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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 1-10767
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VALUE CITY DEPARTMENT STORES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1322832
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 471-4722
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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 such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at December 5, 1997
------------------------------- -------------------------------
Common Stock, Without Par Value 31,892,045 Shares
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VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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<TABLE>
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
November 1, 1997 and August 2, 1997 3
Consolidated Statements of Income
Three months ended November 1, 1997
and November 2, 1996 4
Consolidated Statements of Cash Flows
Three months ended November 1, 1997
and November 2, 1996 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information N/A
Signatures 11
Item 6. Exhibits and Reports on Form 8-K
Part A: Exhibit 27 Financial Data Schedule for First Quarter
Form 10-Q
Exhibit 10.1.4 Corporate Services Agreement, dated
October 13, 1997, between the Company
and SSC.
Part B: Reports on Form 8-K N/A
</TABLE>
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VALUE CITY DEPARTMENT STORES, INC.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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<TABLE>
<CAPTION>
NOVEMBER 1, AUGUST 2,
1997 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 22,206 $ 11,614
Accounts receivable, net 4,471 5,683
Receivables from affiliates 1,297 1,084
Inventories 242,511 236,784
Prepaid expenses and other assets 4,334 12,137
Assets held for sale 239 20,776
Deferred income taxes 9,597 9,208
--------- ---------
Total current assets 284,655 297,286
Property and equipment, at cost:
Furniture, fixtures and equipment 143,072 141,588
Leasehold improvements 97,536 97,798
Capital leases 15,303 15,213
--------- ---------
255,911 254,599
Accumulated depreciation and amortization (106,305) (101,148)
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Property and equipment, net 149,606 153,451
Investment in unconsolidated joint venture 8,528 --
Other assets 7,932 7,236
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Total assets $ 450,721 $ 457,973
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 79,564 $ 69,649
Accounts payable to affiliates 7,552 11,344
Demand note payable -- 12,000
Accrued expenses:
Compensation 6,112 8,882
Taxes 11,126 11,753
Other 21,987 22,901
Current maturities of long-term obligations 2,182 2,281
--------- ---------
Total current liabilities 128,523 138,810
Long-term obligations, net of current maturities 57,884 57,763
Deferred income taxes and other noncurrent
liabilities 4,534 4,960
Shareholders' equity:
Common shares, without par value;
80,000,000 authorized; issued, including
Treasury shares, 32,260,645 shares and
32,259,045 shares, respectively 110,079 110,068
Contributed capital 10,729 10,728
Retained earnings 142,733 139,455
Less deferred compensation expense, net (932) (982)
Treasury shares at cost, 368,600 shares (2,829) (2,829)
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Total shareholders' equity 259,780 256,440
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Total liabilities and shareholders' equity $ 450,721 $ 457,973
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
page 3
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VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
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Total sales $ 324,783 $ 312,494
Less licensed departments sales (60,398) (46,418)
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Net owned sales 264,385 266,076
Cost of sales (166,955) (167,619)
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Gross profit 97,430 98,457
Selling, general and administrative
expenses (97,764) (93,591)
License fees from affiliates,
and other operating income 7,089 5,301
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Operating profit 6,755 10,167
Interest expense, net (1,049) (1,194)
Amortization of excess net assets
over cost -- 348
Other income, net 852 153
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Income before equity in loss of
unconsolidated joint venture and
provision for income taxes 6,558 9,474
Equity in loss of unconsolidated
joint venture (1,109) --
--------- ---------
Income before provision
for income taxes 5,449 9,474
Provision for income taxes (2,171) (3,772)
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Net income $ 3,278 $ 5,702
========= =========
Earnings per share $ 0.10 $ 0.18
========= =========
Weighted average number of common
and common equivalent shares 31,945 32,274
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
page 4
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VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,278 $ 5,702
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,024 7,183
Amortization of excess net assets over cost -- (348)
Deferred income taxes and other noncurrent liabilities (815) (1,690)
Loss of unconsolidated joint venture 1,109 --
Gain on disposal of assets (852) (153)
Change in working capital, assets and liabilities:
Receivables (907) (1,975)
Inventories (5,727) (43,219)
Prepaid expenses and other assets 6,902 (20)
Accounts payable 6,123 14,845
Accrued expenses (3,642) 6,439
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Net cash provided by (used in) operating activities 12,493 (13,236)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,109) (18,918)
Proceeds from sale of assets 21,405 20
Investment in unconsolidated joint venture (9,637) --
Other assets (408) (3,133)
Notes receivable 1,906 26
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Net cash provided by (used in) investing activities 10,157 (22,005)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under demand note facility (12,000) 51,000
Principal payments of long-term obligations (69) (10,207)
Net proceeds from issuance of common shares 11 206
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Net cash (used in) provided by financing activities (12,058) 40,999
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Net increase in cash and equivalents 10,592 5,758
Cash and equivalents, beginning of period 11,614 10,484
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Cash and equivalents, end of period $ 22,206 $ 16,242
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
page 5
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VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996
(UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Value City Department Stores, Inc. ("VCDS") and its wholly owned
subsidiaries. These entities are herein referred to collectively as the
"Company." The Company operates a chain of full-line off-price
department stores, principally under the name "Value City."
The balance sheet for August 2, 1997 is condensed information taken from
the audited financial statements. The interim financial statements are
unaudited and are presented pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the consolidated
financial statements should be read in conjunction with the financial
statement disclosures contained in the Company's 1997 Annual Report. In
the opinion of management, the accompanying consolidated financial
statements reflect all adjustments necessary (which are of a normal
recurring nature) to present fairly the financial position and results
of operations and cash flows for the interim periods presented, but are
not necessarily indicative of the results of operations for a full
fiscal year.
To facilitate comparisons with the current period, certain amounts in
prior year financial statements have been reclassified to conform to the
current year presentation.
2. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
In July 1997, the Company entered into agreements with Mazel Stores,
Inc. to create VCM, Ltd. ("VCM"), a 50/50 joint venture. In August 1997,
VCM purchased 100% of the capital stock of the company which previously
operated the Company's health and beauty aid departments as licensed
departments and purchased the assets of the Company's toys and sporting
goods departments. VCM now operates the health and beauty aid and toys
and sporting goods departments in all of the Company's stores under
license and operating agreements that provide for fees based on a
percentage of sales, as defined, for license fees, advertising fees and
credit and administrative charges. The Company provides certain
personnel, administrative and service functions for which it receives a
monthly fee from VCM to cover the related costs. The license and
operating agreements are for a term of ten years ending on the last day
of fiscal 2007 and contain certain provisions whereby either business
partner can initiate renegotiation of terms if certain minimum
requirements are not met. The Company accounts for its fifty percent
interest in the joint venture under the equity method. In addition, the
Company has guaranteed 50% of VCM's $25,000,000 demand note facility. At
November 1, 1997, VCM had $13,000,000 of total borrowings and $461,000
of issued and outstanding letters of credit under this facility.
page 6
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED NOVEMBER 1, 1997 COMPARED TO THREE MONTHS ENDED NOVEMBER 2,
1996
Total sales, which include licensed departments sales, increased from
$312.5 million to $324.8 million, an increase of $12.3 million or 3.9%.
On a comparable store basis, total sales increased 1.1%. Net owned sales
decreased from $266.1 million to $264.4 million; however, last year's
reported sales include toys and sporting goods sales of $12.0 million.
These departments are now operated by VCM, Ltd. ("VCM"), a 50/50 joint
venture between the Company and Mazel Stores, Inc., and are therefore
treated as licensed department sales. Excluding these sales from the
prior year period, net sales increased from $254.1 million to $264.4
million, an increase of approximately $10.3 million or 4.0%. Owned sales
for stores opened during the prior year not yet considered comparable
increased $8.5 million. This was partially offset by a loss of
approximately $0.5 million in owned sales for one store which was closed
during the current quarter. Comparable store owned sales increased $2.3
million or 1.0%.
Gross profit decreased from $98.5 million to $97.4 million, a decrease
of $1.1 million, or 1.1%. Expressed as a percentage of sales, gross
profit decreased from 37.0% to 36.9%. Last year's gross profit included
approximately $3.7 million related to the toys and sporting goods
departments. Excluding this amount from the prior year, gross profit, as
a percentage of sales, decreased from 37.3% to 36.9% due primarily to
higher markdowns.
Selling, general and administrative expenses ("SG&A") increased $4.2
million, or 4.5% from $93.6 million to $97.8 million, and increased as a
percentage of sales from 35.2% to 37.0%. Stores opened during the prior
fiscal year that are not yet considered comparable contributed an
increase in expenses of $4.0 million. This was offset by savings of $0.2
million for a store closed during the current year. New store SG&A, as a
percentage of sales, is higher than that of comparable stores, due
primarily to pre-opening and depreciation expenses. Comparable store
SG&A increased by approximately $0.2 million but decreased as a
percentage of sales. Home office expenses, including distribution costs,
increased by approximately $2.3 million, primarily to support the new
stores. This was partially offset by a savings of approximately $2.1
million related to the toys and sporting goods departments for which the
Company no longer directly incurs SG&A expense.
Based upon its past experience, the Company estimates the average cost
of opening a new store to range from approximately $5.0 million to $6.5
million, including leasehold improvements, fixtures, inventory,
pre-opening expenses and other costs. Preparations for opening a store
generally take between eight and twelve weeks. The Company charges
pre-opening expenses to operations ratably over the first twelve months
of store operations. It has been the Company's experience that new
stores generally achieve profitability and contribute to net income
after the first full year of operations. Nine stores opened less than
twelve months had a pre-tax net operating loss of $1.7 million for the
current three month period, including $0.9 million of pre-opening
expense amortization. Twelve stores opened less than twelve months
during last year's three month period had pre-tax operating profit of
$0.4 million, including $1.7 million of pre-opening expense
amortization. This was primarily attributable to the high grand opening
sales volume for six stores opened during the prior year's first
quarter.
License fees from affiliates and other operating income increased from
$5.3 million to $7.1 million, an increase of $1.8 million or 33.7%, and
increased as a percentage of sales from 2.0% to 2.7%. This is
attributable to approximately $1.1 million of license fees received from
VCM on their toys and sporting goods sales of $9.6 million.
Operating profit decreased from $10.2 million to $6.8 million, a
decrease of approximately $3.4 million as a result of the above factors.
Interest expense, net of interest income, decreased from $1.2 million to
$1.0 million due primarily to decreased borrowings.
The Company no longer recognizes income for amortization of excess net
assets over cost due to the amount being fully amortized as of the third
quarter of fiscal 1997.
Other income, net, increased from $153,000 to $852,000, due primarily to
a gain recognized from selling the land, building and improvements at a
site originally purchased for future store development.
Equity in loss of unconsolidated joint venture represents the Company's
fifty percent interest in VCM's net losses. These losses are due
primarily to weak sales attributable to transitioning the toys and
sporting goods and health and beauty aids merchandise inventories to a
new format.
Income before provision for income taxes decreased from $9.5 million to
$5.4 million, a decrease of $4.1 million as a result of the above
factors.
page 7
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $156.1 million at November 1, 1997 compared to $158.5
million at August 2, 1997. Current ratios at those dates were 2.21 and 2.14 to
1.0, respectively.
Net cash provided by operating activities totaled $12.5 million for the three
months ended November 1, 1997 and net cash used in operating activities totaled
$13.2 million for the three months ended November 2, 1996. Net income, adjusted
for depreciation and amortization, provided $10.3 million of operating cash flow
for the three months ended November 1, 1997. In addition, operating cash flow
was increased by $0.4 million representing an increase in inventories net of an
increase in accounts payable of $6.1 million. For the three months ended
November 2, 1996, net income, adjusted for depreciation and amortization,
provided $12.9 million of operating cash flow which was decreased by $28.4
million representing an increase in inventories net of an increase in accounts
payable of $14.8 million.
Net cash provided by investing activities totaled $10.2 million for the 1997
period while net cash used in investing activities totaled $22.0 million for the
1996 period. Capital expenditures during the current three months include $0.4
million for new stores, $1.0 million for capital improvements in existing
stores, $0.4 million for energy management systems, $0.9 million for renovations
in existing warehouses, and $0.4 million for M.I.S. equipment upgrades. Capital
expenditures were offset by $21.4 million of proceeds from the sale of assets,
primarily from those classified as assets held for sale as of August 2, 1997,
including the land, building and improvements at a site originally purchased for
future store development and the inventory and fixed assets related to the
Company's toys and sporting goods departments which were sold to VCM, at cost,
when it took over operation of the Company's health and beauty aid and toys and
sporting goods departments as licensed departments in August 1997. The Company
also incurred net cash outlays of $9.6 million to obtain a fifty percent
interest in the VCM joint venture. Other investing activities include cash
outlays of $0.4 million for other assets and cash receipts of $1.9 million from
notes receivable. The Company's inventory control and POS systems are not yet
year 2000 compliant. The inventory control system will require approximately
$0.2 million of programming changes which are scheduled for completion in 1998.
The POS system will be addressed during 1998 in conjunction with an upgrade to
IBM software at a cost of approximately $1.0 million. Capital expenditures for
the balance of the fiscal year are estimated at approximately $18.0 million.
The Company has a $100.0 million credit facility with its bank bearing interest
at or below the prime lending rate depending on certain borrowing elections made
by the Company. At November 1, 1997, the prime rate was 8.5%, there were no
direct borrowings but $6.6 million of letters of credit were issued and
outstanding for merchandise purchases, leaving $93.4 million available under the
facility. The Company believes that the cash generated by its operations, along
with the available proceeds from the credit facility will be sufficient to meet
its future obligations including capital expenditures.
In conjunction with the Company's investment in VCM, the Company guaranteed
fifty percent of VCM's $25.0 million demand note facility. At November 1, 1997,
VCM had $13.0 million of borrowings and $0.5 million of issued and outstanding
letters of credit under the facility.
SEASONALITY
The Company's business is affected by the pattern of seasonality common to most
retail businesses. Historically, the majority of its sales and operating profit
have been generated during the first six months of its fiscal year, which
includes the back-to-school and Christmas selling seasons.
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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INCOME TAXES
The effective tax rate for the three months ended November 1, 1997 and
November 2, 1996 was 39.8%.
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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995)
contained herein or made by management of the Company involve risks and
uncertainties, and are subject to change based on various important
factors. The following factors, among others, in some cases have
affected and in the future could affect the Company's financial
performance and actual results and could cause actual results for 1998
and beyond to differ materially from those expressed or implied in any
such forward-looking statements: the ability of the Company's new senior
management team to implement its strategies, changes in consumer
spending patterns, consumer preferences and overall economic conditions,
the impact of competition and pricing, changes in weather patterns,
changes in existing or potential duties, tariffs or quotas, paper and
printing costs and the ability to hire and train associates.
page 9
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
VALUE CITY DEPARTMENT STORES, INC.
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A. The Company held its 1997 Annual Meeting of Shareholders on December 2,
1997. Holders of 30,578,325 Common Shares of the Company were present
representing 95.9% of the Company's 31,892,045 Common Shares issued and
outstanding and entitled to vote at the meeting.
B. The following persons were elected as members of the Company's Board of
Directors to serve until the annual meeting following their election or
until their successors are duly elected and qualified. Each person
received the number of votes for or the number of votes with authority
withheld indicated below.
<TABLE>
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Name Votes For Votes Withheld
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Ari Deshe 29,965,105 613,220
Jon P. Diamond 29,965,082 613,243
Martin P. Doolan 29,965,417 612,908
Richard Gurian 29,965,258 613,067
Dr. Norman Lamm 29,965,402 612,923
Geraldine Schottenstein 29,964,752 613,573
Jay L. Schottenstein 29,963,454 614,871
Saul Schottenstein 29,963,591 614,734
Robert L. Shook 29,964,551 613,774
Robert M. Wysinski 29,965,350 612,975
</TABLE>
C. In addition to the election of directors described above, the proposal
to approve amendments to the Company's 1991 Stock Option Plan passed
with 27,468,454 shares voting in favor, 2,820,413 shares voting against
and 147,968 shares abstaining.
D. Not applicable.
page 10
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
(Registrant)
By /s/ Robert M. Wysinski
------------------------------------------
Robert M. Wysinski, Senior Vice President,
Chief Financial Officer, Treasurer
And Secretary *
Date: December 15, 1997
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- --------------------------------------------------------------------------------
* Mr. Wysinski is the principal financial officer and has been duly authorized
to sign on behalf of the registrant.
page 11
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Exhibit 10.1.4
CORPORATE SERVICES AGREEMENT
This Agreement is made this 13th day of October, 1997, by and between Value
City Department Stores, Inc. ("VCS") and Schottenstein Stores Corporation
("SSC"). All sections of the previous Agreement dated October 16, 1996 are
replaced by this Agreement.
1. Recitals.
A. Pursuant to an agreement dated June, 1991 (the "Exchange
Agreement"), SSC has agreed to transfer to VCS substantially all of the
business, properties and assets formerly constituting the Department Store
Division of SSC (the "Department Store Division"), and the employees of the
Department Store Division will become employees of VCS.
B. Prior to the transfer of the business, properties and assets of
the Department Store Division to VCS, employees of the Department Store Division
have provided services to other divisions of SSC, and employees of other
divisions of SSC provided services to the Department Store Division.
C. VCS and SSC desire to provide for the continued sharing of
services as set forth in this Agreement.
2. Executive Compensation. Certain executives work for VCS and SSC and
are paid by SSC. VCS shall reimburse SSC for a percentage of the executives'
salaries. That percentage will be based on the number of hours the executive
spends on VCS business versus the executive's total hours worked, such payments
to be made in monthly installments.
3. Internal Legal Advice. The in-house legal staff of SSC shall be
available to VCS for consultation and advice and for the performance of such
legal services as VCS shall reasonably request. VCS shall pay to SSC a
percentage of the payroll and related costs of such legal services equal to the
percentage of time the professional staff spends on VCS legal work versus total
professional staff hours available, such payments to be made in monthly
installments.
4. Pension and Benefit Plan Administration. The Department Store
Division has provided administrative services, and VCS will continue to provide
administrative services, with respect to the SSC Benefit Plans (as defined in
the Exchange Agreement). SSC shall pay VCS for such services during each fiscal
year a percentage of the payroll and related cost to VCS of such services equal
to the percentage of the total number of participants in such plans represented
by the number of employees of SSC who are participants in such plans at the end
of the preceding fiscal year, such payment to be made in monthly installments.
*5. Insurance and Risk Management. SSC has maintained and shall continue
to maintain casualty insurance coverage through casualty insurance policies
commonly used by the industry, shall establish appropriate financial reserves
equivalent to "first dollar" insurance coverage including, if any, self-insured
or deductible amounts for any exposure covered by the casualty insurance
policies, and shall, with respect to workers compensation maintain appropriate
insurance (excluding West Virginia which VCS maintains through the state) or
qualify as a self-insurer to meet the various requirements of the states in
which SSC operates. The policies taken together shall be the "Insurance
Program".
SSC shall continue to maintain and administer and to make available the
Insurance Program for the benefit and coverage of VCS. For continued coverage
under the Insurance Program, VCS shall pay to SSC an annual fee calculated on
the same basis as the calculation of the cost of participation by the Department
Store Division in the insurance program to wit:
o for liability coverage of all forms, the fee shall be a rate, expressed
in dollars, per $1,000 of projected annual sales, which rate shall be
based on the estimated cost of claims, claims administration, reserves
to cover self-insured retentions, premiums charged by insurance carriers
including primary policies, umbrella and excess policies, loss control
and administrative fees.
o for workers compensation, the fee shall be a rate, expressed in dollars,
per $100 of payroll, which rate shall be based on projected payroll and
other remuneration, and calculated based on projected expenses, medical
bills, excess insurance, estimated compensation and administrative
expense for loss control and insurance administration.
The fee for liability coverage shall be subject to adjustment in future
fiscal years. SSC may increase or decrease the insurance premium for coverage in
future fiscal years to reflect the adjustments needed.
page 13
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The fee for workers compensation coverage shall be subject to adjustment
in future fiscal years. SSC may increase or decrease the insurance premium for
coverage in future fiscal years to reflect the adjustments needed.
Notwithstanding the duration of this Service Agreement or any other
section of this Service Agreement pertaining to the duration of VCS and SSC
commitments to each other, the participation of VCS in the Insurance Program in
a given fiscal year does not obligate VCS to participate in the Insurance
Program in subsequent fiscal years after the given fiscal year.
*6. Store Planning, Design and Construction. VCS will provide, upon
request from SSC, store planning, design and construction services. SSC shall
reimburse VCS for the payroll and related cost of VCS employees providing such
services on the basis of the number of hours spent by such employees or projects
performed by such employees during each fiscal year and the cost to VCS of
materials supplied.
Periodically SSC Construction Division, upon request from VCS, will
coordinate construction projects for VCS. The percentage to charge each entity
for SSC's Construction Division's payroll and benefits will be adjusted every
August and January and will be based on the estimated amount of each entity's
projects to be handled by the construction division. Such payments will be made
in monthly installments based on the latest estimates of projects to be
completed for VCS by the construction division. SSC travel expenditures
specifically for VCS projects will also be reimbursed if properly identified.
*7. Advertising. SSC shall make available to VCS, upon request, the
person or persons employed by SSC as announcers or in other aspects of the
production of radio and television commercials. The percentage to charge each
entity for SSC's advertising expense will be adjusted every July and January and
will be based on the amount of billings from SOS to each entity. Whatever
percentage VCD's billings are to the total billings received from SOS
Productions for the prior six months will be the same percentage used to charge
VCS for their portion of SSC's advertising expense.
Such payments will be made in monthly installments.
8. Credit Union Administration. SSC has provided and intends to
continue to make available to its employees the Schottenstein Associates'
Federal Credit Union (the "Credit Union"). The Credit Union has been available
to employees of the Department Store Division, and VCS and SSC intend that the
Credit Union shall continue to be available to employees of VCS. The Department
Store Division has provided, and VCS shall continue to provide administrative
services in connection with the operation of the Credit Union, including the
keeping of membership lists, the processing of loan applications, and the making
and servicing of loans. SSC shall pay VCS for such services that percentage of
the payroll cost to VCS of VCS employees providing such services equal to the
percentage of the total number of VCS and SSC employees who are members of the
Credit Union represented by the total number of employees of SSC who are members
of the Credit Union at the end of the preceding fiscal year, such payment to be
made in monthly installments.
9. Safety Inspection and Maintenance. Employees of SSC will perform
safety and fire protection inspections and related maintenance of stores
operated by VCS. VCS shall reimburse SSC for the payroll and related costs of
SSC employees engaged to perform such inspections and maintenance on the basis
of the number of hours spent by such employees or projects performed by such
employees during each fiscal year.
Charges are to be made monthly.
10. Importing - SSC handles all of the paperwork related to VCS
importing of merchandise to insure all import regulations are followed and
proper duties are paid. For these services, SSC charges VCS 1% of the first cost
of the imported merchandise.
11. Buying - SSC for VCS. One buyer employed by SSC has provided buying
services for the Department Store Division, and shall continue to be available
to provide such services for VCS. Purchases by this buyer shall be made for the
account of VCS, and VCS shall pay to SSC a charge equal to $5,500 per month for
all purchases made by this buyer for VCS. All purchases made by this buyer shall
be subject to the approval of VCS.
12. Real Estate Management Fees. Schottenstein Management Co., ("SMC"),
an affiliate of SSC, will provide real estate management services for certain of
the properties which SSC had previously owned but has since sold pursuant to a
sales/leaseback transaction with a third party. The services to be provided
involve the collection of subtenant rents, maintenance of common areas and other
services typically performed by a real estate management company. VCS shall pay
to SMC a fee equal to 7% of gross subtenant rent billings and in consideration
of common area maintenance management, VCS shall pay to SMC an administrative
fee equal to 15% of their pro rata share of the common area maintenance charges
on any properties for which such 15% fee had been paid prior to the sale lease
back transaction. In addition, SMC shall provide to VCS, at no additional
charge, real estate brokerage services to market existing vacant space and any
rentable space that should become available.
page 14
<PAGE> 3
13. Additional Services; Discontinuation of Services. The parties
recognize that circumstances may change during the course of their relationship,
that the provision of services not contemplated by this Agreement for either
party by the other may prove to be desirable and beneficial, and that services
contemplated by this Agreement may no longer be required. The parties therefore
agree that, should additional services be desired, they will negotiate in good
faith with each other the nature of those services and the payment to be made
therefor, to the end that the provision of such services by the party providing
them shall not be unduly burdensome and the payment to be made for such services
shall not be unfair to the party receiving them. Should services provided
pursuant to this Agreement be determined to be unnecessary or undesirable, the
parties, by mutual agreement, may discontinue them by appropriate amendment to
this Agreement. Should additional services be deemed desirable, the parties
shall likewise amend this Agreement to specify such services and the payment to
be made therefor.
14. Annual Review. The services performed by SSC for VCS and by VCS for
SSC pursuant to this Agreement and the cost thereof shall be subject to review
not later than 90 days following the end of each fiscal year of VCS by the
members of the Audit committee of the Board of Directors of VCS. This Agreement
may be terminated by VCS if the members of the Audit Committee shall find its
operation to be unduly burdensome or to result in disproportionate expense to
VCS.
15. Effective Date. This Agreement is effective as of the beginning of
the fiscal year.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers, thereunto duly authorized, as of the date first
above written.
SCHOTTENSTEIN STORES CORPORATION
By: /s/ Jay L. Schottenstein
--------------------------------------
VALUE CITY DEPARTMENT STORES, INC.
By: /s/ Robert M. Wysinski
--------------------------------------
* Changed since last update
page 15
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-01-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> NOV-01-1997
<EXCHANGE-RATE> 1
<CASH> 22,206
<SECURITIES> 0
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<ALLOWANCES> 0
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<PP&E> 255,911
<DEPRECIATION> 106,305
<TOTAL-ASSETS> 450,721
<CURRENT-LIABILITIES> 128,523
<BONDS> 57,884
0
0
<COMMON> 110,079
<OTHER-SE> 149,701
<TOTAL-LIABILITY-AND-EQUITY> 450,721
<SALES> 264,385
<TOTAL-REVENUES> 264,385
<CGS> 166,955
<TOTAL-COSTS> 264,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,049
<INCOME-PRETAX> 5,449
<INCOME-TAX> 2,171
<INCOME-CONTINUING> 3,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,278
<EPS-PRIMARY> 0.10
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</TABLE>
