ (0.06) - - -
Basic (loss) earnings per share $ (0.13) $ (0.11) $ (0.85) $ (3.03) $ 1.03
Diluted (loss) earnings per share $ (0.13) $ (0.11) $ (0.85) $ (3.03) $ 1.02
Total assets $ 863,945 $ 831,799 $ 880,311 $ 908,009 $ 744,181
Working capital $ 234,857 $ 181,390 $ 228,775 $ 211,402 $ 205,011
Current ratio 1.89 1.60 1.79 1.66 1.82
Long-term obligations $ 326,940 $ 264,664 $ 337,199 $ 326,449 $ 144,168
Number of:(4)
Value City Stores 116 116 117 119 105
DSW Stores 142 126 104 78 58
Filene's Basement Stores 21 20 20 19 -
Net sales per selling sq. ft. (5) $ 225 $ 224 $ 233 $ 234 $ 221
Comparable sales change (6) 1.2% (3.5)% (2.4)% (1.1)% 7.2%
(1) Fiscal 2000 includes 53 weeks; all other years contain 52 weeks.
(2) Excludes sales of licensed departments. Effective February 2, 2002, we
acquired the remaining 50% interest in a joint venture. Results of our
percentage ownership in the joint venture are reflected in joint venture
operations.
(3) See Note 15 to the Consolidated Financial Statements for discussion of the
restatement of amounts.
(4) Includes all stores operating at the end of the fiscal year.
(5) Presented in whole dollars and excludes licensed departments and stores
not operated during the entire fiscal period.
(6) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable if it is opened 14 months at the beginning of
the fiscal year. For fiscal year 2000, comparable store sales are computed
using like 52-week periods.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As discussed in Note 15 to the Consolidated Financial Statements, the
consolidated statements of operations and cash flows have been restated to
reflect certain reclassifications. See Note 15 for a summary of the significant
effects of the restatement. Amounts affected by this restatement included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" have been appropriately revised.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, in some cases have affected the
matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations. These same factors could cause our future financial
performance in fiscal 2004 and beyond to differ materially from those expressed
or implied in any such forward-looking statements. These factors include:
decline in demand for our merchandise, our ability to achieve our business
plans, expected cash flow from operations, vendor and their factor relations,
flow of merchandise, compliance with our credit agreements, 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, marketing strategies, consumer preferences and overall economic
conditions, the impact of competition and pricing, changes in weather patterns,
changes in existing or potential duties, tariffs or quotas, paper and printing
costs, the ability to hire and train associates and development of management
information systems.
Our operations have been historically seasonal, with a disproportionate
amount of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons for Value City and Filene's Basement. DSW seasonal
sales occur both in early Spring and Fall. As a result of seasonality, any
factors negatively affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have
a material adverse effect on our financial condition and results of operations
for the entire year.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of operations
and financial condition as reflected in our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles. As discussed in Note 1 to our Consolidated Financial Statements, the
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
commitments and contingencies at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including, but
not limited to, those related to inventory valuation, depreciation,
amortization, recoverability of long-lived assets including intangible assets,
the calculation of retirement benefits, estimates for self insurance reserves
for health and welfare, workers' compensation and casualty insurance, income
taxes, contingencies, litigation and revenue recognition. Management bases its
estimates and judgments on its historical experience and other relevant factors,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, current and expected
economic conditions, product mix, and in some cases, actuarial and appraisal
techniques. We constantly re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors
considered provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated statements, we cannot guarantee that our
estimates and assumptions will be accurate. As the determination of these
estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe the following represent the most critical estimates and
assumptions, among others, used in the preparation of our consolidated financial
statements. We have discussed the selection, application and disclosure of the
critical accounting policies with our audit committee.
- Revenue recognition. Revenues from our retail operations are
recognized at the latter of point of sale or the delivery of goods
to the customer. Retail revenues are reduced by a provision for
anticipated returns based on historical trends.
- Cost of sales and merchandise inventories. We use the retail method
of accounting for substantially all of our merchandise inventories.
Merchandise inventories are stated at the lower of cost, determined
using the first-in, first-out basis, or market, using the retail
inventory method. The retail method is widely used in the retail
industry due to its practicality. Under the retail inventory method,
the valuation of inventories at cost and the resulting gross margins
are calculated by applying a calculated cost to retail ratio to the
retail value of inventories. The cost of the inventory
18
reflected on our consolidated balance sheet is decreased by charges
to cost of sales at the time the retail value of the inventory is
lowered through the use of markdowns. Hence, earnings are negatively
impacted as merchandise is marked down prior to sale. Reserves to
value inventory at the lower of cost or market were $34.2 million
and $32.5 million at the end of fiscal 2003 and 2002, respectively.
Inherent in the calculation of inventories are certain significant
management judgments and estimates including, setting the original
merchandise retail value or markon, markups of initial prices
established, reduction of pricing due to customer's value perception
or perceived value known as markdowns, and estimates of losses
between physical inventory counts or shrinkage, which, combined with
the averaging process within the retail method, can significantly
impact the ending inventory valuation at cost and the resulting
gross margins.
- Long-lived assets. In evaluating the fair value and future benefits
of long-lived assets, we perform an analysis of the anticipated
undiscounted future cash flows of the related long-lived asset and
reduce the carrying value by the excess where the recorded value
exceeds the fair value.
During fiscal 2003, we recorded a $0.3 million charge related to
long-lived assets at store operating units.
During fiscal 2002, we recorded two different charges related to
long-lived assets. The first charge was for goodwill impairment as a
result of the implementation of SFAS 142, which requires that
goodwill no longer be amortized, but would be subject to annual fair
value based impairment tests. The initial tests for goodwill
impairment, as of February 3, 2002, resulted in a non-cash charge of
$3.4 million, $2.1 million net of taxes, which is reported in our
Consolidated Statement of Operations as of February 1, 2003 in the
caption "Cumulative effect of accounting change." Substantially all
of the charge relates to goodwill associated with our purchase of
Mazel's interest in VCM and is included in the net loss for the year
ended February 1, 2003. At the end of the current fiscal year we
have on our books $37.6 million of goodwill subject to annual
testing. The second charge of $0.6 million related to long-lived
assets at store operating units. The result of reviewing
undiscounted cash flows for stores under SFAS 144, we identified
stores where the recorded value of the asset exceeded the fair
value.
We believe at this time that the long-lived assets' carrying values
and useful lives continue to be appropriate. To the extent these
future projections or our strategies change, the conclusion
regarding impairment may differ from our current estimates.
- Self-insurance reserves. We record estimates for certain health and
welfare, workers compensation and casualty insurance costs that are
self-insured programs. These estimates are based on actuarial
assumptions and are subject to change based on actual results.
Should a greater amount of claims occur compared to what was
estimated for costs of certain health and welfare, workers
compensation and casualty insurance increase beyond what was
anticipated, reserves recorded may not be sufficient and to the
extent actual results vary from assumptions, earnings would be
impacted.
- Pension. The obligations and related assets of defined benefit
retirement plans are presented in Note 5 of the Notes to
Consolidated Financial Statements. Plan assets, which consist
primarily of marketable equity and debt instruments, are valued
using market quotations. Plan obligations and the annual pension
expense are determined by independent actuaries and through the use
of a number of assumptions. Key assumptions in measuring the plan
obligations include the discount rate, the rate of salary increases
and the estimated future return on plan assets. In determining the
discount rate, we utilize the yield on fixed-income investments
currently available with maturities corresponding to the anticipated
timing of the benefit payments. Salary increase assumptions are
based upon historical experience and anticipated future management
actions. Asset returns are based upon the anticipated average rate
of earnings expected on the invested funds of the plans. At January
31, 2004, the weighted-average actuarial assumption of our plans
was: discount rate 6.0%, assumed salary increases 4% and long-term
rate of return on plan assets 8%. To the extent actual results vary
from assumptions, earnings would be impacted.
- Customer loyalty program. We maintain a customer loyalty program for
our DSW operations in which customers receive a future discount on
qualifying purchases. The "Reward Your Style" program is designed to
promote customer awareness and loyalty plus provide the Company with
the ability to communicate with our customers and enhance our
understanding of their spending trends. Upon reaching the target
level, customers may redeem these discounts on a future purchase.
Generally, these future discounts must be redeemed in one year. We
accrue the estimated costs of the anticipated redemptions of the
discount earned at the time of the initial purchase and charge such
costs to selling, general and administrative expense based on
historical experience. The estimates of the costs associated with
the loyalty program require us to make assumptions related to
customer purchase levels and redemption rates. The accrued liability
as of January 31, 2004 and February 1, 2003 was $3.0 million and
$2.2 million,
19
respectively. To the extent assumptions of purchases and redemption
rates vary from actual results, earnings would be impacted.
- Income taxes. We do business in numerous jurisdictions that impose
taxes. Management is required to determine the aggregate amount of
income tax expense to accrue and the amount which will be currently
payable based upon tax statutes of each jurisdiction. The estimation
process involves adjusting income determined by the application of
generally accepted accounting principles for items that are treated
differently by the applicable taxing authorities. Deferred tax
assets and liabilities are reflected on our balance sheet for
temporary differences that will reverse in subsequent years. If
different management judgments had been made, our tax expense,
assets and liabilities could be different. During fiscal 2003, we
established a reserve for deferred income tax assets of $1.5 million
for carry forwards related to state and local net operating losses
and for excess contribution carry forwards. See Note 10 to our
Consolidated Financial Statements on page F-20 of this Annual Report
for a discussion of our significant accounting policies.
RESULTS OF OPERATIONS
We operate three business segments. Value City and Filene's Basement
segments operate full-line, off-price department stores. Our DSW segment sells
better-branded off-price shoes and accessories. As of January 31, 2004, a total
of 116 Value City, 21 Filene's Basement and 142 DSW stores were open. The
following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in our Consolidated
Statements of Operations.
FOR THE YEAR ENDED
------------------------------
1/31/04 2/1/03 2/2/02
52 WEEKS 52 WEEKS 52 WEEKS
-------- -------- --------
Net sales, excluding sales licensed departments 100.0% 100.0% 100.0%
Cost of sales (61.4) (61.8) (62.6)
----- ----- -----
Gross profit 38.6 38.2 37.4
Selling, general and administrative expenses (37.6) (37.0) (38.8)
License fees and other income 0.2 0.3 0.8
----- ----- -----
Operating profit (loss) 1.2 1.5 (0.6)
Interest expense, net (1.4) (1.6) (1.4)
----- ----- -----
Loss before cumulative effect of accounting
change and income taxes (0.2) (0.1) (2.0)
Benefit (provision) for income taxes -- -- 0.7
----- ----- -----
Loss before cumulative effect of accounting change (0.2) (0.1) (1.3)
Cumulative effect of accounting change, net of income taxes -- (0.1) --
----- ----- -----
Net loss (0.2)% (0.2)% (1.3)%
FISCAL YEAR ENDED JANUARY 31, 2004 COMPARED TO FISCAL YEAR ENDED FEBRUARY 1,
2003
Sales. Sales for the fifty-two weeks ended January 31, 2004 (fiscal 2003),
increased by 5.9% to $2.59 billion from $2.45 billion in the fifty-two week
period of fiscal year 2002. By segment comparable store sales were:
2003 2002
------ ------
Value City Department Stores (0.7)% (5.1)%
DSW 5.6% (0.1)%
Filene's Basement 2.6% 0.3%
---- ----
Total 1.2% (3.5)%
==== ====
Comparable store sales percentages were impacted negatively by
unseasonable weather in the early part of fiscal 2003 in all segments. All 116
Value City stores are in our comparative store base. Value City's non-apparel
comparable sales increased 2.1% for the twelve months and apparel comparable
sales declined 2.4% for the fiscal year. The children's apparel division had an
increase of 2.1%, while the men's and ladies' apparel divisions had comparable
sales declines of 4.6% and 2.4%, respectively. DSW comparable store sales
improved 5.6% as overall sales rose almost $143.7 million to $772.6 million for
the year. The DSW increase includes a net increase of 16 stores. Filene's
Basement sales rose $13.7 million to $316.9 million for the fiscal year.
Filene's Basement total stores increased due to a single opening during the
fiscal year.
Gross profit. Consolidated gross profit increased $64.9 million from
$936.1 million to $1,001.0 million, and increased as a percentage of net sales
from 38.2% to 38.6%. Value City's gross profit decrease is primarily
attributable to lower average unit retail
20
prices as a result of lower initial markups during the year. Gross profit for
our DSW and Filene's Basement segments improved as the result of higher initial
markups on merchandise purchases and a reduction in markdowns. Gross profit, as
a percent of sales by segment, was:
2003 2002
---- ----
Value City Department Stores 38.4% 38.9%
DSW 41.0% 39.4%
Filene's Basement 33.4% 32.2%
---- ----
Total 38.6% 38.2%
==== ====
SG&A. For the year, consolidated selling, general and administrative
expenses ("SG&A") increased $68.2 million to $974.2 million or 37.6% of sales.
The year ended January 31, 2004 includes approximately $1.6 million for store
closings, a $16.7 million increase in advertising and $4.3 million in
pre-opening costs for new stores. New store openings in the period were limited
to our DSW and Filene's Basement segments. Preparations for opening a DSW store
or a Filene's Basement store generally take eight to ten weeks. Pre-opening
costs are expensed as incurred. It has been our experience that new stores for
each of our segments generally achieve profitability and contribute to net
income after the first full year of operations. Pre-opening expense for the 16
new DSW stores was $3.7 million in fiscal 2003 compared to $2.6 million for the
22 new stores opened in prior year. Pre-opening expense was $0.6 million in each
of fiscal 2003 and 2002 for the 1 new Filene's Basement store opened in each of
those periods. SG&A, as a percent of sales by segment, were:
2003 2002
---- ----
Value City Department Stores 38.5% 38.2%
DSW 37.8% 37.4%
Filene's Basement 35.0% 34.3%
---- ----
Total 37.6% 37.0%
==== ====
License fees and other income. Overall license fees and other income
decreased $1.8 million from $7.4 million to $5.6 million. License fees decreased
$0.8 million, or 29.1%, as a result of lower sales from licensees. Other income
decreased $1.0 million, or 21.6%, from $4.8 million to $3.7 million. Other
income is comprised of layaway fees and vending income. These sources of income
vary based on customer traffic and contractual arrangements.
Operating profit. Operating profit was $32.4 million in fiscal 2003
compared to $37.5 million in fiscal 2002. As a percentage of net sales operating
profit was 1.2% and 1.5% in fiscal 2003 and 2002, respectively.
Interest expense. Interest expense, net of interest income, decreased $0.8
million from $39.4 million in fiscal 2002 to $38.6 million in fiscal 2003 due
primarily to the $3.3 million write-off of unamortized debt costs in 2002 offset
by an increase in average weighted borrowings and an increase in the average
weighted borrowing rate in 2003. Interest expense included the amortization of
debt discount of $2.0 million.
FISCAL YEAR ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2,
2002
Sales. Sales for the fifty-two weeks ended February 1, 2003 (fiscal 2002),
increased by 7.3% to $2.45 billion from $2.28 billion in the fifty-two week
period of fiscal 2001. By segment, comparable store sales were:
2002 2001
---- ----
Value City Department Stores (5.1)% (3.7)%
DSW (0.1)% 0.0%
Filene's Basement 0.3% 2.2%
---- ----
Total (3.5)% (2.4)%
==== ====
The comparable store sales percentage declines were attributable to a
highly competitive and promotional retail environment and the effects of a
softening economy. Value City's non-apparel comparable sales decreased 3.8% and
apparel comparable sales declined 6.6% in fiscal 2002. The ladies's, men's and
children's apparel divisions represented approximately 58% of total retail sales
for fiscal 2002. Sales declines in these divisions were 2.7%, 9.9% and 8.4%,
respectively. DSW reflected a slightly negative comparable store rate as overall
sales rose almost $119.6 million to $629.0 million for the year. The DSW
increase in fiscal 2002 included a net increase of 22 stores. The Filene's
Basement segment's sales increased $9.8 million to $303.2 million for fiscal
2002 including a slight increase in comparative store sale percentage. Filene's
Basement total stores opened remained unchanged due to a single opening and a
single closing during the fiscal year.
21
Gross profit. Consolidated gross profit increased $81.7 million from
$854.4 million to $936.1 million, and increased as a percentage of net sales
from 37.4% to 38.2%. The Value City segment's gross profit improvement is
primarily the result of improved initial merchandise costs negotiated with
vendors and higher retail offering in our stores. Additionally, Value City
increased control over inventory quantities and markdowns and reduced the loss
associated with shrink from the prior year. Gross profit for our DSW segment
improved as a result of higher initial markups on merchandise purchases and a
reduction in markdowns. Our Filene's Basement segment's gross profit was
negatively affected by early and excess markdowns required to sell and reduce
inventories. Gross profit, as a percent of sales by segment, was:
2002 2001
---- ----
Value City Department Stores 38.9% 37.6%
DSW 39.4% 38.2%
Filene's Basement 32.2% 35.1%
---- ----
Total 38.2% 37.4%
==== ====
SG&A. For the year, consolidated selling, general and administrative
expenses ("SG&A") increased $19.7 million to $906.0 million or 37.0% of sales.
Our fifty-two week period ended February 1, 2003 includes approximately $0.6
million for FASB 144 write-off, $1.1 million for store closings, $6.0 million
for severance costs related to workforce reductions during the year and the
relocation of our Value City merchandising office from Boston to New York. The
relocation of the Value City buyers from Boston to New York City provides
merchants with a closer proximity to our markets and vendors. In addition, we
evaluated stores with negative or inadequate cash flows to determine if any
assets were impaired. New store openings in the period were limited to our DSW
and Filene's Basement segments. Preparations for opening a DSW store or a
Filene's Basement store generally take eight to ten weeks. Pre-opening costs are
expensed as incurred. It has been our experience that new stores for each of our
segments generally achieve profitability and contribute to net income after the
first full year of operations. No Value City stores were opened less than twelve
months during fiscal 2002. Twenty-two DSW stores were opened less than twelve
months in fiscal 2002 and had a pre-tax net operating loss of $2.6 million,
including $2.6 million of pre-opening expenses. Twenty-six DSW stores were
opened less than twelve months during fiscal 2001 and had a pre-tax net
operating loss of $2.5 million, including $0.1 million of pre-opening expenses.
Filene's Basement had one store opened less than twelve months in fiscal 2002
with a pre-tax net operating profit of $0.1 million, including $0.6 million of
pre-opening expenses. SG&A as a percent of sales by segment were:
2002 2001
---- ----
Value City Department Stores 38.2% 40.7%
DSW 37.4% 37.4%
Filene's Basement 34.3% 33.1%
---- ----
Total 37.0% 38.8%
==== ====
License fees and other income. Overall license fees and other income
decreased $10.6 million in fiscal 2002. License fees decreased $9.6 million, or
78.5%, from $12.2 million to $2.6 million, as a result of lower sales from
unrelated licensees. Fees from the VCM joint venture of $9.7 million in fiscal
2001 did not occur in fiscal 2002 because the operations were consolidated in
fiscal 2002 as a result of the purchase of our partner's 50% interest in the VCM
joint venture at the close of business on February 2, 2002. Other income
decreased $0.9 million, or 16.8%, from $5.7 million to $4.8 million. Other
income is comprised of layaway fees and vending income. These sources of income
vary based on customer traffic and contractual arrangements.
Operating profit. Operating profit increased to $37.5 million in fiscal
2002 from a loss of $13.9 million in fiscal 2001, and increased as a percentage
of net sales from a loss of 0.6% in fiscal 2001 to a profit of 1.5% in fiscal
2002.
Interest expense. Interest expense, net of interest income, increased $8.4
million from $31.0 million to $39.4 million due primarily to the $3.3 million
write-off of unamortized debt issuance costs in 2002 and an increase in interest
rates as a result of new term debt, offset partially by a decrease in average
borrowings. Interest expense also included amortization of debt discount of $1.3
million.
Equity in loss of joint venture. Equity in loss of joint venture in fiscal
2001 of $0.4 million was the result of operations in the VCM joint venture with
Mazel. We acquired Mazel's interest in VCM at the close of business February 2,
2002 and have included the operations of these departments in the consolidated
statements presented.
Cumulative effect of accounting change. We also implemented a new
accounting principle during fiscal 2002 resulting in the impairment of goodwill.
The charge for the application of the new principle was $2.1 million net of tax,
or 0.1% of sales. We retained a valuation professional to assist in the
calculation of impairment. Our initial test was performed as of the beginning of
the fiscal year while our annual test occurred in the middle of the fourth
quarter. Goodwill will be subject to annual impairment tests and results of such
tests cannot be predicted.
22
SEASONALITY
Our business is affected by the pattern of seasonality common to most
retail businesses. Historically, the majority of our sales and operating profit
have been generated during the back-to-school and Christmas selling seasons for
our Value City segment and, more recently, our Filene's Basement segment. The
shoe business experiences increased sales in both early Spring and Fall seasons
in relationship to the change in footwear desired by the DSW customer.
FISCAL YEAR
We follow a 52/53-week fiscal year that ends on the Saturday nearest to
January 31. Fiscal 2003, 2002 and 2001 each contain 52 weeks.
INCOME TAXES
Our effective tax rate for fiscal 2003 was 27.9% versus 17.0% for fiscal
2002. The effective tax benefits are negatively impacted due to the increase in
non-deductible expenses for tax purposes associated with the amortization of the
warrants issued in connection with our long term debt. During our fiscal year
ended January 31, 2004, we established a valuation allowance for our deferred
tax assets of $1.5 million. The reserve reflects a reduction in the estimated
amount for future tax deductions, primarily for state and local taxes and excess
contribution carry forwards.
Our effective tax rate for fiscal 2002 was 17.0% versus 36.5% for fiscal
2001. There was an increase in the effective tax rate primarily due to the
increase in non-deductible expenses for tax purposes and the fluctuation in
taxable income. However, that increase was then off-set by the tax effect of the
write-off of financing costs.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of the fiscal year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under this Statement,
obligations that meet the definition of a liability will be recognized
consistently with the retirement of the associated tangible long-lived assets.
This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We assessed the impact of SFAS No. 143 and there
was none.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The adoption of SFAS No. 145 did not have a significant effect on the
Company's results of operations or its financial position. However, it did
require that the Company reclassify the loss on the extinguishment of debt of
approximately $3.3 million from extraordinary loss to interest expense, net, in
the Company's Consolidated Statements of Operations in fiscal 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires the consolidation of
certain entities considered to be variable interest entities ("VIEs"). An entity
is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital is
insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of the
VIE's expected losses or residual returns if they occur. FIN 46 provides certain
exceptions to these rules, relating to qualifying special purpose entities
("QSPE's") subject to the requirements of SFAS No. 140. Upon its original
issuance, FIN 46 required that VIEs created after January 31, 2003 would be
consolidated immediately, while VIEs created prior to February 1, 2003 were to
be consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of
VIEs created prior to February 1, 2003 to December 31, 2003 for calendar
year-end companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to
clarify some of the provisions of the original interpretation and to exempt
certain entities from its requirements. FIN 46R provides special effective date
provisions to enterprises that fully or partially applied to FIN 46 prior to the
issuance of the revised interpretation. In particular, entities that have
already adopted FIN 46 are not required to adopt FIN 46R until the quarterly
reporting period ended May 1, 2004. The Company is currently reviewing the
provisions of FIN 46R and will adopt FIN 46R for the quarterly reporting period
ending May 1, 2004.
23
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances), many of which were
previously classified as equity. This statement was effective for financial
instruments entered into or modified after May 31, 2003 and for pre-existing
instruments as of the beginning of the first interim period beginning after June
15, 2003. Initial adoption of this accounting pronouncement did not have a
material impact on the Company's consolidated financial statements.
The FASB's Emerging Issues Task Force ("EITF") Issue No. 02-16,
"Accounting By A Customer (Including A Reseller) For Cash Consideration Received
From A Vendor" addressed the accounting treatment for vendor allowances. The
adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on the
Company's financial position or results of operations.
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; however, there can be no assurance that the business
will not be affected by inflation in the future.
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for seasonal and new store
inventory purchases, capital expenditures in connection with expansion and
remodeling and infrastructure growth, primarily information technology
development. The primary sources of funds for these liquidity needs are cash
flow from operations and credit facilities. Our working capital and inventory
levels typically build throughout the fall, peaking during the holiday selling
season.
Net working capital was $234.9 million and $181.4 million at January 31,
2004 and February 1, 2003, respectively. Current ratios at those dates were 1.9
and 1.6, respectively. Net cash provided by operating activities totaled $6.2
million and $90.3 million in fiscal 2003 and 2002, respectively. The net cash
decrease is reflective of several items, primarily the increase in inventory of
$30.5 million, the reduction in accounts payable of $13.9 million and the
reduction of accrued expenses of $23.7 million, which were funded from
operations and borrowings under our revolving credit facility. The increases in
inventories for new stores were: $13.8 million for DSW, $5.6 million for
licensed departments and $2.1 million for the opening of Filene's Basement.
Cash used for capital expenditures was $68.7 million and $41.8 million for
fiscal 2003 and 2002, respectively. During fiscal 2003, capital expenditures
included $16.2 million for new stores, $29.2 million for improvements in
existing stores, $5.7 million for office, warehousing and operations of our shoe
business and $17.6 million for MIS equipment upgrades and new systems. A source
of cash from investing activity was proceeds from lease incentives which are
amortized as a reduction of rent expense over the life of the lease.
On June 11, 2002, Value City Department Stores, Inc., together with
certain other principal subsidiaries of Retail Ventures, Inc., entered into a
$525.0 million refinancing that consists of three separate credit facilities
(collectively, the "Credit Facilities"): (i) a three-year $350.0 million
revolving credit facility (the "Revolving Credit Facility"), (ii) two $50.0
million term loan facilities provided equally by Cerberus Partners, L.P. and
Schottenstein Stores Corporation (the "Term Loans"), and (iii) an amended and
restated $75.0 million senior subordinated convertible loan, initially entered
into by us on March 15, 2000, which is held equally by Cerberus Partners, L.P.
and SSC (the "Convertible Loan"). These Credit Facilities are guaranteed by
Retail Ventures, Inc. and substantially all of its subsidiaries.
We are not subject to any financial covenants under these credit
facilities, however, there are numerous restrictive covenants relating to our
management and operation. These non-financial covenants include, among other
restrictions, limitations on indebtedness, guarantees, mergers, acquisitions,
fundamental corporate changes, financial reporting requirements, budget
approval, disposition of assets, investments, loans and advances, liens,
dividends, stock purchases, transactions with affiliates, issuance of securities
and the payment of and modification to debt instruments. These Credit Facilities
are also subject to an Intercreditor Agreement, which provides for an
established order of payment of obligations from the proceeds of collateral upon
default (the "Intercreditor Agreement").
24
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is
structured in a manner that allows us and our subsidiaries availability based on
the value of inventories and receivables. Primary security for the Revolving
Credit Facility is provided by a first priority lien on all of our inventory and
accounts receivable, as well as certain intercompany notes and payment
intangibles. Subject to the Intercreditor Agreement, the Revolving Credit
Facility also has a second priority perfected interest in all of the collateral
securing the Term Loans. Interest on borrowings is calculated at the bank's base
rate or Eurodollar rate plus 2.00% to 2.75%, depending upon the level of average
excess availability we maintain. The maturity date is June 11, 2005. At January
31, 2004 and February 1, 2003, $137.7 million and $169.3 million were available,
respectively, under the Revolving Credit Facility. Direct borrowings aggregated
$125.0 million and $64.0 million for fiscal 2003 and fiscal 2002, respectively,
while $23.4 million and $19.2 million letters of credit were issued and
outstanding for fiscal 2003 and fiscal 2002, respectively.
$100 Million Term Loans - Related Parties
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt and,
subject to the Intercreditor Agreement, have the same rights and privileges as
the Revolving Credit Facility and the Convertible Loan. We and our principal
subsidiaries are obligated on the facility. The maturity date is June 11, 2005.
The Term Loans' stated rate of interest per annum during the initial two
years is 14% if paid in cash and 15% if we elect a paid-in-kind ("PIK") option.
During the first two years of the Term Loans, we may pay all interest in PIK.
During the final year of the Term Loans, the stated rate of interest is 15.0% if
paid in cash or 15.5% if PIK, and the PIK option is limited to 50% of the
interest due. For the years ended January 31, 2004 and February 1, 2003, we
elected to pay interest in cash.
We issued 2,954,792 warrants ("Warrants") to purchase shares of common
stock, at an initial exercise price of $4.50 per share, to the Term Loan C
Lenders. The Warrants are exercisable at any time prior to June 11, 2012. We
have granted the Term Loan C Lenders registration rights with respect to the
shares issuable upon exercise of the Warrants. The $6.1 million value ascribed
to the Warrants was estimated as of the date of issuance using the Black-Scholes
Pricing Model with the following assumptions: risk-free interest rate of 5.6%;
expected life of 10 years; expected volatility of 47%; illiquidity discount of
10%; and an expected dividend yield of 0%. The related debt discount is
amortized into interest expense over the life of the debt.
The number of shares issuable varies upon the occurrence of the following:
(i) the issuance of additional shares of common stock without consideration or
for a consideration per share less than the Warrant exercise price; (ii) the
declaration of any dividend; (iii) the combination or consolidation of the
outstanding shares of common stock into a lesser number of shares; (iv) the
issuance or sale of additional shares at a price per share less than the current
market price but greater than the Warrant exercise price; (v) the issuance of
convertible securities which are convertible into shares of common stock; and/or
(vi) the exchange of shares in a merger or other business combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties
We have amended and restated our $75.0 million Convertible Loan dated
March 15, 2000. As amended, borrowings under the Convertible Loan will bear
interest at 10% per annum. At our option, interest may be PIK during the first
two years, and thereafter, at our option, up to 50% of the interest due may be
PIK until maturity. PIK interest accrued with respect to the convertible loan is
added to the outstanding principal balance, on a quarterly basis, and is payable
in cash upon the maturity of the debt. The Convertible Loan is guaranteed by all
principal subsidiaries and is secured by a lien on assets junior to liens
granted in favor of the Revolving Credit Facility and Term Loans. The
Convertible Loan is not prepayable until June 11, 2007, and has a maturity date
of June 10, 2009. The agent has the right to designate two observers to our
Board of Directors for so long as the agent is the beneficial owner of at least
50% of the advances initially made by it and has the right to designate two
individuals to our Board of Directors for so long as the agent is the beneficial
owner of at least 50% of the conversion shares issued or issuable upon
conversion of the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into
shares of our common stock at an initial conversion price of $4.50. The
conversion price is subject to adjustment upon the occurrence of specified
events.
25
Achievement of expected cash flows from operations and compliance with the
restrictive covenants of our credit agreements (see Note 4 to the Consolidated
Financial Statements) are dependent upon a number of factors, including the
attainment of sales, gross profit, expense levels, vendor relations, and flow of
merchandise that are consistent with our financial projections. Future
limitations of credit availability by factor organizations and/or vendors will
restrict our ability to obtain merchandise and services and may impair operating
results. Although operating results for fiscal 2003 were negative, we believe
that cash generated by operations, along with the available proceeds from our
credit agreements and other sources of financing, will be sufficient to meet our
obligations for working capital, capital expenditures, and debt service
requirements. However, there is no assurance that we will be able to meet our
projections. Further, there is no assurance that extended financing will be
available in the future if we fail to meet our projections or on terms
acceptable to us.
CONTRACTUAL OBLIGATIONS
We have the following minimum commitments under contractual obligations,
as defined by the U. S. Securities and Exchange Commission. A "purchase
obligation" is defined as an agreement to purchase goods or services that is
enforceable and legally binding on us and that specifies all significant terms,
including: fixed or minimum quantities to be purchased, fixed, minimum or
variable price provisions; and the approximate timing of the transaction. Other
long-term liabilities are defined as long-term liabilities that are reflected on
our balance sheet under generally accepting accounting principles of the United
States of America. Based on this definition, the tables below include only those
contracts, which include fixed or minimum obligations. It does not include
normal purchases, which are made in the ordinary course of business.
The following table provides aggregated information about contractual
obligations and other long-term liabilities as of January 31, 2004 (dollars in
thousands).
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------
NO
LESS THAN 1-3 3-5 MORE THAN EXPIRATION
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS DATE
----------------------- ----- ------ ----- ----- ------- ----
Long-term debt $ 300,000 $ 125,000 $ 100,000 $ - $ 75,000 $ -
Capital lease and operating lease
obligations 1,235,982 138,421 269,201 236,742 591,618
Pension benefit obligations 10,018 10,018 - - -
Construction commitments(1) 5,024 5,024 - - -
Purchase obligations(2) 32,986 15,221 6,191 6,090 5,484 -
----------- --------- --------- --------- --------- ----
Total $ 1,584,010 $ 293,684 $ 375,392 $ 242,832 $ 672,102 $ -
=========== ========= ========= ========= ========= ====
1. Construction commitments include capital items to be purchased for
projects that were under construction, or for which a lease had been
signed, as of January 31, 2004.
2. Many of our purchase commitments are cancelable by us without payment or
penalty, and we have excluded such commitments, along with all associate
employment and intercompany commitments.
We have outstanding letters of credit and stand-by letters of credit that
total approximately $23.4 million at January 31, 2004. If certain conditions are
met under the arrangement, we would be required to satisfy the obligations in
cash. Due to the nature of these arrangements and based on historical
experience, we do not expect to make any significant payment outside of terms
set forth in these arrangements.
Additional information regarding our financial commitment as of January
31, 2004 is provided in the Notes to Consolidated Statements. See "Notes to
Consolidated Statements, Note 4 - Long-Term Obligations and Notes Payable
beginning on page F-14 and Note 9 - Commitments and Contingencies" beginning on
page F-20.
ACQUISITIONS
Effective at the close of business on February 2, 2002, we acquired our
partner's interest in VCM for $8.4 million. We now own 100% of VCM and operate
the health and beauty care, toy, sporting goods and food departments in our
Value City stores. This acquisition was funded by cash from operations and a
portion of the proceeds from the credit agreement.
26
OFF-BALANCE SHEET ARRANGEMENTS
It is not our intention to participate in transactions that generate
relationships with unconsolidated entities or financial partnerships such as
special purpose entities ("SPEs") or variable interest entities ("VIEs"), which
would facilitate off balance sheet arrangements or other limited purposes. As of
January 31, 2004, we are in the process of reviewing our related party leases to
ensure we are not involved in any unconsolidated SPEs or VIEs as defined in Item
303 (a)(4)(ii) of Regulation S-K.
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 January 31, 2004, direct borrowings
aggregated $125.0 million. The Revolving Credit Facility permits debt
commitments up to $350.0 million, matures on June 11, 2005 and generally bears
interest at a floating rate of LIBOR plus 2.0% to 2.75% based on the average
excess availability during the previous quarter. We have used interest rate swap
agreements to effectively establish long-term fixed rates on borrowings under
the Revolving Credit Facility, thus reducing a portion of our interest rate
risk. These swap agreements, which are designated as cash flow hedges, involve
the receipt of variable rate amounts in exchange for fixed rate interest
payments over the life of the agreements. At January 31, 2004, we had no
outstanding swap agreements.
A hypothetical 100 basis point increase in interest rates, net of taxes,
would have an approximate $1.2 million impact to our financial position,
liquidity and results of operation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule and the Report
of Independent Registered Public Accounting Firm 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.
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company, under the supervision, and with the participation, of its
management, including its Chief Executive Officer and Chief Financial Officer,
performed an evaluation of the Company's disclosure controls and procedures, as
contemplated by Securities Exchange Act rule 13a-15. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded, as
of the end of the period covered by this report, that such disclosures and
procedures were effective.
No change was made in the Company's internal control over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonable likely to affect, the Company's internal control over
financial reporting.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The following persons are executive officers of the Company. Our officers
of the Company are elected annually by our Board and serve at the pleasure of
the Board.
JOHN C. ROSSLER, age 56, was elected our President in February 2002. In
March 2002, Mr. Rossler became our President and Chief Executive Officer. Mr.
Rossler has served as President of Shonac Corporation and DSW Shoe Warehouse
since December 2000. Mr. Rossler has held various positions with DSW and Shonac
since 1982, including Chief Operating Officer, Executive Vice President and
Chief Financial Officer. Prior to joining Shonac/DSW, Mr. Rossler was the
managing partner of the Columbus office of Alexander Grant/Grant Thornton
International where he was employed for 16 years.
EDWIN J. KOZLOWSKI, age 55, was elected our Executive Vice President and
Chief Operating Officer in February 2002. Mr. Kozlowski was elected Chief
Financial Officer of Shonac Corporation and DSW Shoe Warehouse in May 2001.
Prior to that time Mr. Kozlowski served in various positions with General
Nutrition Companies, Inc. since 1978, including Chief Operating Officer of the
retail division of General Nutrition Centers, Executive Vice President and Chief
Financial Officer, Treasurer and Controller of GNCI and GNI.
JAMES A. MCGRADY, age 53, became our Chief Financial Officer, Treasurer
and Secretary in July 2000. Prior to that time, Mr. McGrady served as Vice
President and Treasurer of Consolidated Stores Corporation beginning in 1986.
From 1979 through 1986, Mr. McGrady was in the practice of public accounting
with KPMG Main Hurdman.
JULIA A. DAVIS, age 43, became our Executive Vice President and General
Counsel in January 2003. Prior to that time, Ms. Davis was a partner in the
Columbus office of Vorys, Sater, Seymour and Pease LLP. Ms. Davis has 17 years
of private legal practice primarily representing and advising national and
regional retailers in a wide variety of employment matters.
STEVEN E. MILLER, age 45, became our Senior Vice President Controller in
2003 after joining the Company in September 2000 as its Vice President
Controller. Prior to that time, Mr. Miller served as Chief Financial Officer of
Spitzer Management, Inc. beginning in 1998. From 1993 through 1998, Mr. Miller
held various positions with Consolidated Stores Corporation including Director,
Assistant Treasurer and Assistant Controller.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors has determined that Harvey L. Sonnenberg
is an audit committee financial expert as such term is defined by the Securities
and Exchange Commission under Item 401(h) of Regulation S-K.
The members of the Audit Committee are Messrs. Harvey L. Sonnenberg
(Chair) and James L. Weisman and Ms. Elizabeth M. Eveillard. The Board of
Directors has affirmatively determined that each of Messrs. Sonnenberg and
Weisman, and Ms. Eveillard is an independent member of the Audit Committee in
accordance with the listing standards of the New York Stock Exchange.
CODE OF ETHICS AND CORPORATE GOVERNANCE INFORMATION
The Company has adopted a code of ethics that applies to all of its
directors, officers and employees, including its principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, and an additional code of ethics that
applies to senior financial officers. These codes of ethics, designated as the
"Code of Conduct" and the Code of Ethics for Senior Financial Officers,"
respectively by the Company, can be found on the Company's investor website at
www.valuecity.com. The Company intends to satisfy the disclosure requirement
under Item 10 of Form 8-K regarding any amendment to, or waiver from, any
applicable provision (related to elements listed under Item 406(b) of Regulation
S-K) of the "Code of Conduct" or the "Code of Ethics for Senior Financial
Officers" that applies to the Company's directors, principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions by posting such information on the
Company's website at www.valuecity.com. The Company has adopted a code of ethics
that applies to all senior financial officers. This code of ethics, designated
as the "Code of Ethics for Senior Financial Officers" by the Company, can be
found on the Company's investor website at www.valuecity.com.
28
The Board of Directors has adopted and approved Corporate Governance
Principles and written charters for its Nominating and Corporate Governance,
Audit and Compensation Committees. In addition, the Audit Committee has adopted
a written Audit Committee Pre-Approval Policy with respect to audit and
non-audit services to be performed by the Company's independent public
accountants. All of the forgoing documents are available on the Company's
investor website at www.valuecity.com and a copy of the foregoing will be made
available (without charge) to any shareholder upon request.
OTHER
The information required by this Item, other than the information set
forth above, is incorporated herein by reference from the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
2004 and is incorporated herein by reference in response to this item. However,
no information set forth in the Company's 2004 Proxy Statement regarding the
Report of the Compensation Committee on Executive Compensation or the
performance graph shall be incorporated by reference into this Form 10-K/A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by this Item is contained in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
2004 and is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
2004 and is incorporated herein by reference in response to this item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by
reference from the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 9, 2004.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
15(a)(1) Financial Statements
The documents listed below are filed as part of this Form 10-K/A:
Page in
Form 10-K/A
-----------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at January 31, 2004 and February 1, 2003 F-2
Consolidated Statements of Operations for the years ended January 31,
2004, February 1, 2003 and February 2, 2002 F-3
Consolidated Statements of Shareholders' Equity for the years ended
January 31, 2004, February 1, 2003 and February 2, 2002 F-4
Consolidated Statements of Cash Flows for the years ended January 31,
2004, February 1, 2003 and February 2, 2002 F-5
Notes to Consolidated Financial Statements F-6
15(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K/A:
Schedule II. Valuation and Qualifying Accounts S-1
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
15(a)(3) EXHIBITS:
See Index to Exhibits which begins on page E-1.
15(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on December 8, 2003, relating to
the press release announcing the Company's consolidated financial results for
the quarter ended November 1, 2003. A copy of the press release was attached to
the filing.
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 report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RETAIL VENTURES, INC.
Date: December 9, 2004 By: /s/ James A. McGrady
----------------------------------
(James A. McGrady, Executive Vice
President, Chief Financial
Officer, Treasurer and Secretary)
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Retail Ventures, Inc.
We have audited the accompanying consolidated balance sheets of Retail Ventures,
Inc. (formerly known as Value City Department Stores, Inc., and a majority owned
subsidiary of Schottenstein Stores Corporation) and its wholly owned
subsidiaries (the "Company") as of January 31, 2004 and February 1, 2003 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each the three years ended January 31, 2004, February 1, 2003 and
February 2, 2002. Our audits also included the financial statement schedule
listed in the Index as Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 the Company as of January 31, 2004
and February 1, 2003, and the results of its operations and its cash flows for
each of the three years in the period ended January 31, 2004, February 1, 2003
and February 2, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in the notes to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective February 3, 2002.
As discussed in Note 15, the accompanying consolidated financial statements have
been restated.
/s/ Deloitte & Touche LLP
----------------------------
Deloitte & Touche LLP
Columbus, Ohio
April 27, 2004
(December 9, 2004 as to Notes 11 and 15)
F-1
RETAIL VENTURES, INC.
CONSOLIDATED BALANCE SHEETS
January 31, 2004 and February 1, 2003
(in thousands, except share amounts)
ASSETS
1/31/04 2/1/03
--------- ---------
CURRENT ASSETS:
Cash and equivalents $ 14,226 $ 11,059
Accounts receivable, net 8,969 10,666
Receivables from related parties 137 933
Inventories 420,338 389,825
Prepaid expenses and other assets 10,651 19,354
Deferred income taxes 44,933 51,317
--------- ---------
TOTAL CURRENT ASSETS 499,254 483,154
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 293,081 254,467
Leasehold improvements 234,719 210,825
Land and building 801 801
Capital leases 37,423 37,423
--------- ---------
566,024 503,516
Accumulated depreciation and amortization (314,206) (270,064)
--------- ---------
PROPERTY AND EQUIPMENT, NET 251,818 233,452
GOODWILL 37,619 37,619
TRADENAMES AND OTHER INTANGIBLES, NET 43,638 47,583
OTHER ASSETS 31,616 29,991
--------- ---------
TOTAL ASSETS $ 863,945 $ 831,799
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 147,771 $ 160,809
Accounts payable to related parties 3,335 4,228
Accrued expenses:
Compensation 31,777 29,173
Taxes 42,066 42,401
Other 38,707 64,344
Current maturities of long-term obligations 741 809
--------- ---------
TOTAL CURRENT LIABILITIES 264,397 301,764
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES
Non-related 154,724 94,473
Related parties 172,216 170,191
OTHER NONCURRENT LIABILITIES 55,841 44,207
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common shares, without par value; authorized 160,000,000 shares and
80,000,000 shares, respectively; issued, including treasury shares,
33,990,707 shares and 33,913,374 shares, respectively 143,077 143,183
Warrants 6,074 6,074
Retained earnings 74,321 78,767
Deferred compensation expense, net (635) (981)
Treasury shares at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (6,011) (5,820)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 216,767 221,164
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 863,945 $ 831,799
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 31, 2004, February 1, 2003 and February 2, 2002
(in thousands, except per share amounts)
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
1/31/04 2/1/03 2/2/02
52 WEEKS 52 WEEKS 52 WEEKS
----------- ----------- -----------
(AS RESTATED - SEE NOTE 15)
Net sales, excluding sales of licensed departments $ 2,594,206 $ 2,450,719 $ 2,283,878
Cost of sales (1,593,214) (1,514,629) (1,429,455)
----------- ----------- -----------
Gross profit 1,000,992 936,090 854,423
Selling, general and administrative expenses (974,171) (906,017) (886,287)
License fees and other income 5,610 7,405 17,967
----------- ----------- -----------
Operating profit (loss) 32,431 37,478 (13,897)
Interest expense, net:
Non-related (12,025) (20,040) (22,226)
Related parties (26,570) (19,348) (8,731)
----------- ----------- -----------
Loss before equity in loss of joint venture, cumulative effect
of accounting change and income taxes (6,164) (1,910) (44,854)
Equity in loss of joint venture - - (406)
----------- ----------- -----------
Loss before cumulative effect of accounting change
and income taxes (6,164) (1,910) (45,260)
Benefit for income taxes 1,718 325 16,537
----------- ----------- -----------
Loss before cumulative effect of accounting change (4,446) (1,585) (28,723)
Cumulative effect of accounting change, net of income taxes - (2,080) -
----------- ----------- -----------
Net loss $ (4,446) $ (3,665) $ (28,723)
----------- ----------- -----------
Basic and diluted loss per share:
Loss before cumulative effect of accounting change $ (0.13) $ (0.05) $ (0.85)
Cumulative effect of accounting change, net of income taxes - (0.06) -
----------- ----------- -----------
Net loss $ (0.13) $ (0.11) $ (0.85)
----------- ----------- -----------
Shares used in per share calculations:
Basic 33,753 33,665 33,610
Diluted 33,753 33,665 33,610
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended January 31, 2004, February 1, 2003 and February 2, 2002
(in thousands)
NUMBER OF SHARES
--------------------
ACCUMULATED
OTHER
COMMON DEFERRED COMPRE-
COMMON SHARES COMMON RETAINED COMPENSATION TREASURY HENSIVE
SHARES IN TREASURY SHARES WARRANTS EARNINGS EXPENSE SHARES LOSS TOTAL
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 3, 2001 34,331 8 $145,659 $111,155 $(6,448) $(59) $250,307
Net loss (28,723) (28,723)
Net unrealized loss on derivative
financial instruments, net of
income tax benefit of $1,731 $(2,595) (2,595)
Minimum pension liability,
net of income tax benefit
of $647 (971) (971)
Total comprehensive loss (32,289)
Exercise of stock options 108 782 782
Net issuance/forfeitures of
restricted shares (211) (669) (517) (1,186)
Amortization of deferred
compensation expense 2,815 2,815
--------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 2, 2002 34,228 8 145,772 82,432 (4,150) (59) (3,566) 220,429
Net loss (3,665) (3,665)
Net unrealized gain on derivative
financial instruments, net of
income tax provision of $1,316 1,974 1,974
Minimum pension liability, net of
income tax benefit of $2,819 (4,228) (4,228)
Total comprehensive loss (5,919)
Warrants issued $6,074 6,074
Net issuance/forfeitures of
restricted shares (315) (2,589) 2,589
Amortization of deferred
compensation expense 580 580
--------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 1, 2003 33,913 8 143,183 6,074 78,767 (981) (59) (5,820) 221,164
Net loss (4,446) (4,446)
Net unrealized gain on derivative
financial instruments, net of
income tax provision of $413 620 620
Minimum pension liability, net
of income tax benefit of $541 (811) (811)
Total comprehensive loss (4,637)
Exercise of stock options 20 60 60
Net issuance/forfeitures of
restricted shares 58 (166) 166 --
Amortization of deferred
compensation expense 180 180
--------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2004 33,991 8 $143,077 $6,074 $74,321 $(635) $(59) $(6,011) $216,767
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 2004, February 1, 2003 and February 2, 2002
(in thousands)
Year Year Year
Ended Ended Ended
1/31/04 2/1/03 2/2/02
52 Weeks 52 Weeks 52 Weeks
-------- -------- --------
(AS RESTATED - SEE NOTE 15)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,446) $ (3,665) $(28,723)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cumulative effect of accounting change - 2,080 -
Amortization of debt issuance costs and discount on debt 6,055 8,492 3,823
Amortization of deferred compensation 180 580 2,815
Depreciation and amortization 52,979 53,406 51,820
Deferred income taxes and other noncurrent liabilities 3,875 11,450 (22,530)
Equity in loss of joint venture - - 406
Loss on disposal of assets 1,594 3,603 4,937
Change in working capital, assets and liabilities:
Receivables 2,493 (4,044) 54,228
Inventories (30,513) 7,005 18,790
Prepaid expenses and other assets 11,546 (432) 7,867
Accounts payable (13,931) 6,264 (45,832)
Accrued expenses (23,658) 5,547 1,116
------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,174 90,286 48,717
------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (68,701) (41,784) (40,244)
Proceeds from sale of assets 43 184 73
Acquisitions, net of cash received - - (8,375)
Other assets and acquisitions (25) - -
Proceeds from lease incentives 5,433 7,246 14,248
------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (63,250) (34,354) (34,298)
------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term obligations:
Related party note - (20,000) -
Capital lease obligations and other debt (817) (583) (555)
Proceeds from related party note - 100,000 -
Net increase (decrease) in revolving credit facility 61,000 (147,000) 10,707
Proceeds from issuance of common shares 60 - 782
Debt issuance costs - (13,205) -
------- --------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 60,243 (80,788) 10,934
------- --------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,167 (24,856) 25,353
CASH AND EQUIVALENTS, BEGINNING OF YEAR 11,059 35,915 10,562
------- --------- --------
CASH AND EQUIVALENTS, END OF YEAR $14,226 $ 11,059 $ 35,915
======= ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
Retail Ventures, Inc. and its wholly owned subsidiaries are herein
referred to collectively as the Company. The Company operates three
segments. Value City Department Stores ("Value City") and Filene's
Basement, Inc. ("Filene's Basement") segments operate full-line, off-price
department stores. The DSW Shoe Warehouse, Inc. ("DSW") segment sells
better-branded off-price shoes and accessories. As of January 31, 2004,
there is a total of 116 Value City Department Stores located principally
in the Midwestern, Eastern and Southern states, 142 DSW stores located
throughout the United States and 21 Filene's Basement stores located
primarily in major metropolitan areas.
On October 8, 2003, the Company reorganized its corporate structure into a
holding company form whereby Retail Ventures, Inc., an Ohio corporation,
became the successor issuer to Value City Department Stores, Inc. As a
result of the reorganization, Value City Department Stores, Inc. became a
wholly-owned subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of Value
City became holders of an identical number of common shares of Retail
Ventures, Inc. The reorganization was affected by a merger which was
previously approved by the Company's shareholders. Since October 8, 2003,
the Company's common shares have been listed for trading under the ticker
symbol "RVI" on the New York Stock Exchange.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Retail
Ventures, Inc. and its wholly subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. To facilitate
comparisons with the current year, certain reclassifications have been
made to prior year financial statements and notes to conform with current
year presentation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to January 31.
Fiscal year 2003, 2002 and 2001 each contain 52 weeks. Unless otherwise
stated, references to years in this report relate to fiscal years rather
than calendar years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Significant estimates are required as a part of
inventory valuation, depreciation, amortization, recoverability of
long-lived assets, establishing reserves for insurance and calculating
retirement benefits. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
actual results could differ from these estimates.
CASH AND EQUIVALENTS
Cash and equivalents represent cash and highly liquid investments with
original maturities of three months or less at the date of purchase to be
cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable is classified as current as the collection period is
generally less than one year. The allowance for doubtful accounts was $0.8
million and $0.9 million for fiscal years 2003 and 2002, respectively.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
Merchandise inventories are stated at the lower of cost, determined using
the first-in, first-out basis, or market using the retail inventory
method. The retail method is widely used in the retail industry due to its
practicality. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins are calculated by
applying a calculated cost to retail ratio to the retail value of
inventories. The cost of the inventory reflected on the consolidated
balance sheet is decreased by charges to cost of sales at the time the
retail value of the inventory is lowered through the use of markdowns.
Hence, earnings are negatively impacted as the merchandise is marked down
prior to sale. Reserves to value inventory at the lower of cost or market
were $34.2 million and $32.5 million at the end of fiscal year 2003 and
2002, respectively.
PRE-OPENING EXPENSES
Pre-opening costs associated with the opening of new stores are expensed
as incurred. Pre-opening costs expensed were $5.0 million, $3.2 million
and $4.4 million for fiscal 2003, 2002 and 2001, respectively.
INVESTMENT IN JOINT VENTURE
Effective at the close of business on February 2, 2002, the Company
acquired Mazel's interest in VCM, Ltd. ("VCM") for $8.4 million. The
balance sheet for VCM has been consolidated in these statements for the
balance sheets presented. VCM operated the health and beauty care, food,
toy, and sporting goods departments in the Company's stores as licensed
departments. VCM was a 50/50 joint venture with Mazel. The Company
accounted for its fifty percent interest in the joint venture under the
equity method. The equity in loss of joint venture was $0.4 million in
fiscal year 2001.
PROPERTY AND EQUIPMENT
Depreciation and amortization are recognized principally on the
straight-line method in amounts adequate to amortize costs over the
estimated useful lives of the respective assets. Leasehold improvements
are amortized over the shorter of their useful lives or lease term. The
estimated useful lives by class of asset are:
Buildings ................................. 31 years
Furniture, fixtures and equipment.......... 3 to 10 years
Leasehold improvements..................... 10 years
ASSET IMPAIRMENT AND LONG-LIVED ASSETS
The Company must periodically evaluate the carrying amount of its
long-lived assets, primarily property and equipment, and finite life
intangible assets when events and circumstances warrant such a review to
ascertain if any assets have been impaired. The carrying amount of a
long-lived asset is considered impaired when the carrying value of the
asset exceeds the expected future cash flows (undiscounted and without
interest) from the asset. The Company reviews are conducted down at the
lowest identifiable level, which include a store. The impairment loss
recognized is the excess of the carrying value, based on discounted future
cash flows, of the asset over its fair value. The impairment loss is
included in selling, general and administrative expense. Based on recent
analysis, the Company expensed $0.3 million and $0.6 million in fiscal
year 2003 and 2002, respectively, of identified stores assets where the
recorded value could not be supported by cash flows. The balance of
goodwill associated with the Gramex acquisition in November 1999 of $1.5
million was charged to selling, general and administrative expense in the
year ended February 2, 2002.
GOODWILL
Goodwill represents the excess cost over the estimated fair values of net
assets including identifiable intangible assets of businesses acquired.
The Company, as a result of adoption of Statement of Financial Accounting
Standards (SFAS) No. 142, will no longer record goodwill amortization.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The initial result of testing for goodwill for impairment in accordance
with SFAS 142, as of February 3, 2002, was a non-cash charge of $3.4
million, $2.1 million net of taxes, which is reported in Consolidated
Statement of Operations as of February 1, 2003 in the caption "Cumulative
effect of accounting change." Substantially all of the charge relates to
goodwill associated with the Company's purchase of Mazel's interest in VCM
and is included in the net loss for the year ended February 1, 2003. At
January 31, 2004, the Company had $37.6 million of goodwill subject to
annual testing.
The proforma effect of ceasing amortization of goodwill under SFAS 142 is
as follows (in thousands, except per share amounts):
YEAR ENDED
------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Reported net loss $(4,446) $(3,665) $(28,723)
Add back goodwill amortization -- -- 3,283
------- ------- --------
Adjusted net loss $(4,446) $(3,665) $(25,440)
------- ------- --------
Basic and diluted loss per share $ (0.13) $ (0.11) $ (0.76)
TRADENAMES AND OTHER INTANGIBLE ASSETS
Tradenames and other intangibles assets are comprised of values assigned
to names the Company acquired and leases acquired. The accumulated
amortization for these assets is $17.8 million and $13.8 million at
January 31, 2004 and February 1, 2003, respectively. The asset value and
accumulated amortization of intangible assets is as follows (in
thousands):
FILENE'S
VALUE CITY DSW BASEMENT TOTAL
---------- --- -------- -----
As of January 31, 2004
Tradenames:
Gross amount $ 1,145 $12,750 $ 9,900 $23,795
Accumulated amortization (433) (4,887) (2,585) (7,905)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $14,417 $ 140 $23,057 $37,614
Accumulated amortization (4,513) (60) (5,293) (9,866)
Average useful life (in years) 25 14 21
As of February 1, 2003
Tradenames:
Gross amount $ 1,120 $12,750 $ 9,900 $23,770
Accumulated amortization (355) (4,038) (1,925) (6,318)
Useful life (in years) 15 15 15
Favorable lease values:
Gross amount $14,417 $ 140 $23,057 $37,614
Accumulated amortization (3,908) (51) (3,524) (7,483)
Average useful life (in years) 25 14 20
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Aggregate amortization expense for the current and each of the five
succeeding years is as follows (in thousands):
FILENE'S
FISCAL YEAR VALUE CITY DSW BASEMENT TOTAL
----------- ---------- --- -------- -----
2003 $ 683 $ 858 $ 2,429 $ 3,970
2004 681 864 2,428 3,973
2005 681 864 2,428 3,973
2006 681 861 2,428 3,970
2007 681 854 2,428 3,963
2008 677 854 2,428 3,959
VENDOR ALLOWANCES
Vendor allowances include allowances, rebates and cooperative advertising
funds received from vendors. These funds are determined for each fiscal
year and the majority are based on various quantitative contract terms.
Amounts expected to be received from vendors relating to the purchase of
merchandise inventories are recognized as a reduction of cost of goods
sold as the merchandise is sold. Amounts that represent a reimbursement of
costs incurred, such as advertising, are recorded as a reduction to the
related expense in the period that the related expense is incurred. The
Company records an estimate of earned allowances based on the latest
projected purchase volumes and advertising forecasts. On an annual basis,
the Company confirms earned allowances with vendors to determine the
amounts are recorded in accordance with the terms of the contract. At
January 31, 2004 and February 1, 2003, the Company had a vendor allowance
balance of less than $100,000.
REVENUE RECOGNITION
Sales of merchandise and services are net of returns and allowances and
exclude sales tax. Revenue from gift certificates is deferred and the
revenue is recognized upon redemption of the gift certificate. Layaway
sales are recognized when the merchandise has been paid for in full.
CUSTOMER LOYALTY PROGRAM
The Company maintains a customer loyalty program for its DSW operations in
which customers receive a future discount on qualifying purchases. The
"Reward Your Style" (RYS) is designed to promote customer awareness and
loyalty plus to provide the Company with ability to communicate with its
customers. Upon reaching the target level, customers may redeem these
discounts on a future purchase. Generally these future discounts must be
redeemed within one year. The Company accrues the estimated costs of the
anticipated redemptions of the discount earned at the time of the initial
purchase and charges such costs to selling, general and administrative
expense based on historical experience. The estimates of the costs
associated with the loyalty program require the Company to make
assumptions related to customer purchase levels and redemption rates. The
accrued liability as of January 31, 2004 and February 1, 2003 are $3.0
million and $2.2 million, respectively.
VALUATION ACCOUNTS
Reserves used for severance for the period ended January 31, 2004, are as
follows (in thousands):
SEVERANCE
---------
Balance, February 2, 2002 $5,357
Provisions to establish reserves 5,950
Charges/payments (7,311)
------
Balance, February 1, 2003 $3,996
Provisions to establish reserves
Charges/payments (3,996)
------
Balance, January 31, 2004 --
------
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. During fiscal year 2003,
2002 and 2001, advertising expense was $110.8 million, $94.1 million and
$83.2 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest rate swap agreements to establish long-term
fixed rates associated with borrowings. The Company does not hold or issue
derivative financial instruments for trading purposes. The Company does
not have derivative financial instruments that are held or issued and
accounted for as hedges of anticipated transactions. Amounts currently due
to or from interest swap counter parties are recorded in interest expense
in the period in which they accrue.
EARNINGS PER SHARE
Basic earnings per share is based on a simple weighted average of common
shares outstanding. Diluted earnings per share reflects the potential
dilution of common shares, related to both outstanding stock options and
warrants, calculated using the treasury stock method and convertible debt
calculated using the if-converted method. For the years ended January 31,
2004, February 1, 2003 and February 2, 2002 all potentially dilutive
instruments were anti-dilutive. The numerator for the calculation of basic
and diluted earnings per share is net (loss) income. The denominator is
the weighted average shares outstanding.
STOCK-BASED COMPENSATION
The Company has various stock-based employee compensation plans that are
described more fully in Note 8. The Company accounts for those plans in
accordance with APB No. 25. "Accounting For Stock Issued to Employees,"
and related Interpretations. No stock-based employee compensation cost is
reflected in net loss, as no options granted under those plans had an
exercise price less than the market value of the underlying common stock
on the date of the grant. The following table illustrates the effect on
net loss and loss per share if the Company had applied the fair value
recognition of SFAS 123, "Accounting For Stock-Based Compensation."
YEAR ENDED
----------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Net loss, as reported $(4,446) $(3,665) $(28,723)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards $(5,341) $(4,999) $ (1,508)
------- ------- --------
Pro forma net loss $(9,787) $(8,664) $(30,231)
------- ------- --------
Earnings per share:
Basic and diluted as reported $ (0.13) $ (0.11) $ (0.85)
Basic and diluted pro forma $ (0.29) $ (0.26) $ (0.90)
To determine the pro forma amounts, the fair value of each stock option
has been estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in the fiscal year 2003, 2002 and 2001, respectively: expected
volatility of 71.1%, 83.4% and 100.4%; dividend yield of 0.0%; risk-free
interest rates of 4.3%, 2.6% and 4.7%; and, expected lives of 8.3, 7.6 and
7.3 years. The weighted average fair value of options granted in the
fiscal year 2003, 2002 and 2001 was $1.49, $2.54 and $6.32, respectively.
Consistent with SFAS No. 123, pro-forma net loss and loss per share have
not been calculated for options granted prior to July 30, 1995. Pro forma
disclosures may not be representative of that to be expected in future
years.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE LOSS
Comprehensive loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The difference between net loss for fiscal year
2003 and 2002 relate to the change in minimum pension liability and the
net unrealized gain (loss) on derivative financial instruments for cash
flow hedges. The Company presents other comprehensive loss in its
consolidated statements of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which
require implementation by a date falling within or after the close of the
fiscal year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Under this
Statement, obligations that meet the definition of a liability will be
recognized consistently with the retirement of the associated tangible
long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company
assessed the impact of SFAS No. 143 and there was none.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. The adoption of SFAS No. 145 did not have a
significant effect on the Company's results of operations or its financial
position. However, for the year ended February 1, 2003, the Company
reclassified the loss on the extinguishment of debt of approximately $3.3
million from extraordinary loss to interest expense, net, in the Company's
Consolidated Statements of Operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
certain entities considered to be variable interest entities (VIEs). An
entity is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital
is insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of
the VIE's expected losses or residual returns if they occur. FIN 46
provides certain exceptions to these rules, relating to qualifying special
purpose entities (QSPE's) subject to the requirements of SFAS No. 140.
Upon its original issuance, FIN 46 required that VIEs created after
January 31, 2003 would be consolidated immediately, while VIEs created
prior to February 1, 2003 were to be consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of
VIEs created prior to February 1, 2003 to December 31, 2003 for calendar
year-end companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of the original interpretation and to
exempt certain entities from its requirements. FIN 46R provides special
effective date provisions to enterprises that fully or partially applied
to FIN 46 prior to the issuance of the revised interpretation. In
particular, entities that have already adopted FIN 46 are not required to
adopt FIN 46R until the quarterly reporting period ended May 1, 2004. The
Company is currently reviewing the provisions of FIN 46R and will adopt
FIN 46R for the quarterly reporting period ending May 1, 2004.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances), many of which were previously classified as equity. This
statement is effective for financial instruments entered into or modified
after May 31, 2003 and for pre-existing instruments as of the beginning of
the first interim period beginning after June 15, 2003. Initial adoption
of this accounting pronouncement did not have a material impact on the
Company's consolidated financial statements.
The FASB's Emerging Issues Task Force ("EITF") Issue No. 02-16,
"Accounting By A Customer (Including A Reseller) For Cash Consideration
Received From A Vendor" addressed the accounting treatment for vendor
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
allowances. The adoption of EITF Issue No. 02-16 in 2003 did not have a
material impact on the Company's financial position or results of
operations.
2. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from and sells merchandise to affiliates
of Schottenstein Stores Corporation ("SSC"), direct owner of approximately
53.0% of the Company's common shares, and VCM prior to February 2, 2002.
The related party transactions are as follows (in thousands):
YEAR ENDED
------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Purchases of merchandise from affiliates $18,494 $13,238 $16,396
------- ------- -------
Sales by licensed departments and the related license fees earned are as
follows (in thousands):
YEAR ENDED
-------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
VCM
Sales -- -- $136,153
License fees -- -- $ 9,698
--------
The Company also leases certain store and warehouse locations owned by SSC
as described in Note 3.
Accounts receivable from and payable to affiliates principally result from
commercial transactions with entities owned or controlled by SSC or
intercompany transactions with SSC. Settlement of affiliate receivables
and payables are in the form of cash. These transactions settle normally
in 30 to 60 days.
The Company shares certain personnel, administrative and service costs
with SSC and its affiliates. The costs of providing these services are
allocated among the Company, SSC and its affiliates without a premium. The
allocated amounts are not significant. SSC does not charge the Company for
general corporate management services. In the opinion of the Company and
SSC management, the aforementioned charges are reasonable.
The Company participates in SSC's self-insurance program for general
liability, casualty loss and certain state workers' compensation programs.
The Company expensed $1.1 million, $11.9 million and $12.3 million in
fiscal years 2003, 2002 and 2001, respectively, for such coverage.
Estimates for self-insured programs are determined by independent
actuaries based on actuarial assumptions, which incorporate historical
incurred claims and incurred but not reported (IBNR) claims.
The Company also makes contributions to a private charitable foundation
controlled by SSC. During fiscal year 2002 the Company expensed $1.7
million of contributions. During fiscal year 2003 and 2001 no
contributions were recorded.
Cerberus Partners, L.P. as a beneficial owner of approximately 22.0% of
the outstanding shares, is also a related party.
See Footnotes 3, 4 and 5 for additional related party disclosures.
3. LEASES
The Company leases stores and warehouses under various arrangements with
related and unrelated parties. Such leases expire through 2024 and in most
cases provide for renewal options. Generally, the Company is required to
pay real estate taxes, maintenance, insurance and contingent rentals based
on sales in excess of specified levels.
The Company has several leasing agreements with SSC and affiliates. Under
a Master Lease Agreement, as amended, the Company leases 5 store locations
owned by SSC, and also leases or subleases from SSC or affiliates of SSC
31 store locations, 6 warehouse facilities and a parcel of land for an
annual minimum rent of $21.8 million and additional contingent rents based
on aggregate sales in excess of specified sales trends for the store
locations. Leases and sub-
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
leases with related parties are for initial periods generally ranging from
five to twenty years, provide for renewal options and require the Company
to pay real estate taxes, maintenance and insurance.
SSC operates a chain of furniture stores, five of which operate in
separate space subleased from the Company at five of its store locations.
Three of these furniture store subleases (the "Furniture Subleases") are
for a term concurrent with the respective lease between the Company and a
third party landlord. These Furniture Subleases provide for the payment by
SSC of base rent and other charges in amounts at least equal to its pro
rata share based on square footage and its pro rata share of any
percentage rent based on its gross sales. Two additional furniture store
subleases are for periods shorter than the Company's lease. SSC paid to
the Company pursuant to these subleases the following (in thousands):
YEAR ENDED
---------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Minimum rentals: $1,132 $1,076 $1,056
Contingent rentals: 263 341 320
------ ------ ------
Total $1,395 $1,417 $1,376
------ ------ ------
The Company incurred no new capital lease obligations in 2003 and 2002 to
obtain store facilities. The total cost of assets held under capital
leases at January 31, 2004 and February 1, 2003 was $37.4 million. Assets
held under capital leases are amortized over the terms of the related
leases. The accumulated amortization for these assets was $7.4 million and
$5.8 million at January 31, 2004 and February 1, 2003, respectively.
Future minimum lease payments required under the aforementioned leases,
exclusive of real estate taxes, insurance and maintenance costs, at
January 31, 2004 are as follows (in thousands):
OPERATING LEASES
--------------------------------------------------
FISCAL UNRELATED RELATED CAPITAL
YEAR TOTAL PARTY PARTY LEASES
---- ---------- --------- --------- -------
2004 $ 134,894 $ 112,873 $ 22,021 $ 3,526
2005 134,713 112,466 22,247 3,438
2006 127,613 105,774 21,839 3,438
2007 119,039 97,985 21,054 3,515
2008 110,618 90,659 19,959 3,571
Future Years 543,297 411,864 131,433 48,320
---------- --------- --------- -------
Total minimum lease payments $1,170,174 $ 931,621 $ 238,553 $65,808
========== ========= ========= -------
Less amount representing interest (35,543)
-------
Present value of minimum
lease payments 30,265
Less current portion (491)
-------
Total long-term portion $29,774
=======
The composition of rental expense (in thousands):
YEAR ENDED
-------------------------------------------
1/31/04 2/1/03 2/2/02
-------- -------- --------
Minimum rentals:
Unrelated parties $103,925 $101,221 $ 90,569
Related parties 21,837 19,539 15,363
Contingent rentals:
Unrelated parties 15,735 3,975 4,414
Related parties 156 208 2,128
-------- -------- --------
Total $141,653 $124,943 $112,474
======== ======== ========
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Many of the Company's leases contain fixed escalations of the minimum
annual lease payments during the original term of the lease. For these
leases, the Company recognizes rental expense on a straight-line basis and
records the difference between the average rental amount charged to
expense and the amount payable under the lease as deferred rent. At the
end of fiscal 2003 and 2002, the balance of deferred rent was $16.7
million and $13.3 million, respectively, and is included in other
noncurrent liabilities. Certain store and warehouse leases provided
landlord incentives totaling $31.1 million and $22.4 million in fiscal
2003 and 2002, respectively. These incentives are recorded as long
term-liabilities in the accompanying consolidated balance sheet and are
amortized as a reduction of rent expense over the remaining minimum lease
term.
4. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
Long-term obligations consist of the following (in thousands):
1/31/04 2/1/03
-------- --------
Credit facilities:
Revolving credit facility $125,000 $ 64,000
Term loans - related parties 100,000 100,000
Discount on term loan - related parties (2,784) (4,809)
Senior subordinated convertible loan - related parties 75,000 75,000
-------- --------
297,216 234,191
Capital lease obligations 30,265 30,851
-------- --------
Other 200 431
======== ========
327,681 265,473
Less current maturities (741) (809)
-------- --------
$326,940 $264,664
-------- --------
Letters of Credit Outstanding $ 23,353 $ 19,163
-------- --------
Availability under revolving credit facility $137,690 $169,343
-------- --------
Accrued interest to related parties $ 628 $ 3,233
-------- --------
At January 31, 2004, Value City Department Stores, Inc., together with
certain other subsidiaries of the Company, had $525.0 million of financing
that consists of three separate credit facilities (collectively, the
"Credit Facilities"): (i) a three-year $350.0 million revolving credit
facility, (ii) two $50.0 million term loan facilities provided equally by
Cerberus Partners, L.P. and Schottenstein Stores Corporation ("SSC"), and
(iii) an amended and restated $75.0 million senior subordinated
convertible loan facility, initially entered into by the Company on March
15, 2000, which is held equally by Cerberus Partners, L.P. and SSC. These
Credit Facilities are guaranteed by the Company and substantially all of
its subsidiaries.
The Company is not subject to any financial covenants; however, the Credit
Facilities contain numerous restrictive covenants relating to the
Company's management and operation. These non-financial covenants include,
among other restrictions, limitations on indebtedness, guarantees,
mergers, acquisitions, fundamental corporate changes, financial reporting
requirements, budget approval, disposition of assets, investments, loans
and advances, liens, dividends, stock purchases, transactions with
affiliates, issuance of securities and the payment of and modifications to
debt instruments under these agreements. These Credit Facilities are also
subject to an Intercreditor Agreement which provides for an established
order of payment of obligations from the proceeds of collateral upon
default (the "Intercreditor Agreement").
The Company recorded a loss on the debt extinguishment of $3.3 million as
a result of the debt financing. This loss is included on the Consolidated
Statements of Operations in interest expense, net and represents the
balance of unamortized deferred loan fees as of June 11, 2002.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is
structured in a manner that allows the Company and its subsidiaries
availability based on the value of their inventories and receivables.
Primary security for the facility is provided by a first priority lien on
all of the inventory and accounts receivable of the Company, as well as
certain intercompany notes and payment intangibles. Subject to the
Intercreditor Agreement, the facility also has a second priority perfected
interest in all of the collateral securing the Term Loans. Interest on
borrowings is calculated at the bank's base rate plus 0.0% to 0.5% or
Eurodollar rate plus 2.00% to 2.75%, depending upon the level of average
excess availability the Company maintains. The maturity date is June 11,
2005.
$100 Million Term Loans - Related Parties
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt
and, subject to the Intercreditor Agreement, have the same rights and
privileges as the Revolving Credit Facility and the Senior Subordinated
Convertible Loan. The Company and its principal subsidiaries are obligated
on the facility. The maturity date is June 11, 2005.
The Term Loans stated rate of interest per annum through June 11, 2004 is
14% if paid in cash and 15% if the Company elects a paid-in-kind ("PIK")
option. During the first two years of this facility, the Company may elect
to pay all interest in PIK. During the final year of the Term Loans, the
stated rate of interest is 15.0% if paid in cash or 15.5% by PIK and the
PIK option is limited to 50% of the interest due. For the years ended
January 31, 2004 and February 1, 2003 the Company elected to pay interest
in cash.
The Company issued 2,954,792 warrants ("Warrants") to purchase shares of
common stock, at an initial exercise price of $4.50 per share, to the Term
Loan C Lenders. The Warrants are exercisable at any time prior to June 11,
2012. The Company has granted the Term Loan C Lenders registration rights
with respect to the shares issuable upon exercise of the Warrants. The
$6.1 million value ascribed to the Warrants was estimated as of the date
of issuance using the Black-Scholes pricing model with the following
assumptions: risk-free interest rate of 5.6%; expected life of 10 years;
expected volatility of 47%; illiquidity discount of 10%; and an expected
dividend yield of 0%. The related debt discount is amortized into interest
expense over the life of the debt.
The number of shares issuable varies upon the occurrence of the following:
(i) the issuance of additional shares of common stock without
consideration or for a consideration per share less than the Warrant
exercise price; (ii) the declaration of any dividend; (iii) the
combination or consolidation of the outstanding shares of common stock
into a lesser number of shares; (iv) the issuance or sale of additional
shares at a price per share less than the current market price but greater
than the Warrant exercise price; (v) the issuance of convertible
securities which are convertible into shares of common stock; and/or (vi)
the exchange of shares in a merger or other business combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties
The Company has amended and restated its $75.0 million Senior Subordinated
Convertible Loan Agreement on June 11, 2002 ("the "Convertible Loan"). As
amended, borrowings under the convertible loan will bear interest at 10%
per annum. At the Company's option, interest may be PIK from the closing
date to the second anniversary thereof, and thereafter, at the option of
the Company, up to 50% of the interest due may be PIK until maturity. PIK
interest accrued with respect to the convertible loan is added to the
outstanding principal balance, on a quarterly basis and is payable in cash
upon the maturity of the debt. The convertible loan is guaranteed by all
principal subsidiaries and is secured by a lien on assets junior to liens
granted in favor of the Lenders on the Revolving Credit Agreement and Term
Loans. The Convertible Loan is not subject to prepayment for five years
from the closing date. The agent has the right to designate two observers
to the Board of Directors for so long as the agent is the beneficial owner
of at least 50% of the advances initially made by it and has the right to
designate two individuals to the Board of Directors for so long as the
agent is the beneficial owner of at least 50% of the conversion shares
issued or issuable upon conversion of the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into
shares of Retail Ventures, Inc. common stock has a conversion price of
$4.50. The maturity date is June 10, 2009.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER DEBT ITEMS
Effective February 4, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. Under SFAS
No. 133, all derivative instruments are required to be recorded on the
balance sheet as assets or liabilities, measured at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in earnings. If the derivative is designated as a cash
flow hedge, the effective portion of the change in the fair value of the
derivative is recorded in other comprehensive income (loss) and is
recognized in the income statement when the hedge item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges and
financial instruments not designated as hedges are recognized in earnings.
The Company utilized an interest rate swap agreement to effectively
establish long-term fixed rates on borrowings under the Credit Agreement,
thus reducing the impact of interest rate changes on future income. These
swap agreements, which were designated as cash flow hedges, involved the
receipt of variable rate amounts in exchange for fixed rate interest
payments over the life of the agreements. The fair value of the Company's
interest rate swap agreements in the Company's consolidated balance sheet
at February 1, 2003 was a $1.4 million current liability and had a fixed
interest rate of 6.99%. The Company had outstanding swap agreements with
notional amounts totaling $75.0 million for the fiscal year ended 2002.
The Company's swap agreement expired April 2003.
The weighted average interest rate on borrowings under the Company's
credit facilities during fiscal year 2003, 2002 and 2001 was 8.4%, 7.8%
and 8.6%, respectively.
The book value of notes payable and long-term debt approximates fair value
at January 31, 2004. The carrying amount of the revolving line of credit
approximates fair value as a result of the variable rate-based borrowings.
The carrying amount of the term loan and subordinated debt also
approximates fair value, as this was the available financing in the
marketplace during the fiscal year.
On June 11, 2002, the Company refinanced its previous financing
arrangement and recorded $3.3 million loss on the extinguishment of debt
resulting from the write-off of deferred financing costs. This write-off
is included in interest expense, net.
5. PENSION BENEFIT PLANS
The Company has three qualified defined benefit pension plans ("plans")
assumed at the time of acquisition of three separate companies. The
Company's funding policy is to contribute annually the amount required to
meet ERISA funding standards and to provide not only for benefits
attributed to service to date but also for those anticipated to be earned
in the future. The Company uses a January 31 measurement date for its
plans.
The following provides a reconciliation of projected benefit obligations,
plan assets and funded status of all plans as of January 31, 2004 and
February 1, 2003 (in thousands):
YEAR ENDED
-------------------------
1/31/04 2/1/03
------- -------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $20,691 $18,662
Service cost 35 29
Interest cost 1,292 1,280
Benefits paid (952) (941)
Actuarial loss 3,327 1,808
Other -- (147)
------- -------
Projected benefit obligation at end of year 24,393 20,691
------- -------
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED
-------------------------
1/31/04 2/1/03
------- -------
Change in plan assets:
Fair market value at beginning of year 15,269 17,681
Actual (loss) return on plan assets 2,932 (1,306)
Employer contributions 1,320 350
Benefits paid (952) (941)
Other (199) (515)
------ -------
Fair market value at end of year 18,370 15,269
------ -------
Funded status (6,023) (5,422)
Unrecognized actuarial loss 10,378 9,094
Unrecognized transition obligation (260) (334)
------ -------
Accrued benefit cost $4,095 $ 3,338
------ -------
Amounts recognized in the consolidated balance sheet consisted of (in
thousands):
YEAR ENDED
-------------------------
1/31/04 2/1/03
------- -------
Accrued benefit cost $(5,923) $(5,329)
Accumulated other comprehensive income 10,018 8,667
------- -------
Net amount recognized $ 4,095 $ 3,338
------- -------
The plan's accumulated benefit obligation was $24.3 million at January 31,
2004, and $20.6 million at February 1, 2003.
YEAR ENDED
-------------------------
(IN THOUSANDS)
1/31/04 2/1/03
------- ------
Projected benefit obligation 24,393 20,691
Accumulated benefit obligation 24,293 20,598
Fair value of plan assets 18,369 15,269
The components of net periodic benefit cost are comprised of the following
(in thousands):
YEAR ENDED
------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Service cost $ 35 $ 29 $ 32
Interest cost 1,292 1,280 1,244
Expected return on plan assets (1,286) (1,453) (1,573)
Amortization of transition (asset) obligation (75) (75) (83)
Amortization of prior-service cost -- (8) (19)
Amortization of net loss 596 198 60
------- ------- -------
Net periodic benefit cost $ 562 $ (29) $ (339)
------- ------- -------
The amount included within other comprehensive income arising from a
change in the additional minimum pension liability, net of income tax, was
$1.4 million at January 31, 2004, $3.7 million at February 1, 2003 and
$1.1 million at February 2, 2002.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assumptions used in each year of the actuarial computations were:
YEAR ENDED
-----------------------
1/31/04 2/1/03
------- ------
Discount rate 6.0% 6.5%
Rate of increase in compensation levels 4.0% 4.0%
Expected long-term rate of return 8.0% 8.0% - 9.0%
The expected long-term rate of return was based on historical average
annual returns for S&P 500, Russell 2000 and LB Intermediate Term
Government for 10 years and since inception assets.
The weighted average allocation of plan assets by category are as follows:
YEAR ENDED
-----------------------
1/31/04 2/1/03
-------- ------
Equity securities 48.4% 35.0%
Fixed securities 45.0 49.0
Commercial mortgage 5.8 --
Other 0.8 16.0
----- -----
100.0% 100.0%
----- -----
The Company's investment strategy is to meet the liabilities of the plans
as they are due and to maximize the return on invested assets within
appropriate risk tolerances.
The Company's funding policy is to contribute an amount annually that
satisfies the minimum funding requirements of ERISA and that is tax
deductible under the Internal Revenue Code. The Company anticipates
contributing approximately $1.5 million in fiscal 2004 to meet minimum
funding requirements.
6. OTHER BENEFIT PLANS
The Company participates in the SSC sponsored 401(k) Plan (the "Plan").
Employees who attained age twenty-one and completed one year of service
could contribute up to thirty percent of their compensation to the Plan on
a pre-tax basis, subject to IRS limitations. The Company matches employee
deferrals into the Plan - 100% on the first 3% of eligible compensation
deferred and 50% on the next 3% of eligible compensation deferred.
Eligibility to defer begins after 60 days of employment and matching
begins after one year of qualified service. Additionally, the Company may
contribute a discretionary profit sharing amount to the Plan each year.
The Company incurred costs associated with the 401(k) Plan of $5.9
million, $5.8 million and $3.5 million for fiscal years 2003, 2002 and
2001, respectively.
The Company provides an Associate Stock Purchase Plan. Eligibility
requirements are similar to the 401(k) Plan. Eligible employees can
purchase common shares of the Company through payroll deductions. The
Company will match 15% of employee investments up to a maximum investment
level. Plan costs to the Company for all fiscal periods presented are not
material to the consolidated financial statements.
Certain employees of the Company are covered by union-sponsored,
collectively bargained, multi-employer pension plans, the costs of which
are not material to the consolidated financial statements.
Certain employees of the Company participated in the Schottenstein Stores
Corporation Deferred Compensation Plan which is a non-qualified, pre-tax,
income deferral plan. The cost of the plan was not material to the
consolidated financial statements. Effective January 31, 2003, the plan
was terminated.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SHAREHOLDERS' EQUITY
The Company issued common shares to certain key employees pursuant to
individual employment agreements and certain other grants from time to
time, which are approved by the Board of Directors. The market value of
the shares at the date of grant is recorded as deferred compensation
expense. The agreements condition the vesting of the shares generally upon
continued employment with the Company with such restrictions expiring over
various periods ranging from three to five years. Deferred compensation is
charged to expense on a straight-line basis during the period that the
restrictions lapse.
As of January 31, 2004 and February 1, 2003, the Company had outstanding
approximately 251,000 and 418,000 restricted shares, respectively, which
are less than 1% of the common shares outstanding and the diluted shares.
8. STOCK OPTION PLANS
The Company has a 2000 Stock Incentive Plan that provides for the issuance
of options to purchase up to 13,000,000 common shares or the issuance of
restricted stock to management, key employees of the Company and
affiliates, consultants as defined, and directors of the Company. Options
generally vest 20% per year on a cumulative basis. Options granted under
the 2000 Stock Plan remain exercisable for a period of ten years from the
date of grant.
An option to purchase 2,500 common shares is automatically granted to each
non-employee director on the first New York Stock Exchange trading day in
each calendar quarter. The exercise price for each option is the fair
market value of the common shares on the date of grant. All options become
exercisable one year after the grant date and remain exercisable for a
period of ten years from the grant date, subject to continuation of the
option-holders' service as directors of the Company.
The Company has a 1991 Stock Option Plan that provided for the grant of
options to purchase up to 4,000,000 common shares. Such options are
exercisable 20% per year on a cumulative basis and remain exercisable for
a period of ten years from the date of grant.
On February 2, 2002, the Company issued 2,720,000 performance-based stock
options. The vesting period of the performance-based stock options is
either eight years or earlier if certain performance criteria are met. As
of February 1, 2003, those performance guidelines have not been met;
therefore, the stock options are currently being vested over eight years.
These stock options have been identified as fixed plans under APB 25; as a
result no compensation expense is recorded in fiscal 2003, 2002 or 2001.
The vesting based on performance criteria is as follows: (A) January 31,
2004 if, for each day of 60-consecutive day period that ends on or before
January 31, 2004, the closing price of the Company's common stock is at
least $12.00 per share or (B) the last of : (i) any 60-consecutive trading
day period that ends after January 31, 2004 and before January 30, 2010
and on each day of which the closing price of the Company's common stock
is at least $12.00 per share; or (ii) the Company has achieved at least 95
percent of the earnings before income tax goal that the Board set for each
of any three consecutive fiscal years ending after February 2, 2002 and on
or before January 30, 2010.
During fiscal 2003 the Company contingently awarded 990,000 options
subject to an Option Price Protection Provision (OPPP). These contingent
options were awarded at the greater of market value or $4.50 and are
subject to a vesting schedule or a performance vesting formula, as
applicable. The OPPP provides that until the Company receives certain
approvals from lenders the issue of these options is contingent. Further,
if any of these contingent options would have vested before they are
actually granted, at or after that time, the grantee may exercise the OPPP
on some or all of the contingent options that would have vested. Pursuant
to an OPPP exercise the grantee is compensated by the Company in the
amount of the gain, if any, represented by the difference between the
stock closing price on the New York Stock Exchange on the date of the
exercise and the strike price per share. The OPPP does not apply once
contingent options are actually granted. Compensation expense for these
contingent options was $0.3 million in 2003.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's stock option plans and
related Weighted Average Exercise Prices ("WAEP") (shares in thousands):
YEAR ENDED
-----------------------------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
SHARES WAEP SHARES WAEP SHARES WAEP
------ ---- ------ ---- ------ ----
Outstanding beginning of year 8,921 $5.36 3,693 $8.07 2,616 $9.32
Granted 833 2.44 6,664 4.30 1,307 8.41
Exercised (20) 3.04 -- -- (108) 8.10
Canceled (468) 8.47 (1,436) 7.38 (122) 9.48
----- ----- ----- ----- ----- ----
Outstanding end of year 9,266 4.94 8,921 5.36 3,693 8.07
----- ----- ----- ----- ----- ----
Options exercisable end of year 2,845 $6.50 1,651 $8.98 1,595 $9.29
Shares available for additional grants 7,456 7,821 3,049
The following table summarizes information about stock options outstanding
as of January 31, 2004 (shares in thousands):
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED
AVERAGE OPTIONS EXERCISABLE
REMAINING --------------------
RANGE OF EXERCISE PRICES SHARES CONTRACT LIFE WAEP SHARES WAEP
------------------------ ------ ------------- ---- ------ ----
$ 1.68 - $ 4.49 1,558 9 yrs $ 2.43 294 $ 2.77
$ 4.50 - $ 10.00 7,333 8 yrs $ 5.05 2,209 $ 5.94
$ 10.01 - $ 21.44 375 5 yrs $13.27 342 $13.31
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental
to the conduct of its business. The Company estimates the range of
liability related to pending litigation where the amount and range of loss
can be estimated. The Company records its best estimate of a loss when the
loss is considered probable. Where a liability is probable and there is a
range of estimated loss, the Company records the minimum estimated
liability related to the claim. In the opinion of management, the amount
of any liability with respect to these proceedings will not be material.
As additional information becomes available, the Company assesses the
potential liability related to its pending litigation and revises the
estimates. Revisions in the Company's estimates and potential liability
could materially impact its results of operations.
10. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in
thousands):
YEAR ENDED
------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Current:
Federal $ 198 $3,523 --
State and local -- 503 $ 2,833
------- ------ --------
198 4,026 2,833
------- ------ --------
Deferred:
Federal (1,463) (2,697) (16,948)
State and local (453) (385) (2,422)
------- ------ --------
(1,916) (3,082) (19,370)
------- ------ --------
Income tax (benefit) expense $(1,718) $ 944 $(16,537)
------- ------ --------
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the expected income taxes based upon the statutory
rate is as follows (in thousands):
YEAR ENDED
------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Income tax (benefit) expense at federal statutory rate $ (667) $500 $(13,376)
Jobs credit (1,524) (926) (1,439)
State and local taxes, net 208 641 (2,449)
Non-deductible interest 662 370 1,885
Valuation allowance 1,467 -- --
Other (1,864) 359 (1,158)
------- ---- --------
$(1,718) $944 $(16,537)
======= ==== ========
The components of the net deferred tax asset as of January 31, 2004 and
February 1, 2003 are (in thousands):
YEAR ENDED
-------------------------
1/31/04 2/1/03
------- ------
Deferred tax assets:
Basis differences in inventory $14,884 $30,184
Basis differences in property and equipment 13,585 5,891
Deferred compensation 1,009 1,695
Amortization of lease acquisition costs 1,308 1,634
Acquired assets 2,036 2,036
Net operating loss 12,322 9,106
Federal tax credit 2,963 1,439
Contribution carry forward 1,467 1,467
Valuation allowance (1,467) --
Tenant allowance 1,478 401
Capital leases 1,362 1,812
Other comprehensive loss 4,008 3,881
Accrued expenses 17,198 --
Other 2,148 9,500
------- -------
74,301 69,046
------- -------
Deferred tax liabilities:
Gain/loss (2,708) (1,128)
State and local taxes (4,941) (3,401)
------- -------
(7,649) (4,529)
------- -------
Total net $66,652 $64,517
======= =======
The net deferred tax asset is recorded in the Company's consolidated
balance sheet as follows (in thousands):
YEAR ENDED
-------------------------
1/31/04 2/1/03
------- ------
Current deferred tax asset $44,933 $51,317
Non-current deferred tax asset 21,719 13,200
------- -------
Net deferred tax asset $66,652 $64,517
------- -------
The Company has determined that there is a probability that future taxable
income may not be sufficient to fully utilize deferred tax assets
(Charitable Contribution Carry forwards) which expire in 2006. Therefore,
an allowance of $1.5 million is needed at the end of the year.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The state net operating loss carry forward is approximately $189.8 million
and is available to reduce state taxable income from 2006 to 2021. The
federal general business tax credit carry forward is approximately $1.4
million which will expire in 2022. In 2002, the Company filed amended tax
returns for prior years, which allowed for the recognition of $15.3
million of deferred tax assets, related primarily to net operating losses.
11. SEGMENT REPORTING
As discussed in Note 15, the Consolidated Statements of Operations for
fiscal years 2003, 2002 and 2001 have been restated to reflect certain
reclassifications. These reclassifications affect the Company's previously
filed segment financial information for fiscal years 2003, 2002 and 2001.
The following segment financial data for fiscal years 2003, 2002 and 2001
have been derived from the restated consolidated financial statements.
The Company is managed in three operating segments: Value City, DSW and
Filene's Basement. All of the operations are located in the United States.
The Company has identified such segments based on management
responsibility and measures segment profit as operating profit (loss),
which is defined as income (loss) before interest expense and income
taxes.
YEAR ENDED JANUARY 31, 2004 (IN THOUSANDS):
FILENE'S
VALUE CITY DSW BASEMENT TOTAL
---------- --- -------- -----
Net sales $1,504,674 $772,631 $316,901 $2,594,206
Operating profit (loss) 8,415 26,506 (2,490) 32,431
Identifiable assets 498,048 224,832 141,065 863,945
Capital expenditures 38,582 21,017 9,102 68,701
Depreciation and
Amortization 31,999 14,679 6,301 52,979
YEAR ENDED FEBRUARY 1, 2003 (IN THOUSANDS):
FILENE'S
VALUE CITY DSW BASEMENT TOTAL
---------- --- -------- -----
Net sales $1,518,595 $628,964 $303,160 $2,450,719
Operating profit (loss) 24,389 15,098 (2,009) 37,478
Identifiable assets 547,538 183,190 101,071 831,799
Capital expenditures 26,136 12,260 3,388 41,784
Depreciation and
Amortization 41,701 5,363 6,342 53,406
YEAR ENDED FEBRUARY 2, 2002 (IN THOUSANDS):
FILENE'S
VALUE CITY DSW BASEMENT TOTAL
---------- --- -------- -----
Net sales $1,481,151 $509,375 $293,352 $2,283,878
Operating (loss) profit (27,773) 4,621 9,255 (13,897)
Identifiable assets 613,897 232,274 34,140 880,311
Capital expenditures 14,788 24,542 914 40,244
Depreciation and
Amortization 41,361 4,099 6,360 51,820
The following sets forth sales by each major merchandise category (in
thousands):
YEAR ENDED
---------------------------------------------
1/31/04 2/1/03 2/2/02
---------- ---------- ----------
Apparel and ready to wear $1,112,789 $1,144,024 $1,189,938
Hard goods and home furnishings 493,511 466,759 376,060
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Shoes and other footwear 987,906 839,936 717,880
---------- ---------- ----------
Total $2,594,206 $2,450,719 $2,283,878
---------- ---------- ----------
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED JANUARY 31, 2004
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
05/03/03 08/02/03 11/01/03 01/31/04
13 WEEKS 13 WEEKS 13 WEEKS 13 WEEKS
--------- --------- --------- ---------
(As restated - see Note 15)
Net sales, excluding sales of licensed
departments $ 588,532 $ 604,594 $ 680,639 $ 720,441
Cost of sales (371,812) (368,228) (419,251) (433,923)
--------- --------- --------- ---------
Gross profit 216,720 236,366 261,388 286,518
Selling, general and administrative expenses (230,034) (234,885) (249,597) (259,655)
License fees and other income 1,501 1,291 1,454 1,364
--------- --------- --------- ---------
Operating (loss) profit (11,813) 2,772 13,245 28,227
Interest expense, net
Non-related (4,207) (2,102) (2,959) (2,757)
Related parties (6,383) (6,957) (6,615) (6,615)
--------- --------- --------- ---------
(Loss) income before income taxes (22,403) (6,287) 3,671 18,855
Benefit (provision) for income taxes 9,230 2,639 (2,770) (7,381)
--------- --------- --------- ---------
Net (loss) income $ (13,173) $ (3,648) $ 901 $ 11,474
--------- --------- --------- ---------
Basic (loss) earnings per share (2) $ (0.39) $ (0.11) $ 0.03 $ 0.34
--------- --------- --------- ---------
Diluted (loss) earnings per share (2) $ (0.39) $ (0.11) $ 0.03 $ 0.25
--------- --------- --------- ---------
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED FEBRUARY 1, 2003
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
05/04/02 08/03/02 11/02/02 02/01/03
13 WEEKS(1) 13 WEEKS 13 WEEKS(1) 13 WEEKS(1)
----------- -------- ----------- -----------
(As restated - see Note 15)
Net sales, excluding sales of licensed departments $ 585,912 $ 569,062 $ 616,990 $ 678,755
Cost of sales (362,725) (345,463) (383,921) (422,520)
--------- --------- --------- ---------
Gross profit 223,187 223,599 233,069 256,235
Selling, general and administrative expenses (222,594) (215,252) (230,114) (238,057)
License fees and other income 2,162 2,431 1,257 1,555
--------- --------- --------- ---------
Operating profit 2,755 10,778 4,212 19,733
Interest expense, net
Non-related (5,302) (7,314) (3,896) (3,528)
Related parties (1,712) (4,641) (5,996) (6,999)
--------- --------- --------- ---------
(Loss) income before cumulative effect of
accounting change and income taxes (4,259) (1,177) (5,680) 9,206
Benefit (provision) for income taxes 1,564 451 2,184 (3,874)
--------- --------- --------- ---------
(Loss) income before cumulative effect of
accounting change (2,695) (726) (3,496) 5,332
Cumulative effect of accounting change,
net of income taxes (2,080) -- -- --
--------- --------- --------- ---------
Net (loss) income $ (4,775) $ (726) $ (3,496) $ 5,332
--------- --------- --------- ---------
Basic and diluted (loss) earnings per share:
Basic
(Loss) income before cumulative
effect of accounting change $ (0.08) $ (0.02) $ (0.10) $ 0.16
Cumulative effect of accounting change,
net of income taxes (0.06) -- -- --
--------- --------- --------- ---------
Basic (loss) earnings per share (2) $ (0.14) $ (0.02) $ (0.10) $ 0.16
--------- --------- --------- ---------
Diluted
(Loss) income before cumulative effect
of accounting change $ (0.08) $ (0.02) $ (0.10) $ 0.12
Cumulative effect of accounting change,
net of income taxes (0.06) -- -- --
--------- --------- --------- ---------
Diluted (loss) profit earnings per share (2) $ (0.14) $ (0.02) $ (0.10) $ 0.12
--------- --------- --------- ---------
(1) The results of operations for the quarters ended 5/4/02, 11/2/02 and
2/1/03 include charges for employee severance of $1.7 million, $1.4
million and $2.8 million, respectively. The quarter ended 02/01/03
includes the full period amortization of the debt discount of $1.1
million.
(2) (Loss) earnings per share calculations for each quarter are based on the
applicable weighted average shares outstanding for each period and may not
necessarily be equal to the full year per share amount.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (IN THOUSANDS):
A supplemental schedule of non-cash investing and financing activities is
presented below:
YEAR ENDED
------------------------------------------
1/31/04 2/1/03 2/2/02
------- ------ ------
Cash paid during the year for:
Interest $34,070 $30,319 $26,788
Income taxes $ 2,298 $ 7,324 $ 2,757
Issuance of warrants -- $ 6,074 --
In June 2002, the Company issued warrants with a fair market value of
$6,074,000, using the Black Scholes model, to the holders of to the Term
Loan C Lenders to purchase 2,954,792 shares of common stock at the initial
exercise price of $4.50 per share, subject to adjustment. The Warrants are
exercisable at any time prior to June 11, 2012. The Company has granted
the Term Loan C Lenders registration rights with respect to the shares
issuable upon exercise of the Warrants.
15. RESTATEMENT:
Subsequent to the issuance of the Company's January 31, 2004 consolidated
financial statements, management determined that certain components in our
Consolidated Statements of Operations for fiscal years 2003, 2002 and 2001
should be reclassified. The reclassifications relate to amortization of
debt issuance costs which were reclassified from selling, general and
administrative expenses to interest expense, net. The reclassifications
have no effect on gross profit or net loss. In addition, the amortization
of debt issuance costs were reclassified in the Consolidated Statements of
Cash Flows to present such amounts in amortization of debt issuance costs
and discount on debt.
The Company also updated the number of authorized common shares disclosed
within the Consolidated Balance Sheets from 80,000,000 to 160,000,000 to
reflect the number of common shares authorized during the Company's
reorganization that occurred on October 8, 2003.
The accompanying Consolidated Statements of Operations and Cash Flows for
fiscal years 2003, 2002 and 2001 have been restated to reflect the
aforementioned reclassifications as follows (in thousands):
YEAR ENDED JANUARY 31, 2004
----------------------------------------------
AS REPORTED RECLASSIFICATION AS RESTATED
----------- ---------------- -----------
Consolidated Statements of Operations:
Selling, general and administrative expenses $(978,201) $4,030 $(974,171)
Operating profit 28,401 4,030 32,431
Interest expense, net
Non-related (9,718) (2,307) (12,025)
Related parties (24,847) (1,723) (26,570)
Consolidated Statements of Cash Flows:
Amortization of debt issuance costs
and discount on debt 2,025 4,030 6,055
Depreciation and Amortization 57,009 (4,030) 52,979
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED FEBRUARY 1, 2003
----------------------------------------------
AS REPORTED RECLASSIFICATION AS RESTATED
----------- ---------------- -----------
Consolidated Statements of Operations:
Selling, general and administrative expenses $(912,912) $6,895 $(906,017)
Operating profit 30,583 6,895 37,478
Interest expense, net
Non-related (14,909) (5,131) (20,040)
Related parties (17,584) (1,764) (19,348)
Consolidated Statements of Cash Flows:
Amortization of debt issuance costs
and discount on debt 1,266 7,226 8,492
Depreciation and Amortization 60,301 (6,895) 53,406
Change in Prepaid expenses and other assets (101) (331) (432)
YEAR ENDED FEBRUARY 2, 2002
----------------------------------------------
AS REPORTED RECLASSIFICATION AS RESTATED
----------- ---------------- -----------
Consolidated Statements of Operations:
Selling, general and administrative expenses $(888,734) $2,447 $(886,287)
Operating profit (loss) (16,344) 2,447 (13,897)
Interest expense, net
Non-related (20,289) (1,937) (22,226)
Related parties (8,221) (510) (8,731)
Consolidated Statements of Cash Flows:
Amortization of debt issuance costs
and discount on debt -- 3,823 3,823
Depreciation and Amortization 54,267 (2,447) 51,820
Change in Prepaid expenses and other assets 9,243 (1,376) 7,867
F-26
RETAIL VENTURES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- --------
COLUMN A BALANCE AT CHARGES TO CHARGES TO BALANCE AT
-------- BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF PERIOD
----------- --------- -------- ------------ -------------- ---------
Allowance deducted from asset to
which it applies:
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended:
02/02/02 $ 992 $4,829 $ 165 $ 4,193 $ 1,793
02/01/03 1,793 10 -- 907 896
01/31/04 896 33 -- 103 826
ALLOWANCE FOR MARKDOWNS:
Year Ended:
02/02/02 54,082 22,698 3,451 46,691 33,540
02/01/03 33,540 8,594 -- 9,659 32,475
01/31/04 32,475 6,569 -- 4,859 34,185
ALLOWANCE FOR SALES RETURNS:
Year Ended:
02/02/02 1,866 1,676 78 1,272 2,348
02/01/03 2,348 528 -- 614 2,262
01/31/04 2,262 963 -- 15 3,210
STORE CLOSING RESERVE:
Year ended:
02/02/02 1,043 -- -- 428 615
02/01/03 615 1,099 -- 1,190 524
01/31/04 524 598 -- -- 1,122
(1) The charges to other accounts represent balances resulting from the
acquisitions of VCM in fiscal 2001.
(2) The deductions in Column D are amounts written off against the respective
reserve.
S-1
INDEX TO EXHIBITS
Exhibits marked with an asterisk (*) are filed herewith.
Exhibit
No. Description
------- -----------------------------------------------------------------------
2.1 Agreement and Plan of Merger among Value City Department Stores, Inc.,
Retail Ventures, Inc. and Value City Merger Sub, Inc., effective as of
October 8, 2003. Incorporated by reference to Exhibit 2 to Form 8-K
(file no. 1-10767) filed on October 8, 2003.
3.1 Amended and Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3(a) to Form 8-K (file No.
1-10767) filed on October 8, 2003.
3.2 Amended and Restated Code of Regulations of the Company. Incorporated
by reference to Exhibit 3(b) to Form 8-K (file No. 1-10767) filed on
October 8, 2003.
10.1 Corporate Services Agreement, dated June 12, 2002, between the Company
and SSC. Incorporated by reference to Exhibit 10.6 to Form 10-Q (file
no. 1-10767) filed June 18, 2002.
10.2 License Agreement, dated June 5, 1991, between the Company and SSC re
Service Marks. Incorporated by reference to Exhibit 10.2 to Amendment
No. 1 to Form S-1 Registration Statement (file no. 33-40214) filed June
6, 1991.
10.3 Form of Indemnification Agreement, dated 1991, between the Company and
its directors and executive officers. Incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to Form S-1 Registration Statement
(file no. 33-40214) filed June 6, 1991.
10.4 Company's Amended and Restated 1991 Stock Option Plan. Incorporated by
reference to Exhibit 4(a) to Amendment No. 1 to Form S-8 Registration
Statement (file no. 333-45852) filed October 16, 2003.
10.5 Company's Employee Stock Purchase Plan. Incorporated by reference to
Exhibit 4(a) to Amendment No. 1 to Form S-8 Registration Statement
(file no. 33-46221) filed October 16, 2003.
10.6 Value City Department Stores, Inc.'s Board of Directors Resolutions
dated as of July 6, 1992, adopting the terms of the Value City
Department Stores, Inc. 1992 Officer/Key Employee Stock Bonus Plan.
Incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Form
S-8 Registration Statement (file no. 33-50198) filed October 16, 2003.
10.7 Form of Company's 1992 Bonus Share Agreement. Incorporated by reference
to Exhibit 4(b) to Amendment No. 1 to Form S-8 Registration Statement
(file no. 33-50198) filed October 16, 2003.
10.8 Form of Depository Agreement. Incorporated by reference to Exhibit 4(c)
to Amendment No. 1 to Form S-8 Registration Statement (file no
33-40198) filed October 16, 2003.
10.9 Company's Amended and Restated 2000 Stock Incentive Plan. Incorporated
by reference to Exhibit 4(a) to Amendment No. 1 to Form S-8
Registration Statement (file no. 333-100398) filed on October 16, 2003.
10.10 Company's Amended and Restated Non-Employee Director Stock Option Plan.
Incorporated by reference to Exhibit 4(a) to Form S-8 Registration
Statement (file no. 333-45856) filed October 16, 2003.
10.11 Master Warehouse Lease dated April 25, 1991, between the Company, as
lessee, and SSC, as lessor, re three warehouse, office, and shop
locations. Incorporated by reference to Exhibit 10.10 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
E-1
10.11.1 First Amendment to Master Warehouse Lease dated February 1992, between
the Company, as lessee, and SSC, as lessor, re three warehouse, office,
and shop locations. Incorporated by reference to Exhibit 10.10.1 to
Form S-1 Registration Statement (file no. 33-47252) filed April 16,
1992.
10.11.2 Second Amendment to Master Warehouse Lease, dated June 1993, between
the Company, as lessee, and SSC, as lessor, re three warehouse, office,
and shop locations. Incorporated by reference to Exhibit 10.10.2 to
Form 10-K (file no. 1-10767) filed October 26, 1993.
10.12 Master Sublease, dated April 25, 1991, between the Company, as
sublessee, and SSC, as sublessor, re three stores. Incorporated by
reference to Exhibit 10.11 to Registration Statement on Form S-1 (file
no. 33-40214) filed April 29, 1991.
10.13 Sublease, dated April 25, 1991, between the Company, as sublessee, and
SSC, as sublessor, re one warehouse, with underlying lease, dated July
15, 1981, between SSC, as lessee, and J.A.L. Realty Company, an
affiliate of SSC, as lessor. Incorporated by reference to Exhibit 10.12
to Registration Statement on Form S-1 (file no. 33-40214) filed April
29, 1991.
10.14 Lease, dated July 7, 1987, between the Company, by assignment from SSC,
as lessee, and Schottenstein Trustees, an affiliate of SSC, as lessor,
re one store. Incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to Form S-1 Registration Statement (file no. 33-40214) filed June
6, 1991.
10.15 Lease, dated June 28, 1989, between the Company, by assignment from
SSC, as lessee, and Southeast Industrial Park Realty Company, an
affiliate of SSC, as lessor, re one warehouse. Incorporated by
reference to Exhibit 10.14.1 to Registration Statement on Form S-1
(file no. 33-40214) filed April 29, 1991.
10.16 Lease, dated October 27, 1989, between the Company, by assignment from
SSC, as lessee, and Southeast Industrial Park Realty Company, an
affiliate of SSC, as lessor, re one warehouse. Incorporated by
reference to Exhibit 10.14.2 to Registration Statement on Form S-1
(file no. 33-40214) filed April 29, 1991.
10.17 Sublease, dated April 25, 1991, between the Company, as sublessor, and
SSC, as sublessee, re Baltimore, MD (Eastpoint) furniture store
location. Incorporated by reference to Exhibit 10.15.1 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
10.18 Sublease, dated April 25, 1991, between the Company, as sublessor, and
SSC, as sublessee, re Baltimore, MD (Westview) furniture store
location. Incorporated by reference to Exhibit 10.15.2 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
10.19 Sublease, dated April 25, 1991, between the Company, as sublessor, and
SSC, as sublessee, re Lansing, MI furniture store location.
Incorporated by reference to Exhibit 10.15.3 to Registration Statement
on Form S-1 (file no. 33-40214) filed April 29, 1991.
10.20 Sublease, dated April 25, 1991, between the Company, as sublessor, and
SSC, as sublessee, re Louisville, KY (Preston Highway) furniture store
location. Incorporated by reference to Exhibit 10.15.4 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
10.21 Form of Assignment and Assumption Agreement between the Company, as
assignee, and SSC, as assignor, re separate assignments of leases for
31 stores. Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991.
10.22 Lease Agreement, dated July 1, 1988, between the Company, by assignment
from SSC dated April 25, 1991, as sublessee, and SSC, as sublessor, re
Benwood, WV store location. Incorporated by reference to Exhibit 10.19
to Form 10-K (file no.1-10767) filed October 24, 1991.
10.23 Form of Restricted Stock Agreement, dated 1992, between the Company and
certain employees. Incorporated by reference to Exhibit 10.27 to
Amendment No. 1 to Form S-1 Registration Statement (file no. 33-47252)
filed April 27, 1992.
E-2
10.24 Lease, dated September 1, 1992, between the Company, as lessee, and
SSC, as lessor, re South Bend, IN store. Incorporated by reference to
Exhibit 10.29 to Form 10-K (file no.1-10767) filed October 22, 1992.
10.25 Lease, dated January 27, 1992, between the Company, as lessee, and
J.A.L. Realty Company, an affiliate of SSC, as lessor, re 3080 Alum
Creek warehouse. Incorporated by reference to Exhibit 10.30 to Form
10-K (file no.1-10767) filed October 22, 1992.
10.25.1 Exercise of the first five-year renewal option commencing February 1,
1997 under lease, dated January 27, 1992, as amended, between the
Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC, as
lessor, re 3080 Alum Creek warehouse. Incorporated by reference to
Exhibit 10.30.1 to Form 10-Q (file no. 1-10767) filed March 19, 1996.
10.26 Lease, dated July 29, 1992, between the Company, as lessee, and J.A.L.
Realty Company, an affiliate of SSC, as lessor, re 3232 Alum Creek
warehouse. Incorporated by reference to Exhibit 10.31 to Form 10-K
(file no.1-10767) filed October 22, 1992.
10.27 Lease, dated October 26, 1993 between the Company, as lessee, and
J.A.L. Realty Company, as lessor, re 2560 Valuway, Columbus, OH.
Incorporated by reference to Exhibit 10.33 to Form 10-K (file
no.1-10767) filed March 14, 1994.
10.27.1 Lease Modification Agreement dated June 16, 1995 to lease, dated
October 26 1993, between the Company, as lessee, and J.A.L. Realty
Company, an affiliate of SSC, as lessor, re 2560 Valuway, Columbus, OH.
Incorporated by reference to Exhibit 10.33.1 to Form 10-K (file
no.1-10767) filed October 27, 1995.
10.28 Ground lease, dated April 15, 1994, between the Company, as lessee, and
J.A.L. Realty Company, an affiliate of SSC, as lessor, re 19 acres.
Incorporated by reference to Exhibit 10.35 to Form 10-K (file no.
1-10767) filed October 26, 1994.
10.29 Agreement of Lease dated September 1, 1994, between Company, as tenant,
and Jubilee Limited Partnership, as landlord, re Carol Stream, IL
store. Incorporated by reference to Exhibit 10.36 to Form 10-Q (file
no. 1-10767) filed December 12, 1994.
10.30 Agreement of Lease, dated March 1, 1994, between the Company, as
tenant, and Jubilee Limited Partnership, as landlord, re Hobart, IN
store. Incorporated by reference to Exhibit 10.37 to Form 10-Q (file
no. 1-10767) filed December 12, 1994.
10.31 Agreement of Lease, dated February 10, 1995, between the Company, as
tenant, and Jubilee Limited Partnership, as landlord, re Gurnee Mills,
IL store. Incorporated by reference to Exhibit 10.38 to Form 10-Q,
(file no. 1-10767) filed March 14, 1995.
10.32 Agreement of Lease, dated January 13, 1995, between the Company, as
tenant, and Westland Partners, as landlord, re Westland, MI store.
Incorporated by reference to Exhibit 10.39 to Form 10-Q, (file no.
1-10767) filed March 14, 1995.
10.33 Agreement of Lease, dated January 13, 1995, between the Company, as
tenant, and Taylor Partners, as landlord, re Taylor, MI store.
Incorporated by reference to Exhibit 10.40 to Form 10-Q, (file no.
1-10767) filed March 14, 1995.
10.34 Sublease, dated December 28, 1994, between the Company, as subtenant,
and Shonac Corporation, as sublandlord, re Alum Creek Drive warehouse
space. Incorporated by reference to Exhibit 10.41 to Form 10-Q, (file
no. 1-10767) filed March 14, 1995.
10.35 Lease, dated September 2, 1997, between the Company, as lessee, and
SSC-Fort Wayne LLC, as lessor. Incorporated by reference to Exhibit
10.33.1 to Form 10-K (file no. 1-10767) filed April 29, 2002.
E-3
10.36 Agreement of Lease, dated April 10, 1995, between the Company, as
tenant, and Independence Limited Liability Company, as landlord, re
Charlotte, NC store. Incorporated by reference to Exhibit 10.45 to Form
10-Q (file no. 1-10767) filed December 12, 1995.
10.37 Sublease and Occupancy Agreement, dated December 15, 1995, between the
Company, SSC and SSC, dba Value City Furniture, re Louisville, KY
(Preston Highway) store. Incorporated by reference to Exhibit 10.46 to
Form 10-Q (file no. 1-10767) filed March 19, 1996.
10.38 Agreement of Lease, dated March 13, 1996, between the Company, as
tenant, and Jubilee Limited Partnership, as landlord, re Saginaw, MI
store. Incorporated by reference to Exhibit 10.47 to Form 10-Q (file
no. 1-10767) filed March 19, 1996.
10.39 Agreement of Lease dated 1996 between the Company, as tenant, and SSC,
as landlord, re the Melrose Park, IL store. Incorporated by reference
to Exhibit 10.49 to Form 10-K (file no. 1-10767) filed November 1,
1996.
10.40 Agreement of Lease, dated October 4, 1996, between the Company, as
tenant, and Hickory Ridge Pavilion, Ltd., as landlord, re the Memphis,
TN store. Incorporated by reference to Exhibit 10.50 to Form 10-K (file
no. 1-10767) filed November 1, 1996.
10.41 Lease, dated 1998, between the Company, as lessee, and Jubilee Limited
Partnership, as lessor, re River Oaks West Shopping Center, Calumet
City, IL. Incorporated by reference to Exhibit 10.56 to Form 10-K (file
no. 1-10767) filed April 30, 1999.
10.42 Lease, dated September 29, 1998 between the Company, as tenant, and
Valley Fair Irvington, LLC, as landlord, re Irvington, NJ. Incorporated
by reference to Exhibit 10.57 to Form 10-K (file no. 1-10767) filed
April 30, 1999.
10.43 Lease, dated March 22, 2000 between East Fifth Avenue, LLC, an
affiliate of SSC, as landlord, and Shonac Corporation, as tenant.
Incorporated by reference to Exhibit 10.60 to Form 10-K (file no.
1-10767) filed April 28, 2000.
10.44 Lease, dated August 30, 2002 by and between Jubilee Limited
Partnership, an Ohio limited partnership (an affiliate of SSC) and
Shonac Corporation, re: Troy, MI DSW store. Incorporated by
reference to Exhibit 10.44 to Form 10-K (file no. 1-10767) filed
April 29, 2004.
10.45 Lease, dated July 31, 2003 by and between JLPK-Dale Mabry, LLC, a
Delaware limited liability company (an affiliate of SSC) and Shonac
Corporation, re: Tampa, FL DSW store. Incorporated by
reference to Exhibit 10.45 to Form 10-K (file no. 1-10767) filed
April 29, 2004.
10.46 Lease, dated October 8, 2003 by and between Jubilee Limited
Partnership, an Ohio limited partnership (an affiliate of SSC) and
Shonac Corporation, re: Denton, TX DSW store. Incorporated by
reference to Exhibit 10.46 to Form 10-K (file no. 1-10767) filed
April 29, 2004.
10.47 Lease, dated October 28, 2003 by and between JLP-RICHMOND LLC, an
Ohio limited liability company (an affiliate of SSC) and Shonac
Corporation, Richmond, VA DSW store. Incorporated by
reference to Exhibit 10.47 to Form 10-K (file no. 1-10767) filed
April 29, 2004.
10.48 Employment Agreement, dated June 21, 2000, between James A. McGrady and
the Company. Incorporated by reference to Exhibit 10.46 to Form 10-K
(file no. 1-10767) filed May 4, 2001.
10.49 Employment Agreement dated February 3, 2002 between John C. Rossler and
the Company. Incorporated by reference to Exhibit 10 to Form 10-Q (file
no. 1-10767) filed September 12, 2002.
10.50 Employment Agreement, dated February 3, 2002, between Edwin J.
Kozlowski and the Company. Incorporated by reference to Exhibit 10.43
to Form 10-K (file no. 1-10767) filed May 1, 2003.
E-4
10.51 Employment Agreement, dated as of April 29, 2004, between Julia A.
Davis and the Company. Incorporated by reference to Exhibit 10.51 to
Form 10-K (file no. 1-10767) filed April 29, 2004.
10.52 Loan and Security Agreement, dated as of June 11, 2002, between the
Company, as Borrowers, and National City Commercial Finance, Inc., as
Administrative Agent for the ratable benefit of the Revolving Credit
Lenders. Incorporated by reference to Exhibit 10.1 to Form 10-Q (file
no. 1-10767) filed June 18, 2002.
10.52.1 First Amendment to Loan and Security Agreement, dated as of October 7,
2003, between Value City Department Stores, Inc., as Agent for the
Borrowers, and National City Commercial Finance, Inc., as
Administrative Agent for the ratable benefit of the Revolving Credit
Lenders. Incorporated by reference to Exhibit 10(a) to Form 8-K (file
No. 1-10767) filed October 8, 2003.
10.53 Financing Agreement dated as of June 11, 2002, by and among the
Company, as Borrowers and Cerberus Partners, L.P. and the Lenders from
time to time party hereto. Incorporated by reference to Exhibit 10.2 to
Form 10-Q (file no. 1-10767) filed June 18, 2002.
10.53.1 First Amendment to the Financing Agreement, dated as of October 7,
2003, by and among Value City Department Stores, Inc., Shonac
Corporation, DSW Shoe Warehouse, Inc., Gramex Retail Stores, Inc.,
Filene's Basement, Inc., GB Retailers, Inc., Value City Limited
Partnership, Value City of Michigan, Inc., J.S. Overland Delivery,
Inc., Value City Department Stores Services, Inc., Westerville Road GP,
Inc. and Westerville Road LP, Inc., Retail Ventures, Inc., Retail
Ventures Jewelry, Inc., Retail Ventures Services, Inc., and Retail
Ventures Imports, Inc. (formerly known as VC Acquisition, Inc.) and
Cerberus Partners, L.P., as agent for the Lenders. Incorporated by
reference to Exhibit 10(b) to Form 8-K (file No. 1-10767) filed October
8, 2003.
10.54 Amended and Restated Senior Convertible Loan Agreement, dated as of
June 11, 2002 by and among Value City Department Stores, Inc., as
Borrower, Shonac Corporation, DSW Shoe Warehouse, Inc., Gramex Retail
Stores, Inc., VCM, Ltd., Filene's Basement, Inc., GB Retailers, Inc.,
J.S. Overland Delivery, Inc., Value City Department Stores Services,
Inc., Value City Limited Partnership, Value City of Michigan, Inc.,
Westerville Road GP, Inc. and Westerville Road LP, Inc., as guarantors,
the Lenders from time to time party hereto, as Lenders, and
Schottenstein Stores Corporation, as Agent. Incorporated by reference
to Exhibit 10.3 to Form 10-Q (file no. 1-10767) filed June 18, 2002.
10.54.1 Amendment No. 1 to Amended and Restated Senior Convertible Loan
Agreement, dated June 11, 2002 by and among Value City Department
Stores, Inc., as Borrower, Shonac Corporation, DSW Shoe Warehouse,
Inc., Gramex Retail Stores, Inc., VCM, Ltd., Filene's Basement, Inc.,
GB Retailers, Inc., J.S. Overland Delivery, Inc., Value City Department
Stores Services, Inc., Value City Limited Partnership, Value City of
Michigan, Inc., Westerville Road GP, Inc. and Westerville Road LP,
Inc., as Guarantors, the Lenders from time to time party hereto, as
Lenders, and Schottenstein Stores Corporation, as Agent. Incorporated
by reference to Exhibit 10.3.1 to Form 10-Q (file no. 1-10767) filed
June 18, 2002.
10.54.2 Amendment No. 2 to Amended and Restated Senior Convertible Loan
Agreement dated as of October 7, 2003, by and among Value City
Department Stores, Inc., Shonac Corporation, DSW Shoe Warehouse, Inc.,
Gramex Retail Stores, Inc., Filene's Basement, Inc., GB Retailers,
Inc., Value City Limited Partnership, Value City of Michigan, Inc.,
J.S. Overland Delivery, Inc., Value City Department Stores Services,
Inc., Westerville Road GP, Inc. and Westerville Road LP, Inc., Retail
Ventures, Inc., Retail Ventures Jewelry, Inc., Retail Ventures
Services, Inc., and Retail Ventures Imports, Inc. (formerly known as VC
Acquisition, Inc.) and Cerberus Partners, L.P., as agent for the
Lenders. Incorporated by reference to Exhibit 10(c) to Form 8-K (file
No. 001-10767) filed October 8, 2003.
10.55 Amended and Restated Registration Right Agreement, dated as of June 11,
2002 by and among Value City Department Stores, Inc. and Cerberus
Partners, L.P. and Schottenstein Stores Corporation. Incorporated by
reference to Exhibit 10.4 to Form 10-Q (file no. 1-10767) filed June
18, 2002.
10.56 Form of Common Stock Purchase Warrants issued to Cerberus Partners,
L.P. and Schottenstein Stores Corporation. Incorporated by reference to
Exhibit 10.5 to Form 10-Q (file no. 1-10767) filed June 18, 2002.
E-5
21* List of Subsidiaries
23* Consent of Independent Registered Public Accounting Firm
24* Power of Attorney
31.1* Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer
32.1* Section 1350 Certification - Principal Executive Officer
32.2* Section 1350 Certification - Principal Financial Officer
* Filed herewith.
E-6