UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2003
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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RETAIL VENTURES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Ohio 20-0090238
--------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
3241 Westerville Road, Columbus, Ohio 43224
---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(614) 471-4722
---------------------------------------------------
Registrant's telephone number, including area code
VALUE CITY DEPARTMENT STORES, INC.
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares outstanding of Common Stock, without par value, as of
December 5, 2003 was 33,975,056.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at November 1, 2003
and February 1, 2003......................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended November 1, 2003
and November 2, 2002......................................... 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended November 1, 2003
and November 2, 2002......................................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 25
Item 4. Controls and Procedures.......................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 27
Item 2. Changes in Securities and Use of Proceeds........................ 27
Item 3. Defaults Upon Senior Securities.................................. 27
Item 4. Submission of Matters to a Vote of Security Holders.............. 27
Item 5. Other Information................................................ 27
Item 6. Exhibits and Reports on Form 8-K................................. 28
Signature.................................................................... 29
-2-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
November 1, February 1,
2003 2003
------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents $8,529 $11,059
Accounts receivable, net 8,163 10,666
Receivables from affiliates 1,012 933
Inventories 547,718 389,825
Prepaid expenses and other assets 22,337 19,354
Deferred income taxes 57,349 51,317
------------------------------------------------------------------------------------------
Total current assets 645,108 483,154
------------------------------------------------------------------------------------------
Property and equipment, net 241,042 233,452
Goodwill 37,619 37,619
Tradenames and other intangibles, net 44,627 47,583
Other assets 29,521 29,991
------------------------------------------------------------------------------------------
$997,917 $831,799
------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $231,683 $160,809
Accounts payable to affiliates 1,661 4,228
Accrued expenses 125,631 135,918
Current maturities of long-term obligations 799 809
------------------------------------------------------------------------------------------
Total current liabilities 359,774 301,764
------------------------------------------------------------------------------------------
Long-term obligations, net of current maturities:
Non-affiliated 209,873 94,473
Affiliated 171,710 170,191
Other noncurrent liabilities 50,482 44,207
Commitments and contingencies -- --
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 33,976,707 and
33,913,374 shares, respectively 143,183 143,183
Warrants 6,074 6,074
Retained earnings 62,847 78,767
Deferred compensation expense, net (767) (981)
Treasury shares, at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (5,200) (5,820)
------------------------------------------------------------------------------------------
206,078 221,164
------------------------------------------------------------------------------------------
$997,917 $831,799
==========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended Nine months ended
-------------------------- ---------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $ 680,639 $ 616,990 $ 1,873,765 $ 1,771,964
Cost of sales (419,251) (383,921) (1,159,291) (1,092,109)
------------------------------------------------------------------------------------------------------------
Gross profit 261,388 233,069 714,474 679,855
Selling, general and
administrative expenses (250,575) (231,241) (717,491) (673,855)
License fees and other
operating income 1,454 1,257 4,246 5,850
------------------------------------------------------------------------------------------------------------
Operating profit 12,267 3,085 1,229 11,850
Interest expense, net
Non affiliated (1,265) (3,331) (9,944) (12,082)
Affiliated (7,331) (5,434) (16,304) (10,884)
------------------------------------------------------------------------------------------------------------
Income (loss) before (provision)
benefit for income taxes
and cumulative effect of
accounting change 3,671 (5,680) (25,019) (11,116)
(Provision) benefit for income taxes (2,770) 2,184 9,099 4,199
------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change 901 (3,496) (15,920) (6,917)
------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting
change, net of income taxes -- -- -- (2,080)
------------------------------------------------------------------------------------------------------------
Net income (loss) $ 901 $ (3,496) $ (15,920) $ (8,997)
============================================================================================================
Shares used in per share calculations:
Basic 33,783 33,677 33,738 33,652
Diluted 34,173 33,677 33,738 33,652
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect
of accounting change $ 0.03 $ (0.10) $ (0.47) $ (0.21)
Cumulative effect of accounting
change, net of income taxes -- -- -- (0.06)
------------------------------------------------------------------------------------------------------------
Basic and diluted earnings
(loss) per share $ 0.03 $ (0.10) $ (0.47) $ (0.27)
============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
-----------------------------
November 1, November 2,
2003 2002
---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (15,920) $ (8,997)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Cumulative effect of accounting change -- 2,080
Amortization of discount on debt 1,519 125
Amortization of deferred compensation 214 429
Depreciation and amortization 41,657 44,183
Deferred income taxes and other noncurrent liabilities (5,303) 1,690
Loss on disposal of asset 252 1,372
Change in working capital, assets and liabilities:
Receivables 2,424 (11,401)
Inventories (157,893) (91,101)
Prepaid expenses and other assets 11 (3,782)
Accounts payable 68,307 74,977
Accrued expenses (15,585) 4,357
---------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (80,317) 13,932
---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (43,517) (30,042)
Proceeds from sale of assets 41 45
Proceeds from lease incentives 5,873 6,436
---------------------------------------------------------------------------------------------
Net cash used in investing activities (37,603) (23,561)
---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of affiliated debt -- 100,000
Debt issuance costs -- (13,205)
Principal payments under long term obligations -- (20,000)
Capital leases and other debt payments (610) (455)
Net increase (decrease) in revolving credit facility 116,000 (62,000)
---------------------------------------------------------------------------------------------
Net cash provided by financing activities 115,390 4,340
---------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (2,530) (5,289)
Cash and equivalents, beginning of period 11,059 35,915
---------------------------------------------------------------------------------------------
Cash and equivalents, end of period $ 8,529 $ 30,626
=============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Retail Ventures, Inc. and its wholly owned subsidiaries. These entities are
herein referred to collectively as the Company. The Company is managed in
three operating segments: Value City Department Stores ("Value City"), DSW
Shoe Warehouse ("DSW"), and Filene's Basement.
On October 8, 2003, the Company adopted 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 became a wholly owned subsidiary of Retail
Ventures, Inc.
In connection with the restructuring, holders of common stock of Value City
became holders of an identical number of shares of common stock of Retail
Ventures, Inc. The restructuring was effected by a merger which was
previously approved by the Company's shareholders. Effective October 8,
2003, shares of the Company's common stock trade under the ticker symbol
"RVI" on the New York Stock Exchange.
VALUE CITY. The Company operates a chain of 116 department stores located
in Ohio, Pennsylvania and 13 other Midwestern, Eastern and Southern states,
principally under the name Value City. For over 80 years, our strategy has
been to provide exceptional value by offering a broad selection of brand
name merchandise at prices substantially below conventional retail prices.
Our Value City stores carry men's, women's and children's apparel,
housewares, giftware, home furnishings, toys, jewelry, health and beauty
care items, shoes and commodities, with apparel comprising well over
one-half of total sales. Our Value City stores average 87,000 square feet
which allow us to offer over 100,000 different items of merchandise similar
to the items found in traditional department, specialty and discount
stores. Our pricing strategy is supported by our ability to purchase large
quantities of goods in a variety of special buying opportunities. For many
years, we have had a reputation in the marketplace as a purchaser of
buy-outs and manufacturers' closeouts.
DSW. The Company also operates a chain of 137 DSW stores located throughout
the United States. Our DSW stores are a chain of upscale shoe stores
offering a wide selection of dress and casual footwear below traditional
retail prices. These stores average 25,000 square feet with up to 45,000
pairs of women's and men's designer brand shoes and athletic footwear per
store. Additionally, Shonac Corporation, the parent company of DSW,
pursuant to license agreements with Value City and Filene's Basement,
operates the license shoe departments in principally all Value City and
Filene's Basement stores. Results of operations of licensed shoe
departments are included with the Value City and Filene's Basement
segments. In July 2002, Shonac Corporation entered into a Supply Agreement
with Stein Mart to supply merchandise to some of Stein Mart's shoe
departments. The Stein Mart Supply Agreement operations are included with
the DSW segment and represent the leased operations of the segment.
-6-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
FILENE'S BASEMENT. The Company operates 21 Filene's Basement stores located
principally in the Northeast United States. Our Filene's Basement stores
average 40,000 square feet and specialize in top tier brand name
merchandise of men's and women's apparel, jewelry, shoes, accessories and
home goods.
The accompanying financial statements reflect all adjustments consisting of
only normal recurring adjustments, which are, in the opinion of management,
necessary to present fairly the consolidated financial position and results
of operations for the periods presented. To facilitate comparisons with the
current year, certain previously reported balances have been reclassified
to conform to the current period presentation.
2. SHAREHOLDERS' EQUITY
Nine months ended
November 1, 2003
(in thousands)
---------------------------------------------------------------------------
Total shareholders' equity, beginning of period $221,164
Net loss (15,920)
Amortization of deferred compensation expense 214
Net unrealized gain on derivative financial
instruments, net of income tax provision of $413 620
---------------------------------------------------------------------------
Total shareholders' equity, end of period $206,078
---------------------------------------------------------------------------
In 2002, the Company issued warrants ("Warrants") with a fair value of $6.1
million to purchase 2,954,792 shares of common stock at an exercise price
of $4.50 per share to the Term Loan C Lenders. The number of shares
issuable upon the exercise of the Warrants and the per share exercise price
are subject to adjustment upon the occurrence of specified events. The
Warrants are exercisable at any time prior to June 11, 2012. The Company
has granted the Term Loan C Lenders registration rights with respect to the
shares issuable upon exercise of the Warrants. The value placed on the
Warrants using the Black-Scholes model was $6.1 million and the related
debt discount is amortized into interest expense over the life of the debt.
$75 Million Senior Convertible Loan
The Company 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 paid-in-kind (PIK) from
the closing date until June 11, 2004, 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 monthly basis and is payable in cash at
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 Company's Revolving Credit Agreement
and Term
-7-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Loans. The Convertible Loan is not subject to prepayment until June 11,
2007. The agent has the right to designate two observers to the Board of
Directors for so long as the agent is the beneficial owner of at least 50%
of the advances initially made by it and has the right to designate two
individuals to the Board of Directors for so long as the agent is the
beneficial owner of at least 50% of the conversion shares issued upon
conversion of the advances initially made by it. The Convertible Loan is
convertible at the option of the holders into shares of Retail Ventures,
Inc. common stock at a conversion price of $4.50. The maturity date is June
10, 2009.
3. EARNINGS PER SHARE
Basic earnings per share are based on the net loss and a simple weighted
average of common shares outstanding.
Diluted earnings per share reflects the potential dilution of common
shares, related to both outstanding stock options and warrants, calculated
using the treasury stock method and convertible debt, calculated using the
if-converted method. The numerator for the diluted earnings per share
calculation is the net income (loss) adjusted to remove the effect of
interest, adjusted for tax, on the convertible debt.
The denominator is summarized as follows for the diluted earnings per share
calculation (in thousands):
Three months ended Nine months ended
----------------------- -----------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 33,783 33,677 33,738 33,652
Assumed exercise of warrants -- -- -- --
Assumed conversion of debt -- -- -- --
Assumed exercise of dilutive stock options 390 -- -- --
-------------------------------------------------------------------------------------------------------
Number of shares for computation of
diluted earnings per share 34,173 33,677 33,738 33,652
-------------------------------------------------------------------------------------------------------
The stock options are dilutive for the three months ended November 1, 2003.
Stock options are anti-dilutive for the three months ended November 2, 2002
and the nine months ended November 1, 2003 and November 2, 2002. Warrants
and convertible debt are anti-dilutive for all periods presented.
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. VALUATION ACCOUNT
Reserves established and used for severance costs are as follows (in
thousands):
Nine months Year
ended ended
---------------- ----------------
November 1, 2003 February 1, 2003
---------------------------------------------------------------------------------
Balance at beginning of period $3,996 $ 5,357
Provisions to establish reserves -- 5,950
Reductions for intended purposes (3,996) (7,311)
---------------------------------------------------------------------------------
Balance at end of period -- $ 3,996
---------------------------------------------------------------------------------
Of the total provision for fiscal 2002, the work force reductions
represented $4.3 million of the severance charge. It related to 232
employees in the areas of corporate office and Value City operations.
5. 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 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 selling, general and administrative expense, in the Company's
consolidated financial statement of operations for the nine months ended
November 2, 2002.
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 otherwise shall be effective for the Company's 2004 financial
statements. Management does not expect the initial adoption of this
accounting pronouncement will have a material impact on the Company's
consolidated financial statements.
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. FIN 46 requires a variable interest entity to be consolidated by a
company, if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority
of the entity's residual returns or both. FIN 46 also requires disclosures
about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to existing entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company has no variable interest entities as of November
1, 2003.
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.
6. ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive loss represents net loss plus the results of certain
non-shareholders' equity changes not reflected in the Consolidated
Statement of Operations. The components of comprehensive loss, net of tax
are as follows (in thousands):
Three months ended Nine months ended
------------------------- --------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------------------------------------------------------------------------------------------------
Net income (loss) $901 $(3,496) $(15,920) $(8,997)
Net unrealized gain on
derivative financial instruments
net of income tax -- 528 620 1,360
Minimum pension liability, net of
income tax -- (183) -- (183)
----------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $901 $(3,151) $(15,300) $(7,820)
----------------------------------------------------------------------------------------------------
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The components of the balance sheet caption accumulated other comprehensive
loss are as follows (in thousands):
November 1, 2003 February 1, 2003
-----------------------------------------------------------------------------------------
Net unrealized loss on derivative
financial instruments, net of income tax $ -- $ (620)
Minimum pension liability, net of income tax (5,200) (5,200)
-----------------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (5,200) $(5,820)
-----------------------------------------------------------------------------------------
The Company's interest rate swap expired during the quarter ended May 3,
2003, and was not renewed.
7. STOCK BASED COMPENSATION
The Company has various stock-based employee compensations plans. 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 grant. The following table
illustrates the effect on net loss and earnings (loss) per share if the
Company had applied the fair value recognition of SFAS 123, "Accounting for
Stock-Based Compensation" (in thousands):
Three months ended Nine months ended
------------------------- ------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 901 $(3,496) $(15,920) $ (8,997)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (1,065) (1,250) (3,374) (3,700)
----------------------------------------------------------------------------------------------------
Pro forma net loss $ (164) $(4,746) $(19,294) $(12,697)
----------------------------------------------------------------------------------------------------
Profit (loss) per share:
Basic and diluted as reported $ 0.03 $ (0.10) $ (0.47) $ (0.21)
Basic and diluted pro forma $ 0.00 $ (0.14) $ (0.57) $ (0.38)
8. TAX VALUATION
The Company establishes valuation allowances for our deferred tax assets
when the amount of expected future taxable income is not likely to support
the use of the deduction or credit. For the nine months ended November 1,
2003, an allowance of $9.8 million has been provided. On February 1, 2003,
and for the previous fiscal year, no allowance was recorded.
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The tax rate prior to the allowance was 75.5%, and reflects the impact of
the non-deductible warrant amortization included for book income but not
tax.
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities is
presented below (in thousands):
Nine months ended
----------------------------
November 1, November 2,
2003 2002
--------------------------------------------------------------------
Cash paid during the period for:
Interest
Non-affiliated $11,702 12,466
Affiliated 16,262 14,573
Income taxes 1,677 2,826
Issue of warrants $ -- $ 6,074
In fiscal 2002, the Company issued warrants with a fair market value of
$6.1 million using the Black-Scholes model 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.
10. SEGMENT REPORTING
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 (loss) profit, which is defined as
income before interest expense and income taxes.
Three-month period ended November 1, 2003 (in thousands):
Filene's
Value City DSW Basement Total
---------- -------- -------- --------
Net sales $375,393 $215,757 $89,489 $680,639
Operating profit (loss) 5,507 9,137 (2,377) 12,267
Capital expenditures 7,816 8,582 3,615 20,013
Depreciation and amortization 6,557 5,601 1,706 13,864
-12-
RETAIL VENTURES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three-month period ended November 2, 2002 (in thousands):
Filene's
Value City DSW Basement Total
---------- -------- -------- --------
Net sales $367,010 $170,193 $79,787 $616,990
Operating (loss) profit (2,122) 3,147 2,060 3,085
Capital expenditures 2,716 6,771 566 10,053
Depreciation and amortization 11,311 723 1,681 13,715
Nine-month period ended November 1, 2003 (in thousands):
Filene's
Value City DSW Basement Total
---------- -------- -------- ----------
Net sales $1,054,809 $591,146 $227,810 $1,873,765
Operating (loss) profit (18,445) 22,669 (2,995) 1,229
Identifiable assets 593,911 259,453 144,553 997,917
Capital expenditures 21,294 16,798 5,425 43,517
Depreciation and amortization 24,824 11,975 4,858 41,657
Nine-month period ended November 2, 2002 (in thousands):
Filene's
Value City DSW Basement Total
---------- -------- -------- ----------
Net sales $1,062,691 $485,002 $224,271 $1,771,964
Operating (loss) profit (7,875) 16,461 3,264 11,850
Identifiable assets 581,754 277,927 117,170 976,851
Capital expenditures 10,749 17,408 1,885 30,042
Depreciation and amortization 33,940 4,522 5,721 44,183
11. 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.
-13-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RISK FACTORS AND SAFE HARBOR STATEMENT
We caution that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Report
and/or other risk factors that may be described in the Safe Harbor Statement and
Business Risks section of the Company's Annual Report on Form 10-K for the year
ended February 1, 2003, or contained in other filings with the Securities and
Exchange Commission or made by our management involve risks and uncertainties,
and are subject to change based on various important factors. The following
factors, among others, in some cases have affected and in the future could
affect our financial performance and actual results and could cause actual
results for 2003 and beyond to differ materially from those expressed or implied
in any such forward-looking statements: decline in demand for our merchandise,
our ability to attain our fiscal 2003 business plan, expected cash 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, 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. One or
more of these factors have affected, and in the future could affect, our
business and financial results and could cause actual results to differ from
plans and projections. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the
forward-looking statements included in this Quarterly Report on Form 10-Q will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representations by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Quarterly Report are based on information presently available to our
management. We assume no obligations to update any forward-looking statements
contained herein.
Historically, our operations have been seasonal, with a disproportionate amount
of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year.
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 Notes to Consolidated Financial Statements that are included in
our Annual Report on Form 10-K for the year ended February 1, 2003 that is filed
with the Securities and Exchange Commission, the preparation of
-14-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
financial statements 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 our historical trends by our customers.
- Cost of sales and merchandise inventories. We use the retail method of
accounting for substantially all of our merchandise inventories.
Merchandise inventories are stated at the lower of cost, determined
using the first-in, first-out basis, or market using the retail
inventory method. The retail method is widely used in the retail
industry due to its practicality. Under the retail inventory method,
the valuation of inventories at cost and the resulting gross margins
are calculated by applying a calculated cost to retail ratio to the
retail value of inventories. The cost of the inventory reflected on
our consolidated balance sheet is decreased by charges to cost of
sales at the time the retail value of the inventory is lowered through
the use of markdowns. Hence, earnings are negatively impacted as
merchandise is marked down prior to sale, or when reserves are
established. The amount of the reserve is equal to the difference
between "retail method cost" of the inventory and the estimated market
value based on significant assumptions about future demand and market
conditions.
-15-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reserves to value inventory at the lower of cost or market were $36.7
million on November 1, 2003 and $32.5 million at the end of fiscal
2002.
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, excluding goodwill, we perform an analysis of the
anticipated undiscounted future cash flows of the related long-lived
asset. If impairment is indicated, we reduce the carrying value by the
excess of the recorded value over the fair value. Goodwill is tested
on an annual basis using a fair value based approach.
For the nine months ended November 1, 2003, we recorded no impairments
related to long-lived assets. During fiscal 2002, we implemented SFAS
142 which required 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, that was
recorded effective for the quarter ended May 4, 2002.
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 or casualty
insurance increase beyond what was anticipated, reserves recorded may
not be sufficient and additional costs to the consolidated financial
statements could be required.
- Pension. The obligations and related assets of defined benefit
retirement plans are included in the Condensed 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
-16-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 November 1, 2003, the
actual assumption of our plans has remained unchanged from our Annual
Report on Form 10-K for the year ended February 1, 2003 filed with the
Securities and Exchange Commission. To the extent actual results vary
from assumptions, earnings would be impacted.
- Customer loyalty program. We maintain a customer loyalty program for
our DSW operations in which customers receive a future discount on
qualifying purchases. Upon reaching the target level, customers may
redeem these discounts on a future purchase. Generally, these future
discounts must be redeemed in one year. We accrue the estimated costs
of the anticipated redemptions of the discount earned at the time of
the initial purchase and charge such costs to selling, general and
administrative expense based on historical experience. The estimates
of the costs associated with the loyalty program require us to make
assumptions related to customer purchase levels and redemption rates.
The accrued liability was $3.4 million as of November 1, 2003 and $2.2
million as of February 1, 2003. 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 net income (loss) determined by the
application of generally accepted accounting principles for items that
are treated differently by the applicable taxing authorities. We
establish valuation allowances for our deferred tax assets when the
amount of expected future taxable income is not likely to support the
use of the deduction or credit. For the nine months ended November 1,
2003, an allowance of $9.8 million has been provided. On February 1,
2003, and for the previous fiscal year, no allowance was recorded.
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.
-17-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
Three months ended Nine months ended
--------------------------- ---------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
Cost of sales (61.6) (62.2) (61.9) (61.6)
------------------------------------------------------------------------------------------------------------
Gross profit 38.4 37.8 38.1 38.4
Selling, general and administrative
expenses (36.8) (37.5) (38.3) (38.0)
License fees and other
operating income 0.2 0.2 0.3 0.3
------------------------------------------------------------------------------------------------------------
Operating profit 1.8 0.5 0.1 0.7
Interest expense, net (1.3) (1.4) (1.4) (1.3)
------------------------------------------------------------------------------------------------------------
Income (loss) before (provision) benefit
for income taxes and cumulative effect
of accounting change 0.5 (0.9) (1.3) (0.6)
(Provision) benefit for income taxes (0.4) 0.3 0.5 0.2
------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change 0.1 (0.6) (0.8) (0.4)
------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting
change, net of income taxes -- -- -- (0.1)
------------------------------------------------------------------------------------------------------------
Net income (loss) 0.1% (0.6)% (0.8)% (0.5)%
------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NOVEMBER 1, 2003 COMPARED TO THREE MONTHS ENDED NOVEMBER 2,
2002
Net sales increased $63.6 million, or 10.3%, from $617.0 million to $680.6
million. Comparable stores sales for the quarter were positive for each segment.
Comparable store sales by segment were:
Three months ended
--------------------------------------
November 1, 2003 November 2, 2002
------------------------------------------------------------------------------
Value City 2.3% (7.2)%
DSW 11.7% 1.8%
Filene's Basement 8.5% 0.0%
------------------------------------------------------------------------------
Total 5.4% (4.6)%
------------------------------------------------------------------------------
-18-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Value City's sales were $375.4 million, an increase of $8.4 million from the
prior year quarter. Apparel sales improved 1.4% in the quarter. The apparel
divisions categories of ladies', men's and children's represent 60.4% of total
retail sales in the quarter and had comparative sales of 0.9%, -1.3% and 6.7%,
respectively. Non-apparel sales improved 5.1% in the quarter primarily as a
result of the strong sales performance in the domestics and housewares
categories. which increased 7.2% and 13.3%, respectively.
DSW sales were $215.8 million, a 26.8% increase in the quarter, which includes a
net increase of 13 DSW stores and the addition of 98 leased locations. DSW's
leased department operations represented 6.9% of the total DSW sales in the
quarter, up from 1.0% in the prior year quarter.
Filene's Basement sales were $89.5 million, a 12.2% increase in the quarter.
Sales increases in the segment were primarily the result of a broader assortment
of brand name merchandise available in the period.
Gross profit increased by $28.3 million to $261.4 million, from $233.1 million,
and increased as a percentage of sales from 37.8% to 38.4%. The Value City
segment gross profit remained relatively unchanged as compared to the prior year
quarter. The DSW segment increase is a result of improved initial markups on
merchandise purchased during the quarter. Filene's Basement segment gross profit
improved as markdowns as a percent of sales decreased in the current year
quarter. Gross profit, as a percent to sales by segments in the third quarter,
was:
Three months ended
-------------------------------------
November 1, 2003 November 2, 2002
--------------------------------------------------------------------------------
Value City 38.0% 37.9%
DSW 40.8% 39.7%
Filene's Basement 34.2% 33.0%
--------------------------------------------------------------------------------
Total 38.4% 37.8%
--------------------------------------------------------------------------------
Selling, general and administrative expenses ("SG&A") increased $19.4 million,
from $231.2 million to $250.6 million, and decreased as a percentage of sales
from 37.5% to 36.8%. This increase includes $8.6 million attributable to 14 new
stores and 98 new leased shoe departments in operation in the DSW segment. SG&A,
as a percent of sales by segment in the third quarter, was:
Three months ended
------------------------------------
November 1, 2003 November 2, 2002
--------------------------------------------------------------------------------
Value City 36.8% 38.8%
DSW 36.7% 37.9%
Filene's Basement 37.2% 30.8%
--------------------------------------------------------------------------------
Total 36.8% 37.5%
--------------------------------------------------------------------------------
License fees and other operating income increased $0.2 million, from $1.3
million to $1.5 million, and remained as a percentage of sales at 0.2%. License
fees and layaway fees represent
-19-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
income received from leased departments in Value City and Filene's Basement
operations and layaway sales at Value City.
Operating profit increased to $12.3 million, from $3.1 million, and increased as
a percentage of sales from 0.5% to 1.8%.
Net interest expense for the quarter decreased $0.2 million to $8.6 million. The
decrease is due primarily to a 1.2% decrease in our weighted average borrowing
rate partially offset by the increase of $46.5 million in average borrowings
from last year to this year primarily used in inventories and capital additions.
The effective tax rate for the three months ended November 1, 2003 is 75.5%
versus 38.5% for the three months ended November 2, 2002. During the period, the
Company did not change the valuation allowance for our deferred tax assets. The
tax rate reflects the impact of the non-deductible warrant amortization included
for book income but not tax.
NINE MONTHS ENDED NOVEMBER 1, 2003 COMPARED TO NINE MONTHS ENDED NOVEMBER 2,
2002
Net sales increased $101.8 million, or 5.7%, from $1,772.0 million to $1,873.8
million. Comparable stores sales for the nine-month period were negative for
Value City segment and positive for the DSW and Filene's Basement segments.
Comparable store sales by segment were:
Nine months ended
--------------------------------------
November 1, 2003 November 2, 2002
--------------------------------------------------------------------------------
Value City (0.4)% (4.9)%
DSW 4.2% 0.3%
Filene's Basement 0.6% 1.9%
-------------------------------------------------------------------------------
Total 0.9% (3.0)%
--------------------------------------------------------------------------------
Value City's sales were $1,054.8 million, a decrease of 0.7% in the period.
Apparel sales decreased 2.2% in the nine month period. The apparel divisions
categories of ladies', men's and children's represent 58.3% of total retail
sales in the year to date period, and had comparative sales of -2.0%, -3.7% and
0.5%, respectively. Non-apparel sales improved 3.1% in the period primarily as a
result of the strong sales performance in the domestics and housewares
categories, which increased 6.2% and 14.2%, respectively.
DSW sales were $591.1 million, a 21.9% increase in the nine-month period, which
includes a net increase of 13 DSW stores and the addition of 98 leased
locations. The leased department operations included in the segment account for
6.7% of the total segment sales in the nine-month period up from 0.4% in the
prior nine-month period.
Filene's Basement sales were $227.8 million, a 1.6% increase in the nine-month
period. This improvement reflects the repositioning of our merchandising plan to
improve brand mix and merchandise presentation.
-20-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gross profit increased by $34.6 million to $714.5 million, from $679.9 million,
and decreased as a percentage of sales from 38.4% to 38.1%. All segments were
negatively impacted by the highly competitive retail environment and the
unseasonably cooler early spring/summer season. The Value City segment gross
profit decrease is attributable to the lower initial markups on merchandise
purchased during the nine-month period and higher markdowns. The DSW segment
increase is a result of improved initial markups on merchandise purchased during
the first nine months of the fiscal year. Filene's Basement segment gross profit
was negatively impacted by markdowns required to sell transitional merchandise
and a planned lowering of the initial markup. Gross profit, as a percent of
sales by segment in the nine-month period, was:
Nine months ended
------------------------------------
November 1, 2003 November 2, 2002
---------------------------------------------------------------------------------
Value City 37.9% 38.5%
DSW 40.2% 39.9%
Filene's Basement 33.7% 34.5%
---------------------------------------------------------------------------------
Total 38.1% 38.4%
---------------------------------------------------------------------------------
Selling, general and administrative expenses ("SG&A") increased $43.6 million,
from $673.9 million to $717.5 million, and increased as a percentage of sales
from 38.0% to 38.3%. This increase includes $28.9 million attributable to 14 new
stores and 98 new leased shoe departments in operation in the DSW segment. The
increase in SG&A as a percentage of sales is due in part to additional marketing
efforts to promote sales and create brand awareness particularly in the Value
City and DSW segments particularly through the use of electronic media. The
prior year SG&A expenses include the $3.3 million debt extinguishment expense
reported in the prior year nine-month period as extraordinary item. SG&A as a
percent of sales by segment in the nine-month period were:
Nine months ended
-----------------------------------
November 1, 2003 November 2, 2002
---------------------------------------------------------------------------------
Value City 39.9% 39.6%
DSW 36.5% 36.5%
Filene's Basement 35.4% 33.7%
---------------------------------------------------------------------------------
Total 38.3% 38.0%
---------------------------------------------------------------------------------
License fees and other operating income decreased $1.7 million, from $5.9
million to $4.2 million, and remained as a percentage of sales at 0.3%.
Operating profit decreased $10.6 million to a profit of $1.2 million, from a
profit of $11.8 million, and decreased as a percentage of sales from 0.7% to
0.1%. The decrease is attributable to sales and margin shortfalls and increased
SG&A as a percent to sales during the nine-month period.
-21-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net interest expense for the nine-month period increased $3.3 million to $26.2
million. The increase is due primarily to a 1.5% increase in our weighted
average borrowing rate, a result of new term debt entered into June 11, 2002,
and an increase of $14.9 million in average borrowings from last year to this
year. The increase in average borrowings from last year to this year was used
primarily for inventories and capital additions.
The effective tax rate for the nine months ended November 1, 2003 is 36.4%
versus 37.8% for the nine months ended November 2, 2002. During the current
nine-month period the Company established a valuation allowance for our deferred
tax assets of $9.8 million. Our tax rate prior to the allowance was 75.5%, and
reflects the impact of the non-deductible warrant amortization included for book
income but not tax.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $285.3 million at November 1, 2003 and $247.1 million at
November 2, 2002. Current ratios at those dates were 1.79 and 1.67. Net cash
used in operating activities totaled $80.3 million in year-to-date fiscal 2003
compared to $13.9 million provided by operations in year-to-date fiscal 2002.
The decrease in operating cash flow for the first nine months of fiscal 2003,
compared with that for the comparable period in fiscal 2002, resulted primarily
from the increased net loss in fiscal 2003, increased inventory levels of $157.9
million in fiscal 2003 and a decrease in accrued expenses of $15.6 million for
the fiscal 2003 period. During the period the inventory increase was the result
of new DSW stores and increased inventories in the Value City and Filene's
Basement segments. These increases in inventories, reductions in accrued
expenses and operating shortfalls are funded from operations, payables leverage
and borrowings under Revolving Credit Facility. The facility increased $116.0
million in the first nine months of fiscal 2003. The same period of fiscal 2002
had a $91.1 million increase in inventory levels. The increase in inventory is
principally a result of the new stores in operation at the DSW segment, the
addition of 70 leased shoe departments we supply and a planned increase in
average per store inventory levels at the Value City segment. This increase in
inventories was funded from operations, payables leverage and borrowings under
the Company's Revolving Credit Facility.
Net cash used for capital expenditures was $43.5 million for the nine-month
period ended November 1, 2003, and $30.0 million for the nine-month period ended
November 2, 2002. During the nine-month period ended November 1, 2003, capital
expenditures included $11.0 million for new stores, $20.2 million for
improvements in existing stores and $12.3 million for Corporate and MIS
equipment and systems upgrades. Proceeds from lease incentives were $5.9 million
in year-to-date fiscal 2003 compared to $6.4 million in year-to-date fiscal 2002
and are amortized as a reduction of rent expense over the life of the lease.
On June 11, 2002, we, together with our principal subsidiaries, entered into a
$525.0 million refinancing that consists of three separate credit facilities:
(i) a new three-year $350.0 million revolving credit facility (the "Revolving
Credit Facility"), (ii) two $50.0 million term loan facilities (the "Term
Loans") provided equally by Cerberus Partners, L.P. and Schottenstein Stores
Corporation ("SSC"), and (iii) an amended and restated $75.0 million senior
convertible loan, initially entered into by us on March 15, 2000, which is held
equally by Cerberus Partners, L.P. and SSC (the "Convertible Loan").
-22-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is subject to numerous restrictive covenants (other than financial
covenants) relating to the management and operation of the Company. The
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.
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is structured in
a manner that allows us and our subsidiaries availability based on the value of
inventories and receivables. Primary security for the Revolving Credit Facility
is provided by a first priority lien on all of our inventory and accounts
receivable, as well as certain intercompany notes and payment intangibles. The
Revolving Credit Facility also has a second priority perfected interest in all
of the collateral securing the Term Loans. Interest on borrowings is calculated
at the bank's base rate or Eurodollar rate plus 2.00% to 2.75%, depending upon
the level of average excess availability we maintain. At November 1, 2003,
$122.7 million was available under the Revolving Credit Facility. Direct
borrowings aggregated $180.0 million. Additionally, $12.3 million of letters of
credit were issued and outstanding.
$100 Million Term Loans
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0 million
Term Loan C. All obligations under the Term Loans are senior debt and have the
same rights and privileges as the Revolving Credit Facility and the Convertible
Loan. We and our principal subsidiaries are obligated on the Term Loans. The
maturity date is June 11, 2005.
The Term Loans stated rate of interest per annum during the initial two years is
14% if paid in cash and 15% if we elect a paid-in-kind ("PIK") option. During
the first two years of the Term Loans, we may pay all interest by PIK. During
the final year of the Term Loans, the stated rate of interest is 15.0% if paid
in cash or 15.5% by PIK and the PIK option is limited to 50% of the interest
due.
In 2002, we issued 2,954,792 warrants ("Warrants") to purchase shares of common
stock, at an 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 value placed on the Warrants, using the
Black-Scholes model, was $6.1 million and the related debt discount is amortized
into interest expense over the life of the debt. The numbers of shares issuable
upon the occurrence of any of the following:
The issuance of additional shares of common stock without consideration or for a
consideration per share less than the Warrant exercise price, declaration of any
dividend, the combination or consolidation of the outstanding shares of common
stock into a lesser number of shares, the issuance or sale of additional shares
at a price per share less than the current market price but
-23-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
greater than the Warrant exercise price, the issuance of convertible securities
which are convertible into shares our common stock, or the exchange of shares in
a merger or other business combination.
$75 Million Senior Convertible Loan
We have amended and restated our $75.0 million Senior Subordinated Convertible
Loan Agreement on June 11, 2002 ("the "Convertible Loan"). As amended,
borrowings under the Convertible Loan bear interest at 10% per annum. At our
option, interest may be PIK until June 11, 2004, 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 monthly basis and is payable in cash at 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. The agent has the right to designate two observers to our Board of
Directors for so long as the agent is the beneficial owner of at least 50% of
the advances initially made by it and has the right to designate two individuals
to our Board of Directors for so long as the agent is the beneficial owner of at
least 50% of the conversion shares issued upon conversion of the advances
initially made by it.
The Convertible Loan is convertible at the option of the holders into shares of
Retail Ventures, Inc. common stock at a conversion price of $4.50. The maturity
date is June 10, 2009.
Achievement of expected cash flows from operations and compliance with the
covenants of our credit agreements (as discussed in the Notes to Consolidated
Financial Statements that are included in our 2002 Annual Report on Form 10-K
filed with the Securities and Exchange Commission) 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 the nine-month
period ended November 1, 2003 were below plan, we believe that cash generated by
operations, along with the available proceeds from our credit agreements and
other sources of financing will be sufficient to meet our obligations for
working capital, capital expenditures, and debt service. 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.
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 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
-24-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 selling, general and administrative expense, in the Company's
consolidated financial statement of operations.
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 otherwise shall be
effective for the Company's 2004 financial statements. Management does not
expect the initial adoption of this accounting pronouncement will have a
material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
requires a variable interest entity to be consolidated by a company, if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. We have no variable interest entities as of
November 1, 2003.
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 our 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk results from fluctuations in interest rates. The Company
is exposed to interest rate risk through borrowings under its revolving credit
agreement.
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RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A hypothetical 100 basis point increase in interest rates, net of taxes, would
have an approximate $0.6 million impact to the financial position, liquidity and
results of operations for the nine months ended November 1, 2003.
Our interest rate swap expired during the quarter ended May 3, 2003, and was not
renewed.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information we are
required to disclose in the reports that we file under the Exchange Act is
accumulated and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.
As of end of the period covered by this report, our management, with the
participation of our chief executive officer and chief financial officer,
carried out an evaluation of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based
upon this evaluation, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were (1) designed
to ensure that material information relating to our company is accumulated and
made known to our management, including our chief executive officer and chief
financial officer, in a timely manner, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Management believes, however, that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
Internal Controls. There has been no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act) during our fiscal quarter ended November 1, 2003, that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 8, 2003, the Company adopted 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 became a wholly owned
subsidiary of Retail Ventures.
In connection with the restructuring, holders of common stock of
Value City became holders of an identical number of shares of
common stock of Retail Ventures. The restructuring was effected
by a merger which was previously approved by the Company's
shareholders. Effective October 8, 2003, shares of the Company's
common stock trade under the ticker symbol "RVI" on the New York
Stock Exchange.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its 2003 Annual Meeting of Shareholders on
September 10, 2003. Holders of 32,314,895 Common Shares of the
Company were present representing 96% of the Company's 33,649,269
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.
Name Votes For Votes Withheld
--------------------- --------- --------------
Henry L. Aaron 32,201,778 113,117
Ari Deshe 32,200,524 114,371
Jon P. Diamond 32,200,674 114,221
Elizabeth M. Eveillard 31,874,023 440,872
Jay L. Schottenstein 30,870,248 1,444,647
Harvey L. Sonnenberg 31,874,124 440,771
James L. Weisman 32,211,818 103,077
Item 5. OTHER INFORMATION. Not applicable
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Document
----------- --------
31.1* Certification of Chief Executive Officer
under Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2* Certification of Chief Financial Officer
under Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1* Certification of Chief Executive Officer
under Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2* Certification of Chief Financial Officer
under Section 906 of the Sarbanes-Oxley Act
of 2002.
* Filed with this report.
(b) Reports on Form 8-K.
A current report on Form 8-K, dated October 8, 2003, was filed
with the Securities and Exchange Commission on October 8, 2003
(Item 5).
A current report on Form 8-K, dated December 8, 2003, was
filed with the Securities and Exchange Commission on December
8, 2003 (Item 12).
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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.
RETAIL VENTURES, INC.
(Registrant)
------------
Date: December 12 , 2003 By: /s/ James A. McGrady
----------------------------------
James A. McGrady,
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary of Retail Ventures, Inc.
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