þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Ohio | 20-0090238 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
3241 Westerville Road, Columbus, Ohio | 43224 | |
(Address of principal executive offices) | (Zip Code) |
Page No. | ||||||||
Part I.Financial Information |
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Item 1.Financial Statements |
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3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
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45 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
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47 | ||||||||
48 | ||||||||
EX-4.1 | ||||||||
EX-10.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-99 |
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October 29, | January 29, | |||||||
2005 | 2005 | |||||||
ASSETS |
||||||||
Cash and equivalents |
$ | 78,778 | $ | 29,258 | ||||
Accounts receivable, net |
47,826 | 7,455 | ||||||
Receivables from related parties |
527 | 501 | ||||||
Inventories |
617,903 | 473,051 | ||||||
Prepaid expenses and other assets |
28,830 | 21,112 | ||||||
Deferred income taxes |
58,288 | 64,359 | ||||||
Total current assets |
832,152 | 595,736 | ||||||
Property and equipment, net |
276,841 | 280,454 | ||||||
Goodwill |
25,899 | 25,899 | ||||||
Tradenames and other intangibles, net |
40,278 | 43,460 | ||||||
Deferred income taxes and other assets |
8,887 | 37,806 | ||||||
Total assets |
$ | 1,184,057 | $ | 983,355 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Accounts payable |
$ | 268,152 | $ | 202,578 | ||||
Accounts payable to related parties |
4,529 | 5,428 | ||||||
Accrued expenses |
186,853 | 150,939 | ||||||
Warrant
liability ($47,948 related party) |
48,472 | |||||||
Current maturities of long-term obligations |
634 | 611 | ||||||
Total current liabilities |
508,640 | 359,556 | ||||||
Long-term obligations, net of current maturities |
||||||||
Non-related parties |
148,652 | 169,134 | ||||||
Related parties |
50,000 | 174,241 | ||||||
Other noncurrent liabilities |
126,491 | 87,710 | ||||||
Minority interest |
108,626 | |||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common shares, without par value;
160,000,000 authorized; issued,
39,536,927 and 34,110,707, respectively |
166,800 | 143,477 | ||||||
Warrants |
6,074 | |||||||
Retained earnings |
81,977 | 50,293 | ||||||
Deferred compensation expense, net |
(2 | ) | (3 | ) | ||||
Treasury shares, at cost, 7,551 shares |
(59 | ) | (59 | ) | ||||
Accumulated other comprehensive loss |
(7,068 | ) | (7,068 | ) | ||||
Total shareholders equity |
241,648 | 192,714 | ||||||
Total liabilities and shareholders equity |
$ | 1,184,057 | $ | 983,355 | ||||
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Three months ended | Nine months ended | |||||||||||||||
October 29, | October 30, | October 29, | October 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
*Restated | *Restated | |||||||||||||||
Net sales |
$ | 746,101 | $ | 699,738 | $ | 2,092,880 | $ | 1,977,692 | ||||||||
Cost of sales |
(462,397 | ) | (419,776 | ) | (1,281,412 | ) | (1,178,731 | ) | ||||||||
Gross profit |
283,704 | 279,962 | 811,468 | 798,961 | ||||||||||||
Selling, general and administrative
expenses |
(290,439 | ) | (273,962 | ) | (835,328 | ) | (778,232 | ) | ||||||||
Change in fair value of warrants
($64,193 and $(31,590) related
party, respectively) |
64,778 | (31,070 | ) | |||||||||||||
License fees and other income |
1,593 | 1,950 | 7,104 | 5,073 | ||||||||||||
Operating profit (loss) |
59,636 | 7,950 | (47,826 | ) | 25,802 | |||||||||||
Interest expense, net |
||||||||||||||||
Non-related parties |
(1,981 | ) | (3,123 | ) | (10,430 | ) | (8,981 | ) | ||||||||
Related parties |
(1,264 | ) | (6,815 | ) | (12,884 | ) | (20,266 | ) | ||||||||
Income (loss) before income taxes |
56,391 | (1,988 | ) | (71,140 | ) | (3,445 | ) | |||||||||
Benefit for income taxes |
1,812 | 646 | 1,645 | 911 | ||||||||||||
Income (loss) before minority interest |
58,203 | (1,342 | ) | (69,495 | ) | (2,534 | ) | |||||||||
Minority interest |
(4,022 | ) | (3,299 | ) | ||||||||||||
Net income (loss) |
$ | 54,181 | $ | (1,342 | ) | $ | (72,794 | ) | $ | (2,534 | ) | |||||
Basic and diluted income (loss) per share: |
||||||||||||||||
Basic |
$ | 1.37 | $ | (0.04 | ) | $ | (1.90 | ) | $ | (0.07 | ) | |||||
Diluted |
$ | 0.88 | $ | (0.04 | ) | $ | (1.90 | ) | $ | (0.07 | ) | |||||
Shares used in per share calculations: |
||||||||||||||||
Basic |
39,479 | 33,978 | 38,227 | 33,914 | ||||||||||||
Diluted |
61,514 | 33,978 | 38,227 | 33,914 |
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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, January 31, 2004 |
33,991 | 8 | $ | 143,077 | $ | 6,074 | $ | 69,741 | $ | (635 | ) | $ | (59 | ) | $ | (6,011 | ) | $ | 212,187 | |||||||||||||||||
Net loss (as restated)* |
(2,534 | ) | (2,534 | ) | ||||||||||||||||||||||||||||||||
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
(as restated)* |
34,084 | 8 | $ | 143,395 | $ | 6,074 | $ | 67,207 | $ | (300 | ) | $ | (59 | ) | $ | (6,011 | ) | $ | 210,306 | |||||||||||||||||
Balance, January 29, 2005 |
34,111 | 8 | $ | 143,477 | $ | 6,074 | $ | 50,293 | $ | (3 | ) | $ | (59 | ) | $ | (7,068 | ) | $ | 192,714 | |||||||||||||||||
Net loss |
(72,794 | ) | (72,794 | ) | ||||||||||||||||||||||||||||||||
Initial public offering of
subsidiary |
104,474 | 104,474 | ||||||||||||||||||||||||||||||||||
Capital transactions of
subsidiary |
4 | 4 | ||||||||||||||||||||||||||||||||||
Exercise of stock options |
5,426 | 24,493 | 24,493 | |||||||||||||||||||||||||||||||||
Tax benefit related to stock
options exercised |
10,158 | 10,158 | ||||||||||||||||||||||||||||||||||
Amortization of deferred
compensation expense |
1 | 1 | ||||||||||||||||||||||||||||||||||
Warrant reclass to liability |
(6,074 | ) | (6,074 | ) | ||||||||||||||||||||||||||||||||
Warrant adjustment to fair value |
(11,328 | ) | (11,328 | ) | ||||||||||||||||||||||||||||||||
Balance, October 29, 2005 |
39,537 | 8 | $ | 166,800 | $ | 0 | $ | 81,977 | $ | (2 | ) | $ | (59 | ) | $ | (7,068 | ) | $ | 241,648 | |||||||||||||||||
-5-
Nine months ended | ||||||||
October 29, | October 30, | |||||||
2005 | 2004 | |||||||
*Restated | ||||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (72,794 | ) | $ | (2,534 | ) | ||
Adjustments to reconcile net loss
to net cash used in operating activities: |
||||||||
Amortization of debt issuance costs and discount on debt |
4,116 | 4,269 | ||||||
Depreciation and amortization |
42,998 | 40,011 | ||||||
Change in
fair value of warrants ($31,590 related party) |
31,070 | |||||||
Deferred income taxes and other noncurrent liabilities |
(3,579 | ) | (10,567 | ) | ||||
Tax benefit related to stock options exercised |
10,158 | |||||||
Loss on disposal of assets |
560 | 25 | ||||||
Minority interest in consolidated subsidiary |
3,299 | |||||||
Impairment charges |
712 | |||||||
Other |
603 | 231 | ||||||
Change in working capital, assets and liabilities: |
||||||||
Receivables |
(40,397 | ) | (4,222 | ) | ||||
Inventories |
(144,852 | ) | (164,494 | ) | ||||
Prepaid expenses and other assets |
(7,903 | ) | (14,305 | ) | ||||
Accounts payable |
61,145 | 128,283 | ||||||
Proceeds from lease incentives |
8,972 | 10,396 | ||||||
Accrued expenses |
35,983 | 16,956 | ||||||
Net cash (used in) provided by operating activities |
(70,621 | ) | 4,761 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(33,400 | ) | (56,754 | ) | ||||
Proceeds from sale of assets |
98 | 111 | ||||||
Tradename acquisition |
(4,056 | ) | ||||||
Net cash used in investing activities |
(33,302 | ) | (60,699 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments of capital lease obligations |
(459 | ) | (606 | ) | ||||
Payments on long-term debt |
(125,000 | ) | ||||||
Net (decrease) increase in revolving credit facility |
(20,000 | ) | 60,000 | |||||
Debt issuance costs |
(3,527 | ) | (438 | ) | ||||
Proceeds from exercise of stock options |
24,493 | 422 | ||||||
Proceeds from sale of stock of subsidiary |
277,936 | |||||||
Net cash provided by financing activities |
153,443 | 59,378 | ||||||
Net increase in cash and equivalents |
49,520 | 3,440 | ||||||
Cash and equivalents, beginning of period |
29,258 | 14,226 | ||||||
Cash and equivalents, end of period |
$ | 78,778 | $ | 17,666 | ||||
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1. | BUSINESS OPERATIONS | |
Retail Ventures, Inc. (Retail Ventures) and its wholly-owned subsidiaries, and DSW Inc. (DSW), a controlled subsidiary, and DSWs wholly-owned subsidiary, DSW Shoe Warehouse, Inc. (DSWSW), are herein referred to collectively as the Company. Retail Ventures operates three segments in the United States of America (United States); Value City Department Stores LLC (Value City), DSW, and Filenes Basement, Inc. (Filenes Basement). | ||
On October 8, 2003, the Company reorganized its corporate structure into a holding company form whereby Retail Ventures, 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. In connection with the reorganization, holders of common shares of Value City Department Stores, Inc. became holders of an identical number of common shares of Retail Ventures. The reorganization was affected by a merger which was previously approved by Value City Department Stores Inc.s shareholders. Since October 2003, Retail Ventures common shares have been listed for trading under the ticker symbol RVI on the New York Stock Exchange. | ||
In December 2004, the Company completed another corporate reorganization whereby Value City Department Stores, Inc. merged with and into Value City, a newly created, wholly-owned subsidiary of Retail Ventures. In connection with this reorganization, Value City transferred all the issued and outstanding shares of DSW and Filenes Basement to Retail Ventures in exchange for a promissory note. | ||
Value City. Located in the Midwestern, Eastern and Southern United States and operating for over 80 years principally under the name Value City, this segments strategy has been to provide exceptional value by offering a broad selection of brand name merchandise at prices substantially below conventional retail prices. At October 29, 2005, there were 114 Value City stores in operation. | ||
DSW. Located throughout the United States, the DSW stores offer a wide selection of brand name and designer dress, casual and athletic footwear for men and women. As of October 29, 2005, there were 197 DSW stores in operation. Additionally, pursuant to a license agreement with Filenes Basement, DSW supplies leased shoe departments in most Filenes Basement stores. Results of operations of the leased shoe departments are included with the DSW segment. In July 2002 and June 2004, respectively, DSW entered into supply agreements with Stein Mart, Inc. (Stein Mart) and Gordmans, Inc. (Gordmans) to supply merchandise to some of the Stein Marts and all of the Gordmans shoe departments. As of October 29, 2005, DSW supplied 157 leased departments for Stein Mart, 53 for Gordmans, 25 for Filenes Basement and one for Frugal Fannies Fashion Warehouse. Results of operations under the supply agreements are included with the DSW segment. During the three months and nine months ended October 29, 2005, DSW opened 13 and 27 new DSW stores, respectively, and, during the nine months ended October 29, |
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2005, re-categorized two DSW/Filenes Basement combination store locations as leased shoe departments which are included in the DSW segment. | ||
Filenes Basement. Filenes Basement stores are located primarily in major metropolitan areas of the United States such as Boston, New York, Atlanta, Chicago and Washington, D.C. Filenes Basement focuses on providing top-tier brand name merchandise at everyday low prices for mens and womens apparel, jewelry, shoes, accessories and home goods. As of October 29, 2005, there were 27 Filenes Basement stores in operation. | ||
2. | BASIS OF PRESENTATION | |
The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with Retail Ventures 2004 Annual Report on Form 10-K for the fiscal year ended January 29, 2005, as amended and filed with the Securities and Exchange Commission (the SEC) on May 12, 2005 (the 2004 Annual Report). This Form 10-Q reflects all changes incorporated into the Retail Ventures Amendment No. 1 to Form 10-Q/A for the quarter ended July 30, 2005. | ||
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the condensed consolidated financial position and results of operations for the periods presented. | ||
The consolidated financial statements are reported on the full consolidation method and include 100% of the assets and liabilities of all controlled subsidiaries. The ownership interests of minority participants are recorded as Minority Interest. All material intercompany transactions and balances are eliminated. | ||
3. | INITIAL PUBLIC OFFERING OF SUBSIDIARY | |
On July 5, 2005, DSW completed an initial public offering (IPO) of 16,171,875 Class A common shares sold at a price to the public of $19.00 per share and raising net proceeds of $285.8 million, net of the underwriters commission and before estimated expenses of approximately $7.9 million. Following the IPO, Retail Ventures owns approximately 63.0% of DSWs outstanding common shares and approximately 93.2% of the combined voting power of such shares. In conjunction with the separation of their businesses following the IPO, Retail Ventures and DSW entered into several agreements, including, among others, a master separation agreement, a shared services agreement and a tax separation agreement. Retail Ventures current intent is to continue to hold its DSW common shares, except to the extent necessary to satisfy obligations under warrants it has granted to certain of its lenders. Retail Ventures is subject to (a) contractual obligations with its lenders to retain ownership of at least 55% by value of the common shares of DSW for so long as Retail Ventures senior loan facility remains outstanding and (b) contractual obligations with its warrantholders to retain enough DSW common shares to be able to satisfy its obligations to deliver such shares to its warrantholders if the warrantholders elect to exercise their warrants in full for DSW Class A common shares. In addition, Retail Ventures has agreed not to sell or otherwise dispose of any of the DSW common shares for a period of 180 days following the IPO without the prior written consent of Lehman Brothers Inc. on behalf of the |
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underwriters of the IPO. Retail Ventures accounted for the sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of $68.7 million was recorded. | ||
4. | STOCK BASED COMPENSATION | |
Retail Ventures has various stock-based employee compensation plans. The Company accounts for those plans in accordance with Accounting Principles Board Opinion (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 discontinued stock purchase plan, which was discontinued at the end of May 2005. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition of Statement of Financial Accounting Standards No.123, Accounting for Stock-Based Compensation. |
Three months ended | Nine months ended | |||||||||||||||
October 29, | October 30, | October 29, | October 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Net income (loss), as reported |
$ | 54,181 | $ | (1,342 | ) | $ | (72,794 | ) | $ | (2,534 | ) | |||||
Add: Stock-based employee
compensation (benefit) expense
included in reported net income,
net of tax |
(861 | ) | 94 | 3,197 | 448 | |||||||||||
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of tax |
554 | (562 | ) | (3,775 | ) | (2,343 | ) | |||||||||
Pro forma net income (loss) |
$ | 53,874 | $ | (1,810 | ) | $ | (73,372 | ) | $ | (4,429 | ) | |||||
Income (loss) per share: |
||||||||||||||||
Basic as reported |
$ | 1.37 | $ | (0.04 | ) | $ | (1.90 | ) | $ | (0.07 | ) | |||||
Diluted as reported |
$ | 0.88 | $ | (0.04 | ) | $ | (1.90 | ) | $ | (0.07 | ) | |||||
Basic pro forma |
$ | 1.36 | $ | (0.05 | ) | $ | (1.92 | ) | $ | (0.13 | ) | |||||
Diluted pro forma |
$ | 0.88 | $ | (0.05 | ) | $ | (1.92 | ) | $ | (0.13 | ) |
5. | TRADENAMES AND OTHER INTANGIBLES | |
During the nine months ended October 30, 2004, Retail Ventures acquired the Leslie Fay tradename for approximately $4.1 million. This amortizing asset has been assigned an anticipated life of 15 years. |
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6. | LONG-TERM OBLIGATIONS AND SHAREHOLDERS EQUITY | |
On July 5, 2005, Retail Ventures amended or terminated the then-existing credit facilities and other debt obligations of Value City and its other affiliates, including certain facilities under which DSW had rights and obligations as a co-borrower and co-guarantor, as follows: | ||
Amended and Restatement of Value City Revolving Credit Facility. | ||
The Company and its affiliates amended and restated the Loan and Security Agreement originally entered into in June 2002 (the Revolving Credit Facility). Pursuant to the $275 million Amended and Restated Loan and Security Agreement, entered into on July 5, 2005, (i) DSW was released from its obligations under the Revolving Credit Facility, (ii) the lenders released their liens on the shares of DSWs capital stock held by Retail Ventures and the capital stock of DSWSW held by DSW, and (iii) leasehold mortgages which had been granted by DSW and DSWSW in 2002 to secure obligations under the June 2002 Revolving Credit Facility were released. Under the July 2005 Amended and Restated Loan and Security Agreement (the Amended and Restated Revolving Credit Facility), Retail Ventures and its wholly-owned subsidiaries are named as co-borrowers. The Amended and Restated Revolving Credit Facility has borrowing base restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate and the Federal Funds effective rate, plus a margin. Retail Ventures obligations under the Amended and Restated Revolving Credit Facility are secured by a lien on substantially all of the personal property of Retail Ventures and its wholly-owned subsidiaries, including a pledge of all of Retail Ventures shares of DSW. In addition, the Amended and Restated Revolving Credit Facility contains usual and customary covenants that, among other things, restrict Retail Ventures ability to grant liens on its assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem its stock, enter into transactions with affiliates and merge or consolidate with another entity. | ||
Amendment of Value City Term Loan Facility. | ||
The Company and its affiliates amended the Financing Agreement, as amended, among Cerberus Partners, L.P. (Cerberus), as agent, and other parties named therein, originally entered into in June 2002 (as so amended, the Term Loan Facility). Pursuant to the Fourth Amendment to Financing Agreement entered into July 5, 2005, (i) DSW was released from its obligations as a co-borrower, (ii) Value City repaid all the term loan indebtedness, and (iii) the Company agreed to amend the issued and outstanding 2,954,792 warrants (Term Loan Warrants) to provide Cerberus, Schottenstein Stores Corporation (SSC) and Back Bay Capital Funding LLC (Back Bay) the right, from time to time, in whole or in part, to (A) acquire Retail Ventures common shares at the then current conversion price (subject to the existing anti-dilution provisions), (B) acquire from Retail Ventures Class A common shares of DSW at an exercise price per share equal to the price of shares sold to the public in DSWs IPO, or (C) acquire a combination thereof. Effective November 23, 2005, Back Bay transferred and assigned its Term Loan Warrants to Millennium Partners, L.P. Although Retail Ventures has no present intention or plan to undertake a spin-off of its DSW common shares to Retail Ventures shareholders, in the event that Retail Ventures would effect such |
-10-
a spin-off in the future, the holders of outstanding unexercised Term Loan Warrants would receive the same number of DSW Class A common shares that they would have received had they exercised their Term Loan Warrants in full for Retail Ventures common shares immediately prior to the record date of such spin-off, without regard to any limitations on exercise contained in the Term Loan Warrants. Following the completion of any such spin-off, the Term Loan Warrants would be exercisable solely for Retail Ventures common shares. The Company has granted the Term Loan Facility lenders registration rights with respect to the shares issuable upon exercise of the Term Loan Warrants. In June 2002, a value of $6.1 million was ascribed to the Term Loan Warrants 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 was amortized into interest expense over the life of the debt. | ||
Amendment and Restatement of Value City Convertible Loan Facility. | ||
The Company and its affiliates amended and restated the Amended and Restated Senior Convertible Loan Agreement, as amended, with Cerberus, as agent and lender, SSC, as lender, and the other parties named therein, originally entered into in June 2002 (the Convertible Loan Facility). Pursuant to the Second Amended and Restated Senior Loan Agreement (the Second Amended and Restated Senior Loan Agreement), entered into July 5, 2005, (i) DSW was released from its obligations as a co-guarantor, (ii) Value City repaid $25 million of this facility, (iii) the remaining $50 million convertible loan was converted into a non-convertible loan, (iv) the capital stock of DSW held by Retail Ventures continues to secure the amended loan facility, and (v) Retail Ventures issued to SSC and Cerberus convertible warrants (the Conversion Warrants) which will be exercisable from time to time until the later of June 11, 2007 and the repayment in full of Value Citys obligations under the Second Amended and Restated Senior Loan Agreement. The July 2005 Second Amended and Restated Senior Loan Agreement is not eligible for prepayment until June 11, 2007. Under the Conversion Warrants, SSC and Cerberus will have the right, from time to time, in whole or in part, to (i) acquire Retail Ventures common shares at the conversion price referred to in the Second Amended and Restated Senior Loan Agreement (subject to existing anti-dilution provisions), (ii) acquire from Retail Ventures Class A common shares of DSW at an exercise price of $19.00 per share which equals the price of the shares sold to the public in DSWs IPO (subject to anti-dilution provisions similar to those in the existing warrants held by SSC and Cerberus), or (iii) acquire a combination thereof. Although Retail Ventures has no present intention or plan to undertake a spin-off of its DSW common shares to Retail Ventures shareholders, in the event that Retail Ventures would effect such a spin-off in the future, the holders of outstanding unexercised Conversion Warrants would receive the same number of DSW Class A common shares that they would have received had they exercised their Conversion Warrants in full for Retail Ventures common shares immediately prior to the record date of such spin-off, without regard to any limitations on exercise contained in the Conversion Warrants. Following the completion of any such spin-off, the Conversion Warrants would be exercisable solely for Retail Ventures common shares. | ||
Warrants |
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As a result of the previously discussed credit facilities modifications made on July 5, 2005, the detached Term Loan Warrants and detached Conversion Warrants with dual optionality qualified as derivatives under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). As a result of the modifications, the fair values of the Term Loan Warrants and Conversion Warrants (together, the Warrants) have been recorded on the balance sheet within current liabilities. As the Term Loan Warrants had previously been recorded on the balance sheet within equity, the difference of $11.3 million, between the book value of the Warrants and the fair value at the time the Warrants were reclassified to a liability, was recorded to paid in capital. The liability has been recorded for the Conversion Warrants for the full amount of their fair value as a result of the modifications and a non-cash charge has been recorded within the Consolidated Statement of Operations. Regarding the change in the fair value of the Warrants, the Company recorded a gain of $64.8 million in the three-month period ended October 29, 2005 and a charge of $31.1 million for the nine months then ended. The initial recording of the Conversion Warrants was $93.1 million. No tax benefit has been recognized in connection with this charge. | ||
These derivative instruments do not qualify for hedge accounting under SFAS No. 133, as changes in the fair values are recognized in earnings in the period of change. | ||
Retail Ventures estimates the fair values of derivatives based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The fair market value of derivative instruments was $48.5 million at October 29, 2005. There were no derivative instruments outstanding at January 29, 2005. As the Warrants may be exercised for either common shares of RVI or common shares of DSW owned by RVI, the settlement of the Warrants will not result in a cash outlay by the Company. | ||
The above amendments to the Term Loan Facility and the Convertible Loan Facility were viewed in the aggregate and deemed to be modifications. | ||
7. | PENSION BENEFIT PLANS | |
The Company has three qualified defined pension benefit plans which it assumed at the time of previous acquisitions of three separate companies. The Companys 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 of 1986, as amended. Contributions are provided 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 pension benefit plans. | ||
The following table shows the components of net periodic benefit cost of the Companys pension benefit plans for the three and nine months ended October 29, 2005 and October 30, 2004: |
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Three months ended | Nine months ended | |||||||||||||||
October 29, | October 30, | October 29, | October 30 | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost |
$ | 11 | $ | 11 | $ | 34 | $ | 32 | ||||||||
Interest cost |
366 | 350 | 1,098 | 1,051 | ||||||||||||
Expected return on plan assets |
(393 | ) | (359 | ) | (1,179 | ) | (1,077 | ) | ||||||||
Amortization of transition asset |
(9 | ) | (9 | ) | (28 | ) | (28 | ) | ||||||||
Amortization of net loss |
175 | 145 | 525 | 435 | ||||||||||||
Net periodic benefit cost |
$ | 150 | $ | 138 | $ | 450 | $ | 413 | ||||||||
As of October 29, 2005, the Company has contributed the $2.5 million required for fiscal 2005 to meet the minimum funding requirements of ERISA. During the nine months ended October 30, 2004, the Company contributed approximately $1.7 million to its pension benefit plans. | ||
8. | OTHER BENEFIT PLANS | |
The Company maintains a Profit Sharing and 401(k) Plan (the 401(k) Plan) for its employees. Employees who attain age twenty-one are eligible to defer compensation as of the first day of the month following 60 days of employment and may contribute up to 30% of their compensation to the 401(k) Plan on a pre-tax basis, subject to Internal Revenue Service limitations. As of the first day of the month following an employees completion of one year of service as defined under the terms of the 401(k) Plan, the Company matches employee deferrals into the 401(k) Plan as follows: 100% on the first 3% of eligible compensation deferred and 50% on the next 2% of eligible compensation deferred. Additionally, the Company may contribute a discretionary profit sharing amount to the 401(k) Plan each year. In fiscal 2004 the Company contributed $1.3 million to the 401(k) Plan for discretionary profit sharing. As of October 29, 2005 the Company has made no discretionary profit sharing contributions for fiscal 2005. | ||
The Company identified the following issue involving its 401(k) Plan: | ||
It is the position of the Securities and Exchange Commission (the SEC) SEC that, if participants 401(k) plan contributions can be invested in employer securities, all of the securities offered pursuant to the plan must be registered under the Securities Act of 1933 (the Securities Act). This is true regardless whether the plan acquires the shares from the employer or on the open market and whether the shares are purchased with employee contributions or the companys match. Based on this interpretation of the Securities Act, Retail Ventures registered 600,000 common shares for inclusion in the Retail Ventures, Inc. Common Stock Fund under the 401(k) Plan. | ||
Although all purchases by the custodian of the 401(k) Plan were made in the open market and in a manner consistent with the 401(k) Plan and the investment elections of the 401(k) Plan participants, Retail Ventures has determined that (i) more common shares have been purchased by the custodian of the 401(k) Plan and allocated to the Retail Ventures, Inc. |
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Common Stock Fund than were registered in accordance with the Securities Act and (ii) certain participants in the 401(k) Plan may not have received the prospectus required to be delivered under the Securities Act. | ||
Effective November 29, 2005, Retail Ventures commenced an offer for a 30-day right of rescission with regard to all of its common shares purchased by the custodian of the 401(k) Plan and included in units purchased by 401(k) Plan participants between July 12, 2003 and December 22, 2004. Under the rescission offer, which will apply to approximately 700,000 Retail Ventures common shares, if 401(k) Plan participants have sold units at a loss, Retail Ventures will credit to their 401(k) Plan account an amount equal to the price per unit they paid less the proceeds from the sale of the units plus applicable interest. Additionally, if 401(k) Plan participants continue to hold the units and the market price of the Retail Ventures common shares as of the expiration date of the rescission offer is less than the price they paid for the units plus applicable interest, Retail Ventures will repurchase units that are subject to the rescission offer and will credit their 401(k) Plan account with an amount equal to the price per unit they paid plus interest from the date of purchase of the units through the date the credit is made. The rescission offer expires after December 29, 2005. | ||
SSC, as the primary sponsor of the 401(k) Plan, and Retail Ventures, as an additional sponsor of the 401(k) Plan, elected to close the Retail Ventures, Inc. Common Stock Fund to additional investments effective July 1, 2005. Subsequent to December 22, 2004, all 401(k) Plan participants received registered securities and the prospectus required to be delivered under the Securities Act. | ||
The Company provided an Employee Stock Purchase Plan (ESPP) for its employees until the end of May 2005, when the ESPP was discontinued. Eligibility requirements were similar to those of the 401(k) Plan. Eligible employees could purchase common shares of the Company through payroll deductions. The Company matched 15% of employee investments up to a maximum investment level. ESPP costs to the Company for all fiscal periods presented were not material to the consolidated financial statements. | ||
While investigating the unregistered sale of shares in connection with the 401(k) Plan, it was also discovered that approximately 640,000 Retail Ventures common shares acquired by our employees through the ESPP may not have been registered under applicable federal or state law. While all of the Retail Ventures common shares were acquired on the open market and in compliance with the provisions of the ESPP, because the shares were not registered, ESPP participants may have a right to rescind their purchases. The Company believes that, at this time, damages resulting from successful claims against the Company for its failure to register the common shares that were purchased through the ESPP would have a negligible effect on the Company. At this time, the Company does not intend to make a rescission offer to participants in the ESPP. | ||
9. | EARNINGS PER SHARE |
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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, in addition to the simple weighted average common shares outstanding, 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 pre-amended Convertible Loan Facility assuming such effect is not anti-dilutive (in which case the interest would be included in the numerator and the potential shares excluded from the denominator). The denominator is the weighted average shares outstanding. |
Three months ended | Nine months ended | |||||||||||||||
October 29, | October 30, | October 29, | October 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in thousands) | ||||||||||||||||
Weighted average shares outstanding |
39,479 | 33,978 | 38,227 | 33,914 | ||||||||||||
Assumed exercise of dilutive SARS |
257 | |||||||||||||||
Assumed exercise of dilutive stock options |
698 | |||||||||||||||
Assumed exercise of dilutive term loan warrants |
4,413 | |||||||||||||||
Assumed exercise of dilutive conversion warrants |
16,667 | |||||||||||||||
Number of shares for computation of
dilutive earnings per share |
61,514 | 33,978 | 38,227 | 33,914 | ||||||||||||
For the nine months ended October 29, 2005 and the three and nine months ended October 30, 2004, all potentially dilutive instruments (stock options, SARS, warrants and convertible debt) were anti-dilutive. | ||
There were securities outstanding at October 29, 2005 and October 30, 2004 that were anti-dilutive and, therefore, were not included in the computation of diluted earnings per share. The total amount of securities outstanding that were not included in the computation of dilutive earnings per share for the periods presented are as follows: |
Three months ended | Nine months ended | |||||||||||||||
October 29, | October 30, | October 29, | October 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock options |
227 | 7,789 | 2,122 | 7,789 | ||||||||||||
SARS |
1,193 | 1,486 | 1,193 | |||||||||||||
Term loan warrants |
2,955 | 4,413 | 2,955 | |||||||||||||
Conversion warrants |
16,667 | |||||||||||||||
Convertible debt |
16,667 | 16,667 | ||||||||||||||
Total potentially dilutive instruments |
227 | 28,604 | 24,688 | 28,604 | ||||||||||||
Reductions to compensation costs of $0.9 million and $0.1 million, net of tax, were recorded during the three months ended October 29, 2005 and October 30, 2004, relating to SARS. |
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Compensation charges of $3.1 million and $0.5 million, net of tax, were recorded during the nine months ended October 29, 2005 and October 30, 2004, respectively, relating to SARS. |
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10. | 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 December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). This statement revised SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) and requires a fair value measurement of all stock-based payments to employees, including grants of employee stock options and recognition of those expenses in the statements of operations. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services and focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. In addition, SFAS No. 123R will require the recognition of compensation expense over the period during which an employee is required to provide service in exchange for an award. The effective date of this statement was originally established to be interim and annual periods beginning after June 15, 2005. In April 2005, however, the SEC delayed the compliance date for SFAS No. 123R until the beginning of the Companys 2006 fiscal year. The Company is currently evaluating the impact of this statement and has not yet determined the method of adoption under SFAS No. 123R and whether the adoption will result in amounts that are similar to the pro forma disclosures required under SFAS No. 123. | ||
11. | ACCUMULATED OTHER COMPREHENSIVE LOSS | |
The balance sheet caption Accumulated other comprehensive loss of $7.1 million at each of October 29, 2005 and January 29, 2005, relates to the Companys minimum pension liability, net of income tax. | ||
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. The Company has determined that there is a probability that future taxable income may not be sufficient to fully utilize deferred tax assets (state net operating losses and charitable contribution carry forwards) which expire in future years at various dates depending on the state jurisdiction. The allowance at October 29, 2005 and at January 29, 2005 was $9.7 and $4.2 million, respectively. | ||
The tax rate of 2.3% for the nine months ended October 29, 2005, reflects: (a) the negative impact of the non-deductible warrant amortization included for book income but not for tax income, (b) the increase of $5.5 million in the valuation allowance and (c) the write-off of $5.2 million of deferred tax assets no longer deductible as a result of tax regulation changes enacted by the State of Ohio legislature related to the new Commercial Activity Tax in Ohio. The negative impacts discussed above were offset by the $10.2 million tax effect of stock |
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option exercises that occurred during the nine months ended October 29, 2005 and that are deductible for tax income but not for book income. | ||
13. | SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
Nine months ended | ||||||||
October 29, | October 30, | |||||||
2005 | 2004 | |||||||
(in thousands) | ||||||||
Cash paid during the period for: |
||||||||
Interest: |
||||||||
Non-related parties |
$ | 7,583 | $ | 7,346 | ||||
Related parties |
15,104 | 17,675 | ||||||
Income taxes |
$ | 15,282 | $ | 11,675 | ||||
Noncash
investing and operating activities
|
||||||||
Changes in accounts payable due to asset purchases |
$ | 3,530 | $ | (1,827 | ) |
14. | SEGMENT REPORTING | |
The Company is managed in three operating segments: Value City, DSW and Filenes Basement. All of the operations are located in the United States. The Company has identified such segments based on chief operating decision maker responsibilities and measures segment profit (loss) as operating profit (loss), which is defined as income (loss) before interest expense (income) and benefit (provision) for income taxes and minority interest. | ||
The Companys business segments were realigned at the beginning of fiscal 2005 to reflect how the Company establishes strategic goals and manages the business. The realignment resulted in the Filenes Basement shoe business being included within the DSW segment. The fiscal 2004 presentation has been retroactively adjusted to conform to this realignment. | ||
The tables below present segment statement of operations information. |
Filenes | ||||||||||||||||
Value City | DSW | Basement | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Three months ended October 29, 2005 |
||||||||||||||||
Net sales |
$ | 341,687 | $ | 302,240 | $ | 102,174 | $ | 746,101 | ||||||||
Operating profit |
40,851 | 17,728 | 1,057 | 59,636 | ||||||||||||
Depreciation and amortization |
7,176 | 4,649 | 2,245 | 14,070 | ||||||||||||
Interest expense (income), net |
2,615 | (149 | ) | 779 | 3,245 | |||||||||||
Benefit (provision) for income taxes |
8,906 | (6,965 | ) | (129 | ) | 1,812 | ||||||||||
Capital expenditures |
6,006 | 5,740 | 1,197 | 12,943 |
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Filenes | ||||||||||||||||
Value City | DSW | Basement | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Three months ended October 30, 2004 |
||||||||||||||||
Net sales |
$ | 347,154 | $ | 262,444 | $ | 90,140 | $ | 699,738 | ||||||||
Operating (loss) profit |
(6,853 | ) | 16,789 | (1,986 | ) | 7,950 | ||||||||||
Depreciation and amortization |
7,445 | 4,823 | 1,788 | 14,056 | ||||||||||||
Interest expense, net |
7,931 | 989 | 1,018 | 9,938 | ||||||||||||
Benefit (provision) for income taxes |
5,899 | (6,371 | ) | 1,118 | 646 | |||||||||||
Capital expenditures |
8,819 | 6,585 | 8,723 | 24,127 |
Filenes | ||||||||||||||||
Value City | DSW | Basement | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Nine months ended October 29, 2005 |
||||||||||||||||
Net sales |
$ | 954,312 | $ | 860,257 | $ | 278,311 | $ | 2,092,880 | ||||||||
Operating (loss) profit |
(89,303 | ) | 53,469 | (11,992 | ) | (47,826 | ) | |||||||||
Depreciation and amortization |
21,848 | 14,229 | 6,921 | 42,998 | ||||||||||||
Interest expense, net |
12,211 | 8,384 | 2,719 | 23,314 | ||||||||||||
Benefit (provision) for income taxes |
13,616 | (17,942 | ) | 5,971 | 1,645 | |||||||||||
Capital expenditures |
13,139 | 21,248 | 2,543 | 36,930 | ||||||||||||
As of October 29, 2005 |
||||||||||||||||
Total assets |
553,967 | 481,788 | 148,302 | 1,184,057 |
Filenes | ||||||||||||||||
Value City | DSW | Basement | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Nine months ended October 30, 2004 |
||||||||||||||||
Net sales |
$ | 1,005,763 | $ | 729,406 | $ | 242,523 | $ | 1,977,692 | ||||||||
Operating (loss) profit |
(12,640 | ) | 46,123 | (7,681 | ) | 25,802 | ||||||||||
Depreciation and amortization |
21,341 | 13,663 | 5,007 | 40,011 | ||||||||||||
Interest expense, net |
23,851 | 2,460 | 2,936 | 29,247 | ||||||||||||
Benefit (provision) for income taxes |
14,459 | (17,584 | ) | 4,036 | 911 | |||||||||||
Capital expenditures |
17,887 | 19,802 | 17,238 | 54,927 | ||||||||||||
As of January 29, 2005 |
||||||||||||||||
Total assets |
467,024 | 395,437 | 120,894 | 983,355 |
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15. | RESTATEMENT OF FINANCIAL STATEMENTS | |
In February 2005, the Office of the Chief Accountant of the SEC issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain lease related accounting issues and their application under accounting principles generally accepted in the United States. Following the release of the SEC letter, many retail companies reviewed their previous interpretations of these lease accounting issues and announced that they would restate their results for previous periods. | ||
After reviewing its accounting for leasing transactions, the Company concluded that it would correct certain errors in its accounting for two types of leasing transactions. First, the Companys statements of cash flows reflected construction allowances as a reduction of capital expenditures (within investing cash flows) rather than as an operating lease activity (within operating cash flows). Second, the Company had excluded the build-out period of its stores from its straight line rent expense calculations. | ||
The Company restated its condensed consolidated statements of operations, shareholders equity and cash flows for the interim periods ended October 30, 2004, and the effected notes therein. The Company also restated the segment financial information for the interim periods ended October 30, 2004 (see Note 14). The impact of the restatement was an increase in net loss of $1.2 million for the nine months ended October 30, 2004 and an increase in net loss of $0.4 million for the three months ended October 30, 2004. | ||
In the condensed consolidated statement of cash flows for the nine months ended October 30, 2004, the Company excluded from cash used for capital expenditures and the change in accounts payable, the amount of asset purchases included in accounts payable, to be consistent with the October 29, 2005 presentation. | ||
The significant effects of the corrections of the errors to the Companys Condensed Consolidated Financial Statements are as follows: |
Three months ended October 30, 2004 | ||||||||||||
As reported | Adjustments | As restated | ||||||||||
Consolidated Statements of Operations: |
||||||||||||
Selling, general and administrative
expenses |
$ | (273,560 | ) | $ | (402 | ) | $ | (273,962 | ) | |||
Operating profit |
8,352 | (402 | ) | 7,950 | ||||||||
Loss before income taxes |
(1,586 | ) | (402 | ) | (1,988 | ) | ||||||
Net loss |
(940 | ) | (402 | ) | (1,342 | ) | ||||||
Basic and diluted loss per share |
(0.03 | ) | (0.01 | ) | (0.04 | ) |
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Nine months ended October 30, 2004 | ||||||||||||
As reported | Adjustments | As restated | ||||||||||
Consolidated Statements of Operations: |
||||||||||||
Selling, general and administrative
expenses |
$ | (777,025 | ) | $ | (1,207 | ) | $ | (778,232 | ) | |||
Operating profit (loss) |
27,009 | (1,207 | ) | 25,802 | ||||||||
Loss before income taxes |
(2,238 | ) | (1,207 | ) | (3,445 | ) | ||||||
Net loss |
(1,327 | ) | (1,207 | ) | (2,534 | ) | ||||||
Basic and diluted loss per share |
(0.04 | ) | (0.03 | ) | (0.07 | ) | ||||||
Consolidated Statements of Cash Flows: |
||||||||||||
Net loss |
$ | (1,327 | ) | $ | (1,207 | ) | $ | (2,534 | ) | |||
Depreciation and amortization |
39,507 | 504 | 40,011 | |||||||||
Deferred income taxes and other
noncurrent liabilities |
(9,008 | ) | (1,559 | ) | (10,567 | ) | ||||||
Proceeds from lease incentives |
8,605 | 1,791 | 10,396 | |||||||||
Accrued expenses |
16,485 | 471 | 16,956 | |||||||||
Net cash (used in) provided by
operating activities |
(5,671 | ) | 8,605 | 2,934 | ||||||||
Net cash used in investing activities |
(50,267 | ) | (8,605 | ) | (58,872 | ) |
16. | COMMITMENTS AND CONTINGENCIES | |
On March 8, 2005, Retail Ventures announced that it had learned of the theft of credit card and other purchase information from a portion of DSW customers. On April 18, 2005, Retail Ventures issued the findings from its investigation into the theft. The theft took place primarily over two weeks and covered all customers who made purchases at 108 DSW stores, primarily during a three-month-period from mid-November 2004 to mid-February 2005. Transaction information involving approximately 1.4 million credit cards was obtained. For each card, the stolen information included credit card or debit card numbers, name and transaction amount. In addition, data from transactions involving approximately 96,000 checks were stolen. In these cases, checking account numbers and drivers license numbers were obtained. | ||
The Company has contacted and is cooperating with law enforcement and other authorities with regard to this matter. To mitigate potential negative effects on its business and financial performance, the Company is working with credit card companies and issuers and has contacted as many of its affected customers as possible. In addition, the Company worked with a leading computer security firm to minimize the risk of any further data theft. The Company is involved in several legal proceedings arising out of this incident that, after consultation with counsel, it believes will not exceed the reserves the Company has currently recorded. | ||
As of October 29, 2005, the Company estimates that the potential exposure for losses related to this theft, including exposure under currently pending proceedings, ranges from |
-21-
approximately $6.5 million to approximately $9.5 million. Because of many factors, including the early development of information regarding the theft and recoverability under insurance policies, if any, there is no amount in the estimated range that represents a better estimate than any other amount in the range. Therefore, in accordance with Financial Accounting Standard No. 5, Accounting for Contingencies, the Company has accrued a charge to operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above, or $6.5 million. As the situation develops and more information becomes available, the amount of the reserve may increase or decrease accordingly. The amount of any such change may be material. | ||
There can be no assurance that there will not be additional proceedings or claims brought against the Company in the future. We have contested and will continue to vigorously contest the claims made against us and will continue to explore our defenses and possible claims against others. | ||
The Company is involved in various other 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 legal 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 Companys estimates and potential liability could materially impact its results of operations. |
-22-
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| Revenue recognition. Revenues from merchandise sales are recognized at the point of sale and are net of returns and exclude sales tax. Revenue from gift cards is deferred and is recognized upon redemption of the gift cards. Layaway sales are recognized when the merchandise has been paid for in full. The layaway program was discontinued in the current year. | ||
| 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. Accordingly earnings are negatively impacted as merchandise is marked down prior to sale. Reserves to value inventory at the lower of cost or market were $43.7 million at October 29, 2005 and $42.8 million at January 29, 2005. | ||
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 |
-24-
to customers 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. | |||
| Asset impairment and long-lived assets. We must periodically evaluate the carrying amount of our long-lived assets, primarily property and equipment, and finite life intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset is considered impaired when the carrying value of the asset exceeds the expected future cash flows (undiscounted and without interest) from the asset. Our reviews are conducted down at the lowest identifiable level, which include a store. The impairment loss recognized is the excess of the carrying value, based on discounted future cash flows, of the asset over its fair value. Should an impairment loss be realized, it will be included in operating expenses. Assets acquired for stores that have been previously impaired are not capitalized when acquired if the stores expected future cash flow (undiscounted and without interest) remains negative. During the nine months ended October 29, 2005, there were no impairments recorded. 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. | ||
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 the total cost of claims for health and welfare, workers compensation and casualty insurance exceed or fall short of those anticipated, reserves recorded may not be appropriate, 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 Companys 2004 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 |
-25-
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 29, 2005, the actuarial assumptions of our plans have remained unchanged from our 2004 Annual Report. To the extent actual results vary from assumptions, earnings would be impacted. | |||
| Customer loyalty program. DSW maintains a customer loyalty program for our DSW stores in which customers receive a future discount on qualifying purchases. The Reward Your Style program is designed to promote customer awareness and loyalty plus provide DSW with the ability to communicate with our customers and enhance our understanding of their spending trends. While the program develops customer loyalty, it also provides DSW with valuable market intelligence and purchasing information regarding its most frequent customers. Upon reaching the target level, customers may redeem these discounts on a future purchase. Generally, these future discounts must be redeemed within six months. 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. DSWs accrued liability for the customer loyalty program as of October 29, 2005 and January 29, 2005 was $7.4 million and $4.5 million, respectively. | ||
During the third quarter of 2004, Filenes Basement implemented a limited-time customer rewards program that ended in December 2004. The rewards program provided qualifying customers with Filenes Basement gift cards in various denominations based on their cumulative spending during the program period. Filenes Basement had an accrued liability related to the rewards program of $0.8 million at January 29, 2005. These rewards were redeemed in the first quarter of fiscal 2005, and no liability remains at October 29, 2005. Filenes Basement utilizes this customer database for direct mail and e-mail marketing efforts during fiscal 2005. | |||
| Change in fair value of Warrants. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the Company recognizes all derivatives on the balance sheet at fair value. For derivatives that are not designated as hedges under SFAS No. 133, changes in the fair values are recognized in earnings in the period of change. For the three and nine months ended October 29, 2005 and October 30, 2004, the Company did not have any derivatives designated as hedges. During the three months ended October 29, 2005, the Company recorded income related to a change in the fair value of the Warrants of $64.8 million. During the nine months ended October 29, 2005, the Company recorded a charge related to the change in the fair value of the Warrants of $31.1 million, including a $93.1 |
-26-
million charge relating to the initial recording of the Conversion Warrants. There were no changes in fair value recorded during the three or nine months ended October 30, 2004 as the Company did not have any derivatives outstanding during that time period. | |||
| Income taxes. We are 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 we do business in. In making these estimates, we adjust income based on a determination of generally accepted accounting principles for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities, as a result of these differences, are reflected on our balance sheet for temporary differences that will reverse in subsequent years. A valuation allowance is established against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. If our management had made these determinations on a different basis, our tax expense, assets and liabilities could be different. During the nine months ended October 29, 2005, we established an additional valuation reserve of $5.5 million for state net operating loss carry forwards and wrote-off $5.2 million of deferred tax assets no longer deductible as a result of changes in state tax regulations in Ohio. During fiscal 2004, we established an additional valuation reserve for deferred income tax assets of $3.2 million for carry forwards related to state net operating losses. | ||
Following the completion of the DSW initial public offering (IPO) in June 2005, DSW is no longer included in the Retail Ventures consolidated federal tax return. |
Three months ended | Nine months ended | |||||||||||||||
October, 29 | October 30, | October 29, | October 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
(62.0 | ) | (60.0 | ) | (61.2 | ) | (59.6 | ) | ||||||||
Gross profit |
38.0 | 40.0 | 38.8 | 40.4 | ||||||||||||
Selling, general and administrative
expenses |
(38.9 | ) | (39.2 | ) | (39.9 | ) | (39.4 | ) | ||||||||
Change in fair value of warrants |
8.7 | (1.5 | ) | |||||||||||||
License fees and other income |
0.2 | 0.3 | 0.3 | 0.3 | ||||||||||||
Operating profit (loss) |
8.0 | 1.1 | (2.3 | ) | 1.3 | |||||||||||
Interest expense, net |
(0.4 | ) | (1.4 | ) | (1.1 | ) | (1.5 | ) | ||||||||
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Three months ended | Nine months ended | |||||||||||||||
October, 29 | October 30, | October 29, | October 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Income (loss) before income taxes |
7.6 | (0.3 | ) | (3.4 | ) | (0.2 | ) | |||||||||
Benefit for income taxes |
0.2 | 0.1 | 0.1 | 0.1 | ||||||||||||
Income (loss) before minority interest |
7.8 | (0.2 | ) | (3.3 | ) | (0.1 | ) | |||||||||
Minority interest |
(0.5 | ) | (0.2 | ) | ||||||||||||
Net Income (loss) |
7.3 | % | (0.2 | )% | (3.5 | )% | (0.1 | )% | ||||||||
Three months ended | |||||||||||
October 29, 2005 | October 30, 2004 | ||||||||||
(Decrease) Increase | |||||||||||
Value City |
(1.0 | )% | (7.8 | )% | |||||||
DSW |
3.5 | % | 0.8 | % | |||||||
Filenes Basement |
2.1 | % | 1.1 | % | |||||||
Total |
1.0 | % | (4.1 | )% | |||||||
-28-
Three months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
Value City |
35.4 | % | 38.9 | % | ||||
DSW |
41.8 | % | 43.5 | % | ||||
Filenes Basement |
35.6 | % | 34.2 | % | ||||
Total |
38.0 | % | 40.0 | % | ||||
-29-
Three months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
Value City |
42.7 | % | 41.5 | % | ||||
DSW |
36.0 | % | 36.9 | % | ||||
Filenes Basement |
37.0 | % | 37.9 | % | ||||
Total |
38.9 | % | 39.2 | % | ||||
-30-
Three months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
Value City |
12.0 | % | (2.1 | )% | ||||
DSW |
5.9 | % | 6.6 | % | ||||
Filenes Basement |
1.0 | % | (2.2 | )% | ||||
Total |
8.0 | % | 1.1 | % | ||||
-31-
Nine months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
(Decrease) increase | ||||||||
Value City |
(4.6 | )% | (4.9 | )% | ||||
DSW |
3.7 | % | 4.7 | % | ||||
Filenes Basement |
1.9 | % | 6.4 | % | ||||
Total |
(0.9 | )% | (0.7 | )% | ||||
-32-
Nine months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
Value City |
36.6 | % | 39.6 | % | ||||
DSW |
42.6 | % | 43.3 | % | ||||
Filenes Basement |
34.4 | % | 34.8 | % | ||||
Total |
38.8 | % | 40.4 | % | ||||
-33-
Nine months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
Value City |
43.2 | % | 41.3 | % | ||||
DSW |
36.5 | % | 37.0 | % | ||||
Filenes Basement |
41.2 | % | 39.7 | % | ||||
Total |
39.9 | % | 39.4 | % | ||||
-34-
Nine months ended | ||||||||
October 29, 2005 | October 30, 2004 | |||||||
Value City |
(9.4 | )% | (1.3 | )% | ||||
DSW |
6.2 | % | 6.4 | % | ||||
Filenes Basement |
(4.3 | )% | (3.2 | )% | ||||
Total |
(2.3 | )% | 1.3 | % | ||||
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-44-
(a) | Recent sales of unregistered securities. Not Applicable. | |
(b) | Use of Proceeds. Not Applicable. |
-45-
(c) | Purchases of equity securities by the issuer and affiliated purchases. |
Total number | Maximum | |||||||||||||||
of shares | number of | |||||||||||||||
purchased as | shares that may | |||||||||||||||
Total | Average | part of publicly | yet be | |||||||||||||
number of | price | announced | purchased | |||||||||||||
shares | paid per | plans or | under plans or | |||||||||||||
Period | purchased | share | programs | programs | ||||||||||||
July 31, 2005 August 27, 2005 |
None | | | None | ||||||||||||
August 28, 2005 October 1, 2005 |
None | | | None | ||||||||||||
October 2, 2005 October 29, 2005 |
None | | | None | ||||||||||||
Total |
None | | | None |
(a) | As previously disclosed in the Companys quarterly report on Form 10-Q for the quarter ended July 30, 2005, pursuant to the Second Amended and Restated Registration Rights Agreement, dated as of July 5, 2005, by and among the Company and the holders of the Warrants (the Registration Rights Agreement), each of Cerberus and Back Bay requested that the Company register for resale pursuant to a Shelf Registration all of the common shares that they may acquire upon exercise of Warrants. | |
On October 14, 2005, the Company filed a Registration Statement on Form S-3 providing for the registration for resale by Cerberus and Back Bay of up to 10,407,502 and 264,788, respectively, of the Companys common shares. | ||
On November 23, 2005, Back Bay transferred and assigned its Warrants to Millennium Partners, L.P. | ||
(b) | None. |
-46-
RETAIL VENTURES, INC. (Registrant) |
||||
Date: December 8, 2005
|
By: | /s/ James A. McGrady | ||
James A. McGrady | ||||
Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Retail Ventures, Inc. |
-47-
Exhibit Number | Description | |
4.1
|
Form of Term Loan Warrant for Millennium Partners, L.P. | |
10.1
|
Cancellation of Lease Agreement, dated June 30, 2005, by and between 4300 Venture 34910 LLC and Value City Department Stores LLC | |
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 | ||
99
|
Safe Harbor Under the Private Securities Litigation Reform Act of 1995 |
-48-