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 October 30, 2004
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
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
Not applicable
---------------------------------------------------------
(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 outstanding Common Shares, without par value, as of November 30,
2004 was 34,076,155.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at October 30, 2004
and January 31, 2004....................................................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended October 30, 2004 and
November 1, 2003........................................................................... 4
Condensed Consolidated Statements of Shareholders' Equity
for the nine months ended October 30, 2004 and November 1, 2003............................ 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended October 30, 2004 and November 1, 2003............................ 6
Notes to the Condensed Consolidated Financial Statements....................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 28
Item 4. Controls and Procedures........................................................................ 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ................................... 29
Item 3. Defaults Upon Senior Securities................................................................ 29
Item 4. Submission of Matters to a Vote of Security Holders............................................ 29
Item 5. Other Information.............................................................................. 29
Item 6. Exhibits....................................................................................... 29
Signature........................................................................................................ 30
Index to Exhibits................................................................................................ 31
-2-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
October 30, January 31,
2004 2004
----------- -----------
ASSETS
Cash and equivalents $ 17,666 $ 14,226
Accounts receivable, net 13,135 8,969
Receivables from related parties 193 137
Inventories 584,832 420,338
Prepaid expenses and other assets 23,844 10,651
Deferred income taxes 52,120 44,933
----------- ---------
Total current assets 691,790 499,254
----------- ---------
Property and equipment, net 269,822 251,818
Goodwill 37,619 37,619
Tradenames and other intangibles, net 44,512 43,638
Other assets 34,295 31,616
----------- ---------
Total assets $ 1,078,038 $ 863,945
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 272,384 $ 147,771
Accounts payable to related parties 5,178 3,335
Accrued expenses 129,285 112,550
Current maturities of long-term obligations 573 741
----------- ---------
Total current liabilities 407,420 264,397
----------- ---------
Long-term obligations, net of current maturities
Non-related 214,286 154,724
Related parties 173,735 172,216
Other noncurrent liabilities 66,504 55,841
Commitments and contingencies
Common shares, without par value;
160,000,000 authorized; issued, including
treasury shares, 34,083,706 and
33,990,707 shares, respectively 143,395 143,077
Warrants 6,074 6,074
Retained earnings 72,994 74,321
Deferred compensation expense, net (300) (635)
Treasury shares, at cost, 7,551 shares (59) (59)
Accumulated other comprehensive loss (6,011) (6,011)
----------- ---------
Total shareholders' equity 216,093 216,767
----------- ---------
Total liabilities and shareholders' equity $ 1,078,038 $ 863,945
=========== =========
The accompanying notes are an integral part of the Condensed 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
------------------------ --------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ---------- -----------
Net sales, excluding sales of
licensed departments $ 699,738 $ 680,639 $ 1,977,692 $ 1,873,765
Cost of sales (419,776) (419,251) (1,178,731) (1,159,291)
--------- --------- ----------- -----------
Gross profit 279,962 261,388 798,961 714,474
Selling, general and administrative
expenses (273,560) (249,597) (777,025) (714,516)
License fees and other income 1,950 1,454 5,073 4,246
--------- --------- ----------- -----------
Operating profit 8,352 13,245 27,009 4,204
Interest expense, net
Non-related (3,123) (2,959) (8,981) (9,268)
Related parties (6,815) (6,615) (20,266) (19,955)
--------- --------- ----------- -----------
(Loss) income before income taxes (1,586) 3,671 (2,238) (25,019)
Benefit (provision) for income taxes 646 (2,770) 911 9,099
--------- --------- ----------- -----------
Net (loss) income $ (940) $ 901 $ (1,327) $ (15,920)
========= ========= =========== ===========
Basic and diluted (loss) income per share:
Basic $ (0.03) $ 0.03 $ (0.04) $ (0.47)
Diluted $ (0.03) $ 0.03 $ (0.04) $ (0.47)
--------- --------- ----------- -----------
Shares used in per share calculations:
Basic 33,978 33,783 33,914 33,738
Diluted 33,978 34,173 33,914 33,738
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
-4-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
Number of Shares
--------------------- Accumulated
Common Deferred Other
Common Shares Common Retained Compensation Treasury Comprehensive
Shares in Treasury Shares Warrants Earnings Expense Shares Loss Total
------ ----------- ------- -------- -------- ------------ -------- --------------- -----
BALANCE, FEBRUARY 1, 2003 33,913 8 $143,183 $6,074 $ 78,767 $(981) $(59) $(5,820) $221,164
Net loss (15,920) (15,920)
Exercise of stock options 7
Net issuance/forfeitures
of restricted shares 57
Amortization of deferred
compensation expense 214 214
Net unrealized gain on
derivative instruments,
net of taxes of $413 620 620
------ - -------- ------ -------- ----- ---- ------- --------
BALANCE, NOVEMBER 1, 2003 33,977 8 $143,183 $6,074 $ 62,847 $(767) $(59) $(5,200) $206,078
====== = ======== ====== ======== ===== ==== ======= ========
BALANCE, JANUARY 31, 2004 33,991 8 $143,077 $6,074 $ 74,321 $(635) $(59) $(6,011) $216,767
Net loss (1,327) (1,327)
Exercise of stock options 109 422 422
Forfeiture of
restricted shares (16) (104) 104
Amortization of deferred
compensation expense 231 231
------ - -------- ------ -------- ----- ---- ------- --------
BALANCE, OCTOBER 30, 2004 34,084 8 $143,395 $6,074 $ 72,994 $(300) $(59) $(6,011) $216,093
====== = ======== ====== ======== ===== ==== ======= ========
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
-5-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine months ended
-------------------------
October 30, November 1,
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $ (1,327) $ (15,920)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of debt issuance costs and discount on debt 4,269 4,494
Amortization of deferred compensation 231 214
Depreciation and amortization 39,507 38,682
Deferred income taxes and other noncurrent liabilities (9,008) (5,303)
Loss on disposal of assets 737 252
Change in working capital, assets and liabilities:
Receivables (4,222) 2,424
Inventories (164,494) (157,893)
Prepaid expenses and other assets (14,305) 11
Accounts payable 126,456 68,307
Accrued expenses 16,485 (15,585)
--------- ---------
Net cash used in operating activities (5,671) (80,317)
--------- ---------
Cash flows from investing activities:
Capital expenditures (54,927) (43,517)
Proceeds from sale of assets 111 41
Tradename acquisition (4,056) --
Proceeds from lease incentives 8,605 5,873
--------- ---------
Net cash used in investing activities (50,267) (37,603)
--------- ---------
Cash flows from financing activities:
Principal payments of capital lease obligations
and other debt (606) (610)
Net increase in revolving credit facility 60,000 116,000
Debt issuance costs (438) --
Proceeds from exercise of stock options 422 --
--------- ---------
Net cash provided by financing activities 59,378 115,390
--------- ---------
Net increase (decrease) in cash and equivalents 3,440 (2,530)
Cash and equivalents, beginning of period 14,226 11,059
--------- ---------
Cash and equivalents, end of period $ 17,666 $ 8,529
========= =========
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
-6-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OPERATIONS
Retail Ventures, Inc. and its wholly owned subsidiaries are herein referred
to collectively as the Company. The Company operates three segments. Value
City Department Stores ("Value City") and Filene's Basement, Inc. ("Filene's
Basement") segments operate full-line, off-price department stores. The DSW
Shoe Warehouse, Inc. ("DSW") segment sells better-branded off-price shoes and
accessories. As of October 30, 2004, there are a total of 116 Value City
Department Stores located principally in the Midwestern, Eastern and Southern
United States, 167 DSW stores located throughout the United States and 25
Filene's Basement stores located primarily in major metropolitan areas. DSW
also supplies, under supply arrangements, to 204 locations for other
non-related retailers in the United States.
On October 8, 2003, the Company reorganized its corporate structure into a
holding company form whereby Retail Ventures, Inc., an Ohio corporation,
became the successor issuer to Value City Department Stores, Inc. As a result
of the reorganization, Value City Department Stores, Inc. became a
wholly-owned subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of Value City
became holders of an identical number of common shares of Retail Ventures,
Inc. The reorganization was effected by a merger which was previously
approved by the Company's shareholders. Since October 8, 2003, the Company's
common shares have been listed for trading under the ticker symbol "RVI" on
the New York Stock Exchange.
VALUE CITY. We operate a chain of 116 off-price department stores located in
the Midwestern, Eastern and Southern states, principally under the name Value
City. For over 80 years, our strategy has been to provide exceptional value
by offering a broad selection of brand name merchandise at prices
substantially below conventional retail prices.
DSW. We operate a chain of 167 DSW stores located throughout the United
States. The DSW stores are upscale shoe stores offering a wide selection of
branded dress and casual footwear below traditional retail prices.
Additionally, Shonac Corporation, the parent company of DSW, pursuant to
license agreements with Value City and Filene's Basement, operates licensed
shoe departments in most Value City and Filene's Basement stores. Results of
operations of the licensed shoe departments are included with the Value City
and Filene's Basement segments. Shonac Corporation has also entered into
agreements to supply merchandise to unrelated third parties' shoe
departments. The results of substantially all supply agreements are included
with the DSW segment.
FILENE'S BASEMENT. We operate 25 Filene's Basement stores with 19 of the
total stores located in the Boston, New York City and Washington, D.C.
metropolitan areas. Filene's Basement focuses on providing the top tier brand
names at everyday low prices for men's and women's apparel, jewelry, shoes,
accessories and home goods.
-7-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements should be read in
conjunction with the 2003 Annual Report on Form 10-K/A.
In the opinion of management, the unaudited interim financial statements
reflect all adjustments consisting of only normal recurring adjustments,
which are 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.
3. TRADENAMES AND OTHER INTANGIBLES
During the three months ended May 1, 2004, the Company acquired the "Leslie
Fay" tradename for approximately $4.0 million. The anticipated life of the
amortizing asset has been initially assigned 15 years.
4. LONG-TERM OBLIGATIONS
During July, 2004 the Company extended the terms of both the $350 million
Revolving Credit Agreement and the $100 million Term Loans by one year. The
Revolving Credit Agreement and the Term Loans originally set to expire on
June 11, 2005, have been extended through June 11, 2006, under substantially
the same terms and conditions.
5. PENSION BENEFIT PLANS
The Company has three qualified defined benefit pension plans assumed at the
time of previous acquisitions. The Company's funding policy is to contribute
an amount annually that satisfies the minimum funding requirements of ERISA
and that is tax deductible under the Internal Revenue Code. Contributions
provide not only for benefits attributed to service to date but also for
those anticipated to be earned in the future. The Company uses a January 31
measurement date for its plans.
The following table shows the components of net periodic benefit cost for the
three and nine months ended October 30, 2004 and November 1, 2003:
Three months ended Nine months ended
-------------------------- --------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---------- ----------- ----------- -----------
(in thousands)
Service cost $ 11 $ 9 $ 32 $ 26
Interest cost 350 323 1,051 969
Expected return on plan assets (359) (321) (1,077) (964)
Amortization of transition asset (9) (19) (28) (56)
Amortization of net loss 145 149 435 447
----- ----- ------- -----
Net periodic benefit cost $ 138 $ 141 $ 413 $ 422
----- ----- ------- -----
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company had anticipated contributing approximately $1.5 million in fiscal
2004 to meet minimum funding requirements. As of October 30, 2004, the
Company contributed approximately $1.7 million.
6. 401(K) AND PROFIT SHARING PLAN
The Company recently became aware of an issue involving its 401(K) and profit
sharing plan. From September 2001 until July 13, 2004, the Company failed to
register the Company's common shares transferred to participants in its
401(k) plan and the interests of those participants in that plan, which may
also be deemed securities requiring registration. In addition, prior to
November, 2004, the Company failed to deliver a prospectus that complied in
all respects with SEC requirements. The Company intends to offer a 30-day
right of rescission to those participants who received its common shares in
violation of applicable securities laws during the one year period preceding
the date of the rescission offer, the statute of limitations period the
Company believes may apply to claims for rescission under applicable laws, or
possibly a longer or shorter period.
Under the rescission offer, the participants will be entitled to require the
Company to repurchase shares at the price per share of the Company's common
shares when the shares were transferred to the participant's account, plus
interest at a rate to be determined. Based upon the Company's preliminary
investigation, it currently believes that up to approximately 700,000 common
shares transferred to 401(k) plan participants since September 2001 may not
have been properly registered in accordance with the Securities Act of 1933.
The Company has undertaken certain curative action under the applicable
securities laws and is also investigating its obligations to undertake any
other curative action which may be required under applicable laws. While the
Company cannot predict the possible effect of federal or state regulatory
action, the Company does not believe that these violations will have a
material adverse effect on the Company's financial position or results of
operations.
7. SHAREHOLDERS' EQUITY
On September 26, 2002, the Company issued 2,954,792 warrants ("Warrants") to
purchase common shares, at an initial exercise price of $4.50 per share, to
Cerberus Partners, L.P., Schottenstein Stores Corporation and Back Bay
Capital Funding LLC (the "Term Loan C Lenders"). The Warrants are exercisable
at any time prior to June 11, 2012. The Company has granted the Term Loan C
Lenders registration rights with respect to the shares issuable upon exercise
of the Warrants. The $6.1 million value ascribed to the Warrants was
estimated as of the date of issuance using the Black-Scholes pricing model
with the following assumptions: risk-free interest rate of 5.6%; expected
life of 10 years; expected volatility of 47%; illiquidity discount of 10%;
and an expected dividend yield of 0%. The related debt discount is amortized
into interest expense over the life of the debt.
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The number of shares issuable varies upon the occurrence of the following:
(i) the issuance of additional common shares without consideration or for a
consideration per share less than the Warrant exercise price; (ii) the
declaration of any dividend; (iii) the combination or consolidation of the
outstanding common shares into a lesser number of shares; (iv) the issuance
or sale of additional shares at a price per share less than the current
market price but greater than the Warrant exercise price; (v) the issuance of
convertible securities which are convertible into common shares; and/or (vi)
the exchange of shares in a merger or other business combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties
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 to the second anniversary thereof, and thereafter, at the
option of the Company, up to 50% of the interest due may be PIK until
maturity. PIK interest accrued with respect to the Convertible Loan is added
to the outstanding principal balance, on a quarterly basis and is payable in
cash upon the maturity of the debt. The Convertible Loan is guaranteed by all
principal subsidiaries and is secured by a lien on assets junior to liens
granted in favor of the lenders on the Revolving Credit Agreement and Term
Loans. The Convertible Loan is not subject to prepayment 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 or issuable upon conversion of
the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into common
shares of the Company and has a conversion price of $4.50. The maturity date
is June 10, 2009.
8. EARNINGS PER SHARE
Basic earnings per share are based on the net income (loss) and a simple
weighted average of common shares outstanding. Diluted earnings per share
reflects the potential dilution of common shares, related to outstanding
stock options, Stock Appreciation Rights (SARS) 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.
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months ended Nine months ended
------------------------- ------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---------- ----------- ----------- -----------
(in thousands)
Weighted average shares outstanding 33,978 33,783 33,914 33,738
Assumed exercise of dilutive stock options -- 390 -- --
------ ------ ------ ------
Number of shares for computation of
dilutive earnings per share 33,978 34,173 33,914 33,738
------ ------ ------ ------
For the three months ended November 1, 2003, all potentially dilutive SARS,
warrants and convertible debt, were anti-dilutive. For the three months ended
October 30, 2004 and the nine months ended October 30, 2004 and November 1,
2003 all potentially dilutive instruments: stock options, SARS, warrants and
convertible debt, were anti-dilutive.
9. 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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
certain entities considered to be variable interest entities (VIEs). An
entity is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital is
insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of
the VIE's expected losses or residual returns if they occur. FIN 46 provides
certain exceptions to these rules, relating to qualifying special purpose
entities (QSPE's) subject to the requirements of SFAS No. 140. Upon its
original issuance, FIN 46 required that VIEs created after January 31, 2003
would be consolidated immediately, while VIEs created prior to February 1,
2003 were to be consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of
VIEs created prior to February 1, 2003 to December 31, 2003 for calendar
year-end companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of the original interpretation and to exempt
certain entities from its requirements. FIN 46R provides special effective
date provisions to enterprises that fully or partially applied to FIN 46
prior to the issuance of the revised interpretation. In particular, entities
that have already adopted FIN 46 are not required to adopt FIN 46R until the
quarterly reporting period ended July 31, 2004. Adoption of the required
sections of FIN 46, as modified and interpreted, including the provisions of
FIN 46R, did not have any effect on the Company's consolidated financial
statements or disclosures.
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. ACCUMULATED OTHER COMPREHENSIVE LOSS
The balance sheet caption accumulated other comprehensive loss of $6.0
million at October 30, 2004 and January 31, 2004, relates to the minimum
pension liability, net of income tax.
11. STOCK BASED COMPENSATION
The Company has various stock-based employee compensation plans. The Company
accounts for those plans in accordance with APB No. 25, "Accounting For Stock
Issued to Employees," and related Interpretations. Accordingly, no
stock-based employee compensation cost has been recognized for the fixed
stock option plans or the stock purchase plan. The following table
illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition of SFAS 123, "Accounting for Stock-Based
Compensation."
Three months ended Nine months ended
---------------------------- ---------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---------- ---------- ---------- -----------
(in thousands, except per share amounts)
Net (loss) income, as reported $ (940) $ 901 $(1,327) $(15,920)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (468) (1,065) (1,895) (3,374)
------- ------- ------- --------
Pro forma net (loss) income $(1,408) $ (164) $(3,222) $(19,294)
------- ------- ------- --------
(Loss) income per share:
Basic and diluted as reported $ (0.03) $ 0.03 $ (0.04) $ (0.47)
Basic and diluted pro forma $ (0.04) $ 0.00 $ (0.10) $ (0.57)
12. TAX VALUATION
The Company establishes valuation allowances for 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 October 30, 2004, no
additional allowance has been provided. During the previous fiscal year ended
January 31, 2004 an allowance of $1.5 million was provided for as the Company
determined that it was more likely than not that future taxable income may
not be sufficient to fully utilize deferred tax assets.
The tax rate of 40.7% reflects the impact of the non-deductible warrant
amortization included for book income but not tax.
-12-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities is
presented below:
Nine months ended
---------------------------
October 30, November 1,
2004 2003
------------ -----------
(in thousands)
Cash paid during the period for:
Interest
Non-related parties $ 7,346 $11,222
Related parties 17,675 16,742
Income taxes $11,675 $ 1,677
14. 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 profit (loss), which is defined as
income before interest expense and income taxes.
The tables below present segment income statement information for the three
and nine months ended October 30, 2004 and November 1, 2003 and balance sheet
information as of October 30, 2004 and January 31, 2004.
Filene's
Value City DSW Basement Total
---------- ---------- -------- -----
(in thousands)
Three months ended October 30, 2004
Net sales $ 346,055 $255,787 $ 97,896 $699,738
Operating (loss) profit (7,653) 16,389 (384) 8,352
Capital expenditures 8,289 7,115 8,723 24,127
Depreciation and amortization 8,617 3,625 1,646 13,888
Filene's
Value City DSW Basement Total
---------- --------- --------- -----
(in thousands)
Three months ended November 1, 2003
Net sales $375,393 $215,757 $ 89,489 $680,639
Operating profit (loss) 6,161 9,357 (2,273) 13,245
Capital expenditures 7,816 8,582 3,615 20,013
Depreciation and amortization 5,903 5,381 1,602 12,886
-13-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Filene's
Value City DSW Basement Total
---------- --------- --------- -----
(in thousands)
Nine months ended October 30, 2004
Net sales $ 1,002,740 $711,488 $ 263,464 $1,977,692
Operating (loss) profit (13,816) 44,604 (3,779) 27,009
Capital expenditures 17,357 20,332 17,238 54,927
Depreciation and amortization 21,665 12,832 5,010 39,507
As of October 30, 2004
Identifiable assets 553,752 345,304 178,982 1,078,038
Filene's
Value City DSW Basement Total
---------- --------- --------- -----
(in thousands)
Nine months ended November 1, 2003
Net sales $ 1,054,809 $591,146 $ 227,810 $1,873,765
Operating (loss) profit (16,453) 23,333 (2,676) 4,204
Capital expenditures 21,294 16,798 5,425 43,517
Depreciation and amortization 22,832 11,311 4,539 38,682
As of January 31, 2004
Identifiable assets 477,213 271,205 115,527 863,945
15. 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.
-14-
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/A for the
year ended January 31, 2004 (the "2003 Annual Report"), or contained in other
filings with the Securities and Exchange Commission (the "SEC") 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 the matters discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations. These same factors could cause
our future financial performance in fiscal 2004 and beyond to differ materially
from those expressed or implied in any such forward-looking statements. These
factors include: decline in demand for our merchandise, our ability to achieve
our business plans, expected cash flow from operations, vendors and their factor
relations, flow of merchandise, compliance with our credit agreements, our
ability to strengthen our liquidity and increase our credit availability, the
availability of desirable store locations on suitable terms, changes in consumer
spending patterns, marketing strategies, consumer preferences and overall
economic conditions, the impact of competition and pricing, changes in weather
patterns, changes in fuel and energy costs, changes in existing or potential
duties, tariffs or quotas, paper and printing costs, the ability to hire and
train associates and development of management information systems.
Our operations have been historically seasonal, with a disproportionate amount
of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons for Value City and Filene's Basement. DSW seasonal
sales occur both in early Spring and Fall. As a result of seasonality, any
factors negatively affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have
a material adverse effect on our financial condition and results of operations
for the entire year.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of operations and
financial condition as reflected in our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
As discussed in Notes to Consolidated Financial Statements that are included in
our 2003 Annual Report, the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of commitments and contingencies at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management evaluates its estimates and
judgments, including, but not limited to, those related to inventory valuation,
depreciation, amortization, recoverability of long-lived assets including
intangible assets, the calculation of retirement benefits, estimates for self
insurance reserves for
-15-
health and welfare, workers' compensation and casualty insurance, income taxes,
contingencies, litigation and revenue recognition. Management bases its
estimates and judgments on its historical experience and other relevant factors,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, current and expected
economic conditions, product mix, and in some cases, actuarial and appraisal
techniques. We constantly re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated statements, we cannot guarantee that our
estimates and assumptions will be accurate. As the determination of these
estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe the following represent the most critical estimates and assumptions,
among others, used in the preparation of our consolidated financial statements.
We have discussed the selection, application and disclosure of the critical
accounting policies with our audit committee.
- Revenue recognition. Revenues from our retail operations are recognized
at the latter of point-of-sale or the delivery of goods to the
customer. Retail revenues are reduced by a provision for anticipated
returns based on historical trends.
- Cost of sales and merchandise inventories. We use the retail method of
accounting for substantially all of our merchandise inventories.
Merchandise inventories are stated at the lower of cost, determined
using the first-in, first-out basis, or market, using the retail
inventory method. The retail inventory 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. Reserves to value inventory
at the lower of cost or market were $39.1 million at October 30, 2004
and $34.2 million at January 31, 2004.
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.
-16-
- Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated
undiscounted future cash flows of the related long-lived asset and
reduce the carrying value by the excess where the recorded value
exceeds the fair value. Goodwill is tested on an annual basis using a
fair value based approach.
For the nine months ended October 30, 2004 we recorded an impairment of
$0.7 million related to the Value City segment for store assets. For
the period ended November 1, 2003, we recorded no impairments related
to long-lived assets.
We believe at this time that the remaining long-lived assets' carrying
values and useful lives continue to be appropriate. To the extent these
future projections or our strategies change, the conclusion regarding
impairment may differ from our current estimates.
- Self-insurance reserves. We record estimates for certain health and
welfare, workers compensation and casualty insurance costs that are
self-insured programs. These estimates are based on actuarial
assumptions and are subject to change based on actual results. Should a
greater amount of claims occur compared to what was estimated for costs
of certain health and welfare, workers compensation and casualty
insurance increase beyond what was anticipated, reserves recorded may
not be sufficient and to the extent actual results vary from
assumptions, earnings would be impacted.
- Pension. The obligations and related assets of defined benefit
retirement plans are included in the Notes to Consolidated Financial
Statements in the Company's 2003 Annual Report. Plan assets, which
consist primarily of marketable equity and debt instruments, are valued
using market quotations. Plan obligations and the annual pension
expense are determined by independent actuaries and through the use of
a number of assumptions. Key assumptions in measuring the plan
obligations include the discount rate, the rate of salary increases and
the estimated future return on plan assets. In determining the discount
rate, we utilize the yield on fixed-income investments currently
available with maturities corresponding to the anticipated timing of
the benefit payments. Salary increase assumptions are based upon
historical experience and anticipated future management actions. Asset
returns are based upon the anticipated average rate of earnings
expected on the invested funds of the plans. At October 30, 2004, the
actuarial assumptions of our plans have remained unchanged from our
2003 Annual Report. To the extent actual results vary from assumptions,
earnings would be impacted.
- Customer loyalty program. We maintain a customer loyalty program for
our DSW operations in which customers receive a future discount on
qualifying purchases. The DSW "Reward Your Style" program is designed
to promote customer awareness and loyalty plus provide the Company with
the ability to
-17-
communicate with our customers and enhance our understanding of their
spending trends. Upon reaching the target level, customers may redeem
these discounts on a future purchase. Generally, these future discounts
must be redeemed within six months. DSW's accrued liability as of
October 30, 2004 and January 31, 2004 was $4.0 million and $3.0
million, respectively.
During the third quarter of 2004, Filene's Basement implemented a
limited-time customer rewards program. The rewards program will provide
qualifying customers with a Filene's Basement certificate in various
denominations based on their cumulative spending during the program
period (October 1, 2004 through December 31, 2004). Filene's Basement
had an accrued liability related to the rewards program of $0.4 million
at October 30, 2004.
For the DSW and Filene's Basement rewards programs, 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 programs require us
to make assumptions related to customer purchase levels and redemption
rates. To the extent assumptions of purchases and redemption rates vary
from actual results, earnings would be impacted.
- Income taxes. We do business in numerous jurisdictions that impose
taxes. Management is required to determine the aggregate amount of
income tax expense to accrue and the amount which will be currently
payable based upon tax statutes of each jurisdiction. The estimation
process involves adjusting income determined by the application of
generally accepted accounting principles for items that are treated
differently by the applicable taxing authorities. Deferred tax assets
and liabilities are reflected on our balance sheet for temporary
differences that will reverse in subsequent years. If different
management judgments had been made, our tax expense, assets and
liabilities could be different. During fiscal 2003, we established a
reserve for deferred income tax assets of $1.5 million for carry
forwards related to state and local net operating losses and for excess
contribution carry forwards. For the nine months ended October 30,
2004, no additional allowance has been provided.
-18-
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(1) Nine months ended(1)
--------------------------- --------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of sales (60.0) (61.6) (59.6) (61.9)
----- ----- ----- -----
Gross profit 40.0 38.4 40.4 38.1
Selling, general and administrative
expenses (39.1) (36.7) (39.3) (38.1)
License fees and other income 0.3 0.2 0.3 0.2
----- ----- ----- -----
Operating profit (loss) 1.2 1.9 1.4 0.2
Interest expense, net (1.4) (1.4) (1.5) (1.5)
----- ----- ----- -----
(Loss) Income before income taxes (0.2) 0.5 (0.1) (1.3)
Benefit (Provision) for income taxes 0.1 (0.4) - 0.5
===== ===== ===== =====
Net (loss) income (0.1)% 0.1% (0.1)% (0.8)%
----- ----- ----- -----
(1) Because of the seasonal nature of our retail business cycle, the results of
operations for the 13 weeks and 39 weeks ended October 30, 2004 and November 1,
2003 (which do not include the Christmas holiday season) are not necessarily
indicative of the Company's results of operations for the fiscal year.
THREE MONTHS ENDED OCTOBER 30, 2004 COMPARED TO THREE MONTHS ENDED NOVEMBER 1,
2003
Net sales increased $19.1 million, or 2.8%, from $680.6 million to $699.7
million. Comparable store sales decreased 4.1% and, by segment, were:
Three months ended
--------------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Value City (7.8)% 2.3%
DSW 0.7% 11.7%
Filene's Basement 1.2% 8.5%
---- ----
Total (4.1)% 5.4%
==== ====
Value City comparable stores sales for the quarter decreased 7.8% due to a
decline in customer traffic against the comparable period partially offset by
higher average unit retail. DSW and Filene's Basement sales increased for the
same period due to increases in customer traffic and average unit retail.
Value City's segment sales decreased $29.3 million to $346.1 million, a 7.8%
comparable store sales decrease in the quarter. The decrease in comparable sales
is comprised of decreases in
-19-
non-apparel hardlines of 3.0%, apparel of 8.6% and Jewelry of 14.2%. The
merchandise categories of mens, ladies and childrens had decreases of 8.3%, 9.4%
and 7.7%, respectively. Shoe sales in the Value City segment were a negative
10.7% in the quarter.
DSW segment sales were $255.8 million, an 18.6% increase in the quarter which
includes a net increase of 30 stores over the comparable period along with the
comparable store sales increase of 0.7%. The DSW operations in the segment
merchandise category of athletics had an increase of 12.9% while the mens and
womens areas had decreases of 2.1% and 1.2%, respectively. During the quarter we
had a net increase of 49 leased shoe departments covered under various supply
agreements over the comparable prior year period.
Filene's Basement sales increased 9.4% in the quarter to $97.9 million which
includes a net increase of 4 stores over the prior year's period and a
comparable store sales increase of 1.2%. Merchandise categories of mens, ladies
and childrens had comparable sale increases of 0.5%, 6.7% and 15.9%,
respectively. The shoe and jewelry categories had increases of 2.6% and 1.5%,
respectively. Home sales in the segment decreased 6.1%.
Total gross profit increased $18.6 million to $280.0 million. Gross profit, as a
percentage of sales, increased to 40.0% compared to 38.4% for the prior year.
The increase in our overall margin rate is attributable to higher initial
markups for all retail business operations. The Value City segment improved
average unit retail, initial retail markup and reduced markdowns to obtain the
gross margin increase. The continued improvement in comparable sales in DSW and
Filene's Basement segments reduced the need for promotional markdowns during the
period. Gross profit, as a percent of sales by segment in the third quarter,
was:
Three months ended
----------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Value City 38.9% 38.0%
DSW 43.5% 40.8%
Filene's Basement 34.9% 34.2%
---- ----
Total 40.0% 38.4%
==== ====
Selling, general and administrative expenses ("SG&A") increased $24.0 million
from $249.6 million to $273.6 million. Approximately $4.0 million is associated
with the increase in pre-opening expenses incurred during the three months ended
October 30, 2004 compared with the three months ended November 1, 2003. Total
SG&A expense associated with stores opened subsequent to November 1, 2003 and
through October 30, 2004 was $18.0 million and represents approximately 75% of
the increase in SG&A expense. As a percentage of sales SG&A was 39.1% compared
to 36.7% in the comparable quarter last year. SG&A, as a percent of sales by
segment in the third quarter, was:
-20-
Three months ended
----------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Value City 41.5% 35.8%
DSW 37.1% 40.1%
Filene's Basement 35.7% 32.2%
---- ----
Total 39.1% 36.7%
==== ====
License fees and other income were $2.0 million and $1.5 million for the
comparative periods. License fees and other income are comprised of fees from
licensees, layaway fees and vending income. These sources of income can vary
based on customer traffic and contractual arrangements.
Operating profit decreased to $8.4 million from $13.2 million and decreased as a
percentage of sales from 1.9% to 1.2%.
Net interest expense for the quarter increased $0.4 million to $9.9 million. The
increase is due primarily to an increase in our weighted average borrowing rate
and an increase of $25.3 million in average borrowings from last year to this
year.
The effective tax rate for the three months ended October 30, 2004 was 40.7% as
compared to 75.5% for the three months ended November 1, 2003. The tax rate
reflects the impact of the non-deductible warrant amortization included for book
income but not tax.
NINE MONTHS ENDED OCTOBER 30, 2004 COMPARED TO NINE MONTHS ENDED NOVEMBER 1,
2003
Net sales increased $103.9 million, or 5.5% from $1,873.8 million to $1,977.7
million. Comparable store sales decreased 0.7% and, by segment, were:
Nine months ended
-----------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Value City (4.9)% (0.4)%
DSW 4.5% 4.2%
Filene's Basement 6.6% 0.6%
---- ----
Total (0.7)% 0.9%
==== ====
Value City's segment sales were $1,002.7 million, a 4.9% decrease in the
nine-month period. Value City's non-apparel comparable sales decreased 1.2%
while apparel sales decreased 6.2%. Non-apparel sales were positively impacted
by increases in domestics of 5.2%. The three apparel divisions, mens, ladies and
childrens had negative comparable sales for the nine-month period of 5.6%, 7.9%
and 3.0%, respectively. The customer traffic decrease from the comparable nine
months a year ago is partially offset by average unit retail increase.
-21-
DSW segment sales were $711.5 million, a 20.4% increase in the nine-month
period, which includes a net increase of 30 DSW stores and the net increase of
49 leased locations over the comparable prior year period. During the nine month
period comparable store sales increased 4.5%. DSW increases in the nine-month
period for womens, mens and athletic were 3.6%, 0.1% and 9.7%, respectively.
Filene's Basement segment sales were $263.5 million, a 15.7% increase in the
nine-month period, which includes a net increase of 4 stores over the comparable
prior year period. Merchandise categories of mens, ladies and childrens had
comparable increases of 7.3%, 6.9% and 26.2%, respectively, while other
categories of shoes and home had increases of 9.6% and 5.4%, respectively.
During the nine-month period comparable store sales increased 6.6%.
Gross profit increased by $84.5 million to $799.0 million, from $714.5 million,
and increased as a percentage of sales from 38.1% to 40.4%. The Value City
segment improved average unit retail, initial retail markup and reduced
markdowns to obtain the gross margin improvement. The positive sales, higher
initial markups and markdown management in DSW and Filene's Basement segments
positively impacted the gross margin for these segments in the nine-month period
comparison. Total gross profit increased 11.8%. Gross profit, as a percent of
sales by segment in the nine-month period, was:
Nine months ended
-----------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Value City 39.6% 37.9%
DSW 43.4% 40.2%
Filene's Basement 35.4% 33.7%
---- ----
Total 40.4% 38.1%
==== ====
SG&A increased $62.5 million, from $714.5 million to $777.0 million, and
increased as a percentage of sales from 38.1% to 39.3%. Approximately $7.3
million is associated with the increase in pre-opening expenses incurred during
the nine months ended October 30, 2004 compared with the nine months ended
November 1, 2003. This increase includes $28.8 million attributable to new
stores and leased shoe departments in operation at DSW and $8.6 million
attributable to new stores in the Filene's Basement division. 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. SG&A as a percent of sales by segment
in the nine-month period was:
Nine months ended
-----------------------------------
October 30, 2004 November 1, 2003
---------------- ----------------
Value City 41.3% 39.2%
DSW 37.2% 37.6%
Filene's Basement 37.3% 34.6%
---- ----
Total 39.3% 38.1%
==== ====
License fees and other operating income increased approximately $0.9 million,
from $4.2 million to $5.1 million, and increased as a percentage of sales from
0.2% to 0.3%. License fees and
-22-
other income are comprised of fees from licensees, layaway fees and vending
income. These sources of income can vary based on customer traffic and
contractual arrangements.
Operating profit increased to $27.0 million from $4.2 million and improved as a
percentage of sales from 0.2% to 1.4%. The operating profit increase is
attributable to the increased margin partially offset by increased expenses.
Net interest expense for the nine-month period was comparable at $29.2 million.
The effective tax rate for the nine months ended October 30, 2004 is 40.7%
versus 36.4% for the nine months ended November 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for seasonal and new store inventory
purchases, capital expenditures in connection with expansion, remodeling and
information technology development. The primary sources of funds for these
liquidity needs are cash flow from operations and credit facilities. Our working
capital and inventory levels typically build throughout the year and reach the
highest level in the fall, peaking during the holiday selling season.
Net working capital was $284.4 million and $234.9 million at October 30, 2004
and January 31, 2004, respectively. Current ratios at those dates were 1.7 and
1.9, respectively. The increase in net working capital is primarily due to the
increased inventory levels at October 30, 2004, due to the seasonality of the
Company's business. The decrease in the current ratio is primarily due to the
increase in accounts payable partially offset by the increased inventory levels.
Net cash used in operations was $5.7 million in year-to-date fiscal 2004 as
compared to $80.3 million in year-to-date fiscal 2003.
Net cash used for capital expenditures was $54.9 million and $43.5 million for
the nine months ended October 30, 2004 and November 1, 2003, respectively.
During the nine months ended October 30, 2004, capital expenditures included
$31.7 million for new stores, $14.6 million for improvements in existing stores
and $8.6 million for information technology equipment upgrades and new systems.
The primary increase in capital expenditures is due to an increase in new store
openings during the nine month period ending October 30, 2004 compared with the
nine month period ending November 1, 2003. In addition to the capital
expenditures during the nine-month period, we acquired a tradename for $4.0
million. A source of cash from investing activities is the proceeds from lease
incentives which are amortized as a reduction of rent expense over the life of
the lease.
On June 11, 2002, Value City Department Stores, Inc., together with certain
other principal subsidiaries of Retail Ventures, Inc., entered into a $525.0
million refinancing that consists of three separate credit facilities
(collectively, the "Credit Facilities"): (i) a three-year $350.0 million
revolving credit facility (the "Revolving Credit Facility"), (ii) two $50.0
million term loan facilities provided equally by Cerberus Partners, L.P. and
Schottenstein Stores Corporation (the "Term Loans"), and (iii) an amended and
restated $75.0 million senior subordinated convertible loan, initially entered
into by us on March 15, 2000, which is held equally by Cerberus Partners, L.P.
-23-
and Shottenstein Stores Corporation (the "Convertible Loan"). These Credit
Facilities are guaranteed by Retail Ventures, Inc. and substantially all of its
subsidiaries.
We are not subject to any financial covenants under these Credit Facilities;
however, there are numerous restrictive covenants relating to our management and
operation. These non-financial covenants include, among other restrictions,
limitations on indebtedness, guarantees, mergers, acquisitions, fundamental
corporate changes, financial reporting requirements, budget approval,
disposition of assets, investments, loans and advances, liens, dividends, stock
purchases, transactions with affiliates, issuance of securities and the payment
of and modification to debt instruments. These Credit Facilities are also
subject to an Intercreditor Agreement, which provides for an established order
of payment of obligations from the proceeds of collateral upon default (the
"Intercreditor Agreement").
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is structured in
a manner that allows us and our subsidiaries availability based on the value of
inventories and receivables. Primary security for the Revolving Credit Facility
is provided by a first priority lien on all of our inventory and accounts
receivable, as well as certain intercompany notes and payment intangibles.
Subject to the Intercreditor Agreement, the Revolving Credit Facility also has a
second priority perfected interest in all of the collateral securing the Term
Loans. Interest on borrowings is calculated at the bank's base rate or
Eurodollar rate plus 2.00% to 2.75%, depending upon the level of average excess
availability we maintain. The maturity date was amended in the current quarter
to expire on June 11, 2006. At October 30, 2004 and January 31, 2004, $108.8
million and $137.7 million were available under the Revolving Credit Facility,
respectively. Direct borrowings aggregated $185.0 million and $125.0 million at
October 30, 2004 and at January 31, 2004, respectively, while $21.2 million and
$23.4 million letters of credit were issued and outstanding, respectively.
$100 Million Term Loans - Related Parties
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0 million
Term Loan C. All obligations under the Term Loans are senior debt and, subject
to the Intercreditor Agreement, have the same rights and privileges as the
Revolving Credit Facility and the Convertible Loan. We and our principal
subsidiaries are obligated on the facility. The maturity date as amended is June
11, 2006.
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 PIK option. During the first two
years of the Term Loans, we may pay all interest in PIK. During the final year
of the Term Loans, the stated rate of interest is 15.0% if paid in cash or 15.5%
if PIK and the PIK option is limited to 50% of the interest due. At the nine
months ended October 30, 2004 and for the year ended January 31, 2004, we
elected to pay interest in cash.
We issued 2,954,792 Warrants to purchase shares of common stock, at an initial
exercise price of $4.50 per share, to the Term Loan C Lenders. The Warrants are
exercisable at any time prior to June 11, 2012. We have granted the Term Loan C
Lenders registration rights with respect to
-24-
the shares issuable upon exercise of the Warrants. The $6.1 million value
ascribed to the Warrants was estimated as of the date of issuance using the
Black-Scholes Pricing Model with the following assumptions: risk-free interest
rate of 5.6%; expected life of 10 years; expected volatility of 47%; illiquidity
discount of 10%; and an expected dividend yield of 0%. The related debt discount
is amortized into interest expense over the life of the debt.
The number of shares issuable varies upon the occurrence of the following: (i)
the issuance of additional shares of common stock without consideration or for a
consideration per share less than the Warrant exercise price; (ii) the
declaration of any dividend; (iii) the combination or consolidation of the
outstanding shares of common stock into a lesser number of shares; (iv) the
issuance or sale of additional shares at a price per share less than the current
market price but greater than the Warrant exercise price; (v) the issuance of
convertible securities which are convertible into shares of common stock; and/or
(vi) the exchange of shares in a merger or other business combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties
We have amended and restated our $75.0 million Convertible Loan dated March 15,
2000. As amended, borrowings under the Convertible Loan bears interest at 10%
per annum. At our option, interest may be PIK during the first two years, and
thereafter, at our option, up to 50% of the interest due may be PIK until
maturity. PIK interest accrued with respect to the convertible loan is added to
the outstanding principal balance, on a quarterly basis, and is payable in cash
upon the maturity of the debt. The Convertible Loan is guaranteed by all
principal subsidiaries and is secured by a lien on assets junior to liens
granted in favor of the lenders on the Revolving Credit Facility and Term Loans.
The Convertible Loan is not prepayable until June 11, 2007, and has a maturity
date of June 10, 2009. The agent has the right to designate two observers to our
Board of Directors for so long as the agent is the beneficial owner of at least
50% of the advances initially made by it and has the right to designate two
individuals to our Board of Directors for so long as the agent is the beneficial
owner of at least 50% of the conversion shares issued or issuable upon
conversion of the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into shares of
our common stock at an initial conversion price of $4.50. The conversion price
is subject to adjustment upon the occurrence of specified events.
Achievement of expected cash flows from operations and compliance with the
restrictive covenants of our credit agreements (as discussed in the Notes to
Consolidated Financial Statements that are included in our 2003 Annual Report)
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. 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.
-25-
Contractual Obligations and Off-Balance Sheet Arrangements
During the current year, we have continued to enter into various construction
commitments, including capital items to be purchased for projects that were
under construction, or for which a lease has been signed. Our obligations under
these commitments aggregated approximately $0.5 million at October 30, 2004. In
addition, we signed lease agreements for new store locations with annual rent of
approximately $12.7 million and average terms of ten years. Associated with the
new lease agreements, we will receive approximately $9.1 million of tenant
improvement allowances which will offset future capital expenditures.
There are no "off-balance sheet" arrangements as of October 30, 2004 as that
term is described by the SEC.
ADOPTION OF ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
certain entities considered to be VIEs. An entity is considered to be a VIE when
it has equity investors who lack the characteristics of having a controlling
financial interest, or its capital is insufficient to permit it to finance its
activities without additional subordinated financial support. Consolidation of a
VIE by an investor is required when it is determined that the investor will
absorb a majority of the VIE's expected losses or residual returns if they
occur. FIN 46 provides certain exceptions to these rules, relating to QSPE's
subject to the requirements of SFAS No. 140. Upon its original issuance, FIN 46
required that VIEs created after January 31, 2003 would be consolidated
immediately, while VIEs created prior to February 1, 2003 were to be
consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of VIEs
created prior to February 1, 2003 to December 31, 2003 for calendar year-end
companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to clarify
some of the provisions of the original interpretation and to exempt certain
entities from its requirements. FIN 46R provides special effective date
provisions to enterprises that fully or partially applied to FIN 46 prior to the
issuance of the revised interpretation. In particular, entities that have
already adopted FIN 46 are not required to adopt FIN 46R until the quarterly
reporting period ended July 31, 2004. Adoption of the required sections of FIN
46, as modified and interpreted, including the provisions of FIN 46R, did not
have any effect on the Company's consolidated financial statements or
disclosures.
SARBANES-OXLEY ACT
We are in the process of documenting and testing our internal control procedures
in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our Independent
Auditors addressing these assessments. During the course of our testing we may
identify deficiencies which we may not be able to remediate in time to meet the
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deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements
of Section 404. In addition, if we fail to maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an
effective internal control environment could have a material adverse effect on
our stock price.
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 Company's results of operations and
financial condition has been minor; however, there can be no assurance that the
Company's business will not be affected by inflation in the future.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, which may
adversely affect our financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. We do
not use financial instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under our
Revolving Credit Facility. At October 30, 2004, direct borrowings aggregated
$185.0 million and an additional $21.2 million of letters of credit were
outstanding against the Revolving Credit Facility. The Revolving Credit Facility
permits debt commitments up to $350.0 million, matures on June 11, 2006 and
generally bears interest at the bank's base rate of Eurodollar rate plus 2.0% to
2.75% based on the average excess availability during the previous quarter.
A hypothetical 100 basis point increase in interest rates on our variable rate
debt outstanding for the nine months ended October 30, 2004, net of income
taxes, would have an approximate $0.7 million impact to our financial position,
liquidity and results of operation.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision, and with the participation, of its
management, including its Chief Executive Officer and Chief Financial Officer,
performed an evaluation of the Company's disclosure controls and procedures, as
contemplated by Securities Exchange Act Rule 13a-15. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded, as
of the end of the period covered by this report, that such disclosures and
procedures were effective.
No change was made in the Company's internal control over financial reporting
during the Company's most recent fiscal quarter that has materially affected, or
is reasonable likely to affect, the Company's internal control over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. Not applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES. Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
ITEM 5. OTHER INFORMATION. Not applicable
ITEM 6. EXHIBITS
See Index to Exhibits on page 31.
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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 10, 2004 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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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
31.1 Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
32.1 Section 1350 Certification of
Chief Executive Officer
32.2 Section 1350 Certification of
Chief Financial Officer
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