Retail Ventures, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended October 28, 2006
OR
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o |
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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)
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Ohio
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20-0090238 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3241 Westerville Road, Columbus, Ohio
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43224 |
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(Address of principal executive offices)
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(Zip Code) |
(614) 471-4722
Registrants 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 (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
þ
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes þ No
The number of outstanding Common Shares, without par value, as of November 30, 2006 was
47,188,177.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
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|
October 28, |
|
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January 28, |
|
|
|
2006 |
|
|
2006 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
184,026 |
|
|
$ |
138,731 |
|
Restricted cash |
|
|
500 |
|
|
|
|
|
Short-term investments |
|
|
75,350 |
|
|
|
|
|
Accounts receivable, net |
|
|
18,156 |
|
|
|
19,259 |
|
Accounts receivable from related parties |
|
|
8,359 |
|
|
|
437 |
|
Inventories |
|
|
643,976 |
|
|
|
491,867 |
|
Prepaid expenses and other assets |
|
|
33,442 |
|
|
|
26,814 |
|
Deferred income taxes |
|
|
85,780 |
|
|
|
66,581 |
|
|
Total current assets |
|
|
1,049,589 |
|
|
|
743,689 |
|
|
|
|
|
|
|
|
|
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|
Property and equipment, net |
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|
266,907 |
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|
269,126 |
|
Goodwill |
|
|
25,899 |
|
|
|
25,899 |
|
Tradenames and other intangibles, net |
|
|
36,034 |
|
|
|
39,217 |
|
Deferred income taxes and other assets |
|
|
11,493 |
|
|
|
8,643 |
|
|
Total assets |
|
$ |
1,389,922 |
|
|
$ |
1,086,574 |
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-3-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share amounts)
(unaudited)
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|
|
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|
October 28, |
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January 28, |
|
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|
2006 |
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2006 |
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
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|
|
|
|
|
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Accounts payable |
|
$ |
313,227 |
|
|
$ |
221,444 |
|
Accounts payable to related parties |
|
|
4,437 |
|
|
|
4,901 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Compensation |
|
|
38,564 |
|
|
|
35,085 |
|
Taxes |
|
|
49,730 |
|
|
|
37,869 |
|
Other |
|
|
105,034 |
|
|
|
88,403 |
|
Warrant liability |
|
|
2,925 |
|
|
|
1,723 |
|
Warrant liability related parties |
|
|
171,342 |
|
|
|
168,680 |
|
Current maturities of long-term obligations |
|
|
715 |
|
|
|
623 |
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|
Total current liabilities |
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|
685,974 |
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|
558,728 |
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|
Long-term obligations, net of current maturities |
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|
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|
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Non-related parties |
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270,533 |
|
|
|
115,995 |
|
Related parties |
|
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500 |
|
|
|
50,000 |
|
Conversion feature of long-term debt |
|
|
39,673 |
|
|
|
|
|
Other noncurrent liabilities |
|
|
101,011 |
|
|
|
87,080 |
|
Deferred income taxes |
|
|
42,624 |
|
|
|
45,829 |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
131,859 |
|
|
|
112,396 |
|
|
|
|
|
|
|
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Commitments and contingencies |
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|
|
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|
|
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Shareholders equity: |
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Common shares, without par value;
160,000,000 authorized; issued, including
7,551 treasury shares, 47,184,427 and
39,864,577 outstanding, respectively |
|
|
273,441 |
|
|
|
159,617 |
|
Accumulated deficit |
|
|
(149,073 |
) |
|
|
(36,082 |
) |
Deferred compensation expense, net |
|
|
|
|
|
|
(1 |
) |
Treasury shares, at cost, 7,551 shares |
|
|
(59 |
) |
|
|
(59 |
) |
Accumulated other comprehensive loss |
|
|
(6,561 |
) |
|
|
(6,929 |
) |
|
Total shareholders equity |
|
|
117,748 |
|
|
|
116,546 |
|
|
Total liabilities and shareholders equity |
|
$ |
1,389,922 |
|
|
$ |
1,086,574 |
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-4-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three months ended |
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Nine months ended |
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October 28, |
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October 29, |
|
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October 28, |
|
|
October 29, |
|
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|
2006 |
|
|
2005 |
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|
2006 |
|
|
2005 |
|
|
Net sales |
|
$ |
787,619 |
|
|
$ |
746,101 |
|
|
$ |
2,193,640 |
|
|
$ |
2,092,880 |
|
Cost of sales |
|
|
(472,090 |
) |
|
|
(462,397 |
) |
|
|
(1,312,535 |
) |
|
|
(1,281,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross profit |
|
|
315,529 |
|
|
|
283,704 |
|
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|
881,105 |
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|
811,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling, general and administrative
expenses |
|
|
(301,939 |
) |
|
|
(290,439 |
) |
|
|
(844,256 |
) |
|
|
(835,328 |
) |
Change in fair value of derivative
instruments |
|
|
(28,009 |
) |
|
|
590 |
|
|
|
(29,246 |
) |
|
|
561 |
|
Change in fair value of derivative
instruments related parties |
|
|
(2,565 |
) |
|
|
66,407 |
|
|
|
(81,480 |
) |
|
|
(71,147 |
) |
License fees and other income |
|
|
2,192 |
|
|
|
1,593 |
|
|
|
5,414 |
|
|
|
7,104 |
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|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Operating (loss) profit |
|
|
(14,792 |
) |
|
|
61,855 |
|
|
|
(68,463 |
) |
|
|
(87,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-related parties interest expense |
|
|
(7,980 |
) |
|
|
(2,307 |
) |
|
|
(14,264 |
) |
|
|
(10,947 |
) |
Related parties interest expense |
|
|
(4,176 |
) |
|
|
(1,264 |
) |
|
|
(6,704 |
) |
|
|
(12,884 |
) |
|
Total interest expense |
|
|
(12,156 |
) |
|
|
(3,571 |
) |
|
|
(20,968 |
) |
|
|
(23,831 |
) |
Interest income |
|
|
2,194 |
|
|
|
326 |
|
|
|
6,171 |
|
|
|
517 |
|
|
Interest expense, net |
|
|
(9,962 |
) |
|
|
(3,245 |
) |
|
|
(14,797 |
) |
|
|
(23,314 |
) |
|
(Loss) income before income taxes
and minority interest |
|
|
(24,754 |
) |
|
|
58,610 |
|
|
|
(83,260 |
) |
|
|
(110,656 |
) |
(Provision) benefit for income taxes |
|
|
(3,411 |
) |
|
|
1,812 |
|
|
|
(13,730 |
) |
|
|
1,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest |
|
|
(28,165 |
) |
|
|
60,422 |
|
|
|
(96,990 |
) |
|
|
(109,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
(5,909 |
) |
|
|
(4,022 |
) |
|
|
(18,033 |
) |
|
|
(3,299 |
) |
|
|
Net (loss) income |
|
$ |
(34,074 |
) |
|
$ |
56,400 |
|
|
$ |
(115,023 |
) |
|
$ |
(112,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.72 |
) |
|
$ |
1.43 |
|
|
$ |
(2.59 |
) |
|
$ |
(2.94 |
) |
Diluted |
|
$ |
(0.72 |
) |
|
$ |
0.92 |
|
|
$ |
(2.59 |
) |
|
$ |
(2.94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
47,053 |
|
|
|
39,479 |
|
|
|
44,376 |
|
|
|
38,227 |
|
Diluted |
|
|
47,053 |
|
|
|
61,514 |
|
|
|
44,376 |
|
|
|
38,227 |
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-5-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
Earnings |
|
Deferred |
|
|
|
|
|
Other |
|
|
|
|
Common |
|
Shares |
|
Common |
|
|
|
|
|
(Accumulated |
|
Compensation |
|
Treasury |
|
Comprehensive |
|
|
|
|
Shares |
|
in Treasury |
|
Shares |
|
Warrants |
|
Deficit) |
|
Expense |
|
Shares |
|
Loss |
|
Total |
|
Balance, January 29, 2005 |
|
|
34,111 |
|
|
|
8 |
|
|
$ |
143,477 |
|
|
$ |
6,074 |
|
|
$ |
42,756 |
|
|
$ |
(3 |
) |
|
$ |
(59 |
) |
|
$ |
(7,068 |
) |
|
$ |
185,177 |
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,310 |
) |
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 |
|
Excess 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 |
|
|
|
|
|
|
|
|
|
|
(20,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,120 |
) |
|
Balance, October 29, 2005 |
|
|
39,537 |
|
|
|
8 |
|
|
$ |
158,008 |
|
|
$ |
0 |
|
|
$ |
34,924 |
|
|
$ |
(2 |
) |
|
$ |
(59 |
) |
|
$ |
(7,068 |
) |
|
$ |
185,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 28, 2006 |
|
|
39,865 |
|
|
|
8 |
|
|
$ |
159,617 |
|
|
$ |
0 |
|
|
$ |
(36,082 |
) |
|
$ |
(1 |
) |
|
$ |
(59 |
) |
|
$ |
(6,929 |
) |
|
$ |
116,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,023 |
) |
Minimum pension liability, net
of income tax benefit of $237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368 |
|
|
|
368 |
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,655 |
) |
Capital transactions of
Subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032 |
|
Stock based compensation
expense, before related tax
effects |
|
|
|
|
|
|
|
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472 |
|
Exercise of stock options |
|
|
320 |
|
|
|
|
|
|
|
1,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,925 |
|
Exercise of warrants |
|
|
7,000 |
|
|
|
|
|
|
|
110,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,317 |
|
Excess tax benefit related to
stock options exercised |
|
|
|
|
|
|
|
|
|
|
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111 |
|
Reclassification of unamortized
deferred compensation |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2006 |
|
|
47,185 |
|
|
|
8 |
|
|
$ |
273,441 |
|
|
$ |
0 |
|
|
$ |
(149,073 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(6,561 |
) |
|
$ |
117,748 |
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-6-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(115,023 |
) |
|
$ |
(112,310 |
) |
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and discount on debt |
|
|
3,677 |
|
|
|
4,116 |
|
Stock based compensation expense |
|
|
472 |
|
|
|
|
|
Stock based compensation expense of subsidiary |
|
|
2,661 |
|
|
|
|
|
Depreciation and amortization |
|
|
41,071 |
|
|
|
42,998 |
|
Change in fair value of derivative instruments ($81,480 and
$71,147 - related parties, respectively) |
|
|
110,726 |
|
|
|
70,586 |
|
Deferred income taxes and other noncurrent liabilities |
|
|
(12,434 |
) |
|
|
(3,579 |
) |
Excess tax benefit related to stock option exercises |
|
|
|
|
|
|
10,158 |
|
Loss on disposal of assets |
|
|
1,587 |
|
|
|
560 |
|
Minority interest in consolidated subsidiary |
|
|
18,033 |
|
|
|
3,299 |
|
Other |
|
|
799 |
|
|
|
603 |
|
Change in working capital, assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(6,819 |
) |
|
|
(40,397 |
) |
Inventories |
|
|
(152,109 |
) |
|
|
(144,852 |
) |
Prepaid expenses and other assets |
|
|
(6,721 |
) |
|
|
(7,903 |
) |
Accounts payable |
|
|
87,401 |
|
|
|
61,145 |
|
Proceeds from lease incentives |
|
|
4,331 |
|
|
|
8,972 |
|
Accrued expenses |
|
|
31,961 |
|
|
|
35,983 |
|
|
Net cash provided by (used in) operating activities |
|
|
9,613 |
|
|
|
(70,621 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(500 |
) |
|
|
|
|
Cash paid for property and equipment |
|
|
(33,332 |
) |
|
|
(33,400 |
) |
Proceeds from sale of assets |
|
|
4 |
|
|
|
98 |
|
Purchases of available-for-sale investments |
|
|
(150,400 |
) |
|
|
|
|
Maturities and sales from available-for-sale investments |
|
|
75,050 |
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(109,178 |
) |
|
|
(33,302 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments of capital lease obligations |
|
|
(462 |
) |
|
|
(459 |
) |
Payments on convertible loan |
|
|
|
|
|
|
(125,000 |
) |
Payments on term loan |
|
|
(49,500 |
) |
|
|
|
|
Net increase (decrease) in revolving credit facility |
|
|
22,500 |
|
|
|
(20,000 |
) |
Debt issuance costs |
|
|
(5,964 |
) |
|
|
(3,527 |
) |
Proceeds from issuance of PIES |
|
|
143,750 |
|
|
|
|
|
Proceeds from exercise of warrants |
|
|
31,500 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,925 |
|
|
|
24,493 |
|
Proceeds from sale of stock of subsidiary |
|
|
|
|
|
|
277,936 |
|
Excess tax benefit related to stock option exercises |
|
|
1,111 |
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
144,860 |
|
|
|
153,443 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents |
|
|
45,295 |
|
|
|
49,520 |
|
Cash and equivalents, beginning of period |
|
|
138,731 |
|
|
|
29,258 |
|
|
Cash and equivalents, end of period |
|
$ |
184,026 |
|
|
$ |
78,778 |
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-7-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS OPERATIONS
Retail Ventures, Inc. (Retail Ventures or RVI) and its wholly-owned subsidiaries, including
but not limited to, Value City Department Stores LLC (Value City) and Filenes Basement, Inc.
(Filenes Basement), and DSW Inc. (DSW), a controlled subsidiary, and DSWs wholly-owned
subsidiaries, including DSW Shoe Warehouse, Inc. (DSWSW), are herein referred to collectively
as the Company.
The Company operates four segments in the United States of America (United States). The
Value City and Filenes Basement segments operate full-line, off-price department stores. The
DSW segment sells branded shoes and accessories. The Corporate segment consists of all revenue
and expenses related to the corporate entities that are not allocated to the other segments. As
of October 28, 2006, there were a total of 113 Value City stores located principally in the
Midwest, mid-Atlantic and southeastern United States, 215 DSW stores located in major
metropolitan areas throughout the United States and 30 Filenes Basement stores located in
major metropolitan areas in the northeast and midwest. DSW also supplies shoes, under supply
arrangements, to 225 locations for other non-related retailers in the United States.
On July 5, 2005, DSW completed an initial public offering (IPO) of 16,171,875 Class A Common
Shares sold at a price of $19.00 per share and raising net proceeds of $285.8 million, net of
the underwriters commission and before expenses of approximately $7.8 million. As of October
28, 2006, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.1% of
DSWs outstanding common shares and approximately 93.2% of the
combined voting power of such shares. RVI accounted for the sale of DSW as a capital transaction. Associated with this
transaction, a deferred tax liability of $68.7 million was recorded. DSW is a controlled
subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock
Exchange under the symbol DSW. 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 Class B Common
Shares, except to the extent necessary to satisfy obligations under warrants it has granted to
Schottenstein Stores Corporation (SSC), Cerberus Partners, L.P. (Cerberus) and Millennium
Partners, L.P. (Millennium) and under other debt financings (see Note 6, Long Term
Obligations). Retail Ventures is subject to 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.
Value City. Located in the Midwest, mid-Atlantic and southeastern United States and operating
principally under the name Value City for over 80 years 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.
DSW. Located in major metropolitan areas throughout the United States, DSW stores offer a wide
selection of brand name and designer dress, casual and athletic footwear for men
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
and women.
Additionally, pursuant to a license agreement with Filenes Basement, DSW operates leased shoe
departments in most Filenes Basement stores. 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. On May 30, 2006, DSW entered into an Amended and Restated Supply Agreement (the
Amended Agreement) to supply shoes to Stein Mart. Under the terms of the Amended Agreement,
DSW will be the exclusive supplier of shoes to all Stein Mart stores that have shoe departments
and will supply merchandise to an additional 102 Stein Mart stores by
the end of fiscal fourth quarter of 2006. As of October 28, 2006, DSW operated 162 leased departments
for Stein Mart, 62 for Gordmans and one for Frugal Fannies Fashion Warehouse. Results of the
supply agreements are included with the DSW segment. During the nine months ended October 28,
2006, DSW opened 20 new DSW stores, closed four stores, ceased
operations in four non-affiliated leased
departments and one affiliated leased department, and added 17 new
non-affiliated leased departments and four affiliated leased
departments.
Filenes Basement. Filenes Basement stores are located primarily in major metropolitan areas
of the eastern and midwestern United States. 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. During the nine months ended October 28, 2006, Filenes Basement
opened four stores and closed one store.
Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not
allocated to other segments through corporate allocation or shared service arrangements. The
remaining results of operation are comprised of debt related expenses, income on investments and
intercompany notes expenses the latter of which is eliminated in consolidation.
2. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements should be read in conjunction with the
Companys Annual Report for the fiscal year ended January 28, 2006, as amended on Form 10-K/A,
as filed with the Securities and Exchange Commission (the SEC) on August 2, 2006 (the 2005
Annual Report).
In the opinion of management, the unaudited interim condensed consolidated financial statements
reflect all adjustments, consisting of only normal recurring adjustments, which are necessary to
present fairly the condensed 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.
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. 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 requires the recognition of compensation expense over the period
during which an employee is required to provide service in exchange for an award. Effective
January 29, 2006, the Company adopted SFAS No. 123R. The impact of adoption to the Companys
results of operations is presented in Note 4.
FASB Statement No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3 (SFAS No. 154) was issued in May 2005. SFAS No. 154 changes the
requirements for the accounting for and reporting of a change in accounting principle. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of this new pronouncement in fiscal 2006 did not impact
the Companys financial condition, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. The evaluation of a tax position in accordance with FIN 48 is a two step process.
The first step is recognition: The enterprise determines whether it is more likely than not that
a tax position will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. The second step is
measurement: A tax position that meets the more likely than not recognition threshold is
measured to determine the amount of benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. FIN 48 provides for a cumulative effect of a change in
accounting principle to be recorded upon the initial adoption. This interpretation is effective
for fiscal years beginning after December 15, 2006. The Company is currently evaluating the
impact this interpretation may have on its consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements which defines
fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures
about fair value measurements. The intent of this standard is to ensure consistency and
comparability in fair value measurements and enhanced disclosures
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
regarding the measurements. This statement is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is currently
evaluating the impact this statement may have on its consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans- an amendment of FASB Statements No. 87, 88, 106,
and 132(R), (SFAS No. 158) which requires an employer to recognize the overfunded or
underfunded status of a defined benefit post-retirement plan as an asset or liability in its
statement of financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity. This statement also
requires the employer to measure the funded status of the plan as of the date of its year-end
statement of financial position. The employer still must disclose any additional information
about certain effects of net periodic benefit cost for the next fiscal year that arise from
delayed recognition of the gains or losses, prior service costs or credits, and transition asset
or obligation in the notes to financial statements. This statement is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the impact this
interpretation may have on its consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year
misstatements should be taken into consideration when quantifying misstatements in current year
financial statements for purposes of determining whether the current years financial statements
are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006.
We are currently assessing the potential impact that the adoption of SAB No. 108 will have on
our financial statements; the impact is not expected to be material.
4. STOCK BASED COMPENSATION
On January 29, 2006, Retail Ventures adopted the fair value recognition provisions of SFAS No.
123R relating to its stock-based compensation plans. Prior to January 29, 2006, Retail Ventures
had accounted for stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations (APB
25). In accordance with APB 25, compensation expense for employee stock options was generally
not recognized for options granted that had an exercise price equal to the market value of the
underlying common shares on the date of grant.
Under the modified prospective method of SFAS No. 123R, compensation expense was recognized
during the nine months ended October 28, 2006, for all unvested stock options, based on the
grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and
for all stock based payments granted after January 29, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123R. Stock-based compensation expense
was recorded in selling, general and administrative expenses in the condensed consolidated
statements of operations. Retail Ventures financial results for the prior periods have not been
restated as a result of this adoption.
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the condensed
consolidated statements of cash flows. During the nine months ended October 29, 2005, the tax
benefits were less than $0.1 million. Beginning in fiscal 2006 with the adoption of SFAS No.
123R, the cash flows resulting from the tax benefits resulting from tax deductions in excess of
compensation expense recognized for those options (excess tax benefits) are classified as
financing cash flows.
Consistent with the valuation method used for the disclosure only provisions of SFAS No. 123,
the Company is using the Black-Scholes option-pricing model to value stock-based compensation
expense. This model assumes that the estimated fair value of options is amortized over the
options vesting periods and the compensation costs would be included in selling, general and
administrative costs in the condensed consolidated statements of operations. RVI recognizes
compensation expense for stock option awards granted subsequent to the adoption of SFAS No. 123R
and time-based restricted stock awards on a straight-line basis over the requisite service
period of the award. Compensation expense for stock option awards granted prior to the adoption
of SFAS No. 123R is recorded based upon the accrual basis.
Retail Ventures Stock Compensation Plans
Retail Ventures has a 2000 Stock Incentive Plan that provides for the issuance of options to
purchase up to 13,000,000 common shares or the issuance of restricted stock to management, key
employees of Retail Ventures and affiliates, consultants (as defined in the plan), and directors
of Retail Ventures. Options generally vest 20% per year on a cumulative basis. Options granted
under the 2000 Stock Incentive Plan remain exercisable for a period of ten years from the date
of grant.
An option to purchase 2,500 common shares is automatically granted to each non-employee director
on the first New York Stock Exchange trading day in each calendar quarter. The exercise price
for each option is the fair market value of the common shares on the date of grant. All options
become exercisable one year after the grant date and remain exercisable for a period of ten
years from the grant date, subject to continuation of the option holders service as directors
of the Company.
Retail Ventures has a 1991 Stock Option Plan that provided for the grant of options to purchase
up to 4,000,000 common shares. Such options are generally exercisable 20% per year on a
cumulative basis from the date of grant and remain exercisable for a period of ten years from
the date of grant.
During the three and nine months ended October 28, 2006, the Company recorded stock based
compensation expense of approximately $1.4 million and $3.1 million, respectively, which
includes approximately $1.1 million and $2.7 million, respectively, of expenses recorded by DSW.
Compensation costs of $7.6 million and $5.1 million were expensed during the nine months ended
October 28, 2006 and October 29, 2005, respectively, relating to stock appreciation rights
(SARS). Compensation costs of $0.5 million and a reduction to
-12-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
compensation costs of $1.5 million were recorded during the three months ended October 28, 2006
and October 29, 2005, respectively relating to SARS. Included in the SARS expense for the nine
months ended October 28, 2006 are expenses relating to the accelerated vesting of some
performance based SARS. During the nine months ended October 28, 2006, approximately $4.3
million was paid to settle exercised SARS.
The following table illustrates the pro forma effect on net income (loss) and income (loss) per
share for the three and nine months ended October 29, 2005 if the Company had applied the fair
value recognition of SFAS No. 123.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
October 29, 2005 |
|
|
October 29, 2005 |
|
|
|
(in thousands, except per share amounts) |
|
|
Net income (loss), as reported |
|
$ |
56,400 |
|
|
$ |
(112,310 |
) |
Add: Stock-based employee compensation
(benefit) expense included in reported net income,
net of tax |
|
|
(861 |
) |
|
|
3,197 |
|
Deduct: Total stock-based employee compensation
benefit (expense) determined under fair value based
method for all awards, net of tax |
|
|
554 |
|
|
|
(3,775 |
) |
|
Pro forma net income (loss) |
|
$ |
56,093 |
|
|
$ |
(112,888 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.43 |
|
|
$ |
(2.94 |
) |
Diluted as reported |
|
$ |
0.92 |
|
|
$ |
(2.94 |
) |
Basic pro forma |
|
$ |
1.42 |
|
|
$ |
(2.95 |
) |
Diluted pro forma |
|
$ |
0.91 |
|
|
$ |
(2.95 |
) |
Stock Options
Forfeitures of options are estimated at the grant date based on historical rates and reduce the
compensation expense recognized. The risk-free interest rate is based on the yield for the U.S.
Treasury securities with a remaining life equal to the five year expected term of the options at
the grant date. Expected volatility is based on the historical volatility of Retail Ventures
Common Shares. The expected term of options granted is derived from historical data on
exercises. The expected dividend yield curve is zero, which is based on the Companys history
and current intent of not declaring dividends to shareholders.
The following table illustrates the weighted-average assumptions used in the option-pricing
model for options granted in each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.9 |
% |
|
|
4.4 |
% |
Expected volatility of Retail Ventures Common Shares |
|
|
65.2 |
% |
|
|
69.8 |
% |
Expected option term |
|
4.8 years |
|
5.1 years |
-13-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The weighted-average fair value of each option granted for the three months ended October 28,
2006 and October 29, 2005 was $9.88 per share and $8.49 per share, respectively, and for the
nine months ended October 28, 2006 and October 29, 2005 was $9.08 per share and $6.33 per share,
respectively.
The following table summarizes the Companys stock option plans and related weighted average
exercise prices (WAEP) for the three and nine months ended October 28, 2006 (shares and
aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
October 28, 2006 |
|
October 28, 2006 |
|
|
Shares |
|
WAEP |
|
Shares |
|
WAEP |
Outstanding beginning of period |
|
|
1,648 |
|
|
$ |
5.75 |
|
|
|
1,782 |
|
|
$ |
5.81 |
|
Granted |
|
|
13 |
|
|
$ |
17.09 |
|
|
|
38 |
|
|
$ |
15.38 |
|
Exercised |
|
|
(211 |
) |
|
$ |
5.07 |
|
|
|
(320 |
) |
|
$ |
6.02 |
|
Forfeited |
|
|
(5 |
) |
|
$ |
5.06 |
|
|
|
(55 |
) |
|
$ |
7.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
1,445 |
|
|
$ |
5.95 |
|
|
|
1,445 |
|
|
$ |
5.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
WAEP |
|
|
Contract Life |
|
|
Value |
|
Options outstanding |
|
|
1,445 |
|
|
$ |
5.95 |
|
|
5 years |
|
$ |
15,913 |
|
Options exercisable |
|
|
931 |
|
|
$ |
6.61 |
|
|
5 years |
|
$ |
9,656 |
|
Shares available for additional grants |
|
|
5,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the amount by which the fair value of the
underlying common shares exceeds the option exercise price. The total intrinsic value of options
exercised during the three and nine months ended October 28, 2006 was $2.2 million and $3.0
million, respectively.
As of October 28, 2006, the total compensation cost related to nonvested options not yet
recognized was $0.3 million with a weighted average expense recognition period remaining of 1.2
years. The total fair value of options that vested during the three and nine months ended
October 28, 2006 was $0.1 million and $1.1 million, respectively.
-14-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes information about options outstanding as of October 28, 2006
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices |
|
Shares |
|
|
Life |
|
|
WAEP |
|
|
Shares |
|
|
WAEP |
|
$ 1.63 - $ 4.49 |
|
|
397 |
|
|
6 years |
|
$ |
2.14 |
|
|
|
219 |
|
|
$ |
2.17 |
|
$ 4.50 - $10.00 |
|
|
818 |
|
|
5 years |
|
$ |
5.56 |
|
|
|
532 |
|
|
$ |
5.99 |
|
$10.01 - $22.00 |
|
|
230 |
|
|
4 years |
|
$ |
13.90 |
|
|
|
180 |
|
|
$ |
13.85 |
|
Stock Appreciation Rights
The SARS are subject to an Option Price Protection Provision (OPPP) which provides that until
the Company receives certain approvals from its lenders, the issue of the options underlying the
SARS is contingent. Further, if any of these SARS would have vested before they are actually
granted, at or after that time, the grantee may exercise the OPPP on some or all of the SARS
that would have vested. Pursuant to an exercise of SARS, the grantee is compensated by the
Company in the amount of the gain, if any, represented by the difference between the closing
price of the RVI Common Shares on the New York Stock Exchange on the date of the exercise and
the strike price per share. The OPPP does not apply once SARS are actually granted. SARS are
recorded as liabilities in the balance sheets due to their ability to be settled in cash or
common shares and the historical exercises being settled in cash. SARS are granted to employees
and are subject to a vesting schedule or a performance vesting formula, as applicable.
Compensation costs of $0.5 million and $7.6 million and a reduction of compensation costs of
$1.5 million and compensation costs of $5.1 million were expensed during the three and nine
months ended October 28, 2006 and October 29, 2005, respectively, relating to SARS. The amount
of SARS accrued at October 28, 2006 and January 28, 2006 was $7.1 million and $3.8 million,
respectively.
The following table summarizes the Companys nonvested SARS and the related WAEP for the three
and nine months ended October 28, 2006 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
October 28, 2006 |
|
October 28, 2006 |
|
|
Shares |
|
WAEP |
|
Shares |
|
WAEP |
Nonvested beginning of period |
|
|
1,131 |
|
|
$ |
8.86 |
|
|
|
1,286 |
|
|
$ |
6.62 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
305 |
|
|
$ |
14.45 |
|
Vested |
|
|
(58 |
) |
|
$ |
5.72 |
|
|
|
(518 |
) |
|
$ |
6.23 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested end of period |
|
|
1,073 |
|
|
$ |
9.03 |
|
|
|
1,073 |
|
|
$ |
9.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-15-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
DSW Stock Compensation Plan
DSW has a 2005 Equity Incentive Plan that provides for the issuance of equity awards to purchase
up to 4,600,000 common shares, including stock options and restricted stock units to management,
key employees of DSW and affiliates, consultants (as defined in the plan), and directors of DSW.
Options generally vest 20% per year on a cumulative basis from the date of grant. Options
granted under the 2005 Equity Incentive Plan generally remain exercisable for a period of ten
years from the date of grant. Prior to fiscal 2005, DSW did not have a stock option plan or any
equity units outstanding. DSW options, restricted stock units and director stock units are not
included in the number of shares used in the basic or dilutive calculation of earnings per share
of Retail Ventures.
Stock Options
Forfeitures of options are estimated at the grant date based on historical rates of Retail
Ventures stock option activity and reduce the compensation expense recognized. The expected
term of options granted is derived from historical data of Retail Ventures stock options due to
the limited historical data on the DSW stock activity. The risk-free interest rate is based on
the yield for the U.S. Treasury securities with a remaining life equal to the five year expected
term of the options at the grant date. Expected volatility is based on the historical volatility
of the DSW Common Shares combined with the historical volatility of three similar companies
stocks, due to the relative short historical trading history of the DSW Common Shares. The
expected dividend yield curve is zero, which is based on DSWs intention of not declaring
dividends to shareholders combined with the limitations on declaring dividends as set forth in
DSWs credit facility.
The following table illustrates the weighted-average assumptions used in the option-pricing
model for options granted in each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.6 |
% |
|
|
4.4 |
% |
Expected volatility of DSW common stock |
|
|
40.5 |
% |
|
|
37.7 |
% |
Expected option term |
|
4.8 years |
|
5.1 years |
The weighted-average fair value of each option granted for the three months ended October 28,
2006 and October 29, 2005 was $11.76 per share and $9.56 per share, respectively, and for the
nine months ended October 28, 2006 and October 29, 2005 was $12.93 per share and $8.14 per
share, respectively.
-16-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes DSWs stock option plan and related WAEP for the three and nine
months ended October 28, 2006 (shares and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
October 28, 2006 |
|
October 28, 2006 |
|
|
Shares |
|
WAEP |
|
Shares |
|
WAEP |
Outstanding beginning of period |
|
|
1,042 |
|
|
$ |
21.48 |
|
|
|
914 |
|
|
$ |
19.54 |
|
Granted |
|
|
71 |
|
|
$ |
27.99 |
|
|
|
254 |
|
|
$ |
29.77 |
|
Exercised |
|
|
(3 |
) |
|
$ |
19.00 |
|
|
|
(22 |
) |
|
$ |
19.00 |
|
Forfeited |
|
|
(4 |
) |
|
$ |
20.08 |
|
|
|
(40 |
) |
|
$ |
19.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
1,106 |
|
|
$ |
21.91 |
|
|
|
1,106 |
|
|
$ |
21.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
|
|
Shares |
|
WAEP |
|
Contract Life |
|
Value |
Options outstanding |
|
|
1,106 |
|
|
$ |
21.91 |
|
|
9 years |
|
$ |
14,417 |
|
Options exercisable |
|
|
146 |
|
|
$ |
19.05 |
|
|
9 years |
|
$ |
2,317 |
|
Shares available for additional grants |
|
|
3,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the amount by which the fair value of the
underlying common shares exceeds the option exercise price. The total intrinsic value of options
exercised during the three and nine months ended October 28, 2006 was less than $0.1 million and
$0.3 million, respectively.
As of October 28, 2006, the total compensation cost related to nonvested options not yet
recognized was approximately $5.1 million with a weighted average expense recognition period
remaining of 4.0 years. The total fair value of options that vested during the three and nine
months ended October 28, 2006 was less than $0.1 million and $1.1 million, respectively.
-17-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes information about DSWs options outstanding as of October 28,
2006 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices |
|
Shares |
|
|
Life |
|
|
WAEP |
|
|
Shares |
|
|
WAEP |
|
$19.00 - $20.00 |
|
|
768 |
|
|
9 years |
|
$ |
19.00 |
|
|
|
144 |
|
|
$ |
19.00 |
|
$20.01 - $25.00 |
|
|
73 |
|
|
9 years |
|
$ |
24.52 |
|
|
|
2 |
|
|
$ |
23.58 |
|
$25.01 - $30.00 |
|
|
168 |
|
|
10 years |
|
$ |
27.94 |
|
|
|
|
|
|
|
|
|
$30.01 - $35.00 |
|
|
67 |
|
|
10 years |
|
$ |
31.16 |
|
|
|
|
|
|
|
|
|
$35.01 - $36.00 |
|
|
30 |
|
|
10 years |
|
$ |
35.79 |
|
|
|
|
|
|
|
|
|
Restricted Stock Units
Restricted stock units generally cliff vest at the end of four years from the date of grant and
are settled immediately upon vesting. Restricted stock units granted to employees that are
subject to the risk of forfeiture are not included in the computation of basic earnings per
share.
Compensation cost is measured at fair value on the grant date and recorded over the vesting
period. Fair value is determined by multiplying the number of units granted by the grant date
market price. The total aggregate intrinsic value of nonvested restricted stock units at October
28, 2006 was $5.0 million and the weighted average remaining contractual life was three years.
As of October 28, 2006, the total compensation cost related to nonvested restricted stock units
not yet recognized was approximately $2.2 million with a weighted average expense recognition
period remaining of 2.6 years.
The following table summarizes DSWs restricted stock units and related WAEP for the three and
nine months ended October 28, 2006 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
October 28, 2006 |
|
October 28, 2006 |
|
|
Shares |
|
WAEP |
|
Shares |
|
WAEP |
Outstanding beginning of period |
|
|
144 |
|
|
$ |
21.80 |
|
|
|
131 |
|
|
$ |
20.46 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
20 |
|
|
$ |
30.34 |
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
$ |
19.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
144 |
|
|
$ |
21.80 |
|
|
|
144 |
|
|
$ |
21.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-18-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Director Stock Units
DSW issues stock units to directors of DSW who are not employees of DSW or Retail Ventures.
During the three and nine months ended October 28, 2006, DSW granted 394 and 9,982 director
stock units, respectively, and expensed less than $0.1 million and $0.3 million, respectively, related to these grants. During the
three and nine months ended October 29, 2005, DSW granted 1,003 and 16,503
director stock units, respectively, and expensed less than $0.1 million and $0.4 million, respectively,
related to these grants. Stock units are automatically granted to each director who is not an
employee of DSW or Retail Ventures on the date of each annual meeting of shareholders for the
purpose of electing directors. The number of stock units granted to each non-employee director
is calculated by dividing one-half of the directors annual retainer (excluding any amount paid
for service as the chair of a board committee) by the fair market value of the DSW Class A
Common Shares on the date of the meeting. In addition, each director eligible to receive
compensation for board service may elect to have the cash portion of his or her compensation
paid in the form of stock units. Stock units granted to directors vest immediately and are
settled upon the director terminating service from the board. As of October 28, 2006 26,995 DSW
director stock units had been issued and no DSW director stock units had been settled.
5. INVESTMENTS
Short-term investments include investment grade variable-rate debt obligations and auction rate
securities and are classified as available-for-sale securities. These securities are recorded at
cost, which approximates fair value due to their variable interest rates, which typically reset
every 7 to 182 days, and despite the long-term nature of their stated contractual maturities,
the Company has the intent and ability to quickly liquidate these securities. Because the fair
value approximates the cost, there are no accumulated unrealized holding gains or losses in
other comprehensive income from these investments. All income generated from these investments
is recorded as interest income.
During the three and nine months ended October 28, 2006, $81.4 million and $150.4 million of
cash, respectively, was used to purchase available-for-sale securities while $53.0 million and
$75.1 million of cash, respectively, was generated by the sale of available-for-sale securities.
As of October 28, 2006, the Company held $75.4 million in short-term investments and at January
28, 2006, the Company had no short-term investments.
The table below details the short-term investments classified as available-for-sale securities
outstanding at October 28, 2006 (in thousands):
|
|
|
|
|
|
|
October 28, 2006 |
|
|
Maturity of |
|
|
Less Than 1 Year |
|
Aggregate fair value |
|
$ |
75,350 |
|
Net gains in accumulated other comprehensive income |
|
|
|
|
Net losses in accumulated other comprehensive income |
|
|
|
|
|
Net carrying amount |
|
$ |
75,350 |
|
|
-19-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. LONG-TERM OBLIGATIONS
On July 5, 2005, Retail Ventures amended, or amended and restated, its then-existing credit
facilities, including certain facilities under which DSW had rights and obligations as a
co-borrower and co-guarantor, and replaced them with an aggregate $475.0 million of financing
that consists of three separate credit facilities, each of which remained outstanding as of
October 28, 2006: (i) a four-year amended and restated $275.0 million revolving credit facility
(the VCDS Revolving Loan) under which Value City, Retail Ventures and certain subsidiaries of
Retail Ventures (other than DSW and DSWSW) are co-borrowers or co-guarantors, (ii) a five-year
$150.0 million revolving credit facility (the DSW Revolving Loan) under which DSW and DSWSW
are co-borrowers and co-guarantors, and (iii) an amended and restated $0.5 million senior
non-convertible loan facility, which is held equally by Cerberus and SSC (the Non-Convertible
Loan), under which Value City is the borrower and Retail Ventures and certain subsidiaries of
Retail Ventures (other than DSW and DSWSW) are co-guarantors. On August 16, 2006, Retail
Ventures issued $125.0 million of Premium Income Exchangeable Securities (PIES). On September
15, 2006, Retail Ventures closed on the exercise by the sole underwriter of its entire option to
purchase an additional aggregate principal amount of $18,750,000 of PIES. Collectively, the
VCDS Revolving Loan, DSW Revolving Loan, Non-Convertible Loan and PIES are referred to as
Credit Facilities.
The Company is not subject to any financial covenants; however, the Credit Facilities contain
numerous restrictive covenants relating to the Companys management and operation. These
non-financial covenants include, among other restrictions, limitations on indebtedness,
guarantees, mergers, acquisitions, fundamental corporate changes, financial reporting
requirements, budget approval, disposition of assets, investments, loans and advances, liens,
dividends, stock purchases, transactions with affiliates, issuance of securities and the payment
of and modifications to debt instruments under these agreements.
The Credit Facilities are described more fully below:
Revolving Credit Facilities
$275 Million Secured Revolving Credit Facility The VCDS Revolving Loan
On July 5, 2005, Retail Ventures and its affiliates amended and restated the VCDS
Revolving Loan, which was originally entered into in June 2002 (the June 2002 Revolving
Credit Facility). Pursuant to the VCDS Revolving Loan, (i) DSW and DSWSW were released
from their obligations under the June 2002 Revolving Credit Facility, (ii) the lenders
released their liens on the DSW Common Shares held by Retail Ventures and the common shares
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 VCDS Revolving Loan, Filenes Basement, Retail Ventures Jewelry, Inc. and certain
of Value Citys wholly-owned subsidiaries are named as co-borrowers. The VCDS Revolving
Loan is guaranteed by Retail Ventures and certain of its wholly-owned subsidiaries. Neither
DSW nor DSWSW are borrowers or guarantors under the VCDS Revolving Loan. The VCDS Revolving
Loan has borrowing base restrictions and provides for borrowings at variable interest rates
based on LIBOR, the prime rate and the Federal Funds
-20-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
effective rate, plus a margin. In addition to the borrowing base restrictions, 10% of the
facility is deemed an excess reserve and is not available for borrowing. Obligations under
the VCDS Revolving Loan are secured by a lien on substantially all of the personal property of
Retail Ventures and its wholly-owned subsidiaries, excluding common shares of DSW owned by
Retail Ventures. At October 28, 2006, $119.1 million was available under the VCDS Revolving
Loan, direct borrowings aggregated $110.5 million and $17.3 million letters of credit were
issued and outstanding. At January 28, 2006, $63.5 million was available under the VCDS
Revolving Loan, direct borrowings aggregated $88.0 million and $19.0 million in letters of
credit were issued and outstanding. The maturity date of the VCDS Revolving Loan is the earlier
of July 5, 2009 or the date that is 91 days prior to the maturity date of the Non-Convertible
Loan.
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
Simultaneously with the amendment and restatement of the June 2002 Revolving Credit Facility in
July 2005, DSW entered into the DSW Revolving Loan. Under this facility, DSW and its
wholly-owned subsidiary, DSWSW, are named as co-borrowers. The DSW Revolving Loan is subject to
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. In addition, if at
any time DSW utilizes over 90% of DSWs borrowing capacity under the facility, DSW must comply
with a fixed charge coverage ratio test set forth in the facility document. DSWs and DSWSWs
obligations under the DSW Revolving Loan are secured by a lien on substantially all of their
personal property and a pledge of all of DSWs shares of DSWSW. At October 28, 2006 and January
28, 2006, $134.2 million and $136.4 million, respectively, were available under the DSW
Revolving Loan and no direct borrowings were outstanding. At October 28, 2006 and January 28,
2006, $15.8 million and $13.6 million, respectively, in letters of credit were issued and
outstanding. The maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans Related Parties
From their inception in June 2002 through their amendment, discussed below, in July 2005, the
Term Loans were comprised of a $50.0 million Term Loan B and a $50.0 million Term Loan C
(collectively, the Term Loans). All obligations under the Term Loans were senior debt and,
subject to an Intercreditor Agreement, had the same rights and privileges as the June 2002
Revolving Credit Facility and the amended and restated $75.0 million senior subordinated
convertible loan (the Convertible Loan). The Company and its principal subsidiaries were
obligated on the Term Loans. During fiscal 2004, the Company extended the maturity dates of the
Term Loans by one year. As a result, the maturity date of the Term Loans was extended to June
11, 2006, under substantially the same terms and conditions as the then-existing Term Loans.
The Term Loans stated rate of interest per annum depended on whether the Company elected to pay
interest in cash or a payment-in-kind (PIK) option. During the first two years of the Term
Loans, the Company had the option to pay all interest in PIK. During the final year of the Term
Loans, the stated rate of interest was 15.0% if paid in cash or 15.5% if PIK
-21-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
and the PIK option was limited to 50% of the interest due. All interest was paid under the cash
election. The principal balance of the Term Loans were repaid in full on July 5, 2005.
The Company issued 2,954,792 Term Loan Warrants to purchase Retail Ventures Common Shares, at an
initial exercise price of $4.50 per share, to Cerberus and SSC in connection with the Term Loan
C. Prior to their amendment in July 2005, the Term Loan Warrants were exercisable at any time
prior to June 11, 2012. In September 2002, Back Bay Capital Funding LLC (Back Bay) bought from
each of Cerberus and SSC a $3.0 million interest in each of their Term Loans, and received a
corresponding portion of the Term Loan Warrants from each of Cerberus and SSC. The Company has
granted the Term Loan C lenders registration rights with respect to the shares issuable upon
exercise of the Term Loan Warrants. The related debt discount was amortized into interest
expense over the life of the debt.
Amendment to Term Loans
On July 5, 2005, the Company and its affiliates amended the Term Loans which had originally been
entered into in June 2002. Pursuant to the July 2005 Fourth Amendment to Financing Agreement,
(i) DSW was released from its obligations as a co-borrower, (ii) Value City repaid all the Term
Loan indebtedness, and (iii) Retail Ventures amended the outstanding Term Loan Warrants to
provide SSC, Cerberus and 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
(subject to anti-dilution provisions similar to those in the existing Term Loan Warrants), or
(C) acquire a combination thereof. Effective November 23, 2005, Back Bay transferred and
assigned its Term Loan Warrants to Millennium. Although Retail Ventures does not intend or plan
to undertake a spin-off of its DSW Common Shares to Retail Ventures shareholders, in the event
that Retail Ventures does effect such a spin-off in the future, the holders of outstanding
unexercised Term Loan Warrants will 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 will be exercisable solely for Retail Ventures Common
Shares.
Senior Subordinated Convertible Loan Related Parties
$75 Million Senior Subordinated Convertible Loan
In June 2002, the Company and its affiliates amended and restated the Convertible Loan dated
March 15, 2000. As amended in 2002, borrowings under the Convertible Loan bore interest at 10%
per annum. At the Companys option, interest could be PIK during the first two years, and
thereafter, at the Companys option, up to 50% of the interest due may be PIK until maturity.
Prior to its amendment and restatement in July 2005, the Convertible Loan was guaranteed by all
Retail Ventures principal subsidiaries and was secured by a lien on
-22-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
assets junior to liens granted in favor of the lenders on the June 2002 Revolving Credit
Facility and Term Loans. All interest was paid in cash.
$50 Million Second Amended and Restated Senior Loan Agreement The Non-Convertible Loan
On July 5, 2005, the Company and its affiliates amended and restated the Convertible Loan as a
non-convertible loan. Pursuant to this amendment and restatement of the Non-Convertible Loan,
(i) DSW was released from its obligations as a co-guarantor, (ii) Value City repaid $25.0
million of the Convertible Loan, (iii) the remaining $50.0 million Convertible Loan was
converted into a Non-Convertible Loan, (iv) the capital stock of DSW held by Retail Ventures
continued to secure the Non-Convertible Loan, and (v) Retail Ventures issued to SSC and Cerberus
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 Non-Convertible Loan. The
maturity date of the Non-Convertible Loan was June 10, 2009 and it was not eligible for
prepayment until June 10, 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 Non-Convertible Loan (subject to existing anti-dilution
provisions), (ii) acquire from Retail Ventures Class A Common Shares of DSW at an exercise price
per share equal to the price of the shares sold to the public in DSWs IPO (subject to
anti-dilution provisions similar to those in the existing Term Loan Warrants held by SSC and
Cerberus), or (iii) acquire a combination thereof. Although Retail Ventures does not intend or
plan to undertake a spin-off of its DSW Common Shares to Retail Ventures shareholders, in the
event that Retail Ventures does effect such a spin-off in the future, the holders of outstanding
unexercised Conversion Warrants will receive the same number of DSW 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 will be exercisable solely for Retail Ventures Common
Shares.
On August 16, 2006, the Non-Convertible Loan was amended and restated for a third time whereby
the Company (i) paid $49.5 million of the then aggregate $50.0 million outstanding balance, (ii)
secured the remaining $0.5 million balance with cash collateral accounts, (iii) pledged DSW
stock sufficient for the exercise of the Convertible Warrants, and (iv) obtained a release of
the capital stock of DSW held by Retail Ventures used to secure the Non-Convertible Loan. The
final maturity date is the earlier of (i) June 10, 2009 or (ii) the date that the Convertible
Warrants held by the Lender, are exercised.
$143,750,000 Premium Income Exchangeable SecuritiesSM (PIES)
On August 10, 2006, Retail Ventures announced the pricing of its 6.625% Mandatorily Exchangeable
Notes due September 15, 2011, or PIES (Premium Income Exchangeable
SecuritiesSM) in the aggregate principal amount of $125,000,000. The closing of the
transaction took place on August 16, 2006. On September 15, 2006, Retail Ventures closed on the
exercise by the sole underwriter of its entire option to purchase an additional aggregate
principal amount of $18,750,000 of PIES.
-23-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The $143,750,000 PIES bear a coupon at an annual rate of 6.625% of the principal amount, payable
quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing
on December 15, 2006 and ending on September 15, 2011. Except to the extent RVI exercises its
cash settlement option, the PIES are mandatorily exchangeable, on the maturity date, into Class
A Common Shares of DSW, no par value per share, which are issuable upon exchange of DSW Class B
Common Shares, no par value per share, beneficially owned by RVI. On the maturity date, each
holder of the PIES will receive a number of DSW Class A Common Shares per $50.0 principal amount
of PIES equal to the exchange ratio described in the RVI prospectus filed with the SEC on
August 11, 2006, or if RVI elects, the cash equivalent thereof or a combination of cash and DSW
Class A Common Shares. The exchange ratio is equal to the number of DSW Class A Common Shares
determined as follows: (i) if the applicable market value of DSW Class A Common Shares equals or
exceeds $34.95, the exchange ratio will be 1.4306 shares; (ii) if the applicable market value of
DSW Class A Common Shares is less than $34.95 but greater than $27.41, the exchange ratio will
be between 1.4306 and 1.8242 shares; and (iii) if the applicable market value of DSW Class A
Common Shares is less than or equal to $27.41, the exchange ratio will be 1.8242 shares, subject
to adjustment as provided in the PIES. The maximum aggregate number of DSW Class A Common Shares
deliverable upon exchange of the PIES is 5,244,575 DSW Class A Common Shares, subject to
adjustment as provided in the PIES.
RVI used the net proceeds of the offering to repay the approximately $49.7 million remaining
balance of an intercompany note due to Value City, and Value City used such proceeds and other
funds to repay $49.5 million of the outstanding principal amount of its $50.0 million
Non-Convertible Loan, together with fees and expenses. Restricted cash of $0.5 million is held
for the remaining balance of the Non-Convertible Loan. The balance of the net proceeds was
applied for general corporate purposes, which included the repayment of approximately $36.5
million of borrowings under the VCDS Revolving Loan.
The embedded exchange feature of the PIES is accounted for as a derivative, which is recorded at
fair value with changes in fair value in the statement of operations. Accordingly, the
accounting for the embedded derivative addresses the variations in the fair value of the
obligation to settle the PIES when the market value exceeds or is less than the threshold
appreciation price. The fair value of the conversion feature at the date of issuance of $11.7
million was equal to the amount of the discount of the PIES and will be amortized into interest
expense over the term of the PIES.
During the three and nine months ended October 28, 2006, the Company recorded a charge related
to the change in fair value of the conversion feature of the PIES from the date of issuance to
October 28, 2006 of $28.0 million. As of October 28, 2006, the fair value liability recorded for
the conversion feature was $39.7 million.
-24-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. PENSION BENEFIT PLANS
The Company has three qualified defined benefit pension 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. 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 February 1 measurement date for its 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 28, 2006 and October 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
Service cost |
|
$ |
11 |
|
|
$ |
11 |
|
|
$ |
32 |
|
|
$ |
34 |
|
Interest cost |
|
|
362 |
|
|
|
366 |
|
|
|
1,087 |
|
|
|
1,098 |
|
Expected return on plan assets |
|
|
(443 |
) |
|
|
(393 |
) |
|
|
(1,329 |
) |
|
|
(1,179 |
) |
Amortization of transition asset |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(28 |
) |
|
|
(28 |
) |
Amortization of net loss |
|
|
150 |
|
|
|
175 |
|
|
|
451 |
|
|
|
525 |
|
|
Net periodic benefit cost |
|
$ |
71 |
|
|
$ |
150 |
|
|
$ |
213 |
|
|
$ |
450 |
|
|
As of October 28, 2006, the Company has contributed $2.0 million required for fiscal 2006 to
meet the minimum funding requirements of ERISA. During the nine months ended October 29, 2005,
the Company contributed approximately $2.5 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 thirty percent 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, 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.
The Company also 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. Under the ESPP, 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 are not
material to the consolidated financial statements.
-25-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. SHAREHOLDERS EQUITY AND WARRANT LIABILITY
The Company issued restricted common shares to certain key employees pursuant to individual
employment agreements and certain other grants from time to time, which are approved by the
Board of Directors. The agreements condition the vesting of the shares generally upon continued
employment with the Company with such restrictions expiring over various periods ranging from
three to five years. The market value of the shares at the date of grant is charged to expense
on a straight-line basis over the period that the restrictions lapse. As of October 28, 2006 and
January 28, 2006, the Company had outstanding approximately
1,600 and 3,000 restricted common shares, respectively,
which represent less than 1% of the common basic and diluted shares
outstanding in each respective period.
Warrants
As a result of the previously discussed Credit Facilities modifications made on July 5, 2005
(see Note 6, Long-Term Obligations), the detached Term Loan Warrants and detached Conversion
Warrants with dual optionality qualified as derivatives under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133). Due to 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. Prior to July 5, 2005, the Term
Loan Warrants were recorded on the balance sheet within equity. The difference of $20.1 million
between the book value of the Warrants and the fair value at the time the Warrants were modified
was reclassified to a liability and was recorded to common shares. The Conversion Warrants
liability is for the full amount of their fair value as a result of the modifications and a
non-cash charge has been recorded within the Condensed Consolidated Statement of Operations.
Regarding the change in the fair value of the Warrants, the Company recorded a charge of $144.2
million in fiscal 2005 (subsequent to the first quarter of fiscal 2005), including the initial
recording of the Conversion Warrants of $134.2 million. For the three months and nine months
ended October 28, 2006, the Company recorded a charge of $2.6 million and $82.7 million,
respectively, for the change in fair value of Warrants. No tax benefit has been recognized in
connection with this charge. These derivative instruments do not qualify for hedge accounting
under SFAS No. 133, therefore, changes in the fair values are recognized in earnings in the
period of change.
Retail Ventures estimates the fair values of derivatives based on the Black-Scholes Pricing
Model using current market rates and records all derivatives on the balance sheet at fair value.
The fair market value of derivative instruments was $174.3 million and $170.4 million at October
28, 2006 and January 28, 2006, respectively. 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.
During the nine months ended October 28, 2006, Retail Ventures issued 7,000,000 of its common
shares at an exercise price of $4.50 per share to Cerberus in connection with the exercise of a
portion of its outstanding Conversion Warrants. In connection with these exercises, Retail
Ventures received $31.5 million during the nine months ended October 28,
-26-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2006. Retail Ventures did not issue any of its common shares in connection with the exercise of
the outstanding Conversion Warrants during the three months ended October 28, 2006.
10. EARNINGS PER SHARE
Basic (loss) earnings per share are based on the net (loss) income and a simple weighted average
of common shares outstanding. Diluted (loss) earnings per share reflects the potential dilution
of common shares, related to outstanding stock options, SARS and warrants, calculated using the
treasury stock method and convertible debt calculated using the if-converted method. The
numerator for the diluted (loss) earnings per share calculation is the net (loss) income
adjusted to remove the effect of interest, adjusted for tax, on the convertible debt. The
denominator is the weighted average number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
Weighted average shares outstanding |
|
|
47,053 |
|
|
|
39,479 |
|
|
|
44,376 |
|
|
|
38,227 |
|
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 |
|
|
47,053 |
|
|
|
61,514 |
|
|
|
44,376 |
|
|
|
38,227 |
|
|
For the three months and nine months ended October 28, 2006 and the nine months ended October
29, 2005, all potentially dilutive instruments: stock options, SARS, warrants and convertible
debt, were anti-dilutive. The total amount of securities outstanding at October 28, 2006 and
October 29, 2005 that were not included in dilutive earnings per share because to do so would
have been anti-dilutive for the periods presented, but could potentially dilute basic earnings
per share in the future are:
|
|
|
|
|
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
SARS |
|
|
1,182 |
|
|
|
1,486 |
|
Stock options |
|
|
1,445 |
|
|
|
2,122 |
|
Term Loan Warrants |
|
|
4,413 |
|
|
|
4,413 |
|
Conversion Warrants |
|
|
9,667 |
|
|
|
16,667 |
|
|
Total potentially dilutive instruments |
|
|
16,707 |
|
|
|
24,688 |
|
|
11. ACCUMULATED OTHER COMPREHENSIVE LOSS
The balance sheet caption Accumulated other comprehensive loss of $6.6 million and $6.9
million at October 28, 2006 and January 28, 2006, respectively, relates to the Companys minimum
pension liability, net of income tax. For the nine months ended October 28, 2006
-27-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
the comprehensive loss was $114.7 million. For the nine months ended October 29, 2005, the
comprehensive loss was the same as the net loss.
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 jurisdiction. The
allowance as of October 28, 2006 and January 28, 2006 was $14.8 million and $13.4 million,
respectively. Based on available data, the Company believes it is more likely than not that the
remaining deferred tax assets will be realized.
The tax rate of negative 16.5% for the nine month period ended October 28, 2006, reflects the
negative impact of the change in fair value of warrants and conversion feature of the PIES
included in book loss but not tax loss and an additional valuation allowance of $1.3 million on
all state net deferred tax assets.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities is presented below:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
October 28, |
|
October 29, |
|
|
2006 |
|
2005 |
|
|
(in thousands) |
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
Non-related parties |
|
$ |
7,087 |
|
|
$ |
7,583 |
|
Related parties |
|
$ |
7,928 |
|
|
$ |
15,104 |
|
Income taxes |
|
$ |
28,984 |
|
|
$ |
15,282 |
|
|
|
|
|
|
|
|
|
|
Noncash activities: |
|
|
|
|
|
|
|
|
Changes in accounts payable due to
asset purchases |
|
$ |
844 |
|
|
$ |
3,530 |
|
Additional paid in capital transferred from
warrant liability for warrant exercises |
|
$ |
78,817 |
|
|
|
|
|
14. SEGMENT REPORTING
During
the third quarter of fiscal 2006, the Companys business segments were realigned to
reflect how the Company manages the business. The realignment
resulted in the addition of a Corporate segment.
The Corporate segment includes activities that are not allocated to individual segments. Prior
year segment tables have been updated to conform to this realignment.
-28-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company is managed in four operating segments: Value City, DSW, Filenes Basement, and
Corporate. 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 as operating (loss) profit, which is defined as (loss) profit before interest expense,
income taxes and minority interest. Capital expenditures in brackets represent assets
transferred to other segments.
The tables below present segment statement of operations information for the three and nine
months ended October 28, 2006 and for the three and nine months ended October 29, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
Value City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
(in thousands) |
Three months ended October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
341,205 |
|
|
$ |
332,219 |
|
|
$ |
114,195 |
|
|
|
|
|
|
|
|
|
|
$ |
787,619 |
|
Operating (loss) profit |
|
|
(11,343 |
) |
|
|
25,224 |
|
|
|
1,901 |
|
|
$ |
(30,574 |
) |
|
|
|
|
|
|
(14,792 |
) |
Depreciation and amortization |
|
|
6,100 |
|
|
|
4,409 |
|
|
|
2,170 |
|
|
|
635 |
|
|
|
|
|
|
|
13,314 |
|
Interest expense |
|
|
(8,158 |
) |
|
|
(145 |
) |
|
|
(2,887 |
) |
|
|
(2,809 |
) |
|
$ |
1,843 |
|
|
|
(12,156 |
) |
Interest income |
|
|
225 |
|
|
|
1,708 |
|
|
|
11 |
|
|
|
2,093 |
|
|
|
(1,843 |
) |
|
|
2,194 |
|
Benefit (provision) for income taxes |
|
|
8,290 |
|
|
|
(10,786 |
) |
|
|
(717 |
) |
|
|
(198 |
) |
|
|
|
|
|
|
(3,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
2,068 |
|
|
$ |
9,309 |
|
|
$ |
6,205 |
|
|
$ |
419 |
|
|
|
|
|
|
$ |
18,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
Value City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
(in thousands) |
Three months ended October 29, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
341,687 |
|
|
$ |
302,240 |
|
|
$ |
102,174 |
|
|
|
|
|
|
|
|
|
|
$ |
746,101 |
|
Operating (loss) profit |
|
|
(23,927 |
) |
|
|
17,727 |
|
|
|
1,057 |
|
|
$ |
66,997 |
|
|
|
|
|
|
|
61,854 |
|
Depreciation and amortization |
|
|
6,786 |
|
|
|
4,648 |
|
|
|
2,122 |
|
|
|
515 |
|
|
|
|
|
|
|
14,071 |
|
Interest expense |
|
|
(2,808 |
) |
|
|
(140 |
) |
|
|
(623 |
) |
|
|
(709 |
) |
|
$ |
709 |
|
|
|
(3,571 |
) |
Interest income |
|
|
739 |
|
|
|
289 |
|
|
|
7 |
|
|
|
|
|
|
|
(709 |
) |
|
|
326 |
|
Benefit (provision) for income taxes |
|
|
8,695 |
|
|
|
(6,965 |
) |
|
|
(166 |
) |
|
|
248 |
|
|
|
|
|
|
|
1,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
4,861 |
|
|
$ |
5,740 |
|
|
$ |
1,537 |
|
|
|
805 |
|
|
|
|
|
|
$ |
12,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
Value City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
(in thousands) |
Nine months ended October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
945,994 |
|
|
$ |
950,008 |
|
|
$ |
297,638 |
|
|
|
|
|
|
|
|
|
|
$ |
2,193,640 |
|
Operating (loss) profit |
|
|
(31,038 |
) |
|
|
76,210 |
|
|
|
(2,909 |
) |
|
$ |
(110,726 |
) |
|
|
|
|
|
|
(68,463 |
) |
Depreciation and amortization |
|
|
18,597 |
|
|
|
14,201 |
|
|
|
6,336 |
|
|
|
1,937 |
|
|
|
|
|
|
|
41,071 |
|
Interest expense |
|
|
(14,573 |
) |
|
|
(428 |
) |
|
|
(5,001 |
) |
|
|
(4,607 |
) |
|
$ |
3,641 |
|
|
|
(20,968 |
) |
Interest income |
|
|
2,166 |
|
|
|
5,290 |
|
|
|
22 |
|
|
|
2,334 |
|
|
|
(3,641 |
) |
|
|
6,171 |
|
Benefit (provision) for income taxes |
|
|
16,485 |
|
|
|
(32,211 |
) |
|
|
2,194 |
|
|
|
(198 |
) |
|
|
|
|
|
|
(13,730 |
) |
|
Capital expenditures |
|
$ |
6,839 |
|
|
$ |
21,798 |
|
|
$ |
9,783 |
|
|
$ |
(1,170 |
) |
|
|
|
|
|
$ |
37,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
506,939 |
|
|
$ |
581,224 |
|
|
$ |
193,595 |
|
|
$ |
387,975 |
|
|
$ |
(279,811 |
) |
|
$ |
1,389,922 |
|
-29-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
Value City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
(in thousands) |
Nine months ended October 29, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
954,312 |
|
|
$ |
860,257 |
|
|
$ |
278,311 |
|
|
|
|
|
|
|
|
|
|
$ |
2,092,880 |
|
Operating (loss) profit |
|
|
(58,233 |
) |
|
|
53,468 |
|
|
|
(11,991 |
) |
|
$ |
(70,586 |
) |
|
|
|
|
|
|
(87,342 |
) |
Depreciation and amortization |
|
|
20,381 |
|
|
|
14,229 |
|
|
|
6,481 |
|
|
|
1,907 |
|
|
|
|
|
|
|
42,998 |
|
Interest expense |
|
|
(18,764 |
) |
|
|
(8,753 |
) |
|
|
(2,900 |
) |
|
|
(6,143 |
) |
|
$ |
12,729 |
|
|
|
(23,831 |
) |
Interest income |
|
|
6,264 |
|
|
|
369 |
|
|
|
27 |
|
|
|
6,586 |
|
|
|
(12,729 |
) |
|
|
517 |
|
Benefit (provision) for income taxes |
|
|
13,972 |
|
|
|
(17,942 |
) |
|
|
6,030 |
|
|
|
(415 |
) |
|
|
|
|
|
|
1,645 |
|
|
Capital expenditures |
|
$ |
14,002 |
|
|
$ |
21,248 |
|
|
$ |
3,041 |
|
|
$ |
(1,361 |
) |
|
|
|
|
|
$ |
36,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
466,868 |
|
|
$ |
501,459 |
|
|
$ |
119,927 |
|
|
$ |
264,881 |
|
|
$ |
(266,561 |
) |
|
$ |
1,086,574 |
|
15. COMMITMENTS AND CONTINGENCIES
As previously reported, 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
covered transaction information involving approximately 1.4 million credit cards and data from
transactions involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in several legal proceedings
arising out of this incident, including two putative class action lawsuits, which
seek unspecified monetary damages, credit monitoring and other relief. Each of the two lawsuits
seeks to certify a different class of consumers. One of the lawsuits seeks to certify a
nationwide class that would include every consumer who used a credit card, debit card, or
check to make purchases at DSW between November 2004 and March 2005 and whose transaction data
was taken during the data theft incident. The other lawsuit seeks to certify classes of
consumers that are limited geographically to consumers who made purchases at certain stores in
Ohio.
In connection with this matter, DSW entered into a consent order with the Federal Trade
Commission (FTC), which has jurisdiction over consumer protection matters. The FTC published
the final order on March 14, 2006, and copies of the complaint and consent order are available
from the FTCs Web site at http://www.ftc.gov and also from the FTCs Consumer Response Center,
Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
DSW has not admitted any
wrongdoing or that the facts alleged in the FTCs proposed unfairness complaint are true. Under
the consent order, DSW will pay no fine or damages. DSW has agreed, however, to maintain a
comprehensive information security program and to undergo a biannual assessment of such program
by an independent third party.
-30-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
There can be no assurance that there will not be additional proceedings or claims brought
against DSW in the future. DSW has contested and will continue to vigorously contest the claims
made against DSW and will continue to explore our defenses and possible claims against others.
DSW estimates that the potential exposure for losses related to this theft, including exposure
under currently pending proceedings, ranges from 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, 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, DSW 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. As of October 28, 2006, the balance
of the associated accrual for potential exposure was $3.1 million.
Although difficult to quantify, since the announcement of the theft, the Company has not
discerned any material negative effect on sales trends it believes is attributable to the theft.
However, this may not be indicative of the long-term developments regarding this matter.
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 and financial condition.
16. SUBSEQUENT EVENTS
On December 5, 2006, RVI, Retail Ventures Services, Inc., Value City
and Filenes Basement, collectively the RVI
Entities, entered into an IT Transfer and Assignment Agreement
(the IT Transfer Agreement) with Brand Technology
Services LLC (BTS), a wholly owned subsidiary of DSW.
Under the terms of the IT Transfer Agreement, the RVI Entities will
transfer certain information technology contracts to BTS. The IT
Transfer Agreement is effective as of October 29, 2006.
Additionally, on
December 5, 2006, the Company and DSW entered into an Amended and Restated Shared Services
Agreement, effective as of October 29, 2006 (the Amended Shared Services Agreement). Under the
terms of the Amended Shared Services Agreement, DSW, through BTS, will provide information technology services to RVI and its
subsidiaries, including Value City and Filenes Basement. RVI
information technology associates are now employed by
BTS. Additionally, RVI and DSW agreed to include other non-material
changes to the Amended Shared Services Agreement.
-31-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
As used in this Quarterly Report on Form 10-Q (this Report) and except as the context otherwise
may require, RVI, Retail Ventures Company, we, us, and our refers to Retail Ventures,
Inc. and its wholly-owned subsidiaries, including but not limited to, Value City Department Stores
LLC (Value City) and Filenes Basement, Inc. (Filenes Basement), and DSW Inc. (DSW), a
controlled subsidiary, and DSWs wholly-owned subsidiaries, including DSW Shoe Warehouse, Inc.
(DSWSW).
OVERVIEW
Retail Ventures is a holding company operating retail stores in three of its four segments: Value
City, Filenes Basement, DSW and Corporate. Value City is a full-line, value-price retailer
carrying mens, womens and childrens apparel, accessories, jewelry, shoes, home fashions,
electronics and seasonal items. Located in the Midwest, mid-Atlantic and southeastern United
States of America (United States) and operating for over 80 years, Value Citys strategy has been
to provide exceptional value by offering a broad selection of brand name merchandise at prices
substantially below conventional retail prices. As of October 28, 2006, there were 113 Value City
stores in operation. DSW is a leading United States specialty branded footwear retailer operating
215 shoe stores in 33 states as of October 28, 2006. DSW offers a wide selection of brand name and
designer dress, casual and athletic footwear for women and men. DSWs typical customers are brand-,
quality- and style-conscious shoppers who have a passion for footwear and accessories. Filenes
Basement stores are located in major metropolitan areas of the eastern and Midwestern United
States. Filenes Basements mission is to provide the best selection of stylish, high-end designer
and famous brand name merchandise at surprisingly affordable prices in mens and womens apparel,
jewelry, shoes, accessories and home goods. As of October 28, 2006, there were 30 Filenes Basement
stores in operation. The Corporate segment consists of all revenue and expenses related to the
corporate entities that are not allocated to the other segments.
We intend for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in those financial
statements from year to year, and the primary factors that accounted for those changes, as well as
how certain accounting principles affect our financial statements. The discussion also provides
information about the financial results of the various segments of our business to provide a better
understanding of how those segments and their results affect the financial condition and results of
operations of the Company as a whole. This discussion should be read in conjunction with our
financial statements and accompanying notes as of October 28, 2006.
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 expenses of approximately $7.8 million. As
of October 28, 2006, Retail Ventures owned Class B Common Shares of DSW representing approximately
63.1% of DSWs outstanding common shares and approximately 93.2% of the combined voting power of
such shares. 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.
-32-
DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the
New York Stock Exchange under the symbol DSW.
The retail industry is highly competitive. We compete with a variety of conventional and discount
retail stores, including national, regional and local independent department and specialty stores,
as well as with catalog operations, on-line providers, factory outlet stores and other off-price
stores. Our operating entities, Value City, DSW and Filenes Basement, have different target
customers and different strategies, but each focuses on this basic principle: the value to the
customer is the result of the quality of the merchandise in relationship to the price paid.
Forward-Looking Statements
Some of the statements in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, including information
incorporated by reference herein, may contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which reflect
our current views with respect to, among other things, future events and financial performance. You
can identify these forward-looking statements by the use of forward-looking words such as
outlook, believes, expects, potential, continues, may, will, should, seeks,
approximately, predicts, intends, plans, estimates, anticipates or the negative version
of those words or other comparable words. Any forward-looking statements contained in this
Quarterly Report on Form 10-Q are based upon our historical performance and on current plans,
estimates and expectations. The inclusion of this forward-looking information should not be
regarded as a representation by us, or any other person that the future plans, estimates or
expectations contemplated by us will be achieved. Such forward-looking statements are subject to
various risks and uncertainties. Accordingly, there are or will be important factors that could
cause our actual results to differ materially from those indicated in these statements. We believe
that these factors include but are not limited to those described under Risk Factors in our
Annual Report for the fiscal year ended January 28, 2006, as amended on Form 10-K/A, as filed with
the Securities and Exchange Commission on August 2, 2006 (the 2005 Annual Report) as supplemented
by Item 1A, Part II of this Report. These factors should not be construed as exhaustive and should
be read in conjunction with the other cautionary statements that are included in this Report. We
do not undertake any obligation to publicly update or review any forward-looking statement, whether
as a result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what we may have
projected. Any forward-looking statements you read in this Quarterly Report on Form 10-Q reflect
our current views with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to our operations, results of operations, financial
condition, growth strategy and liquidity.
CRITICAL ACCOUNTING POLICIES
Managements 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 the Notes to the Consolidated Financial
Statements that are included in our 2005 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
-33-
commitments and contingencies at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including, but not limited to, those related to inventory valuation,
depreciation, amortization, recoverability of long-lived assets including intangible assets, the
calculation of retirement benefits, estimates for self insurance reserves for health and welfare,
workers compensation and casualty insurance, income taxes, contingencies, litigation and revenue
recognition. Management bases its estimates and judgments on its historical experience and other
relevant factors, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. The process of
determining significant estimates is fact specific and takes into account factors such as
historical experience, current and expected economic conditions, product mix, and in some cases,
actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered provide a meaningful
basis for the accounting policies applied in the preparation of the consolidated financial
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. Revenue from merchandise sales is recognized at the point
of sale and is net of returns and excludes sales tax. Revenue from stored value
cards, which include gift cards and returned merchandise credits, is deferred and is
recognized when the cards are redeemed. The liability associated with outstanding
stored value cards was $14.4 million and $14.9 million at October 28, 2006 and
January 28, 2006, respectively, and these amounts are included in the accompanying
consolidated balance sheet within Accrued expenses other. The Company did not
recognize income from unredeemed stored value cards during the nine months ended
October 28, 2006 and October 29, 2005. |
|
|
|
|
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 was $45.9 million and $43.1 million at October 28, 2006
and January 28, 2006, respectively. |
-34-
|
|
|
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 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. |
|
|
|
|
Short-term investments. Short-term investments include investment grade
variable-rate debt obligations and auction rate securities and are classified as
available-for-sale securities. These securities are recorded at cost, which
approximates fair value due to their variable interest rates, which reset
every 7 to 182 days, and despite the long-term nature of their stated contractual
maturities, the Company has the intent and ability to quickly liquidate these
securities. As a result of the resetting variable rates, there are no
cumulative gross unrealized or realized holding gains or losses from
these investments. All income generated from these investments is recorded as interest
income. As of October 28, 2006, the Company held $75.4 million in short-term
investments and at January 28, 2006, the Company had no short-term investments. |
|
|
|
|
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 at the lowest identifiable level which includes 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. |
|
|
|
|
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, our conclusion regarding impairment may differ from our
current estimates. |
|
|
|
|
Store Closing Reserve. During the nine months ending October 28, 2006, the
Company recorded charges associated with the closing of four DSW stores. The
operating lease at one of the four stores was terminated through the exercise of a
lease kick-out option. During the first quarter of 2006, the Company closed one
Filenes Basement store for which closing costs were accrued during the fourth
quarter of 2005. These estimates are monitored on at least a quarterly basis for
changes in circumstances. |
-35-
The table below sets forth the significant components and activity related to these
closing reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
1/28/06 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
10/28/06 |
|
|
|
(in thousands) |
|
Employee severance and termination benefits |
|
$ |
277 |
|
|
$ |
55 |
|
|
$ |
(332 |
) |
|
|
|
|
|
$ |
|
|
Lease Costs |
|
|
2,130 |
|
|
|
528 |
|
|
|
(1,143 |
) |
|
$ |
233 |
|
|
|
1,748 |
|
Other |
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,407 |
|
|
$ |
647 |
|
|
$ |
(1,475 |
) |
|
$ |
233 |
|
|
$ |
1,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
1/29/05 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
10/29/05 |
|
|
|
(in thousands) |
|
Employee severance and termination benefits |
|
$ |
599 |
|
|
|
|
|
|
$ |
(599 |
) |
|
$ |
|
|
|
$ |
|
|
Lease Costs |
|
|
674 |
|
|
$ |
4,933 |
|
|
|
(982 |
) |
|
|
|
|
|
|
4,625 |
|
Other |
|
|
39 |
|
|
|
154 |
|
|
|
(56 |
) |
|
|
|
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,312 |
|
|
$ |
5,087 |
|
|
$ |
(1,637 |
) |
|
$ |
|
|
|
$ |
4,762 |
|
|
|
|
Self-insurance reserves. We record estimates for certain health and welfare,
workers compensation and casualty insurance costs that are self-insured programs.
Self insurance reserves include actuarial estimates of both claims filed, carried at
their expected ultimate settlement value, and claims incurred but not yet reported.
Our liability represents an estimate of the ultimate cost of claims incurred as of
the balance sheet date. Health and welfare estimates are calculated monthly, based
on a historical analysis for the average of the previous two months claims cost and
the number of associates employed. Workers compensation and casualty insurance
estimates are calculated semi-annually, with the assistance of an actuary, utilizing
claims development estimates based on historical experience and other factors. We
have purchased stop loss insurance to limit our exposure to any significant exposure
on a per person basis for health and welfare and on a per claim basis for workers
compensation and casualty insurance. Although we do not anticipate that the amounts
that will ultimately be paid will differ significantly from our estimates,
self-insurance reserves could be affected if future claim experience differs
significantly from the historical trends and the actuarial assumptions. For example,
for workers compensation and liability claims estimates, a 1% increase or decrease
to the assumptions for claims costs and loss development factors would increase or
decrease our self-insurance accrual at October 28, 2006, by $0.4 million and $0.1
million, respectively. The self-insurance reserves were $18.8 million and $18.7
million at October 28, 2006 and January 28, 2006, respectively. |
|
|
|
Pension. The obligations and related assets of defined benefit retirement plans
are included in the Notes to the Consolidated Financial Statements in the Companys
2005 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 |
-36-
|
|
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 28, 2006, the actuarial assumptions of our plans have
remained unchanged from our 2005 Annual Report. To the extent actual results vary
from assumptions, earnings would be impacted. At October 28, 2006, the
weighted-average actuarial assumptions applied to our plans were: discount rate
5.75%, assumed salary increases 3.5% and long-term rate of return on plan assets
8.0%. |
|
|
|
Customer loyalty program. We maintain a customer loyalty program for our DSW
stores in which program members receive a future discount on qualifying purchases.
Upon reaching the target-earned threshold, our members receive certificates for
these discounts which must be redeemed within six months. During the third quarter
of fiscal 2006 we re-launched our loyalty program, which included changing: the name
from Reward Your Style to DSW Rewards, the points threshold to receive a
certificate and the certificate amounts. The changes were designed to improve
customer awareness, customer loyalty and our ability to communicate with our
customers. We accrue the anticipated redemptions of the discount earned at the time
of the initial purchase. To estimate these costs, we are required to make
assumptions related to customer purchase levels and redemption rates based on
historical experience. As these certificates are redeemed, the charge is to cost of
sales. The accrued liability as of October 28, 2006 and January 28, 2006 was $10.7
million and $8.3 million, respectively. Substantially all certificates under the
Reward Your Style program will expire on or before January 31, 2007. |
|
|
|
Change in fair value of derivative instruments. 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 28, 2006 the Company recorded a charge
related to the change in fair value of warrants of $2.6 million and $82.7 million,
respectively. For the three months ended October 29, 2005 the Company recorded a
reduction in expense related to the change in fair value of warrants of $67.0
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 $70.6 million, including
$134.2 million relating to the initial recording of the Conversion Warrants. |
|
|
|
For the three and nine months ended October 28, 2006, the Company recorded a charge
related to the change in the fair value of the conversion feature of the PIES of
$28.0 million. The PIES were not outstanding during the three and nine months ended
October 29, 2005. |
|
|
|
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 in which we do business. In making these estimates, we |
-37-
|
|
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 quarter ended
October 28, 2006, we established an additional valuation allowance of $1.3 million
on all state net deferred tax assets. During fiscal 2005, we established an
additional valuation reserve of $14.4 million for state net operating loss
carryforwards and wrote off $4.0 million in deferred tax assets no longer deductible
as a result of changes in state income tax laws in Ohio. |
|
|
|
Following the completion of the DSW IPO in June 2005, DSW is no longer included in
Retail Ventures consolidated federal tax return. |
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 Companys Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(59.9 |
) |
|
|
(62.0 |
) |
|
|
(59.8 |
) |
|
|
(61.2 |
) |
|
Gross profit |
|
|
40.1 |
|
|
|
38.0 |
|
|
|
40.2 |
|
|
|
38.8 |
|
Selling, general and administrative
expenses |
|
|
(38.3 |
) |
|
|
(38.9 |
) |
|
|
(38.5 |
) |
|
|
(39.9 |
) |
Change in fair value of derivatives |
|
|
(3.9 |
) |
|
|
9.0 |
|
|
|
(5.1 |
) |
|
|
(3.4 |
) |
License fees and other income |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
Operating (loss) profit |
|
|
(1.9 |
) |
|
|
8.3 |
|
|
|
(3.1 |
) |
|
|
(4.2 |
) |
|
Interest income |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
Interest expense |
|
|
(1.5 |
) |
|
|
(0.5 |
) |
|
|
(1.0 |
) |
|
|
(1.1 |
) |
|
(Loss) income before income taxes
and minority interest |
|
|
(3.1 |
) |
|
|
7.9 |
|
|
|
(3.8 |
) |
|
|
(5.3 |
) |
(Provision) benefit for income taxes |
|
|
(0.4 |
) |
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
0.1 |
|
(Loss) income before minority interest |
|
|
(3.5 |
) |
|
|
8.1 |
|
|
|
(4.4 |
) |
|
|
(5.2 |
) |
Minority interest |
|
|
(0.8 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
(0.2 |
) |
|
Net (loss) income |
|
|
(4.3 |
)% |
|
|
7.6 |
% |
|
|
(5.2 |
)% |
|
|
(5.4 |
)% |
|
-38-
THREE MONTHS ENDED OCTOBER 28, 2006 COMPARED TO THREE MONTHS ENDED OCTOBER 29, 2005
Net Sales. Net sales increased $41.5 million, or 5.6%, from $746.1 million to $787.6 million.
Comparable store sales increased 2.3% and, by segment, were:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
|
Increase (Decrease) |
|
Value City |
|
|
1.4 |
% |
|
|
(1.0 |
)% |
DSW |
|
|
2.6 |
% |
|
|
3.5 |
% |
Filenes Basement |
|
|
4.5 |
% |
|
|
2.1 |
% |
|
Total |
|
|
2.3 |
% |
|
|
1.0 |
% |
|
Value City net sales were $341.2 million for the three months ended October 28, 2006, a $0.5
million decrease over the comparable period, or a 0.1% decrease. Comparable store sales increased
1.4% over the comparable period. Value City operated one less store in the fiscal 2006 quarter.
This store had sales of $5.1 million during the three months ended October 29, 2005. Beginning in
fiscal 2005, Value City transitioned to a new merchandise strategy which includes more name brand
merchandise, better assortments and more upfront purchasing. The transition occurred throughout
fiscal 2005 and was substantially in place for the womens and shoe category during the third
quarter of fiscal 2005. The transition of the mens and hardlines
categories was in place as of the three months ended October 28, 2006. The childrens and
jewelry categories are still in transition. The increase in comparable sales at Value City is
comprised of increases in ladies and mens categories of 4.8% and 6.7%, respectively and declines of
7.0%, 2.0%, 2.7% and 3.5% in the childrens, hardlines, intimate apparel and jewelry categories,
respectively. The intimate apparel and jewelry categories represent 2.4% and 2.8% of total
comparative store sales, respectively. During the third quarter of fiscal 2006, the average number
of transactions in the Value City stores decreased 4.0% while the average unit retail increased
8.1%. The number of units in the basket decreased 2.3% reflecting an average retail customer basket
increase of 5.6%.
DSW net sales were $332.2 million for the three months ended October 28, 2006, a $30.0 million
increase over the comparable period, or a 9.9% increase. Comparable store sales in the quarter
improved 2.6%. The increase in DSW sales includes a net increase of
18 DSW stores, three affiliated leased shoe departments and 14
non-affiliated leased shoe departments. The DSW store locations and the leased shoe departments
opened subsequent to October 29, 2005 added $17.2 million
and $1.9 million, respectively. DSW
comparable sales in the merchandise categories of womens and athletics had increases of 3.3% and
8.2%, respectively. The mens and accessories categories decreased by 0.4% and 3.4%, respectively.
The increases in womens were in the casual class, while the fashion class continues to be the best
performing class in the athletic category. The decrease in the accessories category was due to the
transition to a consignment program for shoe care products.
Filenes Basement net sales were $114.2 million for the three months ended October 28, 2006, or a
$12.0 million increase over the comparable period, or an 11.8% increase. Comparable store sales
increased 4.5% over the comparable period. During the third quarter of fiscal 2006,
Filenes Basement opened four new stores with net sales of $8.5 million. In addition, Filenes
Basement
-39-
closed one store during fiscal 2006 that was operating in the previous year. This store had net
sales of $0.9 million in the comparable three month period ended October 29, 2005. The merchandise
categories of mens, ladies, and accessories had comparable sale increases of 5.7%, 2.7%, and
12.3%, respectively. The merchandise categories of childrens and jewelry had comparable sale
decreases of 1.2% and 5.0 %, respectively. The childrens and jewelry categories represent 1.9% and
5.0% of total comparative stores sales, respectively. During the third quarter of fiscal 2006, the
average number of transactions in the Filenes Basement stores increased 7.2% and the average unit
retail increased 11.5%. The number of units in the basket increased 0.5% reflecting an average
retail customer basket increase of 4.0%.
Gross Profit. Total gross profit increased $31.8 million from $283.7 million for the three months
ended October 29, 2005 to $315.5 million for the three months ended October 28, 2006. Gross profit,
as a percent of sales, increased to 40.1% compared to 38.0% for the prior years period. The
increase in the overall margin rate is attributable to positive comparable margin results for all
segments.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
Value City |
|
|
37.0 |
% |
|
|
35.4 |
% |
DSW |
|
|
43.7 |
% |
|
|
41.8 |
% |
Filenes Basement |
|
|
38.4 |
% |
|
|
35.6 |
% |
|
Total |
|
|
40.1 |
% |
|
|
38.0 |
% |
|
Value Citys gross profit increased $5.5 million to $126.4 million in the third quarter of fiscal
2006 from $120.8 million in the third quarter of fiscal 2005, and increase as a percent of sales
from 35.4% in the third quarter of fiscal 2005 to 37.0% in the third quarter of fiscal 2006. This
increase is attributable to an increase in markup on goods available for sale and a decrease in
markdown rate. Segment markdowns for the quarter were $0.4 million less than the comparable prior
year period.
DSW gross profit increased $18.9 million to $145.3 million in the third quarter of fiscal 2006 from
$126.4 million in the third quarter of fiscal 2005, and increased as a percent of net sales from
41.8% in the third quarter of fiscal 2005 to 43.7% in the third quarter of fiscal 2006. The
increase as a percent of sales is primarily attributable to an increased initial markup and a
reduction in markdowns as a percent of sales.
Filenes Basement gross profit increased $7.4 million to $43.8 million in the third quarter of
fiscal 2006 from $36.4 million in the third quarter of fiscal 2005, an increase as a percent of net
sales from 35.6% in the third quarter of 2005 to 38.4% in the third quarter of 2006. The increase
as a percent of sales is primarily attributable to an increased initial markup and lower markdowns
as a percent of sales.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A)
expenses increased $11.5 million from $290.4 million in the third quarter of fiscal 2005 to $301.9
million for the third quarter of fiscal 2006. As a percent of sales, SG&A expense was 38.3%
compared to 38.9% in the comparable quarter last year.
-40-
SG&A expense, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
Value City |
|
|
40.7 |
% |
|
|
42.7 |
% |
DSW |
|
|
36.3 |
% |
|
|
36.0 |
% |
Filenes Basement |
|
|
38.9 |
% |
|
|
37.0 |
% |
|
Total |
|
|
38.3 |
% |
|
|
38.9 |
% |
|
The Value City segments SG&A expense decreased $6.8 million and 2.0% as a percent of sales for the
three months ended October 28, 2006 compared to the three months ended October 29, 2005. The
decrease in SG&A expenses is the result of fixed costs primarily in occupancy and salaries being
leveraged against the current period sales.
DSW segment SG&A expense increased $11.9 million and increased 0.3% as a percent of sales for the
three months ended October 28, 2006 compared to the three months ended October 29, 2005. DSW SG&A
expenses, excluding pre-opening costs, for DSW stores and leased shoe departments opened subsequent
to October 29, 2005 was $5.2 million for the three months ended October 28, 2006. Pre-opening
costs, which are expensed as incurred, decreased approximately $0.6 million to $3.0 million during
the three months ended October 28, 2006 compared with the three months ended October 29, 2005.
These decreases were offset by increases in advertising and home office and corporate expenses of
$1.1 million and $3.7 million, respectively, over the comparable prior year period.
Filenes Basement SG&A expenses increased $6.6 million and increased 1.9% as a percent of sales for
the three months ended October 28, 2006 compared to the three months ended October 29, 2005. SG&A
increased as a percent of sales as a result of pre-opening expenses offset by personnel and
occupancy expenses. Pre-opening costs increased in Filenes Basement by approximately $2.5 million
during the three months ended October 28, 2006 compared with the three months ended October 29,
2005.
Change in Fair Value of Derivatives. During the three months ended October 28, 2006 and October
29, 2005, the Company recorded a non-cash charge of $2.6 million and reduction of expenses of $67.0
million, respectively, representing the changes in fair value of the Conversion Warrants and Term
Loan Warrants. During the three months ended October 28, 2006, a
non-cash charge of $28.0 million was
recorded related to the change in the fair value of the conversion feature of the PIES from the
date of issuance to October 28, 2006.
License Fees and Other Income. License fees and other income were $2.2 million and $1.6 million
for the three months ended October 28, 2006 and October 29, 2005, respectively. License fees and
other income are comprised of fees from licensees and vending income. These sources of income can
vary based on customer traffic and contractual arrangements.
Operating (Loss) Profit. Operating loss for the quarter ended October 28, 2006 was $14.8 million
compared to an operating profit of $61.9 million for the quarter ended October 29, 2005, a decline
of $76.7 million. Operating (loss) profit as a percent of sales was a loss of 1.9% and a profit of
8.3% for October 28, 2006 and October 29, 2005, respectively.
-41-
Operating (loss) profit as a percent of sales by segment in the third quarter was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
Value City |
|
|
(3.3 |
)% |
|
|
(7.0 |
)% |
DSW |
|
|
7.6 |
% |
|
|
5.9 |
% |
Filenes Basement |
|
|
1.7 |
% |
|
|
1.0 |
% |
|
Total |
|
|
(1.9 |
)% |
|
|
8.3 |
% |
|
The operating loss for the Corporate segment is due to the non-cash charge of $2.6 million during
the third quarter of fiscal 2006 compared with the reduction of expenses of $67.0 million for the
three months ended October 29, 2006, which represents the changes in fair value of the Conversion
Warrants and Term Loan Warrants. During the three months ended October 28, 2006, $28.0 million was
recorded as a non-cash charge to reflect the change in the fair value of the conversion feature of the PIES
from the date of issuance to October 28, 2006. There were no PIES outstanding during the three
months ended October 29, 2005.
Interest Expense, Net. Net interest expense for the quarter ended October 28, 2006 increased $6.7
million to $10.0 million for the third quarter of fiscal 2006. The increase is due primarily to a
$3.9 million make-whole provision associated with the payment of $49.5 million of Non-Convertible
Loans which was recorded during the three months ended October 28, 2006, an increase of $109.9
million in average borrowings and a decrease in our weighted average borrowing rate of 0.3% during
the three months ended October 28, 2006, compared to the three months ended October 29, 2005.
Interest income increased $1.9 million over the same period last year due primarily to the increase
in cash and short-term investments over the same period in the prior year.
Income Taxes. The three months ended October 28, 2006 reflects a tax expense of $3.4 million or a
negative 13.8% effective tax rate as compared to negative 3.1% for the three months ended October
29, 2005. The effective tax rate of negative 13.8% reflects the negative impact of the change in
fair value on the mark to market accounting for the Term Loan Warrants, Conversion Warrants and
conversion feature of the PIES included for book income but not tax income and an additional
valuation allowance of $1.3 million on all state net deferred tax assets.
Minority Interest. For the third quarter of fiscal 2006, the net loss increased by $1.9 million
compared to the third quarter of fiscal 2005, to reflect that portion of DSW operations
attributable to minority shareholders interests.
Net (Loss) Income. For the third quarter of fiscal 2006, net loss increased $90.5 million from the
third quarter of fiscal 2005 and represents a negative 4.3% versus 7.6% of net sales, respectively.
The net loss for the third quarter of fiscal 2006 was primarily attributable to the $30.6 million
non-cash change in fair value of the warrants and conversion feature of the PIES. The net income
for the third quarter of fiscal 2005 was primarily attributable to the $67.0 million non-cash
change in fair value of warrants.
-42-
NINE MONTHS ENDED OCTOBER 28, 2006 COMPARED TO NINE MONTHS ENDED OCTOBER 29, 2005
Net Sales. Net sales increased $100.7 million, or 4.8%, from $2,092.9 million to $2,193.6 million.
Comparable store sales increased 2.1% and, by segment, were:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
|
|
Increase (Decrease) |
|
Value City |
|
|
0.6 |
% |
|
|
(4.6 |
)% |
DSW |
|
|
3.0 |
% |
|
|
3.7 |
% |
Filenes Basement |
|
|
4.8 |
% |
|
|
1.9 |
% |
|
Total |
|
|
2.1 |
% |
|
|
(0.9 |
)% |
|
Value Citys net sales were $946.0 million in the nine months ended October 28, 2006, an $8.3
million decrease over the comparable period, or a 0.9% decrease. Comparable stores sales increase
over the comparable period was primarily due to an average unit retail increase offset by a
decrease in the number of transactions. All stores in the segment are in the comparative stores
base. In addition, during the fiscal 2006 period, Value City operated one less store than at
October 29, 2005. This store had net sales of $14.5 million in the nine month period ended October
29, 2005. Comparable sales is comprised of decreases in hardlines, childrens, intimate apparel and
jewelry of 8.2%, 9.2%, 8.4% and 5.4%, respectively. Comparable sales of ladies and mens increased
6.4% and 6.3%, respectively. During the nine months ended October 28, 2006, the average number of
transactions in the Value City stores decreased by 5.8% while the average unit retail increased
13.4%. The number of units in the basket decreased 5.7% and the average customer basket increased
6.9%. Sales have been impacted as a result of the decrease in the number of transactions and the
exiting of health and beauty aids, non-gourmet foods and certain other hardlines businesses due to
changes in the merchandising strategy.
DSW net sales were $950.0 million in the nine months ended October 28, 2006, an $89.7 million
increase over the comparable period, or a 10.4% increase. Comparable store sales in the nine months
ended October 28, 2006 improved 3.0%. The increase in DSW sales includes a net increase of 18 DSW
stores three affiliated leased shoe departments and 14 non-affiliated leased shoe departments. The DSW store locations and the leased shoe
departments opened subsequent to October 29, 2005, added
$31.2 million and $3.1 million,
respectively, in sales over the comparable nine month period in fiscal 2005. DSW comparable sales
in the merchandise categories of womens, athletics, mens and accessories had increases of 4.0%,
4.0%, 0.2% and 0.8%. The increase in the womens sales category was driven by increases in the
casual class, while the increase in the athletic category was the result of an increase in the
womens and mens fashion classes. The increase in the mens was driven by the young mens class.
The increase in the accessories category was driven by an increase in handbags, partially offset by
the transition to a consignment program for shoe care products.
Filenes Basement net sales were $297.6 million in the nine months ended October 28, 2006, a $19.3
million increase over the comparable period, or a 6.9% increase. Comparable store sales increased
4.8% over the comparable period. During the nine months ended October 28, 2006, Filenes Basement
operated four stores, not opened as of October 29, 2005, with net sales of $8.5 million. In
addition, Filenes Basement closed one store during fiscal 2006 that was operating in the previous
-43-
year. This store had net sales of $2.6 million in the nine month period ended October 29, 2005.
Merchandise categories of mens, ladies and childrens had comparable sale increases of 6.3%, 2.4%
and 10.6%, respectively. The jewelry and home goods categories had comparable sales decreases of
2.1% and 2.0%, respectively. The childrens and jewelry categories represented 2.0% and 5.5% of
total comparative stores sales during the nine months ended October 28, 2006, respectively. The
increase in childrens was due primarily to the sales of childrens clothes ages four through seven.
During the nine months ended October 28, 2006, the average number of transactions in the Filenes
Basement stores increased 1.6% while the average unit retail increased 6.4%. The number of units in
the basket increased 0.5% reflecting an average retail customer basket increase of 4.7%.
Gross
Profit. Total gross profit increased $69.6 million from $811.5 million during the nine
months ended October 29, 2005. Gross profit, as a percent of sales, increased to 40.2% for the nine
months ended October 28, 2006 compared to 38.8% for the comparable prior year period. The increase
in the overall margin rate is attributable to positive comparable margin results for all segments.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
Value City |
|
|
37.7 |
% |
|
|
36.6 |
% |
DSW |
|
|
43.5 |
% |
|
|
42.6 |
% |
Filenes Basement |
|
|
37.1 |
% |
|
|
34.4 |
% |
|
Total |
|
|
40.2 |
% |
|
|
38.8 |
% |
|
Value Citys gross profit increased $7.6 million to $356.9 million in the nine-month period ended
October 28, 2006 from $349.4 million in the comparable period of fiscal 2005, and increased as a
percent of net sales to 37.7% from 36.6% in the same respective periods. Value Citys margin rate
increase is attributable to a shift in strategy toward more name brand merchandise and better
assortments at compelling prices. The margin on goods available for sale increased and total
markdowns were $15.7 million less during the nine months ended October 28, 2006 than the prior
years comparable period.
DSWs gross profit increased $47.1 million to $413.6 million in the nine-month period ended October
28, 2006 from $366.5 million in the same nine-month period of fiscal 2005, and increased as a
percent of net sales to 43.5% from 42.6% during the same respective periods. The increase is
attributable to an increased initial markup and a reduction of the internal shrink accrual rate
that resulted in an increase in gross profit of $1.0 million in the nine month period ended October
28, 2006 over the comparable prior year period.
Filenes Basements gross profit increased $14.9 million to $110.5 million in the nine-month period
ended October 28, 2006 from $95.6 million in the comparable period of fiscal 2005, and increased as
a percent of net sales to 37.1% from 34.4% during the same respective periods. The increase is
primarily due to an increased initial markup and lower markdowns as a percent of sales.
Selling, General and Administrative Expenses. SG&A expenses increased $9.0 million from $835.3
million during the nine-month period ended October 29, 2005 to $844.3 million for the nine-month
period ended October 28, 2006. As a percent of sales, SG&A expense was 38.5% for the nine months
ended October 28, 2006 compared to 39.9% for the comparable prior year period. Total
-44-
SG&A expense associated with new DSW stores and new leased shoe departments, not opened as of
October 29, 2005, excluding pre-opening costs, was $9.3 million for the nine months ended October
28, 2006. Pre-opening costs increased approximately $0.4 million during the nine months ended
October 28, 2006 compared to the nine months ended October 29, 2005. During the nine months ended
October 28, 2006, the Company recorded a reduction of expenses of $2.8 million relating to the
proceeds from the settlement of the Visa Check/Master Money Antitrust Litigation. During the nine
months ended October 29, 2005, the Company recorded a one-time decrease in workers compensation
expense of $3.7 million as a result of the completion of a bureau of workers compensation audit
and DSW accrued $6.5 million related to the estimated liability for credit card data theft.
SG&A expense, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
Value City |
|
|
41.4 |
% |
|
|
43.2 |
% |
DSW |
|
|
35.6 |
% |
|
|
36.5 |
% |
Filenes Basement |
|
|
40.5 |
% |
|
|
41.2 |
% |
|
Total |
|
|
38.5 |
% |
|
|
39.9 |
% |
|
The Value City segment SG&A expense decreased $21.4 million to $391.2 million for the nine months
ended October 28, 2006 from $412.6 million for the nine months ended October 29, 2005, which
represented 41.4% and 43.2% of net sales, respectively. SG&A decreased as a percent of sales as a
result of fixed costs primarily in occupancy and salaries being leveraged against the current
period sales and a $2.2 million credit from a credit card antitrust settlement which was received
during the nine months ended October 28, 2006. During the nine months ended October 28, 2006, Value
City operated one less store than at October 29, 2005. During the nine months ended October 29,
2005, Value City recorded a charge of approximately $1.7 million relating to the operating lease
for a store closing and an additional $0.2 million for other store closing costs.
DSW SG&A expense increased $24.7 million to $338.5 million nine months ended October 28, 2006 from
$313.8 million for the nine months ended October 29, 2005, which represented 35.6% and 36.5% of net
sales, respectively. Operating costs for the nine months ended October 29, 2005 included a charge
of $6.5 million related to an estimate for potential losses related to the theft of credit card and
other purchase information. Included in the DSW SG&A expenses are costs, excluding pre-opening
costs, associated with 18 new DSW stores and 14 new leased shoe departments opened subsequent to
October 29, 2005 of $8.7 million and $0.6 million, respectively, for the nine months ended October
28, 2006. Pre-opening costs, which are expensed as incurred, decreased approximately $1.7 million
during the nine months ended October 28, 2006 compared with the nine months ended October 29, 2005.
The store occupancy expense increased as a result of increases in lease expense for new stores and
an impairment charge of $0.8 million. Advertising costs decreased $3.3 million for the nine months
ended October 28, 2006 compared to the comparable period in the prior year and DSW recorded a
benefit of $0.6 million from a settlement of a credit card antitrust agreement during the nine
months ended October 28, 2006. Warehouse expense decreased as a result of improved operational
efficiencies achieved through the use of electronic shipping information and increased unit
volumes. These decreases were offset by increases in home office and corporate expenses of $6.1
million during the nine months ended October 28, 2006 over
-45-
the comparable prior year period, not including the accrual in fiscal 2005 for the data theft
previously discussed.
Filenes Basement SG&A expense increased $5.9 million to $120.5 million for the nine months ended
October 28, 2006 from $114.6 million for the nine months ended October 29, 2005, which represented
40.5% and 41.2% of net sales, respectively. SG&A decreased as a percent of sales as a result of
fixed costs, primarily in occupancy and salaries, being leveraged against the current period sales.
Pre-opening costs, which are expensed as incurred, increased in Filenes Basement by approximately
$2.1 million during the nine months ended October 28, 2006, compared to the nine months ended
October 29, 2005.
Change in Fair Value of Derivatives. During the nine months ended October 28, 2006 and October 29,
2005, the Company recorded a non-cash charge of $82.7 million and $70.6 million, respectively,
representing the changes in fair value of the Conversion Warrants and Term Loan Warrants. During
the nine months ended October 28, 2006, $28.0 million was recorded related to the change in the
fair value of the conversion feature of the PIES from the date of issuance to October 28, 2006.
License Fees and Other Income. License fees and other income were $5.4 million and $7.1 million
for the nine months ended October 28, 2006 and October 29, 2005, respectively. License fees and
other income are comprised of fees from licensees and vending income. These sources of income can
vary based on customer traffic and contractual arrangements. As a result of changes in state tax
regulations in the State of Ohio, we have complied with the States new Commercial Activity Tax. We
have reflected in the nine months ended October 29, 2005 a $2.2 million benefit of which $1.7
million and $0.5 million is attributable to the Value City and DSW segments, respectively.
Operating Loss. Operating loss for the nine months ended October 28, 2006 was $68.5 million
compared to an operating loss of $87.3 million for the nine months ended October 29, 2005, an
improvement of $18.8 million.
Operating (loss) profit as a percent of sales by segment, for the nine months ended October 28,
2006 and October 29, 2005, was:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
|
Value City |
|
|
(3.3 |
)% |
|
|
(6.1 |
)% |
DSW |
|
|
8.0 |
% |
|
|
6.2 |
% |
Filenes Basement |
|
|
(1.0 |
)% |
|
|
(4.3 |
)% |
|
Total |
|
|
(3.1 |
)% |
|
|
(4.2 |
)% |
|
The operating loss for the Corporate segment is due to the non-cash charge of $110.7 million versus
$70.6 million for the nine months ended October 28, 2006 and October 29, 2005, respectively, which
represents the changes in fair value of the Conversion Warrants and Term Loan Warrants. During the
nine months ended October 28, 2006, $28.0 million was recorded related to the change in the fair
value of the conversion feature of the PIES from the date of issuance to October 28, 2006. There
were no PIES outstanding during the nine months ended October 29, 2005.
Interest Expense, Net. Net interest expense for the nine months ended October 28, 2006 decreased
$8.5 million, from $23.3 million for the nine months ended October 29, 2005 to $14.8 million. The
-46-
decrease is due primarily to a decrease of 1.0% in the weighted average borrowing rate, the
write-off in the nine months ended October 29, 2005 of unamortized debt issuance costs for the
Companys term loans and original revolving credit facility of $2.0 million and a decrease of $49.0
million in average borrowings during the nine months ended October 28, 2006 compared to the nine
months ended October 29, 2005. Interest income increased $5.7 million over the same period last
year. The increase in interest income is due primarily to the net increase in cash and short-term
investments over the same period in the prior year.
Income Taxes. The effective tax rate for the nine months ended October 28, 2006 was negative 16.5%
as compared to 1.5% for the nine months ended October 29, 2005. The tax rate of negative 16.5%
reflects the negative impact of the change in fair value on the mark to market accounting for the
Term Loan Warrants, Conversion Warrants and convertible feature of the PIES included for book
income but not tax income. The tax rate for the nine months ended October 29, 2005 also included
the write-off of $5.2 million of deferred tax assets no longer deductible as a result of changes in
state tax regulations in Ohio and the increase in the valuation allowance of $5.5 million provided
for state net operating loss carry forwards. The effective tax rate for the nine months ended
October 28, 2006 included an additional valuation allowance of $1.3 million for state net deferred
tax assets.
Minority Interest. For the nine-month period ended October 28, 2006, the minority interest charge
increased by $14.7 million to reflect that portion of DSW operations attributable to minority
shareholders for the period subsequent to the IPO.
Net Loss. For the nine-month period ended October 28, 2006, net loss increased $2.7 million from
the nine-month period ended October 29, 2005 and represents a negative 5.2% versus a negative 5.4%
of net sales, respectively. The net loss for the nine month period ended October 28, 2006, was
primarily attributable to the $82.7 million non-cash change in fair value of warrants and $28.0
million non-cash change in fair value of the conversion feature of the PIES recorded during the
nine months ended October 28, 2006. The net loss for the nine months ended October 29, 2005, was
primarily attributable to the $70.6 million non-cash change in fair value of warrants partially
offset by a decrease in workers compensation expense of $3.7 million as a result of the completion
of a bureau of workers compensation audit.
SEASONALITY
Our business is affected by the pattern of seasonality common to most retail businesses.
Historically, the majority of our sales and operating profit have been generated during the early
spring, back-to-school and Christmas selling seasons for our Value City segment and, more recently,
our Filenes Basement segment. DSW net sales have typically been higher in spring and early fall,
when DSWs customers interest in new seasonal styles increases.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended October 28, 2006, Retail Ventures received $31.5 million in connection
with the exercises of Convertible Warrants for 7,000,000 common shares at an exercise price of
$4.50 per share
Our primary ongoing cash requirements are for seasonal and new store inventory purchases and
capital expenditures in connection with expansion, remodeling and information technology
-47-
development. DSW expects to invest in inventory and fixtures during the fiscal fourth quarter of
2006 related to an amended and restated supply agreement with Stein Mart to operate 102 additional
leased locations. 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 $363.6 million and $185.0 million at October 28, 2006 and January 28, 2006,
respectively. The increase in net working capital is primarily due to the increased cash and cash
equivalents, short-term investments and increased inventory levels offset by an increase in
accounts payable. Current ratios at those dates were 1.5 and 1.3, respectively.
Net cash provided by operating activities was $9.6 million for the nine months ended October 28,
2006 as compared to $70.6 million used in operating activities for the nine months ended October
29, 2005. The increase of net cash provided by operating activities is primarily due to an increase
of the charge for the change in the fair value of derivatives of $40.1 million and a $2.7 million
decrease in net loss for the first nine months of fiscal 2006 compared to the same period in the
prior year.
Net cash paid for property and equipment was $33.3 million and $33.4 million for the nine months
ended October 28, 2006 and October 29, 2005, respectively, and excludes the impact of capital
expenditures in accounts payable. During the nine months ended October 28, 2006, capital
expenditures included $18.7 million for new stores, $11.8 million for improvements in existing
stores, $2.2 million for office and warehousing and $4.6 million for information technology
equipment upgrades and new systems. Subsequent to the end of the quarter, DSW signed a lease for
additional office space. The capital expense related to the additional office space will be
approximately $10.0 million, the majority of which we expect to incur during the fiscal fourth
quarter of 2006.
On June 11, 2002, Value City Department Stores, Inc., together with certain other principal
subsidiaries of Retail Ventures, entered into a $525.0 million refinancing that consisted of three
separate credit facilities (collectively, the Prior 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 and SSC (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 and SSC (the Convertible Loan). Prior to their
amendment in July 2005 discussed below, these Prior Credit Facilities were guaranteed by Retail
Ventures and substantially all of its subsidiaries, including DSW. These Prior Credit Facilities
were also subject to an Intercreditor Agreement, which provided for an established order of payment
of obligations from the proceeds of collateral upon default (the Intercreditor Agreement).
On July 5, 2005, Retail Ventures amended, or amended and restated, its then-existing credit
facilities, including certain facilities under which DSW had rights and obligations as a
co-borrower and co-guarantor, and replaced them with an aggregate $475.0 million of financing that
consists of three separate credit facilities, each of which remained outstanding as of October 28,
2006: (i) a four-year amended and restated $275.0 million revolving credit facility (the VCDS
Revolving Loan) under which Value City, Retail Ventures and certain subsidiaries of Retail
Ventures (other than DSW and DSWSW) are co-borrowers or co-guarantors; (ii) a five-year $150.0
million revolving credit facility (the DSW Revolving Loan) under which DSW and DSWSW are
co-borrowers and co-guarantors; and (iii) an amended and restated $0.5 million senior
non-convertible loan facility, which is held equally by Cerberus and SSC (the Non-Convertible
Loan), under which Value City is the borrower and Retail
-48-
Ventures and certain subsidiaries of Retail Ventures (other than DSW and DSWSW) are co-guarantors.
On August 16, 2006, Retail Ventures issued $125.0 million of Premium Income Exchangeable Securities
(PIES). On September 15, 2006, Retail Ventures closed on the exercise by the sole underwriter of
its entire option to purchase an additional aggregte principal amount of $18,750,000 of PIES.
Collectively, the VCDS Revolving Loan, DSW Revolving Loan, Non-Convertible Loan and PIES are
referred to as Credit Facilities.
The Company is not subject to any financial covenants; however, the Credit Facilities contain
numerous restrictive covenants relating to the Companys management and operation. These
non-financial covenants include, among other restrictions, limitations on indebtedness, guarantees,
mergers, acquisitions, fundamental corporate changes, financial reporting requirements, budget
approval, disposition of assets, investments, loans and advances, liens, dividends, stock
purchases, transactions with affiliates, issuance of securities and the payment of and
modifications to debt instruments under these agreements.
The Credit Facilities are described more fully below:
Revolving Credit Facilities
$275 Million Secured Revolving Credit Facility The VCDS Revolving Loan
On July 5, 2005, Retail Ventures and its affiliates amended and restated the Revolving Credit
Facility (the June 2002 Revolving Credit Facility) which was originally entered into in June
2002. Pursuant to the VCDS Revolving Loan (i) DSW and DSWSW were released from their obligations
under the June 2002 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 VCDS Revolving Loan,
Filenes Basement, Retail Ventures Jewelry, Inc. and certain Value Citys wholly-owned subsidiaries
are named as co-borrowers. The VCDS Revolving Loan is guaranteed by Retail Ventures and certain of
its subsidiaries. Neither DSW nor DSWSW are borrowers or guarantors under the VCDS Revolving Loan.
The VCDS Revolving Loan 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.
In addition to the borrowing base restrictions, 10% of the facility is deemed an excess reserve
and is not available for borrowing. Obligations under the VCDS Revolving Loan are secured by a
lien on substantially all of the personal property of Retail Ventures and its wholly-owned
subsidiaries, excluding shares of DSW owned by Retail Ventures. At October 28, 2006, $119.1 million
was available under the VCDS Revolving Loan. Direct borrowings aggregated $110.5 million and $17.3
million letters of credit were issued and outstanding. At January 28, 2006, $63.5 million was
available under the VCDS Revolving Loan. Direct borrowings aggregated $88.0 million and $19.0
million letters of credit were issued and outstanding. The maturity date of the VCDS Revolving Loan
is the earlier of July 5, 2009 or the date that is 91 days prior to the maturity date of the
Non-Convertible Loan.
-49-
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
Simultaneously with the amendment and restatement of the June 2002 Revolving Credit Facility, DSW
entered into the DSW Revolving Loan. Under this facility, DSW and its wholly-owned subsidiary,
DSWSW, are named as co-borrowers. The DSW Revolving Loan is subject to a borrowing base restriction
and provides for borrowings at variable interest rates based on LIBOR, the prime rate and the
Federal Funds effective rate, plus a margin. In addition , if at any time DSW utilizes over 90% of
DSWs borrowing capacity under the facility, DSW must comply with a fixed charge coverage ratio
test set forth in the facility document. DSWs and DSWSWs obligations under the DSW Revolving Loan
are secured by a lien on substantially all of their personal property and a pledge of all of DSWs
shares of DSWSW. At October 28, 2006 and January 28, 2006, $134.2 million and $136.4 million,
respectively, was available under the DSW Revolving Loan and no direct borrowings were outstanding.
At October 28, 2006 and January 28, 2006, $15.8 million and $13.6 million, respectively, in letters
of credit were issued and outstanding. The maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans Related Parties
From the inception in June 2002 through their amendment, discussed below, in July 2005, the Term
Loans were comprised of a $50.0 million Term Loan B and a $50.0 million Term Loan C. All
obligations under the Term Loans were senior debt and, subject to an Intercreditor Agreement, had
the same rights and privileges as the June 2002 Revolving Credit Facility and the Convertible Loan.
The Company and its principal subsidiaries were obligated on the Term Loans. During fiscal 2004,
the Company extended the maturity dates of the Term Loans by one year. As a result, the maturity
date of the Term Loans was extended to June 11, 2006, under substantially the same terms and
conditions as the then-existing Term Loans. The Term Loans stated rate of interest per annum
depended on whether the Company elected to pay interest in cash or a payment-in-kind (PIK)
option. During the first two years of the Term Loans, we had the option to pay all interest in PIK.
During the final year of the Term Loans, the stated rate of interest was 15.0% if paid in cash or
15.5% if PIK and the PIK option was limited to 50% of the interest due. All interest was paid under
the cash election. The principal balance of the Term Loans was repaid in full on July 5, 2005.
The Company issued 2,954,792 Term Loan Warrants to purchase RVI Common Shares, at an initial
exercise price of $4.50 per share, to Cerberus and SSC in connection with the Term Loan C. Prior to
their amendment in July 2005, the Term Loan Warrants were exercisable at any time prior to June 11,
2012. In September 2002, Back Bay Capital Funding LLC (Back Bay) bought from each of Cerberus and
SSC a $3.0 million interest in each of their Term Loans, and received a corresponding portion of
the Term Loan Warrants from each of Cerberus and SSC. We have granted the Term Loan C lenders
registration rights with respect to the shares issuable upon exercise of the Term Loan Warrants.
Amendment to Term Loans
On July 5, 2005, the Company and its affiliates amended the Term Loans which had originally been
entered into in June 2002. Pursuant to the July 2005 Fourth Amendment to Financing Agreement, (i)
DSW was released from its obligations as a co-borrower, (ii) Value City repaid all the Term Loan
indebtedness, and (iii) Retail Ventures amended the outstanding Term Loan Warrants to provide
-50-
SSC, Cerberus and 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 (subject to anti-dilution
provisions similar to those in the existing Term Loan Warrants), or (C) acquire a combination
thereof. Effective November 23, 2005, Back Bay transferred and assigned its Term Loan Warrants to
Millennium. Although Retail Ventures does not intend or plan to undertake a spin-off of its DSW
Common Shares to Retail Ventures shareholders, in the event that Retail Ventures does effect such
a spin-off in the future, the holders of outstanding unexercised Term Loan Warrants will 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 will be exercisable
solely for Retail Ventures Common Shares.
Senior Subordinated Convertible Loan Related Parties
$75 Million Senior Subordinated Convertible Loan
In June 2002, the Company and its affiliates amended and restated the Convertible Loan dated March
15, 2000. As amended in 2002, borrowings under the Convertible Loan bore interest at 10% per annum.
At our option, interest could 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 was added to the outstanding principal balance, on a quarterly basis, and is
payable in cash upon the maturity of the debt. Prior to its amendment and restatement in July 2005,
the Convertible Loan was guaranteed by all our principal subsidiaries and was secured by a lien on
assets junior to liens granted in favor of the lenders on the Revolving Credit Facility and Term
Loans.
$50 Million Second Amended and Restated Senior Loan Agreement The Non-Convertible Loan
On July 5, 2005, the Company and its affiliates amended and restated the Convertible Loan. Pursuant
to the Non-Convertible Loan, (i) DSW was released from its obligations as a co-guarantor, (ii)
Value City repaid $25.0 million of the Convertible Loan, (iii) the remaining $50.0 million
Convertible Loan was converted into a non-convertible loan, (iv) the capital stock of DSW held by
Retail Ventures continued to secure the Non-Convertible Loan, and (v) Retail Ventures issued to
SSC and Cerberus 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
Non-Convertible Loan. The maturity date of the Non-Convertible Loan was June 10, 2009 and it was
not eligible for prepayment until June 10, 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 Non-Convertible Loan (subject to existing
anti-dilution provisions), (ii) acquire from Retail Ventures Class A Common Shares of DSW at an
exercise price per share equal to the price of the shares sold to the public in DSWs IPO (subject
to anti-dilution provisions similar to those in the existing Term Loan Warrants held by SSC and
Cerberus), or (iii) acquire a combination thereof. Although Retail Ventures does not intend or plan
to undertake a spin-off of its DSW Common Shares to Retail Ventures shareholders, in the event
that Retail Ventures does effect such a spin-off in the future, the holders of outstanding
unexercised Conversion Warrants will receive
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the same number of DSW 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 will be
exercisable solely for Retail Ventures Common Shares.
On August 16, 2006, the Non-Convertible Loan was amended for a third time whereby the Company (i)
paid $49.5 million of the then aggregate $50.0 million outstanding balance, (ii) secured the
remaining $0.5 million balance with cash collateral accounts, (iii) pledged DSW stock sufficient
for the exercise of the Convertible Warrants, and (iv) obtained a release of the capital stock of
DSW held by Retail Ventures used to secure the Non-Convertible Loan. The final maturity date is the
earlier of (i) June 10, 2009 or (ii) the date that the Convertible Warrants held by the Lender, are
exercised.
$143,750,000
Premium Income Exchangeable SecuritiesSM (PIES)
On
August 10, 2006, Retail Ventures announced the pricing of its 6.625% Mandatorily Exchangeable
Notes due September 15, 2011, or PIES (Premium Income Exchangeable
SecuritiesSM) in the aggregate principal amount of $125,000,000. The closing of the
transaction took place on August 16, 2006. On September 15, 2006, Retail Ventures closed on the
exercise by the sole underwriter of its entire option to purchase an additional aggregate principal
amount of $18,750,000 of PIES.
The PIES bear a coupon at an annual rate of 6.625% of the principal amount, payable quarterly in
arrears on March 15, June 15, September 15 and December 15 of each year, commencing on December 15,
2006 and ending on September 15, 2011. Except to the extent RVI exercises its cash settlement
option, the PIES are mandatorily exchangeable, on the maturity date, into Class A Common Shares of
DSW, no par value per share, which are issuable upon exchange of DSW Class B Common Shares, no par
value per share, beneficially owned by RVI. On the maturity date, each holder of the PIES will
receive a number of DSW Class A Common Shares per $50.0 principal amount of PIES equal to the
exchange ratio described in the RVI prospectus filed with the SEC on August 11, 2006, or if RVI
elects, the cash equivalent thereof or a combination of cash and DSW Class A Common Shares. The
exchange ratio is equal to the number of DSW Class A Common Shares determined as follows: (i) if
the applicable market value of DSW Class A Common Shares equals or exceeds $34.95, the exchange
ratio will be 1.4306 shares; (ii) if the applicable market value of DSW Class A Common Shares is
less than $34.95 but greater than $27.41, the exchange ratio will be between 1.4306 and 1.8242
shares; and (iii) if the applicable market value of DSW Class A Common Shares is less than or equal
to $27.41, the exchange ratio will be 1.8242 shares, subject to adjustment as provided in the PIES.
The maximum aggregate number of DSW Class A Common Shares deliverable upon exchange of the PIES is
4,560,500 DSW Class A Common Shares (or 5,244,575 DSW Class A Common Shares if the underwriter
exercises in full its option to purchase additional PIES pursuant to the underwriting agreement),
subject to adjustment as provided in the PIES.
RVI used the net proceeds of the offering to repay the approximately $49.7 million remaining
balance of an intercompany note due to Value City, and Value City used such proceeds and other
funds to repay $49.5 million of the outstanding principal amount of its $50.0 million
Non-Convertible Loan, together with fees and expenses. The balance of the net proceeds was applied
for general corporate purposes, which included the repayment of approximately $36.5 million of
borrowings under the VCDS Revolving Loan.
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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 are under construction or for which a
lease has been signed. Our obligations under these commitments aggregated approximately $4.2
million at October 28, 2006. In addition, we signed lease agreements for 30 new store locations
with annual aggregate rent of $11.4 million and average terms of approximately 10 years. Associated
with the new lease agreements, we will receive approximately $9.2 million of tenant improvement
allowances which will be used to fund future capital expenditures.
The Company has no off-balance sheet arrangements as of October 28, 2006 as that term is defined
by the SEC.
PROPOSED ACCOUNTING STANDARDS
The FASB periodically issues SFAS, some of which require implementation by a date falling within or
after the close of the fiscal year. See Note 3 to the Condensed Consolidated Financial Statements
for a discussion of the new accounting standards issued or implemented during the nine months ended
October 28, 2006.
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 the VCDS Revolving Loan
and the DSW Revolving Loan. At October 28, 2006, direct borrowings aggregated $110.5 million and an
additional $33.1 million of letters of credit were outstanding against these revolving credit
facilities.
A hypothetical 100 basis point increase in interest rates on our variable rate debt outstanding for
the nine months ended October 28, 2006, net of income taxes, would have an approximate $0.5 million
impact on our financial position, liquidity and results of operations.
Derivative Instruments
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. Retail Ventures estimates the fair value of
derivatives based on pricing models using current market rates and records all derivatives on the
balance sheet at fair value.
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Warrants
During fiscal 2005, subsequent to the first quarter, the Company recorded a charge related to the
initial recording and subsequent change in the fair value of its Warrants of $134.2 million. As of
October 28, 2006, the aggregate fair value liability recorded relating to both the Term Loan
Warrants and Conversion Warrants was $174.3 million. The $125.5 million value ascribed to the
Conversion Warrants was estimated as of October 28, 2006 using the Black-Scholes Pricing Model with
the following assumptions: risk-free interest rate of 4.72%; expected life of 2.6 years; expected
volatility of 45.0%; and an expected dividend yield of 0%. The $8.7 million value ascribed to the
Term Loan Warrants was estimated as of October 28, 2006 using the Black-Scholes Pricing Model with
the following assumptions: risk-free interest rate of 4.64%; expected life of 5.6 years; expected
volatility of 45.0%; and an expected dividend yield of 0%. 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.
Conversion Feature of PIES
During the three and nine months ended October 28, 2006, the Company recorded a charge related to
the change in fair value of the conversion feature of the PIES from the date of issuance to October
28, 2006 of $28.0 million. As of October 28, 2006, the fair value liability recorded for the
conversion feature was $39.7 million. The fair value was estimated using the Black-Scholes Pricing
Model with the following assumptions: risk-free interest rate of 5.2%; expected life of 5 years;
expected volatility of 40.5%; and an expected dividend yield of 0%. The fair value of the
conversion feature at the date of issuance of $11.7 million is equal to the amount of the discount
of the PIES and will be amortized into interest expense over the term of the PIES.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities and Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, to allow timely decisions regarding required
disclosures.
The Company, under the supervision and with the participation of its management, including its
principal executive officer and principal financial officer, performed an evaluation of the effectiveness
of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act). Based on that evaluation, the Companys principal executive and principal
financial officers concluded, as of October 28, 2006, that such disclosure controls and procedures
were effective.
No change in the Companys internal control over financial reporting occurred during the Companys
quarter ended October 28, 2006 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, 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 covered
transaction information involving approximately 1.4 million credit cards and data from transactions
involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in several legal proceedings
arising out of this incident, including two putative class action lawsuits, which seek unspecified
monetary damages, credit monitoring and other relief. Each of the two lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to certify a nationwide class that
would include every consumer who used a credit card, debit card, or check to make purchases at DSW
between November 2004 and March 2005 and whose transaction data was taken during the data theft
incident. The other lawsuit seeks to certify classes of consumers that are limited geographically
to consumers who made purchases at certain stores in Ohio.
In connection with this matter, DSW entered into a consent order with the Federal Trade Commission
(FTC), which has jurisdiction over consumer protection matters. The FTC published the final order
on March 14, 2006, and copies of the complaint and consent order are available from the FTCs Web
site at http://www.ftc.gov and also from the FTCs Consumer Response Center, Room 130, 600
Pennsylvania Avenue, N.W., Washington, D.C. 20580.
DSW has not admitted any wrongdoing or that the
facts alleged in the FTCs proposed unfairness complaint are true. Under the consent order, DSW
will pay no fine or damages. DSW has agreed, however, to maintain a comprehensive information
security program and to undergo a biannual assessment of such program by an independent third
party.
There can be no assurance that there will not be additional proceedings or claims brought against
DSW in the future. DSW has contested and will continue to vigorously contest the claims made
against us and will continue to explore our defenses and possible claims against others.
DSW estimates that the potential exposure for losses related to this theft, including exposure
under currently pending proceedings, ranges from 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, 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, DSW 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. As of October 28, 2006, the balance of the associated accrual for potential exposure was
$3.1 million.
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Although difficult to quantify, since the announcement of the theft, we have not discerned any
material negative effect on sales trends we believe is attributable to the theft. However, this may
not be indicative of the long-term developments regarding this matter.
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 and financial condition.
Item 1A. Risk Factors.
We caution that information in this Form 10-Q, particularly information regarding future economic
performance and finances, and plans, expectations and objectives of management, is forward-looking
(as such term is defined in the Private Securities Litigation Reform Act of 1995) and is subject to
change based on various important factors. The following factors, in addition to factors previously
disclosed under the caption Risk Factors in our 2005 Annual Report, and other possible factors
not listed, could affect our actual results and cause such results to differ materially from those
expressed in forward-looking statements.
We continue to be dependent on DSW to provide us with key services for our business.
From 1998 until the completion of its IPO, DSW was operated as a wholly-owned
subsidiary of Value City or Retail Ventures, and provided key services required for the operation
of Retail Ventures business. In connection with the DSW IPO, we entered into agreements with
DSW related to the separation of our business operations from DSW including, among others,
a master separation agreement and a shared services agreement. Under the terms of the amended and
restated shared services agreement, which when signed became effective as of October 29, 2006,
DSW provides several of our subsidiaries with key services relating to information technology
services, planning and allocation support, distribution services and outbound transportation
management, store design and construction management. The initial term of the
shared services agreement will expire at the end of fiscal 2007 and will be extended
automatically for additional one-year terms unless terminated by one of the parties.
We expect some of these services to be provided for longer or shorter periods than the
initial term. We believe it is necessary for DSW to provide these services for us under the
shared services agreement to facilitate the efficient operation of our business.
Once the transition periods specified in the shared services agreement have expired and are not
renewed, or if DSW does not or is unable to perform its obligations under the shared services
agreement, we will be required to provide these services ourselves or to obtain substitute
arrangements with third parties. We may be unable to provide these services because of financial
or other constraints or be unable to timely implement substitute arrangements
on terms that are favorable to us, or at all, which would have a material adverse effect on our
business, financial condition, cash flow and results of operations.
Retail Ventures is a holding company and relies on its subsidiaries to make payments on its
indebtedness and meet its obligations.
Retail Ventures is a holding company and all our operations are conducted through our subsidiaries.
Therefore, we rely on the cash flow of our subsidiaries to meet our obligations, including our
obligations under the PIES. The ability of these subsidiaries to distribute to Retail Ventures by
way of dividends, distributions, interest or other payments (including intercompany loans) is
subject to various restrictions, including restrictions imposed by the facilities governing our and
our subsidiaries indebtedness, and future indebtedness may also limit or prohibit such payments.
In addition, the ability of our subsidiaries to make such payments may be limited by relevant
provisions of the laws of their respective jurisdictions of organization.
We rely on our good relationships with vendors and their factors which provide vendor financing to
purchase brand name and designer merchandise at favorable prices. If these relationships were to
be impaired, we may not be able to obtain a sufficient selection of merchandise at attractive
prices, and we may not be able to respond promptly to changing fashion trends, either of which
could have a material adverse effect on our competitive position, our business and financial
performance.
We do not have long-term supply agreements or exclusive arrangements with any vendors (except for
greeting cards, bottled drinks and a program for supplying merchandise at the register for our
Value City stores), and, therefore, our success depends on maintaining good relations with our
vendors in all business segments. Since our business is fundamentally dependent on selling brand
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name and designer merchandise at attractive prices, we must continue to obtain from our vendors a
wide selection of this merchandise at favorable wholesale prices. Our growth strategy depends to a
significant extent on the willingness and ability of our vendors to supply us with sufficient
inventory to stock our stores, and of their factors to provide them with vendor financing. If we
fail to continue to deepen and strengthen our relations with our existing vendors and their
factors, or to enhance the quality of merchandise they supply us, and if we cannot maintain or
acquire new vendors of in-season brand name and designer merchandise, we may limit our ability to
obtain a sufficient amount and variety of merchandise at favorable prices, which could have a
negative impact on our competitive position.
We face security risks related to our electronic processing and transmission of confidential
customer information. On March 8, 2005, we announced the theft of credit card and other purchase
information related to DSW customers. This security breach could materially adversely affect our
reputation and business and subject us to liability.
We rely on commercially available encryption software and on other technologies to provide security
for processing and transmission of confidential customer information, such as credit card numbers.
Advances in computer capabilities, new discoveries in the field of cryptography, or other events or
developments, including improper acts by third parties, could result in a compromise or breach of
security measures we use to protect customer transaction data. Compromises of these security
systems could have a material adverse effect on our reputation and business, and may subject us to
significant liabilities and reporting obligations. A party who is able to circumvent our security
measures could misappropriate our information, cause interruptions in our operations, damage our
reputation and customers willingness to shop in our stores and subject us to possible liability.
We may be required to expend significant capital and other resources to protect against these
security breaches or to alleviate problems caused by these breaches.
As previously reported, 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 covered
transaction information involving approximately 1.4 million credit cards and data from transactions
involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in several legal proceedings
arising out of this incident, including two putative class action lawsuits, which seek unspecified
monetary damages, credit monitoring and other relief. Each of the two lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to certify a nationwide class action that
would include every consumer who used a credit card, debit card, or check to make purchases at DSW
between November 2004 and March 2005 and whose transaction data was taken during the data theft
incident. The other lawsuit seeks to certify classes of consumers that are limited geographically
to consumers who made purchases at certain stores in Ohio.
In connection with this matter, DSW entered into a consent order with the Federal Trade Commission
(FTC), which has jurisdiction over consumer protection matters. The FTC published the final order
on March 14, 2006, and copies of the complaint and consent order are available from the FTCs Web
site at http://www.ftc.gov and also from the FTCs Consumer Response Center, Room 130, 600
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Pennsylvania Avenue, N.W., Washington, D.C. 20580. DSW has not admitted any wrongdoing or that the
facts alleged in the FTCs proposed unfairness complaint are true. Under the consent order, DSW
will pay no fine or damages. DSW has agreed, however, to maintain a comprehensive information
security program and to undergo a biannual assessment of such program by an independent third
party.
There can be no assurance that there will not be additional proceedings or claims brought against
DSW in the future. DSW has contested and will continue to vigorously contest the claims made
against us and will continue to explore our defenses and possible claims against others.
DSW estimates that the potential exposure for losses related to this theft, including exposure
under currently pending proceedings, ranges from approximately $6.5 million to approximately $9.5
million. Because of many factors, including the early development of information regarding the
theft, the early stage of lawsuits asserted against DSW and recoverability under insurance
policies, 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, DSW 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. To our knowledge, no class
action lawsuits brought by consumers alleging claims similar to those asserted in the putative
class actions against DSW have been litigated against other merchants which have experienced
similar data thefts. As the situation develops and more information becomes available to us, the
amount of the reserve may increase or decrease accordingly. The amount of any such change may be
material. As of October 28, 2006, the balance of the associated accrual for potential exposure was
$3.1 million.
Although difficult to quantify, since the announcement of the theft, we have not discerned any
material negative effect on sales trends we believe is attributable to the theft. However, this may
not be indicative of the long-term developments regarding this matter.
Risk Factors Relating to Our PIES
PIES holders will bear the full risk of a decline in the market price of the DSW Class A Common
Shares between the pricing date for the PIES and the exchange date.
The number of DSW Class A Common Shares (or, if we elect, the cash value thereof) that the PIES
holders will receive upon exchange is not fixed, but instead will depend on the applicable market
value, which is the average of the volume weighted average prices of DSW Class A Common Shares
during the 20 consecutive trading day period ending on the third trading day immediately preceding
the exchange date (or, if exchange is accelerated as a result of a cash merger or an event of
default, during the 10 consecutive trading day period ending on the trading day immediately
preceding the effective date of the cash merger or the date of acceleration, respectively). The
aggregate market value of the DSW Class A Common Shares (or, the cash value thereof) deliverable
upon exchange may be less than the principal amount of the PIES. Specifically, if the applicable
market value of the DSW Class A Common Shares is less than $27.41, the aggregate market value of
the DSW Class A Common Shares deliverable upon exchange will be less than $50.0, and the holders
investment in the PIES will result in a loss. Accordingly, the PIES holders will bear the full risk
of a decline in the market price of the DSW Class A Common Shares. Any such decline could be
substantial.
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The opportunity for equity appreciation provided by an investment in the PIES is less than that
provided by a direct investment in DSW Class A Common Shares.
The aggregate market value of the DSW Class A Common Shares the PIES holders receive on the
exchange date (or, if we elect, the cash value thereof) will only exceed the principal amount of
the PIES if the applicable market value of the DSW Class A Common Shares exceeds the threshold
appreciation price of $34.95, which represents an appreciation of 27.50% over the initial price of
$27.41. In this event, the PIES holders would receive on the exchange date 78.43% (which percentage
is equal to the initial price of the DSW Class A Common Shares divided by the threshold
appreciation price) of the value of the DSW Class A Common Shares that they would have received if
they had made a direct investment in DSW Class A Common Shares. In addition, if the market value of
DSW Class A Common Shares appreciates and the applicable market value is greater than the initial
price but less than the threshold appreciation price, the aggregate market value of the DSW Class A
Common Shares deliverable upon exchange would be only equal to the principal amount of the PIES and
the PIES holders will realize no equity appreciation of the DSW Class A Common Shares.
The market price of the DSW Class A Common Shares, which may fluctuate significantly, may adversely
affect the market price of the PIES.
We expect that generally the market price of DSW Class A Common Shares will affect the market
price of the PIES more than any other single factor. The market price of the DSW Class A Common
Shares will, in turn, be influenced by the operating results and prospects of DSW, by economic,
financial and other factors and by general market conditions, including, among others:
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sales of DSWs Common Shares by its existing shareholders, including Retail Ventures,
or holders of rights to purchase DSW Common Shares. |
It is impossible to predict whether the market price of DSW Class A Common Shares will rise or fall
over the life of the PIES. In addition, we expect that the market price of the PIES will be
influenced by interest and yield rates in the capital markets, the dividend rate, if any, on DSW
Class A Common Shares, the time remaining to the maturity of the PIES, our creditworthiness and the
occurrence of certain events affecting DSW that do not require an adjustment to the exchange ratio.
Fluctuations in interest rates in particular may give rise to arbitrage opportunities based upon
changes in the relative value of the PIES and the DSW Class A Common Shares. Any such arbitrage
could, in turn, affect the market prices of the PIES and the DSW Class A Common Shares.
The PIES may adversely affect the market price for DSW Class A Common Shares.
The market price of the DSW Class A Common Shares is likely to be influenced by the PIES. For
example, the market price of the DSW Class A Common Shares could become more volatile and could be
depressed by (a) investors anticipation of the potential resale in the market of a substantial
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number of additional DSW Class A Common Shares received upon exchange of the PIES, (b) possible
sales of DSW Class A Common Shares by investors who view the PIES as a more attractive means of
equity participation in DSW than owning DSW Class A Common Shares and (c) hedging or arbitrage
trading activity that may develop involving the PIES and DSW Class A Common Shares.
The adjustments to the exchange ratio do not cover all the events that could adversely affect the
market price of the DSW Class A Common Shares.
The number of DSW Class A Common Shares that the PIES holders are entitled to receive on the
exchange date (or, if we elect, the cash value thereof) is subject to adjustment for certain stock
splits, stock combinations, stock dividends and certain other actions by DSW that modify its
capital structure. However, other events, such as offerings by DSW of DSW Class A Common Shares for
cash or in connection with acquisitions, which may adversely affect the market price of DSW Class A
Common Shares, may not result in an adjustment. If any of these other events adversely affects the
market price of DSW Class A Common Shares, it may also adversely affect the market price of the
PIES.
PIES holders will have no rights with respect to DSW Class A Common Shares, but may be negatively
affected by some changes made with respect to DSW Class A Common Shares.
Until the PIES holders acquire DSW Class A Common Shares upon exchange of the PIES, they will have
no rights with respect to the DSW Class A Common Shares (including, without limitation, voting
rights, rights to respond to tender offers or rights to receive any dividends or other
distributions on the DSW Class A Common Shares, if any (other than through an exchange adjustment))
prior to the exchange date, but their investment may be negatively affected by these events. PIES
holders will be entitled to rights with respect to the DSW Class A Common Shares only after we
deliver the DSW Class A Common Shares on the exchange date and only if the applicable record date,
if any, for the exercise of a particular right occurs after the date the holders receive the
shares. For example, in the event that an amendment is proposed to the amended articles of
incorporation or the amended and restated code of regulations of DSW requiring shareholder approval
and the record date for determining the shareholders of record entitled to vote on the amendment
occurs prior to delivery of the DSW Class A Common Shares, PIES holders will not be entitled to
vote on the amendment, although they will nevertheless be subject to any changes in the powers,
preferences or special rights of the DSW Class A Common Shares. If we elect to deliver only cash
upon the exchange of the PIES, the holders will never be able to exercise any rights with respect
to the DSW Class A Common Shares.
Our obligations under the PIES will be effectively junior to our other existing and future
secured debt to the extent of the value of the assets securing that debt and effectively
subordinate to the debt and other liabilities of our subsidiaries.
The PIES are effectively junior to our other existing and future secured debt to the extent of the
value of the assets securing that debt, and effectively subordinate to the debt and other
liabilities, including trade payables and preferred stock, if any, of our subsidiaries. A
substantial part of our operations is conducted through our subsidiaries. Certain of our
subsidiaries, including Value City and Filenes Basement, but not DSW or DSWSW, are borrowers
and/or guarantors under our loan agreements,
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including the VCDS Revolving Loan. The obligations under the VCDS Revolving Loan are secured by a
lien on substantially all the personal property of Retail Ventures and its wholly-owned
subsidiaries, except that the assets of DSW and DSWSW do not secure this credit facility, and the
common shares of DSW owned by Retail Ventures currently do not secure the VCDS Revolving Loan. The
obligations under the VCDS Revolving Loan are also secured by leasehold interests on certain of the
leasehold properties of Value City and Filenes Basement. The DSW Revolving Loan is secured by
substantially all the assets of DSW and DSWSW, including a pledge by DSW of the stock of DSWSW. Our
intercompany note was secured by the capital stock of DSW and Filenes Basement held by Retail
Ventures. Upon completion of the PIES offering, the lien on the capital stock of DSW and Filenes
Basement that secured the intercompany note, as well as the lien on the capital stock of DSW that
secured the Non-Convertible Loan, were released and the approximately $49.7 million remaining
balance of the intercompany note was repaid. In addition, we made a payment of approximately $36.5
million on the VCDS Revolving Loan. We pledged sufficient DSW Common Shares to the collateral
agent for the PIES to enable us to satisfy our obligations to deliver DSW Class A Common Shares
upon exchange of the PIES, and sufficient DSW Common Shares will continue to be subject to liens
and/or contractual obligations to enable us to satisfy our obligations to the warrantholders to
deliver DSW Class A Common Shares upon exercise of the warrants. In addition, claims of unsecured
creditors of such subsidiaries, including trade creditors, and claims of preferred shareholders, if
any, of such subsidiaries will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of Retail Ventures, including holders of the PIES. The
PIES, therefore, are effectively subordinated to creditors, including trade creditors, and
preferred shareholders, if any, of our subsidiaries.
The VCDS Revolving Loan requires that we obtain the prior consent of our senior lenders before
making any payments of cash or other property with respect to the PIES, other than coupon payments,
if these payments come from any source other than the collateral pledged with the collateral agent
for the PIES. Accordingly, we would need to obtain the consent of our senior lenders to exercise
our cash settlement option under the PIES or, in the event of a cash merger, to pay the present
value of all future coupon payments, or, in the event of an acceleration, to pay the yield
maintenance premium. We cannot provide any assurances that our senior lenders will provide any such
consent.
The tax consequences of an investment in the PIES are uncertain.
Investors should consider the tax consequences of investing in the PIES. No statutory, judicial or
administrative authority directly addresses the characterization of the PIES or instruments similar
to the PIES for United States federal income tax purposes. As a result, significant aspects of the
United States federal income tax consequences of an investment in the PIES are not certain. We are
not requesting any ruling from the Internal Revenue Service with respect to the PIES and cannot
assure PIES holders that the Internal Revenue Service will agree with the treatment described in
this document. We intend to treat, and by purchasing a PIES, for all purposes PIES holders agree to
treat, a PIES as a variable prepaid forward contract rather than as a debt instrument. We intend to
report the coupon payments as ordinary income to PIES holders, but holders should consult their own
tax advisor concerning the alternative characterizations.
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Holders of the PIES are urged to consult their own tax advisor regarding all aspects of the U.S.
federal income tax consequences of investing in the PIES, as well as any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
In the event of our bankruptcy, the principal amount of the PIES would not represent a debt claim
against us.
Certain events of bankruptcy, insolvency or reorganization relating to us or our significant
subsidiaries (including, as to the date hereof, DSW) constitute automatic acceleration events that
lead to the PIES becoming immediately due for exchange into DSW Class A Common Shares. In such
event, although the accrued and unpaid coupons and yield maintenance premium would be due and
payable in cash, the principal amount of the PIES would not represent a debt claim against us. In
addition, while the delivery of DSW Class A Common Shares and cash in payment of the accrued and
unpaid coupons and yield maintenance premium will occur, to the extent permitted by law, as soon as
practicable, there may be a delay.
The secondary market for the PIES, if any, may be illiquid.
There is currently no secondary market for the PIES. A secondary market may not develop, or, if it
does, it may be illiquid at the time the PIES holders may want to resell their PIES. The PIES will
not be listed on any exchange. Because the PIES will not be listed, the market for the PIES may be
less liquid than the market for similar listed securities. The secondary market may not provide
enough liquidity to allow holders to trade or sell their PIES easily. Although the underwriter in
connection with the PIES offering advised the Company that it then intended to make a market for
the PIES, it is not obligated to do so, and it may discontinue any market-making at any time.
DSW has no obligations with respect to the PIES and does not have to consider PIES holders
interests for any reason.
DSW has no obligations with respect to the PIES. Accordingly, DSW is not under any obligation to
take the PIES holders interests or our interests into consideration for any reason. DSW
did not receive any of the proceeds of the PIES offering and did not participate in the
determination of the quantities or prices of the PIES or the determination or calculation of the
number of shares (or, if we elect, the cash value thereof) that the PIES holders will receive at
maturity. DSW is not involved with the administration or trading of the PIES.
PIES holders should carefully consider the risk factors relating to DSW.
Holders of the PIES should carefully consider the information contained under the heading Risk
Factors in the DSW prospectus relating to the PIES offering as well as factors previously
disclosed under the caption Risk Factors in DSWs 2005 Annual Report and quarterly reports. The
DSW prospectus and periodic reports do not constitute a part of this quarterly report, nor is it
incorporated into any RVIs periodic reports by reference.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) |
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Recent Sales of Unregistered Securities. Not applicable |
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(b) |
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Use of Proceeds. Not Applicable |
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(c) |
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
Retail Ventures made no purchases of its common shares during the third quarter of the 2006 fiscal
year.
We have paid no cash dividends and we do not anticipate paying cash dividends on our common shares
during fiscal 2006. Presently we expect that all of our future earnings will be retained for
development of our businesses. The payment of any future cash dividends will be at the discretion
of our Board of Directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business conditions. Each of the
Companys credit facilities restrict the payment of dividends by the Company or any affiliate of
the borrower or guarantor, other than dividends paid in stock of the issuer or paid to another
affiliate, and cash dividends can only be paid to the Company by its subsidiaries up to the
aggregate amount of $5.0 million less the amount of any borrower advances made to the Company by
any subsidiaries. The Companys credit facilities also restrict the ability of the Company and its
subsidiaries to issue dividend notes or similar instruments unless the Companys several lenders
have agreed on how such dividend notes or similar instruments would be treated for collateral
purposes.
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information.
On December 5, 2006, RVI, Retail Ventures Services, Inc., Value City and Filenes Basement,
collectively the RVI Entities, entered into an IT Transfer and Assignment Agreement
(the IT Transfer Agreement)
with Brand Technology Services LLC (BTS), a wholly owned subsidiary of DSW.
Under the terms of the IT Transfer Agreement, the RVI Entities will transfer certain information
technology contracts to BTS. The IT Transfer Agreement is
effective as of October 29, 2006.
Additionally, on December 5, 2006, the Company and DSW entered into an Amended and
Restated Shared Services Agreement, effective as of October 29, 2006 (the Amended Shared Services Agreement).
Under the terms of the Amended Shared Services Agreement, DSW, through BTS, will provide
information technology services to RVI and its subsidiaries, including Value City and Filenes
Basement. RVI information technology associates are now employed by BTS. Additionally, RVI and
DSW agreed to include other non-material changes to the Amended Shared Services Agreement.
On December 5, 2006, DSW entered into a Lease with 4300 Venture 34910, an affiliate of
Schottenstein Stores Corporation, for a new corporate headquarters to be located in Columbus,
Ohio. A copy of the Lease, a related lease for trailer parking and amendment to DSWs
existing home office lease, are
attached hereto as Exhibits 10.3, 10.4 and 10.5, respectively.
Item 6. Exhibits. See Index to Exhibits on page 65.
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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.
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RETAIL VENTURES, INC.
(Registrant)
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Date: December 6, 2006 |
By: |
/s/ James A. McGrady
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James A. McGrady |
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Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary of Retail Ventures, Inc.
(duly authorized officer and chief
financial officer) |
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INDEX TO EXHIBITS
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Exhibit Number |
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Description |
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10.1
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Lease, dated June 30, 2006 between JLPK Levittown NY LLC, an
affiliate of Schottenstein Stores Corporation and DSW Inc., re: Levittown, NY DSW
store. |
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10.2
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Lease, dated November 27, 2006 between JLP Lynnhaven VA LLC, an
affiliate of Schottenstein Stores Corporation and DSW Inc., re: Lynnhaven, Virginia
DSW store. |
|
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10.3
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Lease, dated November 30, 2006 between 4300 Venture 34910 LLC, an
affiliate of Schottenstein Stores Corporation, and DSW Inc., re: Home office. |
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10.4
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Lease, dated November 30, 2006 between 4300 East Fifth Avenue LLC, an
affiliate of Schottenstein Stores Corporation, and DSW Inc., re: Trailer Parking
spaces for home office. |
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10.5
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Lease Amendment, dated November 30, 2006 between 4300 Venture 6729 LLC,
an affiliate of Schottenstein Stores Corporation, and DSW Inc., re: warehouse and
corporate headquarters. |
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10.6
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Lease, dated June 30, 2006 between JLPK Levittown NY LLC, an
affiliate of Schottenstein Stores Corporation and Filenes Basement, re: Levittown,
NY Filenes Basement store. |
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10.7
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IT Transfer and Assignment
Agreement dated October 29, 2006. |
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10.8
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Amended and Restated Shared
Services Agreement between DSW Inc. and Retail Ventures, Inc., dated
October 29, 2006. |
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12
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Ratio of Earnings to Fixed Charges |
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.1
|
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Section 1350 Certification of Chief Executive Officer |
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32.2
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Section 1350 Certification of Chief Financial Officer |
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