Retail Ventures, Inc. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Ended February 2, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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
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(I.R.S. Employer Identification No.) |
Organization) |
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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) |
Registrants telephone number, including area code (614) 471-4722
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class:
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Name of each exchange on which registered: |
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Common Shares, without par value
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New York Stock Exchange |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes þ No
The aggregate market value of voting common equity held by non-affiliates of the registrant
computed by reference to the price at which such voting common equity was last sold, as of August
4, 2007, was $354,764,968.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date: 48,635,629 Common Shares were outstanding at March 31, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Retail Ventures, Inc.s fiscal 2007 Proxy Statement, which will be filed no later than
120 days after February 2, 2008, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
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F-1 |
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F-2 |
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F-4 |
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F-5 |
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F-7 |
Notes to Consolidated Financial Statements
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F-8 |
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SCHEDULES |
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I- Condensed Financial Information of Registrant
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S-1 |
II-Valuation and Qualifying Accounts
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S-2 |
Index to Exhibits
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E-1 |
3
PART I
As used in this Annual Report on Form 10-K (Annual Report on Form 10-K or Form 10-K) and except
as the context otherwise may require, Retail Ventures, Inc. (Retail Ventures or RVI) and its
wholly-owned subsidiaries, including but not limited to, Filenes Basement, Inc. (Filenes
Basement), and DSW Inc. (DSW), a controlled subsidiary, and DSWs wholly-owned subsidiary, DSW
Shoe Warehouse, Inc. (DSWSW), are herein referred to collectively as the Company. Value City
Department Stores LLC (Value City) was a wholly-owned subsidiary through January 22, 2008.
This Annual Report on Form 10-K contains trade dress, tradenames and trademarks of other companies.
Use or display of other parties trademarks, trade dress or tradenames is not intended to, and does
not, imply a relationship with the trademark, tradename or trade dress owner.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995
Some of the statements in this Annual Report on Form 10-K contain forward-looking statements 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, should, seeks,
approximately, predicts, intends, plans, estimates, anticipates or other comparable
words or the negative version of those words. Any forward-looking statements contained in this
Annual Report on Form 10-K are based upon our historical performance and on current plans,
estimates and expectations and assumptions relating to our operations, results of operations,
financial condition, growth strategy and liquidity. 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 numerous risks, uncertainties and other factors that may cause actual
results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. In addition to
other factors discussed elsewhere in this report, including those described under Part I, Item 1A.
Risk Factors, some important factors that could cause actual results, performance or achievements
for the Company to differ materially from those discussed in forward-looking statements include,
but are not limited to, the following:
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our success in opening new stores and operating stores on a timely and profitable
basis; |
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maintaining good relationships with our vendors; |
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our ability to anticipate and respond to fashion trends; |
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fluctuation of our comparable store sales and quarterly financial performance; |
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impact of the disposition of a majority interest in Value City and the reliance on
remaining subsidiaries to pay indebtedness and intercompany service obligations; |
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the risk of Value City deciding to discontinue operations or otherwise not pay its
creditors; |
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disruption of our distribution operations; |
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our dependence on DSW for key services; |
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DSWs success in the development and launch of a DSW e-commerce business; |
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failure to retain our key executives or attract qualified new personnel; |
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our competitiveness with respect to style, price, brand availability and customer
service; |
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declining general economic conditions; |
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liquidity risks related to our investments; |
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risks inherent to international trade with countries that are major manufacturers of
apparel and footwear; and |
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security risks related to the electronic processing and transmission of confidential
customer information. |
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results, performance or achievements may vary materially
from what we may have projected. Furthermore, new factors emerge from time to time and it is not
possible for management to predict all such factors, nor can it assess the impact of any such
factor on the business or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking statement. Any
forward-looking statement speaks only as of the date on which such statement is made, and, except
as required by law, RVI undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to reflect the occurrence
of unanticipated events.
4
ITEM 1. BUSINESS.
History of Our Business
The first Value City department store was opened in Columbus, Ohio in 1917. Until the initial
public offering of Value City Department Stores, Inc. on June 18, 1991, Value City department
stores operated as a division of Schottenstein Stores Corporation (SSC).
On October 8, 2003, the Company reorganized its corporate structure into a holding company form
whereby Retail Ventures, an Ohio corporation, became the successor issuer to Value City Department
Stores, Inc. As a result of the reorganization, Value City Department Stores, Inc. became a
wholly-owned subsidiary of Retail Ventures. In connection with the reorganization, holders of
common shares of Value City Department Stores, Inc. became holders of an identical number of common
shares of Retail Ventures. The reorganization was effected by a merger which was previously
approved by Value City Department Stores, Inc.s shareholders. Since October 2003, Retail Ventures
Common Shares have been listed for trading under the ticker symbol RVI on the New York Stock
Exchange.
As of February 2, 2008, SSC owned approximately 39.5% of the outstanding RVI Common Shares and
beneficially owned approximately 50.2% (assumes issuance of (i) 8,333,333 RVI Common Shares
issuable upon the exercise of conversion warrants, (ii) 1,731,460 RVI Common Shares issuable upon
the exercise of term loan warrants and (iii) 342,709 RVI Common Shares issuable upon exercise of
term loan warrants) of the outstanding RVI common shares. In addition to SSCs ownership of our
common shares, we also have a number of ongoing related party agreements and arrangements with SSC,
which are more fully described in Item 13 of this Annual Report on Form 10-K beginning on page 49.
In December 2004, the Company completed another corporate reorganization whereby Value City
Department Stores, Inc. merged with and into Value City Department Stores LLC, a newly created,
wholly-owned subsidiary of Retail Ventures. In connection with this reorganization, Value City
transferred all the issued and outstanding shares of DSW and Filenes Basement to Retail Ventures
in exchange for a promissory note.
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. RVI
accounted for the sale of DSW as a capital transaction. Associated with this transaction, a
deferred tax liability of $65.5 million was recorded. As of February 2, 2008, Retail Ventures owned
Class B Common Shares of DSW representing approximately 63.0% of DSWs outstanding common shares
and approximately 93.2% of the combined voting power of such shares. 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, a tax separation agreement and subsequently an IT transfer 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 SSC, Cerberus Partners, L.P.
(Cerberus) and Millennium Partners L.P. (Millennium) and under its 6.625% Mandatorily
Exchangeable Notes due September 15, 2011, or Premium Income Exchangeable SecuritiesSM
(PIES). Retail Ventures is subject to contractual obligations (a) 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 and (b) with the holders of its PIES to retain ownership of a number of DSW Class B
common shares (which are exchangeable by Retail Ventures for DSW Class A common shares) equal to
the maximum number of Class A common shares deliverable by Retail Ventures upon exchange of the
PIES.
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition
Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no
net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an
after-tax loss of $90.0 million on the transaction. As part of the transaction, Retail Ventures
issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI common shares, at an exercise price
of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the
change in ownership and operation of Value City Department Stores, Retail Ventures agreed to
provide or arrange for the provision of certain transition services principally related to
information technology, finance and human resources to Value City Department Stores for a period of
one year unless otherwise extended by both parties.
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General
We operate our business in the three segments described below:
DSW. DSW is a leading U.S. specialty branded footwear retailer operating 259 shoe stores in 37
states as of February 2, 2008. Its stores offer a wide selection of better-branded 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. DSWs core focus is to
create a distinctive store experience that satisfies both the rational and emotional shopping needs
of its customers by offering them a vast, exciting selection of in-season styles and brands
combined with the convenience and value they desire. The stores average approximately 24,000 square
feet and hold approximately 30,000 pairs of shoes. DSW believes this combination of selection,
convenience and value differentiates it from its competitors and appeals to consumers from a broad
range of socioeconomic and demographic backgrounds. In addition, DSW operates leased shoe
departments for three non-related retailers in a combined 342 stores and in 36 stores for RVIs
wholly-owned subsidiary Filenes Basement.
Filenes Basement. Filenes Basement stores are located primarily in major metropolitan areas of
the Northeast and Midwest 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.
Filenes Basement focuses on serving the customer with discriminating fashion taste who appreciates
an excellent value. These stores have a large selection of upscale designer and better-branded
merchandise, including couture items imported directly from the fashion capitals of Europe. Famous
for its unique bridal dress promotions, now hailed as the Running of the Brides, Filenes
Basement believes that it is also distinctive in its offering of great fashion, high quality and
affordable prices. As of February 2, 2008, there were 36 Filenes Basement stores in operation.
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
interest on intercompany notes, the latter of which is eliminated in consolidation.
See Note 13 of Notes to Consolidated Financial Statements beginning on page F-31 of this Annual
Report on Form 10-K for detailed financial information regarding our three operating segments.
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DSW
DSWs goal is to continue to strengthen its position as a leading better-branded footwear retailer
by pursuing the following three primary strategies for growth in sales and profitability: expanding
its store base, driving sales through enhanced merchandising and investment in its infrastructure.
DSW operates leased departments for three non-affiliated retailers and one affiliated retailer. DSW
entered into supply agreements to merchandise the non-affiliated shoe departments in Stein Mart,
Inc., Gordmans, Inc., and Frugal Fannies Fashion Warehouse stores as of July 2002, June 2004 and
September 2003, respectively. DSW has operated leased shoe departments for Filenes Basement since
its acquisition by Retail Ventures in March 2000. DSW owns the merchandise, records sales of
merchandise net of returns and sales tax, owns the fixtures (except for Filenes Basement) and
provides supervisory assistance in the covered locations. Stein Mart, Gordmans, Frugal Fannies and
Filenes Basement provide the sales associates. DSW pays a percentage of net sales as rent. As of
February 2, 2008, DSW supplied merchandise to 278 Stein Mart stores, 63 Gordmans stores, one Frugal
Fannies store and 36 Filenes Basement stores. Beginning in fiscal 2006, DSWs leased shoe
department segment has been supported by a store field operations group, a merchandising group and
a planning and allocation group (except for Filenes Basement) that are separate from the DSW
stores group.
Merchandising
Selection. DSWs goal is to excite its customers with a sea of shoes that fulfill a broad range
of style and fashion needs. DSW stores sell a large selection of better-branded merchandise. It
purchases directly from more than 400 domestic and foreign vendors, primarily in-season footwear
found in specialty and department stores and branded make-ups (shoes made exclusively for a
retailer), with selection at each store geared toward the particular demographics of the location.
A typical DSW store carries approximately 30,000 pairs of shoes in over 2,000 styles compared to a
significantly smaller product offering at typical department stores.
DSW separates its merchandise into four primary categories womens dress and casual footwear;
mens dress and casual footwear; athletic footwear; and accessories. While shoes are the main focus
of DSW, also offered is a complementary assortment of handbags, hosiery and other accessories.
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Value. Through the DSW buying organization, DSW is able to provide its customers with high-quality,
in-season fashions at prices that it believes are competitive with the typical sale price found at
specialty retailers and department stores. DSW generally employs a consistent pricing strategy that
typically provides its customers with the same price on its merchandise from the day it is received
until it goes into DSWs planned clearance rotation. The DSW pricing strategy differentiates DSW
from competitors who usually price and promote merchandise at discounts available only for limited
time periods. DSW finds customers appreciate having the power to shop for value when it is most
convenient for them, rather than waiting for a department store or specialty retailer to have a
sale event.
In order to provide additional value to its customers, DSW maintains a customer loyalty program for
the DSW stores in which program members receive a future discount on qualifying purchases. This
program offers additional savings to frequent shoppers and encourages repeat sales. Upon reaching
the target-earned threshold, members receive certificates for these discounts which must be
redeemed in six months.
Convenience. DSW believes it provides customers with the highest level of convenience based on
DSWs belief that customers should be empowered to control and personalize their shopping
experiences. DSW merchandise is displayed on the selling floor with self-service fixtures to
enable customers to view and touch the merchandise. DSW stores are laid out in a logical manner
that groups together similar styles such as dress, casual, seasonal and athletic merchandise. DSW
believes this self-service aspect provides DSW customers with maximum convenience as they are able
to browse and try on the merchandise without feeling rushed or pressured into making a decision too
quickly.
Advertising and Promotion
The marketing strategy for DSW focuses on communicating the selection, convenience and value
offered by DSW through the use of television, radio and print media advertising as well as in-store
promotions. DSW also maintains a gift card program with the intent to generate additional sales by
reaching new customers.
During the third quarter of 2006 DSW re-launched its 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 DSWs ability to communicate with its customers. DSW target markets to DSW Rewards members
throughout the year. DSW classifies these members by frequency and uses direct mail and on-line
communications to stimulate further sales and traffic. As of February 2, 2008, over 8.6 million
members enrolled in the DSW Rewards loyalty program had purchased merchandise in the previous two
fiscal years, up from approximately 7.3 million members as of February 3, 2007. In fiscal 2007,
approximately 69% of DSW store net sales were generated by shoppers in the loyalty program, up from
approximately 66% of DSW store net sales in fiscal 2006.
Stores
Store Location, Design and Operations. Typical DSW stores are approximately 24,000 square feet,
with over 85% of total square footage used as selling space. Most DSW stores are organized on a
single level, which allows customers to view the entire store and product offering as they enter
and move quickly to the area where their desired styles are located. Interiors are well-lit, with
informative signage, and spacious aisles allow ease of movement throughout the store. Shoes in the
stores are displayed in a logical manner that groups together similar styles such as dress, casual,
seasonal and athletic merchandise. Clearance shoes are grouped by size and displayed on racks in
the rear of the store.
Store associates receive training to maximize the customer shopping experience in DSWs
self-service environment. Training components consist of customer service, maintaining neat, clean
and orderly store conditions for ease of shopping, efficient checkout process and friendly service.
DSW also maintains a store management training program to develop the skills of management
personnel and to provide an ongoing talent pool for future store expansion. DSW prefers to fill
store management and field supervisor positions through internal promotions.
Expansion. DSW opened 37 new stores in fiscal 2007, and as of February 2, 2008, DSW has signed
leases for 37 new stores that are scheduled to open in fiscal 2008 and fiscal 2009.
DSW plans to open at least 30 stores in each fiscal year from fiscal 2008 through fiscal 2010.
DSWs plan is to open stores in both new and existing markets while continuing to expand its store
portfolio to include lifestyle and regional mall locations in addition to its traditional power
strip venues. In general, DSWs evaluation of potential new stores focuses on location within a
retail area, demographics, co-tenancy, store size and configuration, and lease terms. DSWs
long-range planning model includes analysis of every major metropolitan area in the country with
the objective of understanding the demand for its products in each market over time,
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and its ability to capture that demand. The analysis also looks at DSWs current penetration levels
in the markets DSW serves and DSWs expected deepening of its penetration levels as DSW continues
to grow its brand to become the shoe retailer of choice in the market.
During fiscal 2007, the average investment required to open a new DSW store was approximately $1.6
million, prior to construction and tenant allowances. Of this amount, in fiscal 2007, gross
inventory typically accounted for approximately $0.6 million, fixtures and leasehold improvements
typically accounted for approximately $0.9 million and pre-opening advertising and other
pre-opening expenses typically accounted for approximately $0.1 million.
Distribution
DSWs primary distribution center is located in an approximately 700,000 square foot facility in
Columbus, Ohio. The design of the distribution center facilitates the prompt delivery of priority
purchases and fast-selling footwear to stores so DSW can take full advantage of each selling
season. In January 2007, DSW implemented a distribution center bypass process which improved
speed-to-market for initial deliveries to stores on the West Coast. As part of this process, DSW
has engaged a third party logistics service provider to receive orders originating from suppliers
on the West Coast or imports entering the United States at a West Coast port of entry. These
initial shipments are then shipped by this service provider to DSW pool points and onwards to the
stores bypassing the Columbus distribution center facility. DSW will continue to evaluate expansion
of this process for applicability in other parts of the country. In fiscal 2007, DSW signed a lease
for a fulfillment center which will process orders from its e-commerce channel.
Leased Departments and Supply Agreements
DSW has operated leased shoe departments for Filenes Basement since March 2000. The intercompany
activity is eliminated in the consolidated financial statements. Effective January 30, 2005, DSW
updated and reaffirmed its contractual relationship with Filenes Basement. Under the new
agreement, DSW owns the merchandise and provides supervisory assistance in all covered locations
and receives a percentage of net sales as payment. Filenes Basement provides the fixtures and
sales associates. As of February 2, 2008, DSW operated leased shoe departments in 36 Filenes
Basement locations.
As of February 2, 2008, DSW also supplied merchandise to 278 Stein Mart stores, 63 Gordmans stores
and one Frugal Fannies store, as discussed in greater detail above.
Segment Seasonality
DSWs business is subject to seasonal trends. DSW store net sales have typically been higher in
spring and early fall, when its customers interest in new seasonal styles increases. Unlike many
other retailers, DSW has not historically experienced a large increase in net sales during its
fourth quarter associated with the winter holiday season.
Service Marks, Trademarks and Tradenames
DSW has registered a number of trademarks and service marks in the United States and
internationally, including DSW® and DSW Shoe Warehouse®. The renewal dates for these U.S.
trademarks are April 25, 2015 and May 23, 2015, respectively. DSW believes that its trademarks and
service marks, especially those related to the DSW concept, have significant value and are
important to building name recognition. To protect the brand identity, DSW has also protected the
DSW trademark in several foreign countries.
DSW also holds patents related to its unique store fixture, which gives DSW greater efficiency in
stocking and operating those stores that have the fixture. DSW aggressively protects its patented
fixture designs, as well as its packaging, store design elements, marketing slogans and graphics.
FILENES BASEMENT
Filenes Basements mission is to be the premiere destination for discriminating value-driven
shoppers for their designer and famous brand fashion needs. Filenes Basement strives to provide the best selection
of stylish, designer and famous brand name merchandise at surprisingly affordable prices
in mens and womens apparel, jewelry, shoes, accessories and home goods. Filenes Basement stores
have a large selection of upscale designer and better-branded merchandise, including couture items
imported directly from the fashion capitals of Europe. Famous for its unique bridal dress
promotions, now hailed as the Running of the Brides, Filenes Basement believes that it is also
unique in its offering of great fashion, high quality and extraordinary prices. The Downtown
Crossing Boston store temporarily closed in the fall of 2007 to allow for extensive building
renovations by the landlord, at the landlords cost. The store will open when the renovation is
completed and is expected to resume operations in the spring of 2009.
8
Merchandising
Designer and Famous Brand Merchandise. Filenes Basement stores offer designer and famous name
brand apparel, home goods and accessories. The merchandise represents a focused assortment of
fashionable, nationally recognized mens and womens apparel, shoes, handbags and other
accessories, fine jewelry, fragrances, giftware and home goods bearing prominent designers and
manufacturers names. Branded merchandise constitutes most of the product line. Filenes Basement
believes that up-front purchasing will promote a reliable flow of branded merchandise to its stores
for opening season assortments in February and August. Accordingly, Filenes Basement now places a
significant portion of its purchases up front. Filenes Basement also has been placing purchases of
make-up goods in Europe, such as sweaters, knits and cold weather goods. The remaining branded
goods are obtained through opportunistic purchases from a diverse group of quality manufacturers
and vendors, including direct imports from some of the most prominent European designers. Because
of the longstanding relationships that Filenes Basement has with vendors, it receives quality
buying opportunities at competitive prices. Filenes Basement purchases merchandise from
approximately 2,000 suppliers. During fiscal 2007, merchandise supplied by Filenes Basements
three top vendors accounted for approximately 12.4% of Filenes Basements net sales.
Value Pricing. With the exception of special event merchandising and some promotions, Filenes
Basement offers everyday low pricing in key fashion categories. The Filenes Basement customer base
has a high fashion I.Q. and recognizes the value in what is being offered and the need to purchase
or risk losing unique items because of the changing nature of the assortment. This allows Filenes
Basement to eliminate some of the expenses associated with a larger sales floor labor force and
heavy promotional activity to keep prices low. The Downtown Crossing Boston store used an automatic
markdown policy, where the longer a product remained in the store, the lower its price became.
There are several factors which allow Filenes Basement to achieve its value pricing. First, it has
excellent, longstanding relationships with its suppliers. This makes Filenes Basement a preferred
choice for vendors with designer and famous brand overruns, department store cancellations and
unmet volume objectives. These vendors understand that goods will be sold in an environment that
supports the stature of their brands. Second, Filenes Basement imports directly from Europe,
cutting out middleman costs. Third, Filenes Basement understands the market for these high-end
brands and has access to numerous up-front and opportunistic buys.
Advertising and Promotion
Filenes Basement employs a multi-media approach to advertising, using print, broadcast, direct
mail, online, e-mail and out-of-home media. The primary method of communicating with the market
throughout the year is via advertising in daily newspapers, typically quarter and half page ads.
With a substantial increase in customer data base enrollment, direct mail and email communications
are becoming a growing part of the advertising mix.
Filenes Basement is not typically an item advertiser. Instead, Filenes Basement focuses on
promoting advantageous purchases from manufacturers or retail stores and the Filenes Basement
store as a brand. The intent is to build the reputation and awareness of having the best prices for
European and American designer brands, as well as quality basics for all shoppers. As a result, the
customers gain confidence that whenever they visit Filenes Basement, they will find exceptional
values on fashionable brands. A large part of this approach relies on promoting major events, the
most famous of which is the Bridal Event. Brides-to-be line up in front of the store hours before
the store opens when the doors open, there is a stampede by the customers, now regularly hailed
as the Running of the Brides, to get their hands on a designer wedding gown at a significantly
reduced price before the selection runs out. The event is so interesting and unique that the event
gets significant free media coverage in every market where the promotion is held. Other major
events include ladies suits, a mens suit promotion, premier designer denims, and end-of-season
clearance events. These events are not only effective during the time of the promotion, but also
help establish the reputation for Filenes Basement as a leader in these categories year-round.
Filenes Basement creates a distinctive look to the print advertising by using fashion
illustrations rather than photography since its advertisements are not item specific. This
enhances the impression that Filenes Basement deals in designer merchandise, since the
illustrations look similar to designer drawings and are unique among its competitors.
By not emphasizing item-based advertising, Filenes Basement avoids the high expense of running
large weekly circulars. As of 2005, it began issuing category-based catalogs to
emphasize the breadth of the assortment in leading fashion trends rather than to sell individual
items. As a result, Filenes Basements advertising as a percent of net sales is relatively low,
typically around 2.5%, excluding grand openings.
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Stores
Store Location, Design and Operations. Filenes Basement stores are typically located in leased
facilities within suburban areas, near large residential neighborhoods and average approximately
31,000 square feet of selling space per store (approximately 45,000 square feet of total space per
store). Certain stores in Boston, New York, Chicago, Atlanta and Washington D.C. are located in key
urban areas. As of February 2, 2008, Filenes Basement
operated 36 stores in nine states and the
District of Columbia. The stores are designed to be convenient and attractive in their merchandise
presentation, dressing rooms, checkouts and customer service areas.
Our Filenes Basement Downtown Crossing Boston store is a landmark institution recognized by
generations of New England families and visitors as a source of quality off-price mens and womens
merchandise. The Downtown Crossing Boston Store temporarily ceased operations in the fall of 2007,
due to the extensive renovation planned for the host building by the buildings new owner. The
store will open when the renovation is completed and is expected to resume operations in the spring of
2009. Before the temporary closing, the Downtown Crossing Boston
store subleased 178,000 square
feet (approximately 65,300 square feet of selling space) on four floors. When the new space is
available, the store premises will be 128,000 square feet (approximately 70,000 square feet of
selling space) on five floors. The sublease has been amended to extend its term, and now terminates
in 2024 with rights exercisable by Filenes Basement to extend at its option until 2044. The
Downtown Crossing Boston store generated approximately 12.9% and 15.1% of Filenes Basements
segment sales during fiscal 2006 and 2005, respectively. Due to the
temporary closing, the
$5.8 million loss attributable to the Downtown Crossing Boston store is reflected in income from
continuing operations during fiscal 2007.
All of Filenes Basement stores are designed for self-service shopping, although fine jewelry
counters maintain a dedicated staff and sales personnel are available to help customers locate
merchandise and to assist in the selection and fitting of apparel and footwear. In all stores, a
customer service desk is conveniently located generally adjacent to the central checkout area. To
promote the ease of checkout, we utilize point of sale scanning systems that expedite the checkout
process by providing automated check and credit approval and price lookup. Sales associates are
trained to create a customer-friendly environment. Filenes Basement accepts all major credit
cards, and also provides a private label credit card program. Filenes Basement maintains a return
policy of 30 days.
Our Filenes Basement stores typical staff consists of a general manager, an assistant store
manager, merchandising group managers and full and part-time associates. Typically, general
managers report to a Regional Vice President who in turn reports to the Executive Vice President,
Stores & Operations.
Filenes Basement store managers are responsible on a day-to-day basis for customer relations,
personnel hiring and scheduling, and all other operational matters arising in the stores. Each
store manager is compensated, in part, based on the performance of the managers store. The store
managers are an important source of information concerning local market conditions, trends and
customer preferences. Filenes Basement prefers to fill management positions through promotion of
existing associates.
Expansion. We opened six new Filenes Basement stores and reopened a fully remodeled store during
fiscal 2007. We plan to open at least one new store in fiscal 2008. Typical new stores are
expected to have a gross square footage of approximately 32,000 to 42,000 square feet. Sites will
tend to be in urban and key suburban locations. Based upon our experience, we estimate the average
cost of opening a new Filenes Basement store is approximately $4.3 million (prior to tenant
allowance) including leasehold improvements, fixtures, inventory, pre-opening expenses and other
costs. Preparations for opening a Filenes Basement store generally take nine weeks. We charge
pre-opening expenses to operations as incurred.
We continually update our stores by changing the merchandise displays and in-store signage. The
annual cost of refurbishing on a per store basis is generally not substantial and is treated as
on-going cost of operations.
Distribution
Filenes Basements merchandise is processed and distributed from a 457,000 square foot leased
distribution facility situated on 32.8 acres with adjacent rail service in Auburn, Massachusetts,
outside of metropolitan Boston, Massachusetts. In 2005, the Auburn distribution center was upgraded
to accommodate the current volume of business and the anticipated growth in new stores. Filenes
Basement plans to invest capital dollars in the 2008 fiscal year to further improve the existing
facility.
We have a dedicated contract carrier that manages the fleet of road tractors and our semi-trailers.
Our contract carrier makes the majority of all deliveries to the stores.
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License Agreements and Leased Departments
Filenes Basement licenses fine jewelry, cosmetics and certain other incidental departments to
independent third parties. The aggregate annual license fees for the 2007 fiscal year were
approximately $9.5 million. Filenes Basement also has an agreement with DSW to supply the in-store
shoe departments on a leased department basis in 36 of its stores; Value City supplied the in-store
shoe department to the Downtown Crossing Boston Filenes Basement store until it temporarily closed
in the late summer of 2007. Until November, 2007, Retail Ventures Jewelry, Inc., a wholly owned
subsidiary of Retail Ventures, operated the jewelry departments in all Filenes Basement stores.
Beginning in November 2007, the fine jewelry departments in the Filenes Basement stores are
operated by a third party as a leased department. The intercompany activity is eliminated in our
consolidated financial statements.
Third party licensees supply their own merchandise and generally supply their own store fixtures.
In most instances, licensees utilize Filenes Basement associates to operate their departments and
reimburse Filenes Basement for all associated costs. Leased departments are operated under the
general supervision of Filenes Basement and licensees are required to abide by its policies with
regard to pricing, quality of merchandise, refunds, store hours and associate conduct. Leased
departments complement the operations of the stores and facilitate the uniformity of the in-store
merchandising strategy.
DSW has operated leased shoe departments for Filenes Basement since March 2000. Effective as of
January 30, 2005, DSW updated and reaffirmed its contractual arrangement with Filenes Basement.
Under the new agreement, DSW owns the merchandise, records sales of merchandise net of returns and
sales tax, and provides supervisory assistance in all covered locations and pays a percentage of
net sales as rent. Filenes Basement provides the fixtures and sales associates. In three of these
locations, Filenes Basement licenses and uses the DSW name in connection with the leased shoe
department. This intercompany activity is eliminated in our consolidated financial statements.
Segment Seasonality
Filenes Basements business is affected by the pattern of seasonality common to most retail
businesses. Historically, increased sales and operating profit have been generated during the early
fall and winter holiday selling seasons.
Service Marks, Trademarks and Tradenames
Filenes Basement has an exclusive, perpetual, worldwide, royalty free license to use the name
Filenes Basement and Filenes Basement of Boston trademark and service mark registrations, as
well as certain other tradenames. Filenes Basements exclusive licensee status with respect to
these registered marks has been recorded with the United States Patent and Trademark Office and
relevant state offices. Other trademarks and tradenames used by Filenes Basement have been
protected as well.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
Retail Ventures. We believe a high level of automation is essential to maintaining and improving
our competitive position. On December 5, 2006, we entered into an Amended and Restated Shared
Services Agreement with our subsidiary, DSW, effective as of October 29, 2006 (the Amended Shared
Services Agreement). Under the terms of the Amended Shared Services Agreement, we receive
information technology services from DSW. The transfer of technology services to DSW placed the
requirement on DSW related to maintaining both the investment in infrastructure and the investments
needed to support the shared services infrastructure.
We rely upon computerized systems to provide information at all levels of our segments, including
warehouse operations, store billing, inventory control, merchandising and automated accounting. We
utilize registers with full scanning capabilities to increase speed and accuracy at customer
checkouts and facilitate inventory restocking. We utilize automated distribution center systems to
track and control the receipt, processing, storage and shipping of product to the stores.
DSW. In order to promote DSWs continued growth, DSW undertook several major initiatives in the
past to build upon the merchandise management system and warehouse management systems that support
DSW. With DSWs top vendors, DSW utilizes an electronic data interchange for product UPC barcodes
and electronic exchange of purchase orders, Advance Shipment Notifications and invoices. In DSW
stores, DSW utilizes Point of Sale (POS) registers with full scanning capabilities to increase
speed and accuracy at customer checkouts and facilitate inventory restocking. DSW uses enterprise
data warehouse and customer relationship management software to manage the DSW Rewards program.
This allows DSW to support, expand and integrate DSW Rewards with the POS system to improve the
customer experience.
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Filenes Basement. Filenes Basement utilizes the JDA merchandise management system to track and
manage merchandise inventory at its stores. A warehouse management system is used at the
distribution center to process and distribute merchandise to the stores. Filenes Basement utilizes
POS registers with full scanning capabilities to increase speed and accuracy at customer checkout
and facilitate inventory restocking. Filenes Basement has automatic replenishment capabilities to
improve the in-stock position in the stores for basics programs. Filenes Basement systems run on
an AS/400 and open systems computers.
Associates
The mission of the Companys human resource functions includes ensuring that the Companys business
plans, organization structure, talent development and bench strength meet the Companys needs for
employee effectiveness to improve quality of work product, superior customer service, shareholder
value and our profit.
As of February 2, 2008, we had approximately 11,800 associates across all segments of which
approximately 4,300 were full-time and the remaining balance were part-time.
We believe that, in general, we have satisfactory
relations with our associates.
Competition
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. The DSW and Filenes Basement operating segments 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.
DSW believes that its customers prefer the wide selection of on-trend merchandise compared to
product offerings of typical traditional department stores, mall-based company stores, national
chains, single-brand specialty retailers and independent shoe retailers because those retailers
generally offer a more limited selection at higher average prices and in a less convenient format
than DSW does. In addition, DSW believes that it successfully competes against competitors who have
attempted to duplicate DSWs format.
Filenes Basement provides perceived high value by offering easily recognized brand-name
merchandise at discounted prices. We believe Filenes Basements niche, however, is the top-tier of
the off-price retailing category and its sales events help shape its image as having a special
cachet. We believe that Filenes Basement is more upscale than its off-price competitors and, in
addition to its exclusive selection of prestige couture merchandise, carries a broader and more
complete selection of better designer brands than the competition. Filenes Basement also offers a
shopping environment that is typically more fashionable than its off-price competition.
Available Information
RVI files reports with the Securities and Exchange Commission (the SEC), including annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information
statements and amendments to such reports. The public may read and copy any materials that RVI
files with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the
SEC at http://www.sec.gov. Additionally, information about RVI, including its reports filed with
the SEC, is available through RVIs web site at http://www.retailventuresinc.com. Such reports are
accessible at no charge through RVIs web site and are made available as soon as reasonably
practicable after such material is filed with or furnished to the SEC. The reference to the Company
website address does not constitute incorporation by reference of the information contained on the
website and that website information should not be considered part of this document.
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ITEM 1A. RISK FACTORS.
In addition to the other information in this Annual Report on Form 10-K, shareholders or
prospective investors should carefully consider the following risk factors when evaluating RVI. If
any of the events described below occurs, our business, financial condition and results of
operations and future growth prospects could suffer.
We may be unable to open all the DSW and Filenes Basement stores contemplated by our growth
strategy on a timely basis, and new stores we open may not be profitable or may have an adverse
impact on the profitability of existing stores, either of which could have a material adverse
effect on our business, financial condition, cash flow and results of operations.
We intend to open at least 30 DSW stores per year in each fiscal year from 2008 through 2010, and
at least one Filenes Basement store in fiscal 2008. However, we may not achieve our planned
expansion on a timely and profitable basis or achieve results in new locations similar to those
achieved in existing locations in prior periods. Our ability to open and operate new DSW and
Filenes Basement stores successfully on a timely and profitable basis depends on many factors,
including, among others, our ability to:
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identify suitable markets and sites for new store locations; |
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negotiate favorable lease terms; |
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build-out or refurbish sites on a timely and effective basis; |
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obtain sufficient levels of inventory to meet the needs of new stores; |
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obtain sufficient financing and capital resources or generate sufficient cash flows from
operations to fund growth; |
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successfully open new DSW and Filenes Basement stores in regions of the United States in
which we currently have few or no stores; |
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open new stores at costs not significantly greater than those anticipated; |
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control the costs of other capital investments associated with store openings, including,
for example, those related to the expansion of distribution facilities; |
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hire, train and retain qualified managers and store personnel; and |
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successfully integrate new stores into our existing infrastructure, operations and
management and distribution systems or adapt such infrastructure, operations and systems to
accommodate our growth. |
As a result, we may be unable to open new stores at the rates expected or at all. If we fail to
successfully implement our growth strategy, the opening of new stores could be delayed or
prevented, could cost more than anticipated and could divert resources from other areas of our
business, any of which could have a material adverse effect on our business, financial condition,
cash flow and results of operations.
To the extent that we open new stores in our existing markets, we may experience reduced net sales
in existing stores in those markets. As the number of our stores increases, our stores will become
more concentrated in the markets we serve. As a result, the number of customers and financial
performance of individual stores may decline and the average sales per square foot at our stores
may be reduced. This could have a material adverse effect on our business, financial condition,
cash flow and results of operations.
We intend to open at least 30 new DSW stores per year from fiscal 2008 to 2010, which could strain
our resources and have a material adverse effect on our business and financial performance.
Our continued and future growth in our DSW segment largely depends on our ability to successfully
open and operate new stores on a profitable basis. During fiscal 2007, 2006 and 2005, DSW opened
37, 29 and 29 new stores, respectively. DSW intends to continue to open at least 30 new stores per
year in each fiscal year from fiscal 2008 through 2010. As of February 2, 2008, DSW has signed
leases for an additional 37 new stores to be opened in fiscal 2008 and fiscal 2009. During fiscal
2007, the average investment required to open a typical new DSW store was approximately $1.6
million. This continued expansion could place increased demands on
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DSWs financial, managerial, operational and administrative resources. For example, DSWs planned
expansion will require DSW to increase the number of people it employs, as well as to monitor and
upgrade its management information and other systems and its distribution facilities. These
increased demands and operating complexities could cause DSW to operate its business less
efficiently, have a material adverse effect on its operations and financial performance and slow
its growth.
The temporary cessation of operations at the Downtown Crossing Boston Filenes Basement store could
lead to reduced sales when that location resumes operations.
The Downtown Crossing Boston Filenes Basement is the original, landmark Filenes Basement store.
The Downtown Crossing store generated 12.9% and 15.1% of Filenes Basement segment sales during
fiscal 2006 and 2005, respectively. Filenes Basement temporarily ceased operations at the Downtown
Crossing Boston store in the fall of 2007 due to the complex redevelopment of the building housing
the original store. Filenes Basement plans to resume operations in the new development in the
spring of 2009. The approximately 18-month temporary cessation of business in this Downtown
Crossing store could result, upon its reopening, in reduced customer traffic and sales at this
location.
DSW plans to launch an e-commerce business in the first half of fiscal 2008 which may not be
successful and could adversely affect DSWs results of operations or distract management from DSWs
core business.
DSW plans to launch an e-commerce business to sell shoes and related accessories through its
website in fiscal 2008. As of February 2, 2008, DSW has invested $26.3 million in capital for the
development of this e-commerce business. In addition, DSW has entered into a ten-year lease
agreement for space to serve as fulfillment center for e-commerce distribution. The development
and launch of such a business channel could cost more than expected, distract management from DSWs
core business, take business from DSWs existing store base resulting in lower sales in DSW stores,
or be unsuccessful. In addition, as this is a new business channel, DSW will be purchasing
inventory based upon anticipated sales. In the event that DSWs sales are lower than planned, DSW
will likely need to take markdowns on inventory which will adversely affect gross margin. In the
event that DSW spends more than anticipated, loses focus on its core business, impacts sales in its
existing store base, or is unsuccessful in the development or execution of an e-commerce business,
this may have a material adverse effect to DSWs business, results of operations or financial
condition.
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, business and financial
performance.
Except for those few vendors with whom we have licensed department arrangements, we do not have
long-term supply agreements or exclusive arrangements, 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 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, this 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.
During fiscal 2007, merchandise supplied to our DSW segment by three key vendors accounted for in
the aggregate approximately 21.0% of DSWs net sales. During fiscal 2007, merchandise supplied to
our Filenes Basement segment by three key vendors accounted for in the aggregate approximately
12.4% of Filenes Basements net sales. The loss or reduction in the amount of merchandise made
available by any one of these key vendors could have a material adverse effect on our business.
We may be unable to anticipate and respond to fashion trends and consumer preferences in the
markets in which we operate, which could materially adversely affect our business, financial
condition, cash flow and results of operations.
Our merchandising strategy is based on identifying each regions customer base and having the
proper mix of products in each store across our segments to attract its target customers. This
requires us to anticipate and respond to numerous and fluctuating variables in fashion trends and
other conditions in the markets in which our stores are situated. A variety of factors will affect
our ability to maintain the proper mix of products in each store, including:
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variations in local economic conditions, which could affect our customers discretionary
spending; |
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unanticipated fashion trends; |
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our success in developing and maintaining vendor relationships that provide us access to
in-season merchandise at attractive prices; |
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our success in distributing merchandise to our stores in an efficient manner; and |
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changes in weather patterns, which in turn affect consumer preferences. |
If we are unable to anticipate and fulfill the merchandise needs of each region, we may experience
decreases in our net sales and may be forced to increase markdowns in relation to slow-moving
merchandise, either of which could have a material adverse effect on our business, financial
condition, cash flow and results of operations.
Our operations are affected by seasonal variability.
Our operations have been historically seasonal, with a disproportionate amount of sales and a
majority of net income occurring in the early fall and winter holiday selling seasons for Filenes
Basement. DSW net sales have typically been higher in spring and early fall. As a result of
seasonality, any factors negatively affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have a material adverse
effect on our financial condition, cash flow and results of operations for the entire year.
Our comparable store sales and quarterly financial performance may fluctuate for a variety of
reasons in addition to seasonal factors, which could result in a decline in the price of our common
shares.
Our business is sensitive to customers spending patterns, which in turn are subject to prevailing
regional and national economic conditions and the general level of economic activity. Our
comparable store sales and quarterly results of operations have fluctuated in the past, and we
expect them to continue to fluctuate in the future. In addition to seasonal fluctuations, including
weather patterns, a variety of other factors affect our comparable store sales and quarterly
financial performance, including:
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changes in our merchandising strategy; |
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timing and concentration of new store openings and related pre-opening and other start-up
costs; |
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levels of pre-opening expenses associated with new stores; |
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changes in our merchandise mix; |
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changes in and regional variations in demographic and population characteristics; |
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timing of promotional events; |
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actions by our competitors; and |
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general United States economic conditions and, in particular, the retail sales
environment. |
Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results
to be expected for any other quarter, and comparable store sales for any particular future period
may decrease. In the future, our financial performance may fall below the expectations of
securities analysts and investors. In that event, the price of our common shares would likely
decline.
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 our 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 credit 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.
15
As a
result of our disposition of 81% of our ownership interest in the Value City subsidiary, we now
rely on our remaining operating segments to make payments on our indebtedness and meet our
obligations. For example, Filenes Basement and DSW will need to absorb certain
costs previously paid by Value City. DSW, Filenes Basement and Value City receive shared services
from and through RVI, and DSW provides services to RVI and its subsidiaries and to Value City. The
costs associated with many of these shared services are allocated among the entities based upon the
percent of an entitys sales compared to total sales, or, in some cases, a usage based charge. In
the event that Value City significantly reduces or ceases operations, its allocation percentage of
shared expenses would decrease, which would increase DSWs and Filenes Basement allocation
percentage of future shared service expenses. Additionally, in the event that Value City
significantly reduces or ceases operations, DSW would not be able to allocate as much or any
expense to Value City relating to Value Citys utilization of information technology and shoe
processing services. This increased allocation percentage and reduction in expense allocation
could be material and have a negative effect on the financial position of the Company.
If Value City decides to discontinue its operations or otherwise not pay creditors whose
obligations RVI has guaranteed, RVI may become subject to various risks associated with such
refusal to pay creditors, any insolvency or bankruptcy proceedings.
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition
Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. If Value City decides to
significantly reduce or cease its operations or otherwise does not pay creditors whose obligations
RVI has guaranteed, RVI may become subject to risks associated with
any such possible failure to
pay or a possible insolvency or bankruptcy filing by Value City. There are risks and uncertainties
inherent in such events and RVI is unable to predict the precise effect of any Value City
reorganization and/or liquidation process on RVIs operations and financial condition. In the
event of a Value City bankruptcy filing, creditors of Value City may seek to assert claims against
RVI and its subsidiaries, whether or not such claims currently exist or have any merit. If such
claims were successfully asserted and proved, RVI would have to obtain funding sources to the
extent cash on hand, lending facilities, cash generated from operations or other assets were
insufficient to satisfy those claims. RVI may also be required to record impairment charges or
write-offs as a result of any bankruptcy proceeding and to incur expenses and liabilities
associated with any bankruptcy proceeding. Additionally, any Value City bankruptcy and the
publicity surrounding its filing could adversely affect RVIs and its subsidiaries businesses and
relationships with employees, customers and suppliers. All of the foregoing circumstances or
events could have a material adverse impact on RVIs financial condition and results of operations.
If Value City defaults on its lease for the premises at 3241 Westerville Rd., RVI and DSW may
become subject to various risks associated with the location of operations on these premises.
Concurrent with RVIs disposition of its 81% ownership interest in the Value City business, RVI and
DSW entered into an Occupancy Licensing Agreement with Value City to provide for RVIs and DSWs
continuing occupancy of a portion of the premises at 3241 Westerville Road. If Value City defaults
on its lease of this premises, RVI and DSW may become subject to risks associated with such a
default, including the inability to access the premises, which could have a material adverse impact
on RVIs and DSWs financial condition and results of operations. RVIs corporate offices as well
as significant IT operations are located at this premises.
We have debt which could have consequences if we were unable to repay the balances or interest due.
We have debt on our balance sheet which could have consequences if we were unable to repay the
balances or interest due. For example, it could:
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limit our flexibility in planning for, or reacting to, changes in our industry in
which we operate; |
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place us at a competitive disadvantage compared to our competitors that have less
debt; |
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limit our ability to seek and borrow additional funds; and |
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expose us to risks inherent in interest rate fluctuations because some of our
borrowings are at variable rates of interest, which could result in higher interest
expense in the event of increases in interest rates. |
Our ability to make payments on and to refinance our indebtedness and to fund planned capital
expenditures will depend on our ability to generate cash in the future. This, to some extent, is
subject to general economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
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Our business may not generate sufficient cash flow from operating activities or future availability
under our credit facilities may not be in amounts sufficient to enable us to pay our indebtedness
or to fund our other liquidity needs. We may need to refinance all or a portion of our
indebtedness, on or before maturity. We may not be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
Upon the occurrence of an event of default under our existing credit facilities, the lenders could
elect to declare the applicable outstanding indebtedness immediately due and payable and terminate
all commitments to extend further credit. We cannot be sure that our lenders would waive a default
or that we could pay the indebtedness in full if it were accelerated.
Filenes Basement and DSWs secured revolving credit facilities could limit operational
flexibility.
$100 Million Secured Revolving Credit Facility The Filenes Basement Revolving Loan
Under the Filenes Basement Revolving Loan expiring January 23, 2013, Filenes Basement is named as
the borrower. The Filenes Basement Revolving Loan is guaranteed by Retail Ventures and certain of
its wholly-owned subsidiaries. Neither DSW nor DSWSW are borrowers or guarantors under the Filenes
Basement Revolving Loan. The Filenes Basement Revolving Loan has borrowing base restrictions and
provides for borrowings at variable interest rates based on the London Interbank Offered Rate or
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 Filenes Basement Revolving Loan are secured by a lien on
substantially all of the personal property of Filenes Basement, and of Retail Ventures and its
other wholly-owned subsidiaries, excluding shares of DSW owned by Retail Ventures. In addition, the
secured revolving credit facility contains usual and customary restrictive convenants relating to
the management and operation of our business. These covenants, among other things, restrict
Filenes Basements ability to grant liens on Filenes Basements assets, incur additional
indebtedness, open or close stores, pay cash dividends and redeem Filenes Basements stock, enter
into transactions with affiliates and merge or consolidate with another entity. These covenants
could restrict Filenes Basements operational flexibility, and any failure to comply with these
convenents or Filenes Basements payment obligations would limit Filenes Basements ability to
borrow under the secured revolving credit facility and, in certain circumstances, may allow the
lenders thereunder to require repayment.
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
DSW has entered into a $150 million secured revolving credit facility with a term expiring July
2010. Under this facility, DSW and its subsidiary DSWSW, are named as co-borrowers. This facility
is subject to a borrowing base restriction and provides for borrowings at variable interest rates
based on the London Interbank Offered Rate, or LIBOR, the prime rate and the Federal Funds
effective rate, plus a margin. DSWs obligations under its secured revolving credit facility are
secured by a lien on substantially all DSWs personal property and a pledge of DSWs shares of
DSWSW. In addition, the secured revolving credit facility contains usual and customary restrictive
covenants relating to the management and operation of our business. These covenants, among other
things, restrict DSWs ability to grant liens on DSWs assets, incur additional indebtedness, open
or close stores, pay cash dividends and redeem DSWs stock, enter into transactions with affiliates
and merge or consolidate with another entity. 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 documents. These covenants could restrict DSWs operational
flexibility, and any failure to comply with these covenants or DSWs payment obligations would
limit DSWs ability to borrow under the secured revolving credit facility and, in certain
circumstances, may allow the lenders thereunder to require repayment.
Our stock price may fluctuate significantly, which could negatively affect the trading of our
common shares.
The market price of our common shares has fluctuated significantly in the past and may likely
continue to fluctuate in the future, which could negatively affect the trading of our common
shares. Various factors and events have caused this fluctuation and are likely to cause the
fluctuations to continue. These factors include, among others:
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developments related to DSW and fluctuations in the market price of DSW shares; |
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quarterly variations in actual or anticipated operating results; |
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changes by securities analysts in estimates regarding Retail Ventures; |
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conditions in the retail industry; |
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the condition of the stock market; and |
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general economic conditions. |
Our failure to retain our existing senior management team and to continue to attract qualified new
personnel could materially adversely affect our business.
Our business requires disciplined execution at all levels of our organization to ensure that we
continually have sufficient inventories of assorted brand name merchandise at below traditional
retail prices. This execution requires an experienced and talented management team. If we were to
lose the benefit of the experience, efforts and abilities of our key executive and key buying
personnel, our business could be materially adversely affected. We have entered into employment
agreements with certain of these key personnel. Furthermore, our ability to manage our retail
expansion will require us to continue to train, motivate and manage our employees and to attract,
motivate and retain additional qualified managerial and merchandising personnel. Competition for
these personnel is intense, and we may not be successful in attracting, assimilating and retaining
the personnel required to grow and operate profitably.
We may be unable to compete favorably in our highly competitive markets.
The off-price retail, department store and retail footwear markets are highly competitive with few
barriers to entry. We compete against a diverse group of retailers, both small and large, including
locally owned, regional and national department stores, specialty retailers, discount chains and
off-price retailers. Some of our competitors are larger and have substantially greater resources
than we do. Our success depends on our ability to remain competitive with respect to style, price,
brand availability and customer service. The performance of our competitors, as well as a change in
their pricing policies, marketing activities and other business strategies, could have a material
adverse effect on our business, financial condition, cash flow, results of operations and our
market share.
SSC and/or its affiliates may compete directly against us.
Corporate opportunities may arise in the area of potential competitive business activities that may
be attractive to SSC and us in the area of employee recruiting and retention. Any competition could
intensify if SSC acquired a business that carried an assortment of shoes or merchandise in these
stores similar to those found in our stores, targeted customers similar to ours or adopted a
similar business model or strategy for its shoe businesses. Given that RVI and DSW are not
wholly-owned by SSC, SSC may be inclined to direct relevant corporate opportunities to its other
affiliates rather than us.
SSC is under no obligation to communicate or offer any corporate opportunity to us. In addition,
SSC has the right to engage in similar activities as us, do business with our suppliers and
customers and employ or otherwise engage any of our officers or employees. SSC and its affiliates
engage in a variety of businesses, including, but not limited to, business and inventory
liquidations, real estate management and real estate acquisitions.
A decline in general economic conditions, or the outbreak or escalation of war or terrorist acts,
could lead to reduced consumer demand for our merchandise.
Consumer spending habits, including spending for the merchandise that we sell, are affected by,
among other things, prevailing economic conditions, levels of employment, salaries and wage rates,
prevailing interest rates, income tax rates and policies, consumer confidence and consumer
perception of economic conditions. In addition, consumer purchasing patterns may be influenced by
consumers disposable income. A general slowdown in the United States economy or an uncertain
economic outlook could adversely affect consumer spending habits.
Consumer confidence is also affected by the domestic and international political situation. The
outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or
affecting the United States, could lead to a decrease in spending by consumers. In the event of an
economic slowdown, we could experience lower net sales than expected on a quarterly or annual basis
and be forced to delay or slow our retail expansion plans.
We rely on foreign sources for our merchandise, and our business is therefore subject to risks
associated with international trade.
We purchase merchandise from domestic and foreign vendors. In addition, many of our domestic
vendors import a large portion of their merchandise from abroad. For this reason, we face risks
inherent in purchasing from foreign suppliers, such as:
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economic and political instability in countries where these suppliers are located; |
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international hostilities or acts of war or terrorism affecting the United States or
foreign countries from which our merchandise is sourced; |
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increases in shipping costs; |
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transportation delays and interruptions, including as a result of increased inspections
of import shipments by domestic authorities; |
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work stoppages; |
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adverse fluctuations in currency exchange rates; |
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laws of the United States affecting the importation of goods, including duties, tariffs
and quotas and other non-tariff barriers; |
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expropriation or nationalization; |
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changes in local government administration and governmental policies; |
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changes in import duties or quotas; |
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compliance with trade and foreign tax laws; and |
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local business practices, including compliance with local laws and with domestic and
international labor standards. |
We require our vendors to operate in compliance with applicable laws and regulations and our
internal requirements. However, we do not control our vendors or their labor and business
practices. The violation of labor or other laws by one of our vendors could have a material adverse
effect on our business.
DSW and Filenes Basement each relies on a primary distribution center. The loss or disruption of
either of these centralized distribution centers could have a material adverse effect on our
business and operations.
Most of DSWs inventory is shipped directly from suppliers to a primary centralized distribution
center in Columbus, Ohio, where the inventory is then processed, sorted and shipped to one of DSWs
pool locations located throughout the country and then on to DSW stores. In the fourth quarter of
fiscal 2006, DSW began operations of its West Coast bypass.
Inventory for Filenes Basement stores is processed and shipped from a primary distribution
facility in Auburn, Massachusetts.
Our operating results depend on the orderly operation of our receiving and distribution process,
which in turn depends on third-party vendors adherence to shipping schedules and our effective
management of our distribution facilities. We may not anticipate all the changing demands that our
expanding operations in these two segments will impose on our receiving and distribution systems,
and events beyond our control, such as disruptions in operations due to fire or other catastrophic
events, labor disagreements or shipping problems, may result in delays in the delivery of
merchandise to our stores.
While we maintain business interruption and property insurance, in the event a distribution center
were to be shut down for any reason or if we were to incur higher costs and longer lead times in
connection with a disruption at a distribution center, our insurance may not be sufficient, and
insurance proceeds may not be timely paid to us.
We will require strong cash flows from our DSW and Filene Basement operations to support capital
requirements, operations and debt repayment.
We will require strong cash flows from our DSW and Filenes Basement operations to support our
capital requirements, our general operating activities and to fund debt repayment. Our inability to
generate sufficient cash flows to support these activities or the lack of availability of financing
in adequate amounts and on appropriate terms could adversely affect our financial performance or
our earnings per share growth.
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If we fail to execute our opportunistic buying and inventory management well for Filenes Basement,
our business could be materially adversely affected.
We purchase some of the inventory for our Filenes Basement stores opportunistically with our
buyers purchasing close to need. To drive traffic to the stores and to increase same store sales,
the treasure hunt nature of the off-price buying experience requires continued replenishment of
fresh high quality, attractively priced merchandise. While the practice of opportunistic buying
enables our buyers to buy at the right time and price, in the quantities we need and into market
trends, it places considerable discretion in our buyers. This discretion subjects us to risks that
our buyers will miscalculate on the timing, quantity and nature of inventory flowing to the stores.
We rely on our distribution infrastructure to support delivering goods to our stores on time. We
must effectively and timely distribute inventory to stores, maintain an appropriate mix and level
of inventory and effectively manage pricing and markdowns. Failure to acquire and manage our
inventory well and to operate our distribution infrastructure effectively could materially
adversely affect our performance and our relationship with our customers.
If we do not attract and retain quality sales, distribution center and other associates in
sufficient numbers as well as experienced buying and management personnel, our performance could be
materially adversely affected.
Our performance is dependent on attracting and retaining a large and growing number of quality
associates. Many of these associates are in entry level or part-time positions with historically
high rates of turnover. Our ability to meet our labor needs while controlling our costs is subject
to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation
and changing demographics. In the event of increasing wage rates, if we do not increase our wages
competitively, our customer service could suffer because of a declining quality of our workforce,
or our earnings would decrease if we increase our wage rates. Further, our off-price model limits
the market for experienced buying and management personnel and requires us to do significant
internal training and development. Changes that adversely impact our ability to attract and retain
quality associates could materially adversely affect our performance.
If our information systems do not operate and our new technologies are not implemented effectively,
our business could be materially disrupted or our sales or profitability could be reduced.
The efficient operation of our business is dependent on information systems, including the ability
to have them operated effectively and to successfully implement new technologies, systems, controls
and adequate disaster recovery systems. The failure of our information systems to perform as
designed or the failure to implement and operate them effectively could materially disrupt our
business or subject us to liability and thereby harm our profitability.
We are reliant on our information systems and the loss or disruption of services could affect our
ability to implement our growth strategy and have a material adverse effect on our business.
Our information systems are integral to efficiently operating our stores and in managing the
operations of a growing store base. The capital and other expenditures required to keep our
information systems operating at peak performance may be higher than anticipated and could strain
our resources. In addition, any significant disruption of the data centers upon which we rely
could have a material adverse affect on those operations dependent on those systems, most
specifically, store operations, our distribution centers and our merchandising teams.
While we maintain business interruption and property insurance, in the event the data centers on
which we rely are shut down, our insurance may not be sufficient to cover the impact to the
business, or insurance proceeds may not be timely paid to us.
On December 5, 2006, we entered into an Amended and Restated Shared Services Agreement with DSW,
effective as of October 29, 2006 (the Amended Shared Services Agreement). Under the terms of the
Amended Shared Services Agreement, we receive information technology services from DSW. RVI
information technology associates are now employed by DSW. Through this agreement, DSW now
provides the cash related to capital expense for information technology assets for RVI and its
subsidiaries. DSW expects to recoup its expenditures by charging depreciation to RVI based on the
expected lives of the assets.
We may be unable to quickly monetize our investment in DSW Common Shares.
As of February 2, 2008, Retail Ventures owned DSW Class B Common Shares representing approximately
63.0% of DSWs outstanding Common Shares and approximately 93.2% of the combined voting power of
such shares. DSW Class A Common Shares are listed on the New York Stock Exchange under the symbol
DSW. Pursuant to an Exchange Agreement between RVI and DSW, DSW Class B Common Shares may be
exchanged into DSW Class A Common Shares at Retail Ventures option. Absent registration, DSW
Common Shares held by Retail Ventures are deemed to be restricted stock, which would limit our
ability to liquidate any of such shares if we chose to do so.
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Pursuant to the terms of the Master Separation Agreement dated July 5, 2005 by and between Retail
Ventures and DSW, DSW agreed to effect up to one demand registration per calendar year of DSW Class
A Common Shares or DSW Class B Common Shares held by Retail Ventures. Our ability to liquidate DSW
Common Shares on an expedited basis may be restricted due to the lead time required to register
such shares with the Securities and Exchange Commission.
The liquidity of DSWs investments could fluctuate based on adverse market conditions.
Recent auction failures have adversely affected the liquidity of auction rate securities as
investors have not been able to sell their securities on their auction dates. If these market
conditions persist, DSW may be unable to sell its auction rate securities at their scheduled
auction dates. As of February 2, 2008, $38.0 million of
DSWs $82.5 million in total investments was
invested in auction rate securities. DSW has reduced its investment in auction rate securities to
$13.7 million as of March 31, 2008. Of the $13.7 million investment at March 31, 2008, $3.7 million
in auction rate securities have not undergone an auction. Due to auction failures limiting the
liquidity of our investments, we have presented $10.0 million of
DSWs investment in auction rate
securities as long-term investments as of February 2, 2008 that were previously classified as short
term investments.
If DSW is unable to liquidate the remaining auction rate securities at their scheduled auction
dates, DSW may not have access to its funds until the maturity date of these investments, which
could be until 2034. Further, in the event that it is unlikely that DSW will be able to receive
the full proceeds from these investments at the maturity date, DSW may be required to impair the
securities. Based on the nature of the
impairment(s) DSW would record a temporary impairment as an unrealized loss in comprehensive
income or an other than temporary impairment in earnings, which could materially impact its results
of operations. DSW did not record any impairment related to these investments as it does not
believe that the underlying credit quality of the assets has been impacted by the reduced liquidity
of these investments.
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 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 cooperated with law enforcement and other authorities with
regard to this matter. DSW is involved in a putative class action lawsuit, which seeks unspecified
monetary damages, credit monitoring and other relief. The lawsuit seeks to certify a class of
consumers that is limited geographically to consumers who made purchases at certain stores in Ohio.
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 its 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 possible settlement of claims 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 to DSWs results of
operations or financial condition. As of February 2, 2008, the balance of the associated accrual
for potential exposure was $0.5 million.
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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 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 (which was amended and restated effective October 29, 2006). Under the terms of
the amended and restated shared services agreement. 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 expired at the end of fiscal 2007 and
was automatically extended to the end of fiscal 2008 by operation of the contract. The agreement
provides for automatic extensions for additional one-year terms unless terminated by one of the
parties. Retail Ventures and DSW are in the process of negotiating the transfer of the following
shared service departments to DSW: Finance; Internal Audit; Tax; Human Resource Information
Systems; Risk Management; and Import Services. The companies have taken steps to begin the transfer
of employees in these departments to DSW, but the definitive terms and conditions of the transfer
and the provision of these departments services from DSW to RVI entities have not yet been agreed
upon. 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.
The current term of the shared services agreement will expire at the end of fiscal 2008. RVI and
DSW are in the process of negotiating the transfer of the following shared service departments to
DSW: Finance, Internal Audit, Tax, Human Resource Information Systems and Risk Management. The
companies have taken steps to begin the transfer of employees in
these departments to DSW, however the
definitive terms and conditions of the transfer to DSW and the provision of these departments services
by DSW to RVI have not yet been agreed upon.
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.
We are controlled indirectly by Schottenstein Stores Corporation, whose interests may differ from
our other shareholders.
As of February 2, 2008, SSC owned approximately 39.5% of the outstanding RVI Common Shares and
beneficially owned approximately 50.2% (assumes issuance of (i) 8,333,333 RVI Common Shares
issuable upon the exercise of conversion warrants, (ii) 1,731,460 RVI Common Shares issuable upon
the exercise of term loan warrants, and (iii) 342,709 RVI Common Shares issuable upon exercise of
term loan warrants) of the outstanding RVI Common Shares. SSC, a privately held corporation, is
controlled by Jay L. Schottenstein, the Chairman of our Board of Directors, and members of his
immediate family. Given its ownership interests, SSC will be able to control or substantially
influence the outcome of all matters submitted to our shareholders for approval, including, the
election of directors, mergers or other business combinations, and acquisitions or dispositions of
assets. The interests of SSC may differ from or be opposed to the interests of our other
shareholders, and its control may have the effect of delaying or preventing a change in control
that may be favored by other shareholders.
Some of our directors and officers also serve as directors or officers of DSW, or may have
conflicts of interest because they may own DSW Common Shares or options to purchase DSW Common
Shares, or they may receive cash-based or equity-based awards based on the performance of DSW.
Some of our directors and officers also serve as directors or officers of DSW or may own DSW Common
Shares or options to purchase DSW Common Shares, or they may be entitled to participate in the DSW
incentive plans. Jay L. Schottenstein is our Chairman of the Board of Directors and Chairman of the
Board of Directors of DSW; Heywood Wilansky is our President and Chief Executive Officer and a
director of DSW; Harvey L. Sonnenberg is a director of Retail Ventures and of DSW; Julia A. Davis
is our Executive Vice President, General Counsel and Assistant Secretary, and previously served as
Executive Vice President, General Counsel and Secretary of DSW until April 10, 2006; Steven E.
Miller is Senior Vice President and Controller of both Retail Ventures and DSW; and James A.
McGrady is our Executive Vice President, Chief Financial Officer, Treasurer and Secretary and is a
Vice President of DSW. DSWs incentive plans provide cash-based and equity-based compensation to
employees based on DSWs performance. These employment arrangements and ownership interests or
cash-based or equity-based awards could create, or appear to create, potential conflicts of
interest when directors or officers who own DSW Common Shares or stock options or who participate
in the DSW incentive plans are faced with decisions that could have different implications for DSW
than they do for us. These potential conflicts of interest may not be resolved in our favor.
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Risk Factors Relating to Our PIES
PIES holders 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 $50.00, 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.
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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developments related to DSW; |
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quarterly variations in DSWs actual or anticipated operating results; |
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changes by securities analysts in estimates regarding DSW; |
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conditions in the retail industry; |
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the condition of the stock market; |
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general economic conditions; and |
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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. |
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.
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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
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 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 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 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 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 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 Filenes Basement, but not DSW or its subsidiaries, are borrowers and/or
guarantors under our loan agreements, including the Filenes Basement Revolving Loan (as defined
herein). The obligations under the Filenes Basement Revolving Loan are secured by a lien on
substantially all the personal property of Filenes Basement, and of Retail Ventures and its other
wholly-owned subsidiaries, excluding the common shares of DSW owned by Retail Ventures. The
obligations under the Filenes Basement Revolving Loan are also secured by leasehold interests on
certain of the leasehold properties of Filenes Basement. The DSW Revolving Loan (as defined
herein), 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 (as defined herein), 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.
24
The Filenes Basement 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 anticipated treatment. 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.
Holders of the PIES are urged to consult their own tax advisor regarding all aspects of the United
States 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.
Settling the PIES with DSW Class A Common Shares may result in a material amount of taxable income
to Retail Ventures.
If we settle the PIES with DSW Class A Common Shares, it may result in a material amount of taxable
income to Retail Ventures. We believe that this will not result in a material amount of cash taxes
payable by Retail Ventures; however, there can be no assurance that the settlement of the PIES
would not result in a material amount of cash taxes payable by Retail Ventures.
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.
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 Retail Ventures interests with respect to the PIES 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 Retail Ventures elects, 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 disclosed under the
caption Risk Factors in DSWs 2008 Annual Report on Form 10-K and other periodic reports. The DSW
prospectus and periodic reports do not constitute a part of this Annual Report on Form 10-K, nor
are they incorporated into any of RVIs periodic reports by reference.
25
In the event that we or certain of our subsidiaries commence any proceeding seeking liquidation,
reorganization or similar relief under any bankruptcy law, we may suffer material adverse effects
on our business as a result of the acceleration of our obligations under the PIES.
Certain events of bankruptcy, insolvency or reorganization relating to us or our significant
subsidiaries constitute automatic acceleration events that lead to the PIES becoming immediately
due for exchange into DSW Class A Common Shares. For example, if a significant subsidiary
commences a proceeding seeking liquidation, reorganization or similar relief under any bankruptcy
law, our obligations under the PIES will automatically accelerate. In such event, in addition to
the PIES becoming due for exchange, the accrued and unpaid coupons and yield maintenance premium
would also be due and payable in cash or, at our election, additional DSW Class A Common Shares.
The number of DSW Class A Common Shares deliverable to holders, in respect of the principal amount
of the PIES and, if we were to so elect, the accrued and unpaid coupons and yield maintenance
premium, would be calculated based on the then-current market prices of the DSW Class A Common
Shares. At the market price of DSW Class A Common Shares as of the date hereof, the maximum number
of DSW Class A Common Shares deliverable under the indenture in exchange for PIES would be
deliverable. Upon any acceleration of our obligations under the PIES, we would lose the
opportunity to benefit from any appreciation in the value of such shares, both as any such
appreciation may have benefited the Company under the formula for calculation of the PIES exchange
ratio and otherwise.
ITEM 1B. UNRESOLVED STAFF COMMENTS. None.
26
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores we operated as of February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
DSW |
|
Basement |
|
Total |
Alabama |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Arizona |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
California |
|
|
25 |
|
|
|
|
|
|
|
25 |
|
Colorado |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Connecticut |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Delaware |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Florida |
|
|
18 |
|
|
|
|
|
|
|
18 |
|
Georgia |
|
|
9 |
|
|
|
1 |
|
|
|
10 |
|
Illinois |
|
|
14 |
|
|
|
4 |
|
|
|
18 |
|
Indiana |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
Iowa |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Kansas |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Kentucky |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Louisiana |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Maine |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Maryland |
|
|
8 |
|
|
|
5 |
|
|
|
13 |
|
Massachusetts |
|
|
11 |
|
|
|
8 |
|
|
|
19 |
|
Michigan |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
Minnesota |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Missouri |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Nebraska |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Nevada |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
New Hampshire |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
New Jersey |
|
|
8 |
|
|
|
3 |
|
|
|
11 |
|
New York |
|
|
18 |
|
|
|
7 |
|
|
|
25 |
|
North Carolina |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Ohio |
|
|
12 |
|
|
|
2 |
|
|
|
14 |
|
Oklahoma |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Oregon |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Pennsylvania |
|
|
14 |
|
|
|
2 |
|
|
|
16 |
|
Rhode Island |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Tennessee |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Texas |
|
|
28 |
|
|
|
|
|
|
|
28 |
|
Utah |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Virginia |
|
|
12 |
|
|
|
1 |
|
|
|
13 |
|
Washington |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Washington D.C. |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Wisconsin |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
259 |
|
|
|
36 |
|
|
|
295 |
|
|
|
|
We maintain buying offices in Columbus, Ohio and Burlington, Massachusetts, a suburb of Boston. Our
principal RVI executive offices are located in a building in Columbus, Ohio now subleased from
Value City. DSWs principal executive offices are also located next to the site of its main
warehouse and distribution facility in Columbus, Ohio.
We operate one warehouse/distribution facility located in Columbus, Ohio and one distribution
facility in Auburn, Massachusetts. In fiscal 2007, DSW signed a lease for a fulfillment center
which will process orders from DSWs e-commerce channel. In January 2007, DSW implemented a
distribution center bypass process which has improved speed-to-market for initial deliveries to
stores on the West Coast. As part of this process, DSW has engaged a third party logistics service
provider to receive orders originating from suppliers on the West Coast or imports entering the
United States at a West Coast port of entry. These initial shipments are then shipped by this
service provider to DSWs pool points and onwards to the stores bypassing DSWs primary Columbus
distribution center facility. In addition, to expedite the flow of merchandise to certain clusters
of stores, we use third party processors and utilize vendor direct shipments where such use is
advantageous. Our warehouse and distribution facilities for the DSW and Filenes
27
Basement businesses are adequate for our current needs and we believe that such facilities, with
certain modifications and additional equipment, will be adequate for our foreseeable future
demands. Filenes Basement plans to invest capital dollars in the 2008 fiscal year to further
improve its existing facilities.
The stores and all of the warehouse and distribution, buying and executive office facilities are
leased or subleased. The Company has several leasing agreements with SSC and affiliates of SSC. The
Company leases or subleases from SSC or its affiliates 22 store
locations, four warehouse facilities,
one office space and a parcel of land. The remaining stores and warehouses are leased from
unrelated entities. Most of the store leases provide for an annual rent based upon a percentage of
gross sales, with a specified minimum rent.
ITEM 3. 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 DSWs 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 cooperated with law enforcement and other authorities with
regard to this matter. DSW is involved in a putative class action lawsuit which seeks unspecified
monetary damages, credit monitoring and other relief. The lawsuit seeks to certify a class of
consumers that is limited geographically to consumers who made purchases at certain stores in Ohio.
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 its defenses and possible claims against others.
DSW estimated 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 possible settlement of claims 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, the Company 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 to DSWs results of
operations or financial condition. As of February 2, 2008, the balance of the associated accrual
for potential exposure was $0.5 million.
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 of the 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 most likely estimated liability related to the claim. In the opinion
of management, the amount of any potential liability with respect to these proceedings will not be
material to the Companys results of operations or financial condition. As additional information
becomes available, the Company will assess the potential liability related to its pending
litigation and revise the estimates as needed. Revisions in its estimates and potential liability
could materially impact the Companys results of operations and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
28
PART II
|
|
|
ITEM 5. |
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common shares are listed for trading under the ticker symbol RVI on the New York Stock
Exchange. The following table sets forth the high and low sales prices of our common shares as
reported on the NYSE Composite Tape during the periods indicated. As of March 31, 2008, there were
938 holders of record of our common shares.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal 2006: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
16.60 |
|
|
$ |
12.35 |
|
Second Quarter |
|
|
18.00 |
|
|
|
14.31 |
|
Third Quarter |
|
|
17.50 |
|
|
|
13.61 |
|
Fourth Quarter |
|
|
20.47 |
|
|
|
15.29 |
|
Fiscal 2007: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
23.30 |
|
|
$ |
19.12 |
|
Second Quarter |
|
|
21.00 |
|
|
|
11.97 |
|
Third Quarter |
|
|
13.64 |
|
|
|
7.87 |
|
Fourth Quarter |
|
|
8.49 |
|
|
|
3.91 |
|
Fiscal 2008: |
|
|
|
|
|
|
|
|
First Quarter (through March 31, 2008) |
|
$ |
7.46 |
|
|
$ |
4.59 |
|
Retail Ventures made no purchases of its common shares during the fourth quarter of the 2007 fiscal
year.
We have paid no cash dividends in the two most recent fiscal years and we do not anticipate paying
cash dividends on our common shares during fiscal 2008. Presently we expect that all of our future
earnings will be retained for development of our businesses. The payment of any future 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 restricts 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 loans made to the
Company by any subsidiaries. The Companys credit facilities are more fully explained within the
Liquidity and Capital Resources discussion in Item 7 on page 32 of this Annual Report on Form
10-K.
PERFORMANCE GRAPH
The following graph compares the performance of the Company with that of the Standard & Poors
General Merchandise Stores Index and the Russell 2000 Index, both of which are published indexes.
This comparison includes the period beginning February 1, 2003 through February 2, 2008.
The Standard & Poors General Merchandise Stores Index is published weekly in the Standard & Poors
Statistical Service and the index value preceding each fiscal year end has been selected for
purposes of this comparison. The Russell 2000 Index is a capitalization-weighted index of domestic
equity securities traded on the New York and American Stock Exchanges and the NASDAQ that measures
the performance of the 2,000 smallest companies in the Russell 3000 Index.
29
The comparison of the cumulative total returns for each investment assumes that $100 was invested
on February 1, 2003, and that all dividends earned on such investment were reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company / Index |
|
|
01-Feb-03 |
|
|
31-Jan-04 |
|
|
29-Jan-05 |
|
|
28-Jan-06 |
|
|
03-Feb-07 |
|
|
02-Feb-08 |
|
|
RETAIL VENTURES, INC. |
|
|
$ |
100.00 |
|
|
|
$ |
307.18 |
|
|
|
$ |
338.97 |
|
|
|
$ |
652.82 |
|
|
|
$ |
1,035.38 |
|
|
|
$ |
364.10 |
|
|
|
RUSSELL 2000 |
|
|
$ |
100.00 |
|
|
|
$ |
158.03 |
|
|
|
$ |
168.69 |
|
|
|
$ |
203.89 |
|
|
|
$ |
228.06 |
|
|
|
$ |
208.33 |
|
|
|
S&P GENERAL MERCHANDISE STORES |
|
|
$ |
100.00 |
|
|
|
$ |
138.16 |
|
|
|
$ |
164.71 |
|
|
|
$ |
171.91 |
|
|
|
$ |
202.22 |
|
|
|
$ |
183.70 |
|
|
|
30
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated various selected financial information.
Such selected consolidated financial data should be read in conjunction with the consolidated
financial statements of Retail Ventures, including the notes thereto, set forth in Item 8 of this
Annual Report on Form 10-K and Managements Discussion and Analysis of Financial Condition and
Results of Operations set forth in Item 7 of this Annual Report on Form 10-K. As a result of RVIs
disposition of an 81% ownership interest in its Value City business during fiscal 2007, the results
of the Value City operations are included in discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended (1) |
|
|
February 2, |
|
February 3, |
|
January 28, |
|
January 29, |
|
January 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
(dollars in thousands, except per share amounts and net sales per selling square foot) |
Net sales |
|
$ |
1,871,904 |
|
|
$ |
1,706,533 |
|
|
$ |
1,533,396 |
|
|
$ |
1,305,015 |
|
|
$ |
1,085,531 |
|
Operating profit before
change in fair value of
derivative instruments
(2) |
|
$ |
63,473 |
|
|
$ |
99,489 |
|
|
$ |
59,385 |
|
|
$ |
32,194 |
|
|
$ |
12,522 |
|
Change in fair value of derivative
instruments |
|
$ |
248,193 |
|
|
$ |
(175,955 |
) |
|
$ |
(144,209 |
) |
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
$ |
311,666 |
|
|
$ |
(76,466 |
) |
|
$ |
(84,824 |
) |
|
$ |
32,194 |
|
|
$ |
12,522 |
|
Income (loss) from continuing operations |
|
$ |
202,104 |
|
|
$ |
(128,642 |
) |
|
$ |
(127,103 |
) |
|
$ |
18,992 |
|
|
$ |
(148 |
) |
Loss from discontinued operations |
|
$ |
(150,662 |
) |
|
$ |
(22,271 |
) |
|
$ |
(56,315 |
) |
|
$ |
(38,440 |
) |
|
$ |
(5,071 |
) |
Net income (loss) |
|
$ |
51,442 |
|
|
$ |
(150,913 |
) |
|
$ |
(183,418 |
) |
|
$ |
(19,448 |
) |
|
$ |
(5,219 |
) |
Basic earnings (loss) per share from
continuing operations |
|
$ |
4.20 |
|
|
$ |
(2.85 |
) |
|
$ |
(3.29 |
) |
|
$ |
0.56 |
|
|
$ |
0.00 |
|
Diluted earnings (loss) per share from
continuing operations |
|
$ |
3.56 |
|
|
$ |
(2.85 |
) |
|
$ |
(3.29 |
) |
|
$ |
0.44 |
|
|
$ |
0.00 |
|
Basic loss per share from discontinued
operations |
|
$ |
(3.13 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.46 |
) |
|
$ |
(1.13 |
) |
|
$ |
(0.15 |
) |
Diluted loss per share from discontinued
operations |
|
$ |
(2.65 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.46 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
1.07 |
|
|
$ |
(3.35 |
) |
|
$ |
(4.75 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.15 |
) |
Diluted earnings (loss) per share |
|
$ |
0.91 |
|
|
$ |
(3.35 |
) |
|
$ |
(4.75 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.15 |
) |
Total assets |
|
$ |
951,965 |
|
|
$ |
1,301,658 |
|
|
$ |
1,175,154 |
|
|
$ |
1,270,227 |
|
|
$ |
1,055,096 |
|
Working capital |
|
$ |
295,862 |
|
|
$ |
274,439 |
|
|
$ |
147,746 |
|
|
$ |
179,767 |
|
|
$ |
102,541 |
|
Current ratio |
|
|
1.98 |
|
|
|
1.45 |
|
|
|
1.25 |
|
|
|
1.43 |
|
|
|
1.26 |
|
Long-term obligations |
|
$ |
157,793 |
|
|
$ |
168,053 |
|
|
$ |
79,678 |
|
|
$ |
70,001 |
|
|
$ |
55,000 |
|
Number of:(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSW Stores |
|
|
259 |
|
|
|
223 |
|
|
|
199 |
|
|
|
172 |
|
|
|
142 |
|
Filenes Basement Stores |
|
|
36 |
|
|
|
31 |
|
|
|
27 |
|
|
|
26 |
|
|
|
21 |
|
Net sales per selling sq. ft. (4) |
|
$ |
235.34 |
|
|
$ |
270.31 |
|
|
$ |
271.57 |
|
|
$ |
266.28 |
|
|
$ |
260.88 |
|
Comparable store sales change (5) |
|
|
0.3 |
% |
|
|
2.7 |
% |
|
|
4.9 |
% |
|
|
4.9 |
% |
|
|
4.6 |
% |
|
|
|
(1) |
|
Fiscal year ended February 3, 2007 consists of 53 weeks. All other years reported
consist of 52 weeks. |
|
(2) |
|
The Company believes that the non-cash
change in fair value of derivative instruments is not directly related to its retail
operations and is therefore providing supplemental adjusted results that exclude this item.
This financial measure should facilitate analysis by investors and others who follow the
Companys financial performance. |
|
(3) |
|
Includes all stores operating at the end of the fiscal year. |
|
(4) |
|
Presented in whole dollars and excludes leased departments and stores not operated
during the entire fiscal period. |
|
(5) |
|
A store or leased department is considered to be comparable if it has been opened 14
months at the beginning of the fiscal year. |
31
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This managements discussion and analysis of financial condition and results of operations
(Managements Discussion and Analysis) contains forward-looking statements that involve risks and
uncertainties. Please see Cautionary Statement Regarding Forward-Looking Information for Purposes
of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 on page 4
of this Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions
associated with these statements. You should read the following discussion in conjunction with our
historical consolidated financial statements and the notes thereto appearing elsewhere in this
Annual Report on Form 10-K. The results of operations for the periods reflected herein are not
necessarily indicative of results that may be expected for future periods, and our actual results
may differ materially from those discussed in the forward-looking statements as a result of various
factors, including but not limited to those listed under Risk Factors and included elsewhere in
this Annual Report on Form 10-K.
OVERVIEW
Retail Ventures is a holding company with three operating segments: Filenes Basement, DSW and
Corporate. DSW is a United States specialty branded footwear retailer operating 259 shoe stores in
37 states as of February 2, 2008. DSW offers a large selection of better-branded merchandise. DSWs
typical customers are brand-, quality- and style-conscious shoppers who have a passion for footwear
and accessories. Filenes Basement stores are located primarily in major metropolitan areas in the
northeast and midwest 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 February 2, 2008,
there were 36 Filenes Basement stores in operation. The Corporate segment consists of all
corporate assets, liabilities and expenses that are not allocated to the other segments.
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 February 2, 2008, Retail Ventures owned Class B Common Shares of DSW representing approximately
63.0% of DSWs outstanding Common Shares and approximately 93.2% of the combined voting power of
such shares. 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. Retail Ventures accounted for the
sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of
$65.5 million was recorded.
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition
Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no
net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an
after-tax loss of $90.0 million on the transaction. As part of the transaction, Retail Ventures
issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price
of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the change
in ownership and operation of Value City Department Stores, Retail Ventures agreed to provide or
arrange for the provision of certain transition services principally related to information
technology, finance and human resources to Value City Department Stores for a period of one year
unless otherwise extended by both parties.
Following the disposition of Value City certain corporate services employees that provided shared
services were hired by Value City and certain other corporate service positions were eliminated.
RVI and DSW are in the process of finalizing the transfer of the following shared service
departments to DSW: Finance; Internal Audit; Tax; Human Resource Information Systems; and Risk
Management. The companies have initiated steps regarding the transfer of employees in these
departments to DSW. The definitive terms and conditions of the transfer have not yet been agreed
upon. The allocation of shared service expenses will have an increased expense impact on DSW and
Filenes Basement.
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 included in this Annual Report on Form 10-K.
32
Key Financial Measures
In evaluating the results of operations, our management refers to a number of key financial and
non-financial measures relating to the performance of our business segments. Among our key
financial measures are net sales, operating profit, and net income. Non-financial measures that we
use in evaluating our performance include number of stores, leased operations, net sales per
average gross square foot for our stores and change in comparable store sales. Comparable store
sales is a measure which indicates the performance of our existing stores by measuring the growth
in sales for such stores for a particular period over the corresponding period in the prior year.
For fiscal 2007 and prior years, we considered comparable store sales to be sales at stores that
were open 14 months as of the prior fiscal year end. Comparable store sales are also referred to as
comp-store sales by others within the retail industry. The method of calculating comparable store
sales varies across the retail industry. As a result, our calculation of comparable store sales may
not necessarily be comparable to similarly titled measures reported by other companies.
The Companys revenues are generated through sales from existing stores and through sales from new
stores. In fiscal 2007, DSW opened 37 new stores and closed one store, and Filenes Basement opened
seven new stores and closed two stores. For fiscal 2008, Filenes Basement plans to open at least
one new store and DSW plans to open at least 30 additional stores. During fiscal 2007, Filenes
Basement ceased operations in two stores temporarily due to remodeling, one of which reopened in
fiscal 2007 while the other is not expected to reopen until fiscal 2009.
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, or GAAP. As discussed in Note 1 to our consolidated
financial statements, the preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of commitments and contingencies at the
date of the financial statements and reported amounts of revenues and expenses during the reporting
period. On an ongoing basis, management evaluates its estimates and judgments, including, but not
limited to, those related to inventory valuation, depreciation, amortization, recoverability of
long-lived assets including intangible assets, the calculation of retirement benefits, estimates
for self insurance reserves for health and welfare, workers compensation and casualty insurance,
income taxes, contingencies and litigation. 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. Revenues from merchandise sales are recognized at the point of sale,
net of returns and exclude sales tax.
Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift
card. Our policy is to recognize income from breakage of gift cards when the likelihood of
redemption of the gift card is remote. In the fourth quarter of fiscal 2007, we determined
that we had accumulated enough historical data to recognize income from gift card breakage. We
recognized $0.4 million as miscellaneous income from gift card breakage in fiscal 2007. Prior
to the fourth quarter of fiscal 2007, we had not recognized any income from gift card
breakage. |
|
|
|
|
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
realizable value, 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 |
33
|
|
|
markdowns. Accordingly, earnings are negatively impacted as merchandise is marked down prior
to sale. Reserves to value inventory at its realizable value were $31.8 million and $25.0
million at the end of fiscal 2007 and 2006, respectively. |
|
|
|
|
Inherent in the calculation of inventories are certain significant management judgments and
estimates, including setting the original merchandise retail value (known as markon), markups
of initial prices established, reduction of pricing due to customers 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. |
|
|
|
|
Investments. Investments, which include demand notes and auction rate securities, are
classified as available-for-sale securities. These demand notes and auction rate securities
are recorded at cost, which approximates fair value due to their variable interest rates,
which typically reset every 3 to 189 days. All income generated from these investments is
recorded as interest income. |
|
|
|
|
DSW records an investment impairment charge at the point it is believed an investment has
experienced a decline in value that is other-than-temporary. In determining whether an
impairment has occurred, DSW reviews information about the underlying
investment that is publicly available and assesses its ability to hold the securities for the
foreseeable future. The investment is written down to its current market value at the time the
impairment is deemed to have occurred. Any other-than-temporary impairment charge could
materially affect DSWs results of operations. |
|
|
|
|
As of February 2, 2008 and February 3, 2007, DSW held $70.0 million and $98.7 million,
respectively, in short-term investments. As of February 2, 2008, DSW held $12.5 million in
long-term investments and held no long-term investments as of February 3, 2007. DSWs
long-term investment balance includes $10.0 million in auction rate securities that failed at
auction after February 2, 2008 and were presented as long-term as it is unknown if DSW will be
able to liquidate these securities within one year. |
|
|
|
|
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 amount of the asset exceeds the expected future cash flows 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 of the asset over its fair
value, based on discounted future cash flows. Should an impairment loss be realized, it will
be included in operating expenses. Assets acquired for stores that have been previously
impaired are not capitalized when acquired if the stores expected future cash flow remains
negative. During fiscal 2007, 2006 and 2005, we recorded impairment losses of $5.6 million,
$0.8 million, and $0.5 million, respectively, related to long-lived assets at store
operating units. We believe at this time that the carrying values and useful lives of
long-lived assets continue to be appropriate. To the extent these future projections or our
strategies change, the conclusion regarding impairment may differ from our current
estimates. |
|
|
|
|
Store closing reserve. During the 2007 fiscal year, the Company recorded charges
associated with the closing of one DSW and two Filenes Basement stores. During the 2006
fiscal year, the Company recorded charges associated with the closing of five DSW stores.
The operating lease at one of the five 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 fiscal 2005. These
reserves are monitored on at least a quarterly basis for changes in circumstances. The store
closing reserves were $0.4 million and $0.1 million at the end of fiscal 2007 and 2006,
respectively. |
|
|
|
|
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 utilizing claims development estimates based on
historical experience and other factors. Workers compensation and general liability
estimates are calculated, 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 the
amounts ultimately paid will differ significantly from our estimates, self-insurance
reserves could be affected if future claims experience differs significantly from the
historical trends and the actuarial assumptions. For example, for workers compensation and
general liability estimates, a 1% increase or decrease to the assumptions for claims costs
and loss development factors would increase or decrease our self-insurance by less than $0.1
million. The self-insurance reserves were $3.0 million and $3.6 million at the end of fiscal
2007 and 2006, respectively. The decrease in self-insurance reserves was principally
associated with the decrease in general liability. |
34
|
|
|
Pension. The obligations and related assets of defined benefit retirement plans are
presented in Note 8 of the Notes to Consolidated Financial Statements in this Annual Report
on Form 10-K. 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 and
the estimated future return on plan assets. In determining the discount rate, we utilize the
yield on fixed-income investments currently available with maturities corresponding to the
anticipated timing of the benefit payments. Asset returns are based upon the anticipated
average rate of earnings expected on the invested funds of the plans. At both February 3,
2007 and February 2, 2008, the weighted-average actuarial assumptions applied to our plan
were a discount rate of 6.0% and long-term rate of return on plan assets of 8.0%. To the
extent actual results vary from assumptions, earnings would be impacted. |
|
|
|
|
Customer loyalty program. DSW maintains a customer loyalty program for the DSW stores in
which program members receive a discount on future purchases. Upon reaching the
target-earned threshold, members receive certificates for these discounts which must be
redeemed within six months. During the third quarter of fiscal 2006 DSW re-launched its
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 DSWs ability to communicate
with its customers. DSW accrues the anticipated redemptions of the discount earned at the
time of the initial purchase. To estimate these costs, DSW is required to make assumptions
related to customer purchase levels and redemption rates based on historical experience. The
accrued liability as of February 2, 2008 and February 3, 2007 was $6.4 million and
$5.0 million, respectively. |
|
|
|
|
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. The Company uses the Black-Scholes Pricing Model to
calculate the fair value of derivative instruments. |
|
|
|
|
For the fiscal years ended February 2, 2008 and February 3, 2007, the Company recorded a
benefit of $154.6 million and a charge of $124.8 million, respectively, related to the change
in fair value of warrants. For the fiscal years ended February 2, 2008 and February 3, 2007,
the Company recorded a reduction of expenses of $93.6 million and a charge of $51.1 million,
respectively, related to the change in the fair value of the conversion feature of the PIES. |
|
|
|
|
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 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 fiscal 2007, we established
an additional valuation reserve of $84.9 million for deferred tax assets. During fiscal
2006, we established an additional valuation reserve of $2.2 million for deferred tax
assets. During fiscal 2005, we established an additional valuation reserve of $14.4 million
for state net operating loss carry forwards and wrote off $4.0 million of 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. Following the disposition of an 81% ownership
interest in the Value City operations during January 2008, Value City is no longer included in
Retail Ventures consolidated federal tax return. |
RESULTS OF OPERATIONS
We operate three business segments. Our Filenes Basement segment operates full-line, off-price
junior department stores. Our DSW segment is a specialty branded footwear retailer. As of February
2, 2008, a total 36 Filenes Basement and 259 DSW stores were open. The Corporate segment consists
of all corporate assets, liabilities and expenses not allocated to the other segments through
corporate allocation or shared service arrangements. As a result of RVIs disposition of an 81%
ownership interest in its Value City operations during fiscal 2007, the results of the Value City
Operations are included in discontinued operations.
35
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
fall and winter holiday selling seasons for 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.
Fiscal Year
We follow a 52/53-week fiscal year that ends on the Saturday nearest to January 31. Fiscal years
2007 and 2005 consisted of 52 weeks. Fiscal year 2006 consisted of 53 weeks. Unless otherwise
stated, references to years in this report relate to fiscal years rather than calendar years.
The following table sets forth, for the periods indicated, the percentage relationships to net
sales of the listed items included in our Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-two |
|
Fifty-three |
|
Fifty-two |
|
|
Weeks |
|
Weeks |
|
Weeks |
|
|
Ended |
|
Ended |
|
Ended |
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(59.9 |
) |
|
|
(58.5 |
) |
|
|
(59.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
40.1 |
|
|
|
41.5 |
|
|
|
40.3 |
|
Selling, general and administrative expenses |
|
|
(37.1 |
) |
|
|
(36.0 |
) |
|
|
(36.6 |
) |
Change in fair value of derivative instruments |
|
|
13.3 |
|
|
|
(10.3 |
) |
|
|
(9.4 |
) |
License fees and other income |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
16.6 |
|
|
|
(4.5 |
) |
|
|
(5.5 |
) |
|
Interest expense |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
Interest income |
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.0 |
|
|
Interest expense, net |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
Income (loss) from continuing operations
before income taxes and minority interest |
|
|
16.5 |
|
|
|
(4.6 |
) |
|
|
(6.3 |
) |
Income tax expense |
|
|
(4.6 |
) |
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
Income (loss) from continuing operations
before minority interest |
|
|
11.9 |
|
|
|
(6.1 |
) |
|
|
(7.8 |
) |
Minority interest |
|
|
(1.1 |
) |
|
|
(1.4 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
10.8 |
% |
|
|
(7.5 |
)% |
|
|
(8.3 |
)% |
Fiscal Year Ended February 2, 2008 (fiscal 2007) Compared To Fiscal Year Ended February 3, 2007
(fiscal 2006)
Sales. Sales for fiscal 2007 increased by 9.7% to $1.87 billion from $1.71 billion for fiscal 2006.
By operating segment, comparable store sales were:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
DSW |
|
|
(0.8 |
)% |
|
|
2.5 |
% |
Filenes Basement |
|
|
3.6 |
% |
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
0.3 |
% |
|
|
2.7 |
% |
|
DSW net sales increase includes the impact of a net increase of 36 new DSW stores, 12
non-affiliated leased departments and six Filenes Basement leased departments during fiscal 2007.
Leased department sales comprised 12.5% of total net sales in fiscal 2007, compared to 10.2% in
fiscal 2006. As compared to fiscal 2006, DSW stores that were new in fiscal 2007 added $66.3
million in sales, which was partially offset by a decrease in sales of $17.1 million from DSW
stores that closed in fiscal 2006 and 2007. As compared to fiscal 2006, leased departments that
were new in fiscal 2006, primarily the Stein Mart leased departments opened in January 2007, added
$44.3 million in sales. Increases in other store classes were offset by decreases due to the impact
of the 53rd week as compared to fiscal 2006. DSW comparable store sales in fiscal 2007
decreased 0.8%, or $8.9 million, compared to the previous fiscal year.
36
Compared with fiscal 2006, DSW comparable store sales for fiscal 2007 decreased in womens and
mens by 1.0% and 2.1%, respectively, while increasing in athletic and accessories by 1.0% and
4.3%, respectively.
Filenes Basement net sales for the fifty-two weeks ended February 2, 2008 increased 9.1%, or $38.8
million, to $466.3 million from $427.5 million in the fifty-three weeks ended February 3, 2007. The
increase in net sales is primarily due to the comparable store sales increase of 3.6%, and a net
increase of five stores over the prior years period. As
compared to fiscal 2006, stores that were new in fiscal 2007 added
$35.6 million in sales, which was partially offset by a decrease in
sales of $24.1 million from stores that closed in fiscal 2007. The merchandise categories of mens, womens and
accessories had comparable sale increases of 6.5%, 0.8%, and 12.4%, respectively. The merchandise
categories of home and jewelry had comparable sale decreases of 1.6% and 5.8%, respectively.
Gross Profit. Total gross profit increased $42.1 million, or 5.9%, from $708.9 million to $751.0
million. Gross profit, as a percentage of sales, decreased to 40.1% compared to 41.5% for the prior
years period. The decrease in the overall margin rate is attributable to the decreases in gross
profit at the DSW and Filenes Basement segments.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
DSW |
|
|
41.5 |
% |
|
|
43.1 |
% |
Filenes Basement |
|
|
35.9 |
% |
|
|
37.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40.1 |
% |
|
|
41.5 |
% |
|
DSW gross profit increased $33.1 million to $583.8 million in fiscal 2007 from $550.7 million in
2006, and decreased as a percentage of net sales from 43.1% in fiscal 2006 to 41.5% in fiscal 2007.
The increase of approximately $33.1 million in gross profit is primarily attributable to the
overall increase in sales. The decrease as a percentage of sales is attributable to increased
markdowns partially offset by an increase in initial markup. The increase in markdowns in fiscal
2007 was a result of increased promotional activity as compared to fiscal 2006.
Filenes Basement gross profit increased $9.0 million to $167.2 million in fiscal 2007 from $158.2
million in fiscal 2006, and decreased as a percentage of net sales from 37.0% in fiscal 2006 to
35.9% in fiscal 2007. The increase of approximately $9.0 million in gross profit is attributable to
the overall increase in sales. The decrease as a percentage of sales is attributable to increased
markdowns due in part to clearance merchandise sold at the Downtown Crossing Boston store partially
offset by an increase in initial markup.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses
increased $80.1 million from $614.0 million in fiscal 2006 to $694.1 million in fiscal 2007. Total
SG&A expense associated with new DSW and Filenes Basement stores and new leased shoe departments
not opened in the prior year, excluding pre-opening costs, was $35.8 million. Pre-opening costs
increased approximately $0.3 million for fiscal 2007 compared to fiscal 2006.
SG&A expense, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
DSW |
|
|
36.1 |
% |
|
|
35.4 |
% |
Filenes Basement |
|
|
41.8 |
% |
|
|
39.5 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
37.1 |
% |
|
|
36.0 |
% |
|
For fiscal 2007, the DSW segment SG&A expense increased $54.3 million to $507.3 million from $453.0
million in fiscal 2006 which represented 36.1% and 35.4% of net sales, respectively. The increase
in SG&A expenses was a result of increases in home office related expenses of $17.7 million,
professional fees of $3.0 million, and $6.0 million of expenses related to the start-up of DSWs
e-commerce channel. The DSW stores and leased departments that opened subsequent to February 3,
2007 added $20.4 million and $1.2 million in SG&A expenses in fiscal 2007, respectively. The
increases in SG&A expenses were partially offset by a decrease of bonus expense of $14.4 million
and a decrease in marketing expenses as compared to fiscal 2006 due to nonrecurring expenses
related to the change in the loyalty program in 2006. In total, the home office increase over the
prior year was approximately 0.7% of sales.
The Filenes Basement segment SG&A expense increased $25.9 million to $194.8 million in fiscal 2007
from $168.9 million in fiscal 2006 and increased as a percent of sales from 39.5% in fiscal 2006 to
41.8% in fiscal 2007. Personnel expense, occupancy expense and other
operating expenses each
increased $2.1 million, $19.3 million and
$4.5 million, respectively. The occupancy expenses associated with new Filenes Basement stores opened in fiscal
2007, excluding pre-opening costs was $14.2 million. Pre-opening expense increased $1.0 million to
$3.7 million in fiscal 2007 from $2.7 million in fiscal 2006.
37
Included
in the SG&A expenses for the 2007 year are the closed store costs for the Downtown Crossing
Boston location which increased $1.8 million over fiscal 2006.
Change in Fair Value of Derivatives. During fiscal 2007 and fiscal 2006, the Company recorded a
non-cash reduction of expenses of $154.6 million and a charge of $124.8 million, respectively,
representing the changes in fair value of Conversion Warrants and Term Loan Warrants. During
fiscal 2007, $93.6 million was recorded as a reduction of expenses from the change in the fair
value of the conversion feature of the PIES. During fiscal 2006, $51.1 million was recorded as a
charge from the change in the fair value of the conversion feature of the PIES from the date of
issuance to February 3, 2007. The Company utilizes the Black-Scholes Pricing Model to estimate the
fair value of the derivatives.
The
change in the fair value of the derivatives is primarily due to the
declines in the RVI and DSW stock prices.
License fees and other income. License fees and other income were $6.6 million in fiscal 2007
compared to $4.6 million in the prior year. The increase was primarily attributable to an insurance
recovery recorded during fiscal 2007 of $0.9 million. These sources of income can vary based on
customer traffic and contractual arrangements.
Operating Profit (Loss). The operating profit for 2007 was $311.7 million compared to an operating
loss of $76.5 million in 2006, an improvement of $388.2 million. The operating profit as a
percentage of sales was 16.6% in 2007 compared to an operating loss as a percentage of sales of
4.5% in 2006.
Operating
profit (loss) as a percentage of sales by segment was:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
DSW |
|
|
5.8 |
% |
|
|
7.9 |
% |
Filenes Basement |
|
|
(3.8 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16.6 |
% |
|
|
(4.5 |
)% |
|
The
operating profit for the Corporate segment increased $424.2 million to an operating profit of
$248.2 million in fiscal 2007 from an operating loss of $176.0 million in fiscal 2006, primarily
due to the increase of $279.4 million between the reduction of expenses of $154.6 million versus
the non-cash charge of $124.8 million for fiscal 2007 and 2006, respectively, which represents the
changes in fair value of the Conversion Warrants and Term Loan Warrants. The improvement also
reflects the increase of $147.4 million between the reduction of expenses of $96.3 million for
fiscal 2007 versus and a charge of $51.1 million recorded for fiscal 2006 related to the change in
the fair value of the conversion feature of the PIES.
Interest Expense. Interest expense was $13.5 million in fiscal 2007, a $4.1 million increase from
fiscal 2006. Interest expense included the amortization of debt discount of $2.0 million and $0.9
million fiscal 2007 and 2006, respectively. The increase is primarily due to the increase of $96.3
million in average borrowings during fiscal 2007.
Interest Income. During fiscal 2007, interest income rose $3.2 million to $10.5 million due to
investments held by the DSW segment and an overall increase in cash and cash equivalents.
Income
Taxes. Fiscal 2007 reflects a 28.1% effective tax rate as compared to a negative 32.9%
fiscal 2006 effective rate. The 2007 tax rate of 28.1% reflects the
impact of $154.6 million for
the change in fair value on the mark to market accounting for the warrants, which are not tax
deductible, and an increase in the valuation allowance provided for federal and state deferred tax
assets of $84.9 million.
Minority
Interest. Fiscal 2007 net income decreased by $19.9 million
compared to $24.2 million in
fiscal 2006, to reflect that portion of the income attributable to DSW minority shareholders.
Income (Loss) from Continuing Operations. The fiscal 2007 income from continuing operations
improved $330.7 million compared to fiscal 2006 and represents
10.8% versus a negative 7.5% of net
sales, respectively. Major contributing elements to this improvement are the $424.1 million increase
in fair value of derivatives and the $3.2 million increase in interest income, offset by the $4.3
million increase in income attributable to the minority interest.
Loss
from Discontinued Operations. The $128.4 million increase in the loss from discontinued
operations is primarily due to the $90.0 million loss on the disposition of the 81% ownership
interest in the Value City operations recorded by Retail Ventures.
The $90.0 million loss is primarily due to the
recording of $26.6 million of guarantees and the balance was related to
the write-off of the investment in the discontinued operations and
the transfer of its assets.
38
In
addition, included in the increase in the loss from discontinued
operations is a $38.4 million
increase in the loss from the Value City operations. The increase in
the loss was due to the decrease in sales of
$188.4 million primarily due to a decrease in comparable store
sales and a decrease in the tax benefit of $11.2 million. The decrease in sales was
partially offset by a decrease in cost of sales of $85.8 million
and a decrease in SG&A expense of
$71.1 million. The decrease in SG&A was
primarily due to a decrease in personnel and personnel
related expenses as well as there being 18 less
days of variable expenses in the 52 week fiscal 2007 year as compared to the 53
week fiscal 2006 year and the
fiscal 2007 results include activity through the January 22,
2008 disposition date.
Fiscal Year Ended February 3, 2007 (fiscal 2006) Compared To Fiscal Year Ended January 28, 2006
(fiscal 2005)
Sales. Sales for fiscal 2006 increased by 11.8% to $1.71 billion from $1.53 billion for fiscal
2006. By operating segment, comparable store sales were:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
DSW |
|
|
2.5 |
% |
|
|
5.4 |
% |
Filenes Basement |
|
|
3.1 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.7 |
% |
|
|
4.9 |
% |
|
DSW net sales for the fifty-three weeks ended February 3, 2007 increased by 11.8%, or $135.0
million, to $1.28 billion from $1.14 billion in the fifty-two weeks ended January 28, 2006.
Comparable store sales in fiscal 2006 improved 2.5% compared to the previous fiscal year. The
increase in DSW net sales includes the impact of a 53rd week in fiscal 2006 and a net
increase of 24 DSW stores, 117 non-affiliated leased shoe departments and five Filenes Basement
leased shoe departments during fiscal 2006. The new DSW locations added $53.3 million in net sales
compared to fiscal 2005, while the new leased shoe departments added $6.6 million in net sales.
Leased shoe department sales comprised 10.2% of total net sales in fiscal 2006, compared to 10.5%
in fiscal 2005.
Compared with fiscal 2005, DSW comparable store sales for fiscal 2006 increased in womens,
athletic, and accessories by 3.0%, 5.8%, and 1.8%, respectively, while decreasing in mens by 0.1%.
In the womens category, the casual class was the best performing group while athletic increases
are still driven by the fashion class. In accessories, positive results from DSWs ongoing product
offerings were partially offset by the transition to a consignment program for DSWs shoe care
products. In mens, positive seasonal results were offset by negatives in the dress and casual
classifications.
Filenes Basement net sales for the fifty-three weeks ended February 3, 2007 increased 9.8%, or
$38.2 million, to $427.5 million from $389.3 million in the fifty-two weeks ended January 28, 2006.
The increase in net sales is primarily due to the comparable store sales increase of 3.1%, the
impact of a 53rd week in fiscal 2006 and a net increase of four stores over the prior
years period. Net sales for the new stores opened in fiscal 2006 added $24.3 million to sales. The
merchandise categories of mens, womens and accessories had comparable sale increases of 4.1%,
1.1%, and 6.5%, respectively. The merchandise categories of home and jewelry had comparable sale
decreases of 2.7% and 3.6 %, respectively. The home and jewelry categories each represented 5.8% of
total comparative stores sales in fiscal 2006.
Gross Profit. Total gross profit increased $90.5 million, or 14.6%, from $618.4 million to $708.9
million. Gross profit, as a percentage of sales, increased to 41.5% compared to 40.3% for the prior
years period. The increase in the overall margin rate is attributable to the increase in gross
profit from the DSW and Filenes Basement segments.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
DSW |
|
|
43.1 |
% |
|
|
42.4 |
% |
Filenes Basement |
|
|
37.0 |
% |
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
41.5 |
% |
|
|
40.3 |
% |
|
The DSW gross profit increased $65.9 million to $550.7 million in fiscal 2006 from $484.8 million
in 2005, and increased as a percentage of net sales from 42.4% in fiscal 2005 to 43.1% in fiscal
2006. The increase of approximately $58.2 million in gross profit is primarily attributable to the
overall increase in sales of which $8.0 million was attributable to the 53rd week. The
increase is also attributable to an increased initial markup.
Filenes Basement gross profit increased $24.6 million to $158.2 million in fiscal 2006 from $133.6
million in fiscal 2005, and increased as a percentage of net sales from 34.3% in fiscal 2005 to
37.0% in fiscal 2006. The increase of approximately $13.4 million in gross profit is attributable
to the overall increase in sales of which $2.4 million is attributable to the 53rd week.
The increase is also attributable to an increased initial markup and lower markdowns as a percent
of sales.
39
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $52.2 million from $561.8 million in fiscal 2005 to $614.0 million in fiscal 2006. Total
SG&A expense associated with new DSW and Filenes Basement stores and new leased shoe departments
not opened in the prior year, excluding pre-opening costs, were $25.0 million. Pre-opening costs
increased approximately $1.3 million for fiscal 2006 compared to fiscal 2005. During fiscal 2005
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:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
DSW |
|
|
35.4 |
% |
|
|
36.3 |
% |
Filenes Basement |
|
|
39.5 |
% |
|
|
39.5 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
36.0 |
% |
|
|
36.6 |
% |
|
For fiscal 2006, the DSW segment SG&A expense increased $37.4 million to $453.0 million from $415.6
million in fiscal 2005, which represented 35.4% and 36.3% of net sales, respectively. The
percentage decrease results from reductions in marketing and preopening costs of $9.0 million and
$0.5 million, respectively. The marketing favorability was the result of a positive variance
related to the Reward Your Style loyalty program compared with the prior fiscal year, resulting
in a $7.1 million year over year impact. DSW was also able to reduce its marketing spend by
realizing efficiencies in its media buying and moving some marketing services in house. Additional
favorability in the reduced operating percent is that operating costs for fiscal 2005 included a
charge of $6.5 million related to an accrual of potential losses related to the theft of credit
card and other purchase information. Those positive factors were offset by an increase in store
expense of $16.3 million and personnel related expenses in DSWs home office of $18.3 million. The
store expense increase is due to new stores and remained at 12% of sales compared to the prior
year. The personnel expenses include additional headcount and related costs, additional incentive
compensation, and the costs related to the adoption of SFAS 123R. In total, the home office increase
over the prior year was approximately 1.2% of sales.
The Filenes Basement segment SG&A expense increased 9.9% or $15.1 million to $168.9 million in
fiscal 2006 from $153.8 million in fiscal 2005. Personnel expense, occupancy expense and other
operating expenses all increased $2.1 million, $1.4 million and $1.8 million, respectively. The
total SG&A expense associated with new Filenes Basement stores not opened in fiscal 2005,
excluding pre-opening costs, was $8.0 million.
Change in Fair Value of Derivatives. During fiscal 2006 and fiscal 2005, the Company recorded a
non-cash charge of $124.8 million and $144.2 million, respectively, representing the changes in
fair value of the Conversion Warrants and Term Loan Warrants. The decrease in the charge is
primarily due to the exercise by Cerberus Partners, L.P. (Cerberus) of 7,000,000 warrants during
fiscal 2006. During fiscal 2006, $51.1 million was recorded related to the change in the fair value
of the conversion feature of the PIES from the date of issuance to February 3, 2007. There were no
PIES outstanding during fiscal 2005. The Company utilizes the Black-Scholes Pricing Model to
estimate the fair value of the derivatives.
License fees and other income. License fees and other income were $4.6 million in fiscal 2006
compared to $2.8 million in the prior year. 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. The operating loss for 2006 was $76.5 million compared to an operating
loss of $84.8 million in 2005, an improvement of $8.3 million. The operating loss as a percentage
of sales was 4.5% in 2006 compared to 5.5% in 2005.
Operating (loss) profit as a percent of sales by segment was:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
DSW |
|
|
7.9 |
% |
|
|
6.1 |
% |
Filenes Basement |
|
|
(0.3 |
)% |
|
|
(2.8 |
)% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(4.5 |
)% |
|
|
(5.5 |
)% |
|
The increase in the operating loss for the Corporate segment of $31.7 million is primarily due to
the $51.1 million charge recorded related to the change in the fair value of the conversion feature of the
PIES from the date of issuance to February 3, 2007. There were no PIES outstanding during fiscal
2005. The $51.1 million charge was partially offset by the decrease in the non-cash charge of
$124.8 million in fiscal 2006 versus $144.2 million for fiscal 2005, which represents the changes
in fair value of the Conversion Warrants and Term Loan Warrants.
40
Interest Expense. Interest expense was $9.4 million in fiscal 2006 a $2.1 million decrease from
fiscal 2005. Interest expense included the amortization of debt discount of $0.9 million and $0.8
million fiscal 2006 and 2005, respectively. The increase is primarily due to the increase of $56.9
million in average borrowings during fiscal 2006.
Interest Income. During fiscal 2006, interest income rose to $7.3 million due to
short-term securities held by the DSW segment and an overall increase in cash and cash equivalents.
Income
Taxes. Fiscal 2006 reflects a negative 32.9% effective tax rate as compared to a negative
24.6% fiscal 2005 effective rate. The 2006 tax rate of negative 32.9% reflects the impact of $43.7
million for the change in fair value on the mark to market accounting for the warrants, which are
not tax deductible, a decrease in the valuation allowance provided for federal and state deferred
tax assets of $2.9 million, and an increase in deferred tax liability for the basis in subsidiary of
$6.0 million.
Minority Interest. Fiscal 2006 net income decreased by $24.2 million compared to $7.0 million in
fiscal 2005, to reflect that portion of the income attributable to DSW minority shareholders.
Loss from Continuing Operations. The fiscal 2006 loss from continuing operations increased $1.5
million compared to fiscal 2005 and represents 7.5% versus 8.3% of net sales, respectively. Major
contributing elements in the change in loss from continuing operations from fiscal 2005 to fiscal
2006 are the $90.5 million increase in gross profit offset by
the $52.2 million increase in SG&A
expense, the $31.7 million increase in derivatives and the $17.2 million increase in minority
interest expense.
Loss
from Discontinued Operations. The $34.0 million decrease in the loss from discontinued
operations from fiscal 2005 to fiscal 2006 is primarily due to the increase in gross profit of
$15.7 million, the decrease in SG&A expense of
$19.7 million and the increase in the income tax benefit of $0.7
million partially offset by a decrease in
net sales of $18.8 million. The decrease
in net sales was primarily due to the decrease in comparable store sales of 1.3% partially offset
by the impact of a 53rd week in fiscal 2006. The increase in gross profit was primarily
attributable to higher initial markups and reduced markdown rates partially offset by an increase
in shrinkage expense. The decrease in SG&A expense was primarily due to reductions in personnel
expense, administrative overhead expense and occupancy expenses. The
increase in the income tax
benefit is due to the change in the effective tax rate from 15.7% in
fiscal 2005 to 33.5% in fiscal
2006. The tax rate for fiscal 2006 was impacted by the recording of $2.2 million of additional
valuation allowances.
Inflation
The results of operations and financial condition are presented based upon historical cost. While
it is difficult to accurately measure the impact of inflation because of the nature of the
estimates required, management believes that the effect of inflation, if any, on the results of
operations and financial condition has been minor; however, there can be no assurance that the
business will not be affected by inflation in the future.
Liquidity and Capital Resources
Our primary ongoing cash requirements are for debt service plus seasonal and new store inventory
purchases, capital expenditures in connection with expansion and remodeling and infrastructure
growth, primarily information technology development. The primary sources of funds for these
liquidity needs are cash flow from operations and credit facilities. Our working capital and
inventory levels typically build throughout the fall, peaking during the winter holiday selling
season for Filenes Basement. For DSW the inventory levels increase relative to the expected sales
increase when its customers interest in new seasonal styles increases.
Net working capital was $295.9 million and $274.4 million at February 2, 2008 and February 3, 2007,
respectively. Current ratios at those dates were 1.98 and 1.45, respectively. Net cash
provided by
operating activities from continuing operations totaled
$76.2 million and $84.3
;million in fiscal
2007 and 2006, respectively. The fiscal 2007 decrease of $8.1 million in net cash
provided by
operating activities is primarily due to the (i) $13.1 million decrease from the
change in working
capital assets and liabilities, (ii) $330.7 million increase in the fiscal 2007
net income from
continuing operations and (iii) $424.1 million decrease in the non cash change in the fair value of
derivatives.
Net
working capital was $274.4 million and $147.7 million at February 3, 2007 and January 28, 2006,
respectively. Current ratios at those dates were 1.45 and 1.25, respectively. Net cash provided by
operating activities totaled $84.3 million and $68.6 million in fiscal 2006 and 2005, respectively.
The fiscal 2006 increase of $15.7 million in net cash provided by operating activities is primarily
due to the (i) $23.5 million decrease in deferred income taxes and other non current liabilities,
(ii) $1.5 million increase in the fiscal 2006 net income from continuing operations and (iii) $31.7
million increase in the non cash charge from the change in fair value of warrants.
Cash used for capital
expenditures was $118.9 million and $58.2 million in fiscal 2007 and 2006,
respectively, and excludes the impact of capital expenditures in accounts payable. During fiscal
2007, capital expenditures included $52.4 million for new stores,
41
$9.4 million for improvements in existing stores, $15.9 million for office and warehousing, $26.3
million related to the start-up of DSWs e-commerce channel and $14.9 million for information
technology upgrades and new systems, excluding the e-commerce channel.
DSW expects to spend approximately $90 million for capital expenditures in fiscal 2008. DSWs
future investments will depend heavily on the number of stores they open and remodel,
infrastructure and information technology programs that they undertake and the timing of these
expenditures. In fiscal 2007, DSW opened 37 new stores. DSW plans to open at least 30 stores per
year in each fiscal year from fiscal 2008 through fiscal 2010. During fiscal 2007, the average
investment required to open a typical new DSW store was approximately $1.6 million, prior to
construction and tenant allowances. Of this amount, gross inventory typically accounted for $0.6
million, fixtures and leasehold improvements typically accounted for $0.9 million and pre-opening
advertising and other pre-opening expenses typically accounted for $0.1 million.
Filenes Basement plans to open at least one new store and fully remodel a store and improve its
existing distribution facility in fiscal 2008. Filenes Basement expects to spend $6.5 million for
capital expenditures over the next fiscal year.
On August 16, 2006, Retail Ventures issued $125 million of 6.625% Mandatorily Exchangeable Notes
due September 15, 2011, or 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. RVI used a portion of the net proceeds of the offering to repay 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 the Non-Convertible Loan. The Filenes
Basement Revolving Loan, DSW Revolving Loan, Non-Convertible Loan and PIES are sometimes referred
to collectively as the 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
$100 Million Secured Revolving Credit Facility The Filenes Basement Revolving Loan
In connection with RVIs disposition of its 81% ownership of its Value City business segment
effective January 23, 2008, Value City was released from its obligations under the $275 million
secured revolving credit facility (referred to herein as the VCDS Revolving Loan), which was
terminated, and any collateral security granted by Value City to secure such obligations was also
released. The VCDS Revolving Loan included Filenes Basement as a co-borrower. Effective January
23, 2008, Filenes Basement entered into a $100 million secured revolving credit facility (the
Filenes Basement Revolving Loan) through an amendment and restatement of its indebtedness and
obligations as a co-borrower under the VCDS Revolving Loan.
Under the Filenes Basement Revolving Loan, Filenes Basement is named as the borrower. The
Filenes Basement Revolving Loan is guaranteed by Retail Ventures and certain of its wholly-owned
subsidiaries. Neither DSW nor DSWSW are borrowers or guarantors under the Filenes Basement
Revolving Loan. The Filenes Basement 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 Filenes
Basement Revolving Loan are secured by a lien on substantially all of the personal property of
Filenes Basement and of Retail Ventures and its other wholly-owned subsidiaries, excluding shares
of DSW owned by Retail Ventures. At February 2, 2008, $27.0 million was available under the
Filenes Basement Revolving Loan. Direct borrowings aggregated $22.5 million and $3.4 million
letters of credit were issued and outstanding. There were no borrowings or letters of credit under
the Filenes Basement Revolving Loan as of February 3, 2007. The maturity date of the Filenes
Basement Revolving Loan is January 23, 2013.
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
Under the DSW Revolving Loan, 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
42
DSWs shares of DSWSW. At February 2, 2008, $134.3 million was available under the DSW Revolving
Loan and no direct borrowings were outstanding. At February 2, 2008 and February 3, 2007, $15.7
million and $13.4 million, respectively, in letters of credit were issued and outstanding. At
February 3, 2007, $136.6 million was available under the DSW Revolving Loan and no direct
borrowings were outstanding. The maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans Related Parties
The principal balances of the $100 million Term Loans were 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 one of the Term Loans.
The Term Loan Warrants are exercisable at any time prior to June 11, 2012. In September 2002, 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 lenders registration rights with respect to the shares issuable
upon exercise of the Term Loan Warrants. The $6.1 million value ascribed to the Term Loan Warrants
was estimated as of the date of issuance using the Black-Scholes Pricing Model with the following
assumptions: risk-free interest rate of 5.6%; expected life of 10 years; expected volatility of
47%; illiquidity discount of 10%; and an expected dividend yield of 0%. The related debt discount
was amortized into interest expense over the life of the debt.
Payment of and Amendment to Term Loans
Pursuant to the July 2005 Fourth Amendment to Financing Agreement, (i) DSW was released from its
obligations as a co-borrower under the Term Loans, (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.
Non-Convertible Loan Related Parties
$75 Million Senior Subordinated Convertible Loan
As amended in 2002, borrowings under our $75 million Convertible Loan bore interest at 10% per
annum. At our option, interest could be payment-in-kind (PIK) during the first two years, and
thereafter, at our 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 our principal
subsidiaries and was secured by a lien on assets junior to liens granted in favor of the lenders on
the VCDS Revolving Loan 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 entered into an amended and restated $50.0 million senior
non-convertible loan facility, held equally by Cerberus and SSC, under which Value City was the
borrower and RVI and certain of its wholly-owned subsidiaries were
co-guarantors. Pursuant to the Non-Convertible Loan, (i) DSW was released from its obligations as a co-guarantor,
(ii) Value City repaid $25 million of the Convertible Loan, (iii) the remaining $50 million
Convertible Loan was converted into a non-convertible loan, (iv) the capital stock of DSW held by
Retail Ventures continues to secure the 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 is June 10, 2009 and it is not eligible for
prepayment until June 10, 2007. Under the Conversion Warrants, SSC and Cerberus will have the
right, from time
43
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.
$0.25 Million Senior Non-Convertible Loan
On August 16, 2006, the Non-Convertible Loan was again amended and restated 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 Conversion Warrants, and (iv) obtained a release of the capital stock of
DSW held by RVI used to secure the Non-Convertible Loan. On June 11, 2007, the outstanding
principal balance of the Non-Convertible Loan of $0.25 million owed to Cerberus was prepaid,
together with accrued interest thereon, when Cerberus completed the exercise of its remaining
Conversion Warrants. The final maturity date of the $0.25 million Non-Convertible Loan held by SSC
is the earlier of (i) June 10, 2009 or (ii) the date that the Conversion Warrants held by SSC are
exercised. This loan and cash collateral was assumed by RVI in connection with the disposition of
its 81% ownership interest in the Value City operations on January 23, 2008.
$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, 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 $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 $50.00 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 a portion of 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. An additional $0.25 million of the Non-Convertible Loan
was paid by Value City to Cerberus, together with interest, in fiscal 2007. During fiscal 2007,
RVI assumed the remaining $0.25 million Non-Convertible Loan still held by SSC, and SSC continues
to hold restricted cash of $0.25 million as collateral for the remaining balance of the
Non-Convertible 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.
44
During fiscal 2007, the Company recorded a reduction of expenses related to the change in fair
value of the conversion feature of the PIES of $93.6 million. During fiscal 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 February 3, 2007 of $51.1 million. As of February 2, 2008, the fair value
asset recorded for the conversion feature of the PIES was $30.8 million.
Auction Rate Securities
As of February 2, 2008, $38.0 million of DSWs $82.5 million in total investments was invested in
auction rate securities. DSW has reduced its investment in auction rate securities to $13.7
million as of March 31, 2008. Due to auction failures limiting
the liquidity of DSWs investments,
DSW has presented $10.0 million of its investment in auction rate securities as long-term
investments as of February 2, 2008 that were previously
classified as short term investments. If DSW is unable to liquidate
the remaining auction rate securities at their scheduled auction
dates, DSW may not have access to its funds until the maturity date
of these investments, which could be until 2034. DSW
believes that the current lack of liquidity relating to its auction rate securities will have no
impact on its ability to fund the ongoing operations and growth initiatives.
Liquidity and Capital Resources Considerations Relating to the Value City Disposition
RVI completed the disposition of an 81% ownership interest in its Value City business on January
23, 2008. Retail Ventures or its wholly-owned subsidiary, Retail Ventures Services, Inc. (RVS),
has guaranteed or may, in certain circumstances, be responsible for certain liabilities of Value
City including, but not limited to: amounts owed under certain guarantees with various financing
institutions; amounts owed under guarantees of Value Citys operations regarding certain equipment
leases; amounts owed under certain employee benefit plans; amounts owed under certain income tax
liabilities, amounts owed by RVS under certain service agreements through which Value City obtains
general services or information technology equipment or licenses.
As of February 2, 2008, RVI had recorded a liability of $26.6 million for the guarantees of Value
City commitments. If Value City does not continue as a going concern and Value City is unable to
pay its obligations with respect to the foregoing indebtedness guaranteed by Retail Ventures or
RVS, these guarantees may become immediately due and payable by Retail Ventures or RVS, as
applicable, which would have a material adverse effect on RVI.
To facilitate the change in ownership and operation of Value City, Retail Ventures agreed to
provide or arrange for the provision of certain transition services to Value City for a period of
one year unless otherwise extended by both parties. If Value City does not continue as a going
concern and Value City is unable to pay its obligations with respect to the transition services the
Company may be unable to recover some or all of the unremitted transition service charges.
Liquidity Relating to the Filenes Basement Downtown Crossing Boston Store
With respect to the temporary cessation of operations at the Downtown Crossing Boston Filenes
Basement store, the landlord is making payments to Filenes Basement until the premises are
renovated and turned over to Filenes Basement.
Contractual Obligations
We have the following minimum commitments under contractual obligations. A purchase obligation is
defined as an agreement to purchase goods or services that is enforceable and legally binding on us
and that specifies all significant terms, including fixed or minimum quantities to be purchased,
fixed, minimum or variable price provisions and the approximate timing of the transaction. Based on
this definition, the table below includes only those contracts which include fixed or minimum
obligations. It does not include normal purchases, which are made in the ordinary course of
business.
45
The following table provides aggregated information about known contractual obligations and other
long-term liabilities as of February 2, 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No |
|
|
|
|
|
|
Less Than |
|
1 - 3 |
|
3 - 5 |
|
More Than |
|
Expiration |
Contractual Obligations(6) |
|
Total |
|
1 Year |
|
Years |
|
Years |
|
5 Years |
|
Date |
Longterm debt |
|
$ |
166,500 |
|
|
|
|
|
|
$ |
250 |
|
|
$ |
143,750 |
|
|
$ |
22,500 |
|
|
$ |
|
|
Interest payments on longterm debt(1) |
|
|
35,847 |
|
|
$ |
9,642 |
|
|
|
19,062 |
|
|
|
7,143 |
|
|
|
|
|
|
|
|
|
Operating lease obligations (2) |
|
|
1,394,062 |
|
|
|
163,002 |
|
|
|
326,007 |
|
|
|
284,377 |
|
|
|
620,676 |
|
|
|
|
|
Construction commitments(3) |
|
|
5,835 |
|
|
|
5,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (4) |
|
|
42,905 |
|
|
|
21,689 |
|
|
|
7,909 |
|
|
|
6,040 |
|
|
|
7,267 |
|
|
|
|
|
FIN 48 (5) |
|
|
3,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,649,090 |
|
|
$ |
200,168 |
|
|
$ |
353,228 |
|
|
$ |
441,310 |
|
|
$ |
654,384 |
|
|
$ |
|
|
|
|
|
|
(1) |
|
Projected interest payments are for the PIES, Non-Convertible
Loan and the Filenes Basement Revolving
Loan and are based on the outstanding principal amount at February 2, 2008 and interest rate
per the agreement. |
|
(2) |
|
Many operating leases require us, as part of the lease, to pay for common area
maintenance, real estate taxes and contingent rents. These costs vary year by year and are
based almost entirely on actual costs incurred by the landlord and as such are not included in
the lease obligations presented above. |
|
(3) |
|
Construction commitments include capital items to be purchased for projects that
were under construction, or for which a lease had been signed, as of February 2, 2008. |
|
(4) |
|
Other contractual obligations include purchase commitments, guarantees and
indemnificiations. Many of our purchase commitments are cancelable by us without payment or
penalty, and we have excluded such commitments, along with all associate employment and
intercompany commitments. |
|
(5) |
|
The amount of FIN 48 obligations as of February 2, 2008, is $3.9 million,
including approximately $0.9 million of accrued interest and penalties. Uncertain tax benefits
are positions taken or expected to be taken on an income tax return that may result in
additional payments to tax authorities. The balance of the uncertain tax benefits are included
in the More Than 5 Years column as we are not able to reasonably estimate the timing of the
potential future payments. |
|
(6) |
|
Deferred taxes, minority interest, payments on RVI restricted
stock units and payments related to pension plans are not
included in this table. |
In 2006, RVI used the proceeds from the issuance of PIES to repay the approximately $49.7 million
remaining balance of an intercompany note due Value City, and to lend Value City and Filenes
Basement $62 million through intercompany loans. Value City used these and other funds to pay down
$49.5 million of the outstanding principal amount of the $50 million Non-Convertible Loan and
approximately $36.5 million of borrowings under the VCDS Revolving Loan. During 2005, the Company
repaid the amount owed on the $100 million VCDS Term Loans plus accrued interest, $25 million of
the $75 million Convertible Loan and a portion of the Revolving Credit Facility with the proceeds
of DSWs IPO used to repay intercompany promissory notes relating to dividends issued by DSW to
Retail Ventures.
At February 2, 2008, the Company has outstanding $143.8 million of PIES, $22.5 million of direct
borrowings under the Filenes Basement Revolving Loan and $0.25 million under the assumed
Non-Convertible Loan. At February 3, 2007, the Company had outstanding $143.8 million of PIES and
$35.0 million of direct borrowings attributed to Filenes Basement under the VCDS Revolving Loan.
The Company had outstanding letters of credit that totaled approximately $3.4 million and $15.7
million, respectively, at February 2, 2008,
on the Filenes Basement Revolving Loan and DSW
Revolving Loan and $2.1 million and $13.4 million, respectively, at February 3, 2007 on the
Filenes Basement portion the VCDS Revolving Loan and DSW Revolving Loan. If certain conditions are
not met under these letter of credit arrangements, the Company would be required to satisfy the
obligations in cash. Due to the nature of these arrangements and based on historical experience,
the Company does not expect to make any significant payment outside of the terms set forth in these
arrangements.
During the current year, we have continued to enter into various construction commitments,
including capital items to be purchased for projects that were under construction or for which a
lease has been signed. Our obligations under these commitments aggregated approximately $5.8
million at February 2, 2008. In addition, we signed lease agreements for 38 new store locations
with annual aggregate rent of $14.0 million and average terms of approximately 10 years. Associated
with the new lease agreements, we will receive approximately $10.6 million of tenant improvement
allowances which will offset future capital expenditures.
46
We operate substantially all our stores, warehouses and corporate office space from leased
facilities. Lease obligations are accounted for either as operating leases or as capital leases. We
disclose in the Notes to Consolidated Financial Statements the
minimum payments due under operating or capital leases. See Note 6
Leases beginning on page F-21.
Additional information regarding our financial commitments as of February 2, 2008 is provided in
the Notes to Consolidated Financial Statements. See Note 7 Long-Term Obligations beginning on
page F-22 and Note 11 Commitments and Contingencies beginning on page F-28.
Recent Accounting Pronouncements
Recent accounting pronouncements and their impact on Retail Ventures are disclosed in Note 1 of our
Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
It is not our intention to participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as special purpose entities or variable
interest entities, which would facilitate off-balance sheet arrangements or other limited purposes.
Retail Ventures had no off-balance sheet arrangements as of February 2, 2008, as that term is
described by the SEC.
ITEM 7A. 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.
Auction Rate Securities
As of
February 2, 2008, DSW had $38.0 million invested in auction
rate securities. DSW was able to
successfully decrease its investment to $13.7 million as of March 31, 2008. Due to auction
failures limiting the liquidity of DSWs investment, DSW has classified $10.0 million of investment
in auction rate securities to long-term investments as of February 2, 2008. While recent failures
in the auction process have affected DSWs ability to access these funds, DSW does not believe that
the underlying valuation of the securities have been impaired. DSW expects to continue to earn
interest at the prevailing rates on its remaining auction rate securities.
Secured Revolving Credit Facilities
We are exposed to interest rate risk primarily through our borrowings under the $100 million
Filenes Basement Revolving Loan and the $150 million DSW Revolving Loan. At February 2, 2008,
direct borrowings aggregated $22.5 million and an additional $19.1 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 year ended February 2, 2008, net of
income taxes, would have had an approximate $0.3 million impact on our financial position,
liquidity and results of operations.
Warrants
VCHI Acquisition Co. Warrants
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition
Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. As part of the transaction,
Retail Ventures issued warrants (the VCHI Warrants) to VCHI Acquisition Co. to purchase 150,000
RVI Common Shares at an exercise price of $10.00 per share, and exercisable within 18 months of
January 23, 2008. At the date of issuance, January 23, 2008, the closing price of the RVI Common
Shares was $6.09. Upon exercise of the VCHI Warrants, Retail Ventures will deliver the shares via
net-share or physical settlement at the election of the warrant holder.
The VCHI Warrants are not derivative instruments as defined under SFAS No. 133. The warrants were
measured at fair value on the date of the transaction, January 23, 2008, and recorded within
equity. The $0.1 million value ascribed to the VCHI Warrants was estimated as of February 2, 2008
using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of
2.1%; expected life of 1.5 years; expected volatility of 58.4% and an expected dividend yield of
0.0%.
47
Term Loan Warrants and Conversion Warrants
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.
During fiscal 2007, the Company recorded a reduction of expenses related to the change in the fair
value of the Conversion Warrants and Term Loan Warrants of $154.6 million. As of February 2, 2008,
the aggregate fair value liability recorded relating to both the Term Loan Warrants and Conversion
Warrants is $42.2 million. The $26.6 million value ascribed to the Conversion Warrants was
estimated as of February 2, 2008 using the Black-Scholes Pricing Model with the following
assumptions: risk-free interest rate of 2.1%; expected life of 1.4 years; expected volatility of
55.5%; and an expected dividend yield of 0.0%. The $15.6 million value ascribed to the Term Loan
Warrants was estimated as of February 2, 2008 using the Black-Scholes Pricing Model with the
following assumptions: risk-free interest rate of 2.7%; expected life of 4.4 years; expected
volatility of 55.4% and an expected dividend yield of 0.0%. As the Conversion Warrants and Term
Loan Warrants may be exercised for either common shares of RVI or common shares of DSW owned by
RVI, the settlement of such warrants will not result in a cash outlay by the Company.
Conversion Feature of PIES
During fiscal 2007, the Company recorded a reduction of expenses related to the change in fair
value of the conversion feature of the PIES of $93.6 million. As of February 2, 2008, the fair
value asset recorded for the conversion feature was $30.8 million. The fair value was estimated
using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of
4.2%; expected life of 3.6 years; expected volatility of 44.0%; and an expected dividend yield of
0.0%. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule and the Report of Independent Registered
Public Accounting Firm thereon are filed pursuant to this Item 8 and are included in this Annual
Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including its
Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness
of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded, as of the
end of the period covered by this Annual Report on Form 10-K, that such disclosure controls and
procedures were effective.
Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The
Companys internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America.
Management assessed the effectiveness of the Companys internal control system as of February 2,
2008. In making its assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework.
Based on this assessment, management concluded that the Company maintained effective internal
control over financial reporting as of February 2, 2008.
Deloitte & Touche LLP, the Companys independent registered public accounting firm, has issued an
audit report covering the Companys internal control over financial reporting, as stated in its
report which begins on page F-1 of this Annual Report on Form 10-K.
48
Changes in Internal Control over Financial Reporting
No change was made in the Companys internal control over financial reporting during the Companys
fiscal quarter ended February 2, 2008 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION. None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
In accordance with General Instruction G(3), the information contained under the captions
EXECUTIVE OFFICERS, ELECTION OF DIRECTORS and OTHER DIRECTOR INFORMATION, COMMITTEES OF
DIRECTORS AND CORPORATE GOVERNANCE INFORMATION in our definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on June 3, 2008, to be filed with the SEC pursuant to Regulation
14A promulgated under the Exchange Act (the Proxy Statement), are incorporated herein by
reference to satisfy the information required by this Item.
NYSE Certification
Mr. Wilansky, Chief Executive Officer and President of the Company, and Mr. McGrady, Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of the Company, have issued
certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and applicable
SEC regulations with respect to this Annual Report on Form 10-K. The full text of the
certifications are set forth in Exhibits 31 and 32 to this Annual Report on Form 10-K.
Mr. Wilansky submitted his annual certification to the New York Stock Exchange (NYSE) on June 22,
2007, stating that he was not aware of any violation by the Company of the NYSEs corporate
governance listing standards, as required by Section 303A.12(a) of the NYSE Listed Company Manual.
Item 11. EXECUTIVE COMPENSATION.
In accordance with General Instruction G(3), the information contained under the captions
COMPENSATION OF MANAGEMENT and OTHER DIRECTOR INFORMATION COMMITTEES OF DIRECTORS AND CORPORATE
GOVERNANCE INFORMATION GENERAL in the Proxy Statement is incorporated herein by reference to
satisfy the information required by this Item. The report of the Compensation Committee of the
Companys Board of Directors on executive compensation included in the Proxy Statement shall not be
deemed to be incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS.
In accordance with General Instruction G(3), the information contained under the captions SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS and EQUITY
COMPENSATION PLAN INFORMATION in the Proxy Statement is incorporated herein by reference to
satisfy the information required by this Item.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
In accordance with General Instruction G(3), the information contained under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS and OTHER DIRECTOR INFORMATION, COMITTEES OF DIRECTORS AND
CORPORATE GOVERNANCE INFORMATION- CORPORATE GOVERNANCE PRINCIPLES. in the Proxy Statement is
incorporated herein by reference to satisfy the information required by this Item.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
In accordance with General Instruction G(3), the information contained under the caption AUDIT AND
OTHER SERVICE FEES in the definitive Proxy Statement is incorporated herein by reference to
satisfy the information required by this Item.
49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
15(a)(1) Financial Statements
The documents listed below are filed as part of this Form 10-K:
|
|
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Page in |
|
|
Form 10-K |
Report of Independent Registered Public Accounting Firm |
|
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F-1 |
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Consolidated Balance Sheets at February 2, 2008 and February 3, 2007 |
|
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F-2 |
|
Consolidated Statements of Operations for the years ended February 2, 2008, February 3, 2007
and January 28, 2006 |
|
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F-4 |
|
Consolidated Statements of Shareholders Equity for the years ended February 2, 2008, February 3, 2007
and January 28, 2006 |
|
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F-5 |
|
Consolidated Statements of Cash Flows for the years ended February 2, 2008, February 3, 2007
and January 28, 2006 |
|
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F-7 |
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Notes to Consolidated Financial Statements |
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F-8 |
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15(a)(2) Consolidated Financial Statement Schedules: |
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|
The schedule listed below is filed as part of this Form 10-K: |
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Schedule I. Condensed Financial Information of Registrant |
|
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S-1 |
|
Schedule II. Valuation and Qualifying Accounts |
|
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S-2 |
|
Schedules not listed above are omitted because of the absence of the conditions under which they
are required or because the required information is included in the financial statements or the
notes thereto.
15(a)(3) and (b) Exhibits:
See Index to Exhibits which begins on page E-1.
15(c) Additional Financial Statement Schedules:
None.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
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April 24, 2008 |
By: |
/s/ James A. McGrady |
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James A. McGrady, Executive Vice President, Chief |
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Financial Officer, Treasurer and Secretary |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the dates indicated.
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Signature |
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Title |
|
Date |
|
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Chairman of the Board of Directors |
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April 24, 2008 |
Jay L. Schottenstein |
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|
/s/ Heywood Wilansky
Heywood Wilansky |
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President, Chief Executive Officer and Director (Principal Executive Officer) |
|
April 24, 2008 |
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|
|
|
/s/ James A. McGrady
James A. McGrady |
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Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |
|
April 24, 2008 |
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Director |
|
April 24, 2008 |
Henry L. Aaron |
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Director |
|
April 24, 2008 |
Ari Deshe |
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Director |
|
April 24, 2008 |
Jon P. Diamond |
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Director |
|
April 24, 2008 |
Elizabeth M. Eveillard |
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Director |
|
April 24, 2008 |
Lawrence J. Ring |
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Director |
|
April 24, 2008 |
Harvey L. Sonnenberg |
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Director |
|
April 24, 2008 |
James L. Weisman |
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|
*By: |
|
/s/ James A. McGrady
James A. McGrady (Attorney-in-fact) |
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Retail Ventures, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Retail Ventures, Inc. and
subsidiaries (the Company) as of February 2, 2008 and February 3, 2007 and the related
consolidated statements of operations, shareholders equity, and cash flows for each of the three
years in the period ended February 2, 2008. Our audits also
included the consolidated financial statement
schedules listed in the Index at Item 15. We also have audited the Companys internal control over
financial reporting as of February 2, 2008, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for these financial statements and financial
statement schedules, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on these financial statements and financial statement schedules and an
opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Retail Ventures, Inc. and subsidiaries as of February
2, 2008 and February 3, 2007, and the results of their operations and their cash flows for each of
the three years in the period ended February 2, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such consolidated financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of February 2, 2008, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
As discussed in Note 2 to the consolidated financial statements, the Company
discontinued the Value City segment of its operations in January 2008
when it disposed of an 81% ownership interest in its Value City
operations to VCHI Acquisition Co. on January 23, 2008. The loss on
the sale and operating results prior to the sale are included in
loss from discontinued operations in the accompanying consolidated
financial statements.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
April 24, 2008
F-1
RETAIL VENTURES, INC.
CONSOLIDATED BALANCE SHEETS
February 2, 2008 and February 3, 2007
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
|
February 3, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
112,951 |
|
|
$ |
143,020 |
|
Restricted cash |
|
|
257 |
|
|
|
|
|
Short-term investments |
|
|
70,005 |
|
|
|
98,650 |
|
Accounts receivable, net |
|
|
14,373 |
|
|
|
9,369 |
|
Accounts receivable from related parties |
|
|
2,245 |
|
|
|
3,767 |
|
Inventories |
|
|
339,320 |
|
|
|
328,560 |
|
Prepaid expenses and other current assets |
|
|
31,232 |
|
|
|
27,508 |
|
Deferred income taxes |
|
|
28,225 |
|
|
|
25,737 |
|
Current assets of discontinued operations |
|
|
|
|
|
|
251,336 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
598,608 |
|
|
|
887,947 |
|
|
|
|
|
|
|
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment |
|
|
242,369 |
|
|
|
178,110 |
|
Leasehold improvements |
|
|
176,380 |
|
|
|
140,748 |
|
|
|
|
|
|
|
|
|
|
|
418,749 |
|
|
|
318,858 |
|
Accumulated depreciation and amortization |
|
|
(164,090 |
) |
|
|
(139,390 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
254,659 |
|
|
|
179,468 |
|
Goodwill |
|
|
25,899 |
|
|
|
25,899 |
|
Long-term investments |
|
|
12,500 |
|
|
|
|
|
Note
receivable from discontinued operations |
|
|
|
|
|
|
34,441 |
|
Tradenames and other intangibles, net |
|
|
19,927 |
|
|
|
26,401 |
|
Deferred income taxes |
|
|
|
|
|
|
26,114 |
|
Conversion feature of long-term debt |
|
|
30,848 |
|
|
|
|
|
Other assets |
|
|
9,524 |
|
|
|
8,926 |
|
Non current assets of discontinued operations |
|
|
|
|
|
|
112,462 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
951,965 |
|
|
$ |
1,301,658 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-2
RETAIL VENTURES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
February 2, 2008 and February 3, 2007
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
|
February 3, |
|
|
|
2008 |
|
|
2007 |
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
149,900 |
|
|
$ |
144,037 |
|
Accounts payable to related parties |
|
|
2,431 |
|
|
|
48,652 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Compensation |
|
|
8,407 |
|
|
|
33,260 |
|
Taxes |
|
|
22,857 |
|
|
|
19,696 |
|
Guarantees
from discontinued operations |
|
|
17,477 |
|
|
|
|
|
Other |
|
|
59,461 |
|
|
|
60,769 |
|
Warrant liability |
|
|
936 |
|
|
|
3,594 |
|
Warrant liability-related parties |
|
|
41,277 |
|
|
|
212,806 |
|
Current liabilities of discontinued operations |
|
|
|
|
|
|
90,694 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
302,746 |
|
|
|
613,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations |
|
|
157,793 |
|
|
|
168,053 |
|
Conversion feature of long-term debt |
|
|
|
|
|
|
62,770 |
|
Other noncurrent liabilities |
|
|
128,497 |
|
|
|
89,698 |
|
Deferred income taxes |
|
|
29,657 |
|
|
|
|
|
Non current liabilities of discontinued operations |
|
|
|
|
|
|
137,581 |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
160,349 |
|
|
|
138,428 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common shares, without par value; 160,000,000 authorized; issued
and outstanding, including 7,551 treasury shares, 48,623,430 and
47,270,777 outstanding, respectively |
|
|
305,254 |
|
|
|
276,690 |
|
Accumulated deficit |
|
|
(130,577 |
) |
|
|
(184,461 |
) |
Treasury shares, at cost, 7,551 shares |
|
|
(59 |
) |
|
|
(59 |
) |
Warrants |
|
|
124 |
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
(1,819 |
) |
|
|
(233 |
) |
Accumulated other comprehensive loss from discontinued operations |
|
|
|
|
|
|
(317 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
172,923 |
|
|
|
91,620 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
951,965 |
|
|
$ |
1,301,658 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-3
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 2, 2008, February 3, 2007 and January 28, 2006
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
|
February 3, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
1,871,904 |
|
|
$ |
1,706,533 |
|
|
$ |
1,533,396 |
|
Cost of sales |
|
|
(1,120,899 |
) |
|
|
(997,667 |
) |
|
|
(915,009 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
751,005 |
|
|
|
708,866 |
|
|
|
618,387 |
|
Selling, general and administrative expenses |
|
|
(694,108 |
) |
|
|
(614,015 |
) |
|
|
(561,845 |
) |
Change in fair value of derivative instruments |
|
|
96,276 |
|
|
|
(53,012 |
) |
|
|
(151 |
) |
Change in fair value of derivative instruments- related parties |
|
|
151,917 |
|
|
|
(122,943 |
) |
|
|
(144,058 |
) |
License fees and other income |
|
|
6,576 |
|
|
|
4,638 |
|
|
|
2,843 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
311,666 |
|
|
|
(76,466 |
) |
|
|
(84,824 |
) |
Non-related parties interest expense |
|
|
(13,536 |
) |
|
|
(7,159 |
) |
|
|
(4,125 |
) |
Related parties interest expense |
|
|
(12 |
) |
|
|
(2,284 |
) |
|
|
(7,407 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(13,548 |
) |
|
|
(9,443 |
) |
|
|
(11,532 |
) |
Interest income |
|
|
10,472 |
|
|
|
7,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(3,076 |
) |
|
|
(2,137 |
) |
|
|
(11,532 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
and minority interest |
|
|
308,590 |
|
|
|
(78,603 |
) |
|
|
(96,356 |
) |
Income tax expense |
|
|
(86,607 |
) |
|
|
(25,873 |
) |
|
|
(23,745 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority interest |
|
|
221,983 |
|
|
|
(104,476 |
) |
|
|
(120,101 |
) |
Minority interest |
|
|
(19,879 |
) |
|
|
(24,166 |
) |
|
|
(7,002 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
202,104 |
|
|
|
(128,642 |
) |
|
|
(127,103 |
) |
Loss from discontinued operations, net of tax |
|
|
(150,662 |
) |
|
|
(22,271 |
) |
|
|
(56,315 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
51,442 |
|
|
$ |
(150,913 |
) |
|
$ |
(183,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continuing operations |
|
$ |
4.20 |
|
|
$ |
(2.85 |
) |
|
$ |
(3.29 |
) |
Diluted earnings (loss) per share from continuing operations |
|
$ |
3.56 |
|
|
$ |
(2.85 |
) |
|
$ |
(3.29 |
) |
Basic loss per share from discontinued operations |
|
$ |
(3.13 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.46 |
) |
Diluted loss per share from discontinued operations |
|
$ |
(2.65 |
) |
|
$ |
(0.49 |
) |
|
$ |
(1.46 |
) |
Basic earnings (loss) per share |
|
$ |
1.07 |
|
|
$ |
(3.35 |
) |
|
$ |
(4.75 |
) |
Diluted earnings (loss) per share |
|
$ |
0.91 |
|
|
$ |
(3.35 |
) |
|
$ |
(4.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
48,165 |
|
|
|
45,088 |
|
|
|
38,586 |
|
Diluted shares |
|
|
56,794 |
|
|
|
45,088 |
|
|
|
38,586 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended February 2, 2008, February 3, 2007 and January 28, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Shares in |
|
|
Common |
|
|
|
|
|
|
(Accumulated |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehen- |
|
|
|
|
|
|
Shares |
|
|
Treasury |
|
|
Shares |
|
|
Warrants |
|
|
Deficit) |
|
|
Expense |
|
|
Shares |
|
|
sive Loss |
|
|
Total |
|
Balance, January
29, 2005 |
|
|
34,111 |
|
|
|
8 |
|
|
$ |
143,477 |
|
|
$ |
6,074 |
|
|
$ |
42,756 |
|
|
$ |
(3 |
) |
|
$ |
(59 |
) |
|
$ |
(7,068 |
) |
|
$ |
185,177 |
|
Loss from
continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127,103 |
) |
Loss from
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,315 |
) |
Change in minimum
pension liability,
net of income tax
benefit of $495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
159 |
|
Change in minimum
pension liability,
net of income tax
benefit of $429,
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(183,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial public
offering of
subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,187 |
|
Capital
transactions of
subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393 |
|
Exercise of stock
options |
|
|
5,754 |
|
|
|
|
|
|
|
26,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,286 |
|
Excess tax benefit
related to stock
option excercises |
|
|
|
|
|
|
|
|
|
|
9,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,974 |
|
Amortization of
deferred
compensation
expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Warrant
reclassification to
liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,074 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,074 |
) |
Warrant adjustment
to fair value |
|
|
|
|
|
|
|
|
|
|
(20,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January
28, 2006 |
|
|
39,865 |
|
|
|
8 |
|
|
$ |
159,617 |
|
|
$ |
|
|
|
$ |
(36,082 |
) |
|
$ |
(1 |
) |
|
$ |
(59 |
) |
|
$ |
(6,929 |
) |
|
$ |
116,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,642 |
) |
Loss from
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,271 |
) |
Change in minimum
pension liability,
net of income tax
expense of $44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
500 |
|
Change in minimum
pension liability,
net of income tax
expense of $109,
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
transactions of
subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,534 |
|
Stock based
compensation
expense, before
related tax effects |
|
|
|
|
|
|
|
|
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
634 |
|
Exercise of stock
options |
|
|
406 |
|
|
|
|
|
|
|
2,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,934 |
|
Exercise of warrants |
|
|
7,000 |
|
|
|
|
|
|
|
110,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,317 |
|
Deferred income tax
adjustment |
|
|
|
|
|
|
|
|
|
|
3,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,189 |
|
Reclassification of
unamortized
deferred
compensation |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
initially apply
FASB Statement No.
158, net of tax
expense of $1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,403 |
|
|
|
2,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to
initially apply
FASB Statement No.
158, net of tax
expense of $1,787,
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,784 |
|
|
|
2,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February
3, 2007 |
|
|
47,271 |
|
|
|
8 |
|
|
$ |
276,690 |
|
|
$ |
|
|
|
$ |
(184,461 |
) |
|
$ |
|
|
|
$ |
(59 |
) |
|
$ |
(550 |
) |
|
$ |
91,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Continued)
Years Ended February 2, 2008, February 3, 2007 and January 28, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Shares in |
|
|
Common |
|
|
|
|
|
|
(Accumulated |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehen- |
|
|
|
|
|
|
Shares |
|
|
Treasury |
|
|
Shares |
|
|
Warrants |
|
|
Deficit) |
|
|
Expense |
|
|
Shares |
|
|
sive Loss |
|
|
Total |
|
Balance, February
3, 2007 |
|
|
47,271 |
|
|
|
8 |
|
|
$ |
276,690 |
|
|
$ |
|
|
|
$ |
(184,461 |
) |
|
$ |
|
|
|
$ |
(59 |
) |
|
$ |
(550 |
) |
|
$ |
91,620 |
|
Income from
continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,104 |
|
Loss from
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,662 |
) |
Change in minimum
pension liability,
net of income tax
expense of $1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,269 |
) |
|
|
(1,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
transactions of
subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,083 |
|
Cumulative effect
of FIN 48 adoption
for discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
Reclassification of
stock appreciation
rights |
|
|
|
|
|
|
|
|
|
|
1,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,934 |
|
Stock based
compensation
expense, before
related tax effects |
|
|
|
|
|
|
|
|
|
|
947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
947 |
|
Exercise of stock
options |
|
|
19 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
Exercise of warrants |
|
|
1,333 |
|
|
|
|
|
|
|
25,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,612 |
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February
2, 2008 |
|
|
48,623 |
|
|
|
8 |
|
|
$ |
305,254 |
|
|
$ |
124 |
|
|
$ |
(130,577 |
) |
|
$ |
|
|
|
$ |
(59 |
) |
|
$ |
(1,819 |
) |
|
$ |
172,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 2, 2008, February 3, 2007 and January 28, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
|
February 3, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
51,442 |
|
|
$ |
(150,913 |
) |
|
$ |
(183,418 |
) |
Less: Loss from discontinued operations, net of tax |
|
|
150,662 |
|
|
|
22,271 |
|
|
|
56,315 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations |
|
|
202,104 |
|
|
|
(128,642 |
) |
|
|
(127,103 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and discount on debt |
|
|
3,495 |
|
|
|
2,147 |
|
|
|
1,044 |
|
Amortization of deferred compensation |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
Stock based compensation expense |
|
|
947 |
|
|
|
634 |
|
|
|
|
|
Stock based compensation expense of subsidiary |
|
|
3,083 |
|
|
|
2,534 |
|
|
|
|
|
Depreciation and amortization |
|
|
40,785 |
|
|
|
33,071 |
|
|
|
30,997 |
|
Change in fair value of derivative instruments (($151,917), $122,943 and
$144,058 - related party) |
|
|
(248,193 |
) |
|
|
175,955 |
|
|
|
144,209 |
|
Deferred income taxes and other noncurrent liabilities |
|
|
70,931 |
|
|
|
(21,475 |
) |
|
|
2,050 |
|
Excess tax benefit related to stock option exercises |
|
|
|
|
|
|
|
|
|
|
9,472 |
|
Impairment of assets |
|
|
5,622 |
|
|
|
832 |
|
|
|
507 |
|
Loss on disposal of assets |
|
|
350 |
|
|
|
1,183 |
|
|
|
1,305 |
|
Minority interest in consolidated subsidiary |
|
|
19,879 |
|
|
|
24,166 |
|
|
|
7,002 |
|
Other |
|
|
(186 |
) |
|
|
1,865 |
|
|
|
1,586 |
|
Change in working capital, assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(3,482 |
) |
|
|
(1,262 |
) |
|
|
9,216 |
|
Inventories |
|
|
(10,760 |
) |
|
|
(43,935 |
) |
|
|
(11,161 |
) |
Prepaid expenses and other assets |
|
|
(4,690 |
) |
|
|
(9,186 |
) |
|
|
(7,936 |
) |
Accounts payable |
|
|
9,396 |
|
|
|
26,721 |
|
|
|
(11,969 |
) |
Proceeds from lease incentives |
|
|
14,002 |
|
|
|
10,168 |
|
|
|
10,781 |
|
Accrued expenses |
|
|
(27,052 |
) |
|
|
9,536 |
|
|
|
8,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
76,231 |
|
|
|
84,313 |
|
|
|
68,600 |
|
Net cash provided by (used in) operating activities from discontinued
operations |
|
|
12,944 |
|
|
|
12,667 |
|
|
|
(35,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for property and equipment |
|
|
(115,408 |
) |
|
|
(58,657 |
) |
|
|
(29,913 |
) |
Purchases of available-for-sale investments |
|
|
(209,855 |
) |
|
|
(188,250 |
) |
|
|
|
|
Maturities and sales from available-for-sale investments |
|
|
226,000 |
|
|
|
89,600 |
|
|
|
|
|
Acquisition of tradename |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations |
|
|
(99,284 |
) |
|
|
(157,307 |
) |
|
|
(29,913 |
) |
Net cash used in investing activities from discontinued operations |
|
|
(658 |
) |
|
|
(7,408 |
) |
|
|
(16,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in revolving credit facility |
|
|
(12,500 |
) |
|
|
5,000 |
|
|
|
(40,021 |
) |
Payments on notes
to discontinued operations |
|
|
|
|
|
|
(84,119 |
) |
|
|
(190,322 |
) |
Proceeds from issuance of Premium Income Exchangeable Securities |
|
|
|
|
|
|
143,750 |
|
|
|
|
|
Proceeds from exercise of warrants |
|
|
6,000 |
|
|
|
31,500 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
71 |
|
|
|
2,934 |
|
|
|
26,286 |
|
Debt issuance costs |
|
|
(587 |
) |
|
|
(6,156 |
) |
|
|
(1,297 |
) |
Proceeds from sale of stock of subsidiary |
|
|
|
|
|
|
|
|
|
|
277,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities from continuing
operations |
|
|
(7,016 |
) |
|
|
92,909 |
|
|
|
72,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities from discontinued
operations |
|
|
(29,487 |
) |
|
|
(3,684 |
) |
|
|
(50,454 |
) |
Net (decrease) increase in cash and equivalents from continuing operations |
|
$ |
(30,069 |
) |
|
$ |
19,915 |
|
|
$ |
111,296 |
|
Cash and equivalents from continuing operations, beginning of year |
|
|
143,020 |
|
|
|
123,105 |
|
|
|
11,809 |
|
Cash and equivalents from continuing operations, end of year |
|
$ |
112,951 |
|
|
$ |
143,020 |
|
|
$ |
123,105 |
|
Net (decrease) increase in cash and equivalents from discontinued operations |
|
$ |
(17,201 |
) |
|
$ |
1,575 |
|
|
$ |
(1,823 |
) |
Cash and equivalents from discontinued operations, beginning of year |
|
|
17,201 |
|
|
|
15,626 |
|
|
|
17,449 |
|
Cash and equivalents from discontinued operations, end of year |
|
$ |
0 |
|
|
$ |
17,201 |
|
|
$ |
15,626 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Retail Ventures, Inc. (Retail Ventures or RVI) and its wholly-owned subsidiaries and
majority-owned subsidiary are herein referred to collectively as the Company. Retail Ventures
common shares are listed on the New York Stock Exchange under the ticker symbol RVI. The Company
operates three segments in the United States of America (United States). Filenes Basement, Inc.
(Filenes Basement) is an off-price retailer and DSW Inc. (DSW) is a specialty branded footwear
retailer. The Corporate segment consists of all revenue and expenses that are not allocated to the
other segments. As of February 2, 2008, there were 259 DSW stores located in major metropolitan
areas throughout the United States and 36 Filenes Basement stores located in major metropolitan
areas in the northeast and midwest. DSW also supplies shoes, under supply arrangements, for 342
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 February 2, 2008,
Retail Ventures owned Class B Common Shares of DSW representing approximately 63.0% 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 $65.5 million was recorded. DSW is a controlled subsidiary of Retail
Ventures and its Class A Common Shares are listed on the New York Stock Exchange under the ticker
symbol DSW.
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition
Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no
net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an
after-tax loss of $90.0 million on the transaction. As part of the transaction, Retail Ventures,
Inc. issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI common shares, at an exercise
price of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the
change in ownership and operation of Value City Department Stores, Retail Ventures agreed to
provide or arrange for the provision of certain transition services principally related to
information technology, finance and human resources to Value City Department Stores for a period of
one year unless otherwise extended by both parties.
Principles of Consolidation
The consolidated financial statements include the accounts of Retail Ventures, its wholly-owned
subsidiaries and its majority-owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation. As a result of RVIs disposition of an 81% ownership interest in
its Value City operations during fiscal 2007, the results of Value Citys operations are included
in discontinued operations (see Note 2 to the Consolidated Financial Statements).
Fiscal Year
The Companys fiscal year ends on the Saturday nearest to January 31. Fiscal year 2007 contains 52
weeks, fiscal year 2006 contains 53 weeks and fiscal 2005 contains 52 weeks. Unless otherwise
stated, references to years in this report relate to fiscal years rather than calendar years.
Use of Estimates
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 contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting period. Significant
estimates are required as a part of inventory valuation, depreciation, amortization, recoverability
of long-lived assets, establishing reserves for insurance, calculating retirement benefits and
derivative valuations. Although these estimates are based on managements knowledge of current
events and actions it may undertake in the future, actual results could differ from these
estimates.
Cash and Equivalents
Cash and equivalents represent cash, highly liquid investments with original maturities of three
months or less at the date of purchase and credit card receivables which generally settle within
three days to be cash equivalents.
F-8
Investments
Investments include auction rate securities and demand notes and are classified as
available-for-sale securities. These securities are recorded at cost and have variable interest
rates that typically reset every 3 to 189 days. All income generated from these investments is recorded as interest income.
The Company evaluates its investments for impairment and whether impairment is other-than-temporary, and
measurement of an impairment loss. Based on the nature of the
impairment(s), the Company would record a temporary impairment as an
unrealized loss in comprehensive income or an other than temporary
impairment in earnings. The Company did not recognize any impairment on
investments during fiscal 2007, fiscal 2006 or fiscal 2005. Please see Note 5 for additional
discussion of the investment in auction rate securities.
Accounts Receivable, Net
Accounts receivable are classified as current assets because the average collection period is
generally less than one year. The carrying amount approximates fair value because of the relatively
short average maturity of the instruments and no significant change in interest rates. The
allowance for doubtful accounts was $0.2 million and $0.1 million at February 2, 2008 and February
3, 2007, respectively.
Concentration of Credit Risk
Financial instruments, which principally subject the Company to concentration of credit risk,
consist of cash, equivalents, and short term investments. The Company invests excess cash when
available through financial institutions in overnight investments. At times, such amounts may be in
excess of FDIC insurance limits. The Company also maintains auction rate securities and demand
notes with a creditworthy institution.
Concentration of Vendor Risk
During fiscal years 2007, 2006, and 2005, merchandise supplied to DSW by three key vendors
accounted for approximately 21%, 22%, and 22% of net sales, respectively. During fiscal 2007,
merchandise supplied to the Filenes Basement segment by three key vendors accounted for
approximately 12.4% of Filenes Basements net sales in the aggregate.
Inventories
Merchandise inventories are stated at the realizable value, determined using the first-in,
first-out basis, or market, using the retail inventory method. The retail method is widely used in
the retail industry due to its practicality. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins are calculated by applying a calculated cost to
retail ratio to the retail value of inventories. The cost of the inventory reflected on the
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
the merchandise is marked down prior to sale. Reserves to value inventory at its realizable value
were $31.8 million and $25.0 million at the end of fiscal year 2007 and 2006, respectively.
Inherent in the calculation of inventories are certain significant management judgments and
estimates, including setting the original merchandise retail value or mark-on, markups of initial
prices established, reductions in prices due to customers perception of value (known as
markdowns), and estimates of losses between physical inventory counts, or shrinkage, which,
combined with the averaging process within the retail inventory method, can significantly impact
the ending inventory valuation at cost and the resulting gross profit.
Pre-Opening Expenses
Pre-opening costs associated with the opening of new stores are expensed as incurred for stores
opened during the fiscal year and those under construction and to be opened in future fiscal years.
Pre-opening costs expensed were $10.0 million, $9.7 million and $8.4 million for fiscal 2007, 2006
and 2005, respectively. During these respective periods, the Company opened 37 DSW and seven
Filenes Basement stores in 2007, 29 DSW stores and five Filenes Basement stores in 2006 and 29
DSW stores and one Filenes Basement store in 2005.
F-9
Property and Equipment
Depreciation and amortization are recognized principally on the straight line method in amounts
adequate to amortize costs over the estimated useful lives of the respective assets. Leasehold
improvements are amortized over the shorter of their useful lives (10 years) or initial lease term.
The estimated useful lives of furniture, fixtures and equipment are three to ten years.
Asset Impairment and Long-Lived Assets
The Company must periodically evaluate the carrying amount of its 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 from the asset. The Companys review is conducted at the lowest identifiable level of cash
flows which includes a store. The impairment loss recognized is the excess of the carrying value of
the asset over its fair value, based on discounted future cash flows. The impairment loss is
included in selling, general and administrative expense. Assets acquired for stores that have been
previously impaired are not capitalized when acquired if the stores expected future cash flow
remains negative.
Impairment charges by segment, excluding goodwill, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
2007 |
|
2006 |
|
2005 |
DSW |
|
$ |
2,081 |
|
|
$ |
832 |
|
|
$ |
234 |
|
Filenes Basement |
|
|
3,541 |
|
|
|
|
|
|
|
273 |
|
|
|
|
$ |
5,622 |
|
|
$ |
832 |
|
|
$ |
507 |
|
Store Closings
During fiscal 2007, the Company recorded additional reserves for the closing of one DSW store
and two Filenes Basement stores. During fiscal 2006, the Company recorded additional reserves
for the closing of five DSW stores. The operating lease at one of the five 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.
The table below sets forth the significant components and activity related to these closing
reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
2/3/07 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
2/2/08 |
|
Employee severance and termination benefits |
|
|
|
|
|
$ |
2,104 |
|
|
$ |
(1,715 |
) |
|
$ |
|
|
|
$ |
389 |
|
Lease Costs |
|
$ |
75 |
|
|
|
300 |
|
|
|
(360 |
) |
|
|
|
|
|
|
15 |
|
Other |
|
|
|
|
|
|
771 |
|
|
|
(771 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75 |
|
|
$ |
3,175 |
|
|
$ |
(2,846 |
) |
|
$ |
|
|
|
$ |
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
1/28/06 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
2/3/07 |
|
Employee severance and termination benefits |
|
$ |
86 |
|
|
$ |
37 |
|
|
$ |
(123 |
) |
|
|
|
|
|
|
|
|
Lease Costs |
|
|
282 |
|
|
|
552 |
|
|
|
(992 |
) |
|
$ |
233 |
|
|
$ |
75 |
|
Other |
|
|
|
|
|
|
64 |
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
368 |
|
|
$ |
653 |
|
|
$ |
(1,179 |
) |
|
$ |
233 |
|
|
$ |
75 |
|
Goodwill
Goodwill represents the excess cost over the estimated fair values of net assets including
identifiable intangible assets of businesses acquired. Goodwill is tested for impairment at least
annually in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets.
F-10
Tradenames and Other Intangible Assets
Tradenames and other intangible assets are comprised of values assigned to names and leases the
Company acquired. The accumulated amortization for these assets is $25.9 million and $23.5 million
at February 2, 2008 and February 3, 2007, respectively. During fiscal 2007, the Company wrote off a
tradename in its entirety. The impact of this write-off is included in discontinued operations in
the statement of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
|
Corporate |
|
|
DSW |
|
|
Basement |
|
|
Total |
|
|
|
(dollars in thousands) |
|
As of February 2, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain name: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not subject to amortization |
|
|
|
|
|
$ |
21 |
|
|
|
|
|
|
$ |
21 |
|
Tradenames: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount |
|
|
|
|
|
|
12,750 |
|
|
$ |
9,900 |
|
|
|
22,650 |
|
Accumulated amortization |
|
|
|
|
|
|
(8,287 |
) |
|
|
(5,225 |
) |
|
|
(13,512 |
) |
Useful life |
|
|
|
|
|
15 years |
|
15 years |
|
|
|
|
Favorable lease values: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount |
|
|
|
|
|
$ |
140 |
|
|
$ |
23,057 |
|
|
$ |
23,197 |
|
Accumulated amortization |
|
|
|
|
|
|
(102 |
) |
|
|
(12,327 |
) |
|
|
(12,429 |
) |
Useful life |
|
|
|
|
|
14 years |
|
19 years |
|
|
|
|
As of February 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount |
|
$ |
4,066 |
|
|
$ |
12,750 |
|
|
$ |
9,900 |
|
|
$ |
26,716 |
|
Accumulated amortization |
|
|
(814 |
) |
|
|
(7,437 |
) |
|
|
(4,565 |
) |
|
|
(12,816 |
) |
Useful life |
|
15 years |
|
15 years |
|
15 years |
|
|
|
|
Favorable lease values: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross amount |
|
|
|
|
|
$ |
140 |
|
|
$ |
23,057 |
|
|
$ |
23,197 |
|
Accumulated amortization |
|
|
|
|
|
|
(98 |
) |
|
|
(10,598 |
) |
|
|
(10,696 |
) |
Useful life |
|
|
|
|
|
14 years |
|
17 years |
|
|
|
|
Aggregate amortization expense for the current and each of the five succeeding years is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
Fiscal Year |
|
Corporate |
|
DSW |
|
Basement |
|
Total |
2007 |
|
$ |
271 |
|
|
$ |
854 |
|
|
$ |
2,389 |
|
|
$ |
3,514 |
|
2008 |
|
|
|
|
|
|
854 |
|
|
|
2,334 |
|
|
|
3,188 |
|
2009 |
|
|
|
|
|
|
854 |
|
|
|
1,531 |
|
|
|
2,385 |
|
2010 |
|
|
|
|
|
|
854 |
|
|
|
1,531 |
|
|
|
2,385 |
|
2011 |
|
|
|
|
|
|
854 |
|
|
|
1,531 |
|
|
|
2,385 |
|
2012 |
|
|
|
|
|
|
854 |
|
|
|
1,475 |
|
|
|
2,329 |
|
Self-insurance Reserves
The Company records 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. The liability represents an estimate of the ultimate cost of claims incurred as
of the balance sheet date. Health and welfare estimates are calculated utilizing claims development
estimates based on historical experience and other factors. Workers compensation and general
liability estimates are calculated, utilizing claims development estimates based on historical
experience and other factors. The Company has purchased stop loss insurance to limit its exposure
to any significant exposure on a per person basis for health and welfare and on a per claim basis
for workers compensation and general liability. Although the Company does not anticipate the
amounts ultimately paid will differ significantly from the estimates, self-insurance reserves could
be affected if future claim experience differs significantly from the historical trends and the
actuarial assumptions. The self-insurance reserves were $3.0 million and $3.6 million at the end
of fiscal 2007 and 2006, respectively.
Deferred
Rent
Many of the Companys operating leases contain predetermined
fixed increases of the minimum rental rate during the initial lease term.
For these leases, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the amount charged
to expense and the rent paid as deferred rent and begins amortizing such
deferred rent upon the delivery of the lease location by the lessor. The
amounts included in the other noncurrent liabilities caption were $38.1
million and $32.4 million, at February 2, 2008 and February 3, 2007, respectively.
Construction
and Tenant Allowances
The Company receives cash allowances from landlords, which are
deferred and amortized on a straight-line basis over the life of the lease as a reduction
of rent expense. These allowances are included in the caption other non-current
liabilities and were $76.2 million and $57.0
million, at February 2, 2008 and February 3, 2007, respectively.
Revenue Recognition
Revenues from merchandise
sales are recognized at the point of sale, net of returns and exclude
sales tax. Revenue from gift cards is deferred and the revenue is recognized
upon redemption of the
gift card. Our policy is to recognize income from breakage of gift cards
F-11
when the likelihood of redemption of the gift card is remote. In the fourth quarter of fiscal 2007,
it was determined that there was enough historical data to recognize income from gift card
breakage. The Company recognized $0.4 million as miscellaneous income from gift card breakage in
fiscal 2007. Prior to the fourth quarter of fiscal 2007, we had not recognized any income from gift
card breakage.
Customer Loyalty Program
DSW maintains a customer loyalty program for the DSW stores in which program members receive a
discount on future purchases. Upon reaching the target-earned threshold, members receive
certificates for these discounts which must be redeemed within six months. During the third quarter
of fiscal 2006 DSW re-launched its 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 DSWs
ability to communicate with its customers. DSW accrues the anticipated redemptions of the discount
earned at the time of the initial purchase. To estimate these costs, DSW is required to make
assumptions related to customer purchase levels and redemption rates based on historical
experience. The accrued liability as of February 2, 2008 and February 3, 2007 was $6.4 million and
$5.0 million, respectively.
Derivative Financial Instruments
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), as amended, the Company recognizes all derivatives on the balance sheet at fair
value. For derivatives that are not designated as hedges under SFAS 133, changes in the fair values
are recognized in earnings in the period of change. There were no derivatives designated as hedges
outstanding as of February 2, 2008 or February 3, 2007. The Company does not hold or issue
derivative financial instruments for trading purposes. Retail Ventures estimates the fair values of
derivatives based on the Black-Scholes model using current market information and records all
derivatives on the balance sheet at fair value.
Minority Interest
The minority interest liability represents the portion of DSWs total shareholders equity owned by
unaffiliated investors in DSW. The minority interest percentage is computed by the ratio of shares
held by unaffiliated interests to total shares outstanding. Minority interest in the statement of
operations is calculated using the same ratio. In the statement of cash flows, the non-cash
minority interest represents the minority shareholders portion of DSWs income as well as their
allocable portion of DSW equity transactions other than retained earnings.
Earnings Per Share
Basic earnings per share is based on net income (loss) and a simple weighted average of common
shares outstanding. Diluted earnings per share reflects the potential dilution of common shares,
related to outstanding stock options, stock appreciation rights and warrants, calculated using the
treasury stock method. The numerator for the diluted earnings (loss) per share calculation is the
net income (loss). The denominator is the weighted average number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Assumed exercise of dilutive weighted average shares
outstanding |
|
|
48,165 |
|
|
|
45,088 |
|
|
|
38,586 |
|
Assumed exercise of dilutive stock appreciation rights |
|
|
227 |
|
|
|
|
|
|
|
|
|
Assumed exercise of dilutive stock options |
|
|
527 |
|
|
|
|
|
|
|
|
|
Assumed exercise of dilutive term loan warrants |
|
|
2,607 |
|
|
|
|
|
|
|
|
|
Assumed exercise of dilutive conversion warrants |
|
|
5,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares for computation of dilutive earnings
per share |
|
|
56,794 |
|
|
|
45,088 |
|
|
|
38,586 |
|
|
|
|
F-12
The amount of securities outstanding at February 2, 2008, February 3, 2007 and January 28, 2006
that were not included in the computation of dilutive earnings per share because the equity units
exercise price was greater than the average market price of the common shares for the period and,
therefore, the effect would be anti-dilutive, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
VCHI warrants |
|
|
150 |
|
|
|
|
|
|
|
|
|
Stock options |
|
|
334 |
|
|
|
1,335 |
|
|
|
1,782 |
|
SARs |
|
|
499 |
|
|
|
978 |
|
|
|
1,308 |
|
Term loan warrants |
|
|
|
|
|
|
4,413 |
|
|
|
4,413 |
|
Conversion warrants |
|
|
|
|
|
|
9,667 |
|
|
|
16,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of all potentially dilutive instruments |
|
|
983 |
|
|
|
16,393 |
|
|
|
24,170 |
|
|
Stock-Based Compensation
For purposes of applying the provisions of SFAS No. 123 (revised 2004) Share-Based Payment (SFAS
123R), the fair value of options granted is estimated on the date of grant using the Black-Scholes
option pricing model. See Note 4 for a detailed discussion of stock-based compensation.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owners. The Company presents other comprehensive income (loss) in its consolidated
statements of shareholders equity.
Recent Accounting Pronouncements
In
July 2006, the Financial Accounting Standards Board
(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 impact of the adoption of this statement is described
in Note 12.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157)
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 regarding the measurements. This
statement is effective for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. FASB has provided a one-year deferral for the implementation of SFAS 157
for non-financial assets and liabilities that are not required or permitted to be measured at fair
value on a recurring basis. 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 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. The adoption of SFAS 158 at February 3,
2007 decreased its liabilities by $2.4 million and increased shareholders
equity by $2.4 million. These changes to the Companys financial statements were non-cash and have
no impact on the Companys existing debt covenants, credit ratings or financial flexibility.
F-13
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). This statement allows entities to choose to measure financial
instruments and certain other financial assets and financial liabilities at fair value. SFAS 159
is effective for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact this statement may have on its consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations, (SFAS 141R),
FAS 141R establishes a framework for how an acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in
a business combination or a gain from a bargain purchase, and (iii) determines what information to
disclose to enable users of financial statements to evaluate the nature and financial effects of
the business combination. SFAS 141R will be effective for fiscal years beginning after December 15,
2008 and early adoption is not permitted. Adoption of SFAS 141R will not impact our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. This statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary (previously referred to as minority
interest) and for the deconsolidation of a subsidiary. This statement shall be applied
prospectively as of the beginning of the fiscal year in which this statement is initially adopted,
except for the presentation and disclosure requirements, which shall be applied retrospectively for
all periods presented. The statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The
Company is currently evaluating the impact this statement may have on its consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, (SFAS 161). This statement establishes enhanced disclosures about the entitys
derivative and hedging activities. This statement is effective for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. Adoption of SFAS 161
will result in enhanced disclosure regarding the Companys derivatives.
2. DISCONTINUED OPERATIONS
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
operations to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC,
Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no net cash
proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an after-tax loss
of $90.0 million on the transaction. As part of the transaction, Retail Ventures issued warrants
to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per
share, and exercisable within 18 months of January 23, 2008. To facilitate the change in ownership
and operation of Value City Department Stores, Retail Ventures agreed to provide or arrange for the
provision of certain transition services principally related to information technology, finance and
human resources to Value City Department Stores for a period of one year unless otherwise extended
by both parties.
Included
in the fiscal 2007 loss from discontinued operations of
$150.7 million is $60.7 million of
after-tax net loss for the Value City operations through January 22, 2008 and the loss on the sale
of the Value City operations of $90.0 million. The loss on the sale is comprised of $26.6 million
for the recording of guarantees, the write off of the remaining investment in
the discontinued operations and
the balance was related to the transfer of assets. See additional information regarding the
guarantees within Note 11 to the consolidated financial statements.
The following table presents the significant components of Value City operating results included in
discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
February 2, |
|
|
February 3, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Net sales |
|
$ |
1,172,687 |
|
|
$ |
1,361,125 |
|
|
$ |
1,379,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
$ |
(60,653 |
) |
|
$ |
(33,514 |
) |
|
$ |
(66,836 |
) |
Income tax benefit |
|
|
|
|
|
|
11,243 |
|
|
|
10,521 |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
$ |
(60,653 |
) |
|
$ |
(22,271 |
) |
|
$ |
(56,315 |
) |
|
|
|
|
|
|
|
|
|
|
F-14
The following table presents the assets and liabilities of Value City reflected as discontinued
operations in the Consolidated Balance Sheet (in thousands).
|
|
|
|
|
|
|
February 3, |
|
|
|
2007 |
|
Cash |
|
$ |
17,201 |
|
Restricted cash |
|
|
511 |
|
Accounts receivable, net |
|
|
7,667 |
|
Inventories |
|
|
217,024 |
|
Prepaid expenses and other |
|
|
8,933 |
|
|
|
|
|
Total current assets |
|
|
251,336 |
|
|
|
|
|
Property and equipment, net |
|
|
100,440 |
|
Tradenames and intangibles, net |
|
|
8,574 |
|
Other non current assets |
|
|
3,448 |
|
|
|
|
|
Total non current assets |
|
|
112,462 |
|
|
|
|
|
Total assets |
|
$ |
363,798 |
|
|
|
|
|
|
|
|
|
|
Accounts payable, net |
|
$ |
24,647 |
|
Accrued expenses |
|
|
65,281 |
|
Current maturities of long-term obligations |
|
|
766 |
|
|
|
|
|
Total current liabilities |
|
|
90,694 |
|
|
|
|
|
Note payable to parent |
|
|
34,441 |
|
Long-term obligations, net of current maturities |
|
|
97,730 |
|
Other non current liabilities |
|
|
5,410 |
|
|
|
|
|
Total non current liabilities |
|
|
137,581 |
|
|
|
|
|
Total liabilities |
|
$ |
228,275 |
|
|
|
|
|
3. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from affiliates of Schottenstein Stores Corporation (SSC), the
direct owner of approximately 39.5% of the common shares of Retail Ventures (excluding common
shares underlying warrants held by SSC). The amount of purchases from SSC and its affiliates in
fiscal 2007, fiscal 2006 and fiscal 2005 was $0.7 million, $2.2 million and $2.4 million,
respectively.
The Company also leases certain store and warehouse locations owned by SSC.
Accounts receivable from and payable to SSC and its affiliates principally result from commercial
transactions with entities owned or controlled by SSC or intercompany transactions with SSC.
Settlement of affiliate receivables and payables are in the form of cash. These transactions settle
normally in 30 to 60 days. The Company shares certain personnel, administrative and service costs
with SSC and its affiliates. The costs of providing these services are allocated among the Company,
SSC and its affiliates without a premium. The allocated amounts are not significant. SSC does not
charge the Company for general corporate management services. SSC provides certain real estate
services to the Company for which the Company expensed $0.2 million in fiscal 2007. In fiscal
2007, SSC also assisted in the closing of the Downtown Crossing Boston store, resulting in expense
to the Company of $0.7 million.
Cerberus, as a beneficial owner of approximately 4.3% of the outstanding common shares of Retail
Ventures, is also a related party. Cerberus is the holder of 1,731,460 term loan warrants as of
February 2, 2008.
See Notes 6, 7 and 10 to the consolidated financial statements for additional related party
disclosures.
4. STOCK BASED COMPENSATION
On January 29, 2006, Retail Ventures adopted the fair value recognition provisions of SFAS 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 123R, compensation expense was recognized during the
year ended February 2, 2008 for all unvested stock options, based on the grant date fair value
estimated in accordance with the original provisions of SFAS
F-15
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 123R. Stock-based compensation expense
was recorded in selling, general and administrative expenses in the Consolidated Statements of
Operations. Retail Ventures financial results for the prior periods have not been restated as a
result of this adoption.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting
from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash
Flows. Beginning in fiscal 2006 with the adoption of SFAS 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 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 Consolidated Statements of Operations. RVI recognizes compensation expense for stock option
awards granted subsequent to the adoption of SFAS 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 123R is recorded using an accelerated method.
Retail Ventures Stock Compensation Plans
The Company 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 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.
The Company 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
and remain exercisable for a period of ten years from the date of grant.
During fiscal 2007 and 2006, included in income from continuing operations is stock based
compensation expense of approximately $5.1 million and $4.0 million, respectively, which includes
approximately $4.2 million and $3.4 million, respectively, of expenses recorded by DSW. In fiscal
2007 and 2006, the impact of FAS123R on the Companys basic and diluted earnings per share was a
negative $0.04 and a negative $0.03, respectively.
The following table illustrates the pro forma effect on net loss and loss per share for fiscal 2005
if the Company had applied the fair value recognition of SFAS 123 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
January 28, |
|
|
2006 |
Net loss, as reported |
|
$ |
(183,418 |
) |
Add: Stock-based employee compensation expense included in
reported net loss, net of tax |
|
|
4,698 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards |
|
|
(5,748 |
) |
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(184,468 |
) |
|
|
|
|
|
|
Loss per share: |
|
|
|
|
Basic and diluted as reported |
|
$ |
(4.75 |
) |
Basic and diluted pro forma |
|
$ |
(4.78 |
) |
F-16
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 is zero, which is based on the Companys history and current intent of
not declaring dividends to shareholders.
The weighted-average grant date fair value of options granted in fiscal 2007, 2006 and 2005 was
$8.00 per share, $9.18 per share and $6.34 per share, respectively. The following table illustrates
the weighted-average assumptions used in the option-pricing model for options granted in each of
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended |
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
|
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.4 |
% |
|
|
4.6 |
% |
|
|
4.3 |
% |
Expected volatility of Retail Ventures Common Shares |
|
|
56.1 |
% |
|
|
62.5 |
% |
|
|
71.8 |
% |
Expected option term |
|
5.0 |
years |
|
4.8 |
years |
|
4.5 |
years |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The following table summarizes the Companys stock options for fiscal 2007, including the related
Weighted Average Exercise Prices (WAEP), Weighted Average Remaining Contract Life (WARCL) and
Weighted Average Grant Date Fair Value (GDFV), using the Black-Scholes option pricing model
(shares and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
WAEP |
Outstanding beginning of year |
|
|
1,335 |
|
|
$ |
5.59 |
|
Granted |
|
|
50 |
|
|
$ |
15.09 |
|
Exercised |
|
|
(19 |
) |
|
$ |
3.67 |
|
Canceled |
|
|
(54 |
) |
|
$ |
5.83 |
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
1,312 |
|
|
$ |
5.97 |
|
Options exercisable end of year |
|
|
1,207 |
|
|
$ |
5.76 |
|
Shares available for additional grants |
|
|
5,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
Year ended February 2, 2008: |
|
Shares |
|
WAEP |
|
GDFV |
|
Contract Life |
|
Value |
Options outstanding |
|
|
1,312 |
|
|
$ |
5.97 |
|
|
$ |
3.61 |
|
|
4 years |
|
$ |
3,244 |
|
Options vested or expected to vest |
|
|
1,304 |
|
|
$ |
5.96 |
|
|
$ |
3.61 |
|
|
4 years |
|
$ |
3,224 |
|
Options exercisable |
|
|
1,207 |
|
|
$ |
5.76 |
|
|
$ |
3.51 |
|
|
4 years |
|
$ |
2,982 |
|
The aggregate intrinsic value is calculated as the amount by which the fair value of the underlying
common shares exceeds the option exercise price. Total intrinsic value of options exercised during
fiscal 2007, 2006 and 2005 was $0.3 million, $3.5 million and $28.6 million, respectively.
As of the end of fiscal 2007, the total compensation cost related to nonvested options not yet
recognized was $0.1 million with a weighted average expense recognition period remaining of 2.1
years. The total fair value of options that vested during fiscal 2007, 2006 and 2005 was $0.6
million, $1.9 million and $ 1.6 million, respectively.
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 issuance 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 granted to employees
F-17
and are subject to a vesting schedule or a performance vesting formula, as applicable. Prior to
fiscal 2007, SARs were 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.
During fiscal 2007, the Compensation Committee of the Board of Directors determined to settle all
future exercises of SARs granted under the 2000 Stock Incentive Plan in the form of common shares,
except as prohibited by the individuals award agreement. As a result of this change, $1.9 million
was reclassified from noncurrent liabilities to equity on the balance sheet, including $0.7 million
accrued by the discontinued operations.
SARs generally vest ratably over five years although some of the more recent grants vest over a
three year period with 50% vesting at the end of the third year. The exercise price is equal to
the fair market value on the date of the grant. SARs compensation costs of negative $2.5 million, $7.4
million and $6.2 million were recorded in continuing operations during fiscal 2007, fiscal 2006 and
fiscal 2005, respectively, relating to SARs. Included in the SARs expense for fiscal 2006 and
fiscal 2005 are expenses relating to the accelerated vesting of some performance based SARs.
During fiscal 2007, 2006 and 2005 approximately $0.3 million, $5.1 million and $3.2 million,
respectively, was paid to settle exercised SARs by continuing operations. Compensation costs of
less than $0.1 million, $2.1 million and $1.3 million was recorded by the discontinued operations
in fiscal 2007, 2006 and 2005, respectively. During fiscal 2007, 2006 and 2005, the discontinued
operations paid less than $0.1 million $1.3 million and $0.7 million, respectively, to settle
exercised SARs.
The following table summarizes the Companys SARs for the year ended February 2, 2008 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended February 2, 2008 |
|
|
Shares |
|
WAEP |
Outstanding beginning of period |
|
|
978 |
|
|
$ |
9.49 |
|
Granted |
|
|
140 |
|
|
$ |
20.72 |
|
Exercised |
|
|
(205 |
) |
|
$ |
6.21 |
|
Forfeited |
|
|
(188 |
) |
|
$ |
13.05 |
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
725 |
|
|
$ |
11.66 |
|
|
|
|
|
|
|
|
|
|
Exercisable end of period |
|
|
307 |
|
|
$ |
7.97 |
|
The
weighted-average grant date fair value of SARs granted during
fiscal 2007 was $10.69 per share. The weighted-average assumptions
used in the Black-Scholes option-pricing model for SARs granted in
fiscal 2007 were: risk-free interest rate of 4.5%; expected
volatility of 54.5%; expected term of 5.0 years and an expected
dividend yield of 0.09%.
Restricted Stock Units
The Company issues restricted stock units to certain executives of the Company. The restricted
stock units issued by Retail Ventures, generally vest over three years, in one-third increments per
year and are settled immediately upon vesting. The restricted stock units are settled only in cash
in an amount equal to the fair market value of an equivalent number of the Companys common shares
on the date of vesting. The restricted stock units provide that no common shares of the Company
will be issued, authorized, reserved, purchased or sold at any time in connection with the
restricted stock units. The restricted stock units are under no circumstances considered common
shares nor do they entitle the holder of the restricted stock units to the exercise of any other
rights arising from the ownership of common shares, including dividend and voting rights.
Total compensation expense costs recognized for continuing operations related to the restricted
stock units in fiscal 2007, fiscal 2006 and fiscal 2005 was a negative $0.6 million, $2.1 million
and $2.4 million, respectively. The amount of restricted stock
units attributable to continuing operations
accrued at February 2, 2008 and February 3, 2007 was $0.2 million and $1.7 million, respectively.
The Company paid $0.9 million, $1.9 million and $1.3 million to settle vested restricted stock
units in fiscal 2007, 2006 and fiscal 2005 respectively for continuing operations.
The discontinued operations recorded compensation expense related to the restricted stock units in
fiscal 2007, fiscal 2006 and fiscal 2005 of negative $0.3 million, $0.7 million and $0.9 million,
respectively. The amount of restricted stock units accrued by discontinued operations at February
3, 2007 was $0.6 million. The discontinued operations paid $0.3 million, $0.6 million and $0.5
million to settle vested restricted stock units in fiscal 2007, 2006 and 2005, respectively.
F-18
The following table summarizes the Companys outstanding restricted stock units for fiscal 2007 and
2006 (units in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended |
|
Fiscal year ended |
|
|
February 2, 2008 |
|
February 3, 2007 |
|
|
Units |
|
Units |
Outstanding beginning of period |
|
|
170 |
|
|
|
300 |
|
Granted |
|
|
47 |
|
|
|
35 |
|
Vested |
|
|
(160 |
) |
|
|
(160 |
) |
Forfeited |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
57 |
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
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. 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.
Stock Options
Forfeitures of options are estimated at the grant date based on historical rates of RVIs stock
option activity and reduce the compensation expense recognized. The expected term of options
granted is derived from historical data of RVIs stock options due to the limited historical data
on DSW stock activity. The risk-free interest rate is based on the yield for U.S. Treasury
securities with a remaining life equal to the five year expected term of the options at the grant
date. The expected dividend yield 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 Black-Scholes
option-pricing model for options granted in each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.5 |
% |
|
|
4.6 |
% |
|
|
4.1 |
% |
Year end volatility of DSW common stock |
|
|
39.4 |
% |
|
|
39.9 |
% |
|
|
42.3 |
% |
Expected option term |
|
5.0 |
years |
|
4.8 |
years |
|
5.0 |
years |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The weighted average grant date fair value of each DSW option granted in fiscal years 2007, 2006
and 2005 was $17.27, $13.01 and $8.43, respectively. As of February 2, 2008, the total compensation
cost related to nonvested options not yet recognized was approximately $8.7 million, with a
weighted average expense recognition period remaining of 3.4 years. The following tables summarize
DSWs stock options, including the related per share Weighted Average Exercise Prices (WAEP)
and Weighted Average Grant Date Fair Value (GDFV), using the Black-Scholes option pricing model.
(shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
February 2, 2008 |
|
|
Shares |
|
WAEP |
Outstanding beginning of year |
|
|
1,084 |
|
|
$ |
22.14 |
|
Granted |
|
|
527 |
|
|
$ |
41.67 |
|
Exercised |
|
|
(13 |
) |
|
$ |
20.04 |
|
Forfeited |
|
|
(78 |
) |
|
$ |
27.46 |
|
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
1,520 |
|
|
$ |
28.65 |
|
Options exercisable end of year |
|
|
379 |
|
|
$ |
20.90 |
|
Shares available for additional grants |
|
|
2,832 |
|
|
|
|
|
F-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
Year ended February 2, 2008: |
|
Shares |
|
WAEP |
|
GDFV |
|
Contract Life |
|
Value |
Options outstanding |
|
|
1,520 |
|
|
$ |
28.65 |
|
|
$ |
12.12 |
|
|
8 years |
|
$ |
683 |
|
Options vested or expected to vest |
|
|
1,435 |
|
|
$ |
30.34 |
|
|
$ |
12.06 |
|
|
8 years |
|
$ |
655 |
|
Options exercisable |
|
|
379 |
|
|
$ |
20.90 |
|
|
$ |
9.00 |
|
|
8 years |
|
$ |
297 |
|
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 years ended February 2, 2008, February 3, 2007 and January 28, 2006 was $0.2 million,
$0.5 million and less than $0.1 million, respectively. The total fair value of options that vested
during the years ended February 2, 2008 and February 3, 2007 was $2.0 million and $1.6 million,
respectively. There were no options that vested during the year ended January 28, 2006.
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 February 2, 2008
and February 3, 2007 was $3.0 million and $5.5 million, respectively. As of February 2, 2008 and
February 3, 2007, the total compensation cost related to nonvested restricted stock units not yet
recognized was approximately $1.9 million and $2.1 million, respectively, with a weighted average
expense recognition period remaining of 1.6 years and 2.3 years, respectively. The weighted
average exercise price for all restricted stock units is zero.
The following table summarizes DSWs restricted stock units for the periods presented (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended February 2, 2008 |
|
Fiscal year ended February 3, 2007 |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
|
Grant Date Fair |
|
|
Units |
|
Value |
|
Units |
|
Value |
Outstanding beginning of period |
|
|
135 |
|
|
$ |
22.03 |
|
|
|
131 |
|
|
$ |
20.46 |
|
Granted |
|
|
29 |
|
|
$ |
28.69 |
|
|
|
23 |
|
|
$ |
30.91 |
|
Exercised/ Vested |
|
|
(10 |
) |
|
$ |
24.85 |
|
|
|
(10 |
) |
|
$ |
24.85 |
|
Forfeited |
|
|
(3 |
) |
|
$ |
27.96 |
|
|
|
(9 |
) |
|
$ |
19.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
151 |
|
|
$ |
23.92 |
|
|
|
135 |
|
|
$ |
22.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Stock Units
DSW issues stock units to directors who are not employees of DSW or RVI. During the years ended
February 2, 2008 and February 3, 2007, DSW granted 10,398 and 10,525 director stock units,
respectively, and expensed $0.3 million in both fiscal years, related to these grants. Stock units
are automatically granted to each director who is not an employee of DSW or RVI 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 (including committee retainer fees but excluding any amount paid for service as the chair
of a board committee) by the fair market value of a share 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 such directors 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. Stock units granted to directors which are not subject to forfeiture are
considered to be outstanding for the purposes of computing basic earnings per share. The exercise
price of the director stock units is zero. As of February 2, 2008, 37,936 director stock units had
been issued and no director stock units had been settled.
F-20
5. INVESTMENTS
During the
years ended February 2, 2008 and February 3, 2007,
$209.9 million and $188.3
million, respectively, of cash was used to purchase available-for-sale securities while $226.0
million and $89.6 million, respectively, was generated by the sale of available-for-sale
securities. As of February 2, 2008 and February 3, 2007, DSW held $70.0 million and $98.7
million in short-term investments, respectively. At February 2, 2008, DSW held $12.5 million
in long-term investments, and at February 3, 2007, DSW had no long-term investments.
DSWs long-term investments balance includes $10.0 million in auction rate securities that
failed at auction subsequent to February 2, 2008 and were
presented as long-term as it is
unknown if DSW will be able to liquidate these securities within one year. In fiscal 2007, DSW
did not record any impairment related to these investments as it does not believe that the
underlying credit quality of the assets has been impacted by the reduced liquidity of these
investments.
6. LEASES
The Company leases stores and warehouses under various arrangements with related and unrelated
parties. Such leases expire through 2024 and in most cases provide for renewal options. Generally,
the Company is required to pay real estate taxes, maintenance, insurance and contingent rentals
based on sales in excess of specified levels. There were no capital leases outstanding during
fiscal 2007 or 2006 in continuing operations.
Future minimum lease payments required under the aforementioned leases, exclusive of real estate
taxes, insurance and maintenance costs, at February 2, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
|
|
|
|
|
Unrelated |
|
|
Related |
|
Fiscal Year |
|
Total |
|
|
Party |
|
|
Party |
|
2008 |
|
$ |
163,002 |
|
|
$ |
145,486 |
|
|
$ |
17,516 |
|
2009 |
|
|
166,087 |
|
|
|
148,315 |
|
|
|
17,772 |
|
2010 |
|
|
159,920 |
|
|
|
142,190 |
|
|
|
17,730 |
|
2011 |
|
|
149,997 |
|
|
|
132,118 |
|
|
|
17,879 |
|
2012 |
|
|
134,380 |
|
|
|
116,096 |
|
|
|
18,284 |
|
Future Years |
|
|
620,676 |
|
|
|
497,714 |
|
|
|
122,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
1,394,062 |
|
|
$ |
1,181,919 |
|
|
$ |
212,143 |
|
|
|
|
|
|
|
|
|
|
|
The composition of rental expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
Minimum rentals: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties |
|
$ |
125,381 |
|
|
$ |
108,741 |
|
|
$ |
100,548 |
|
Related parties |
|
|
12,945 |
|
|
|
10,311 |
|
|
|
8,825 |
|
Contingent rentals: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties |
|
|
25,391 |
|
|
|
17,749 |
|
|
|
17,311 |
|
Related parties |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
163,717 |
|
|
$ |
136,801 |
|
|
$ |
126,684 |
|
Many of the Companys leases contain fixed escalations of the minimum annual lease payments during
the original term of the lease. For these leases, the Company recognizes rental expense on a
straight-line basis and records the difference between the average rental amount charged to expense
and the amount payable under the lease as deferred rent. At the end of fiscal 2007 and 2006, the
balance of deferred rent was $38.1 million and $32.4 million, respectively, and is included in
other noncurrent liabilities. Certain store and warehouse leases provided landlord incentives
totaling $76.2 million and $57.0 million in fiscal 2007 and 2006, respectively. These incentives
are recorded as other noncurrent liabilities in the accompanying consolidated balance sheet and are
amortized as a reduction of rent expense over the remaining minimum lease term.
F-21
7. LONG TERM OBLIGATIONS
Long term obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Credit facilities: |
|
|
|
|
|
|
|
|
Revolving credit facilities |
|
$ |
22,500 |
|
|
$ |
35,000 |
|
Senior Loan Agreement related parties |
|
|
250 |
|
|
|
|
|
Premium Income Exchangeable Securities (PIES) |
|
|
143,750 |
|
|
|
143,750 |
|
Discount on PIES |
|
|
(8,707 |
) |
|
|
(10,697 |
) |
|
|
|
$ |
157,793 |
|
|
$ |
168,053 |
|
|
Letters of credit outstanding: |
|
|
|
|
|
|
|
|
Filenes Basement revolving credit facility |
|
$ |
3,360 |
|
|
|
|
|
Continuing operations under previous VCDS revolving credit facility |
|
|
|
|
|
$ |
2,087 |
|
DSW revolving credit facility |
|
$ |
15,711 |
|
|
$ |
13,448 |
|
Availability under revolving credit facilities: |
|
|
|
|
|
|
|
|
Filenes Basement revolving credit facility |
|
$ |
26,996 |
|
|
|
|
|
Continuing operations under previous VCDS revolving credit facility |
|
|
|
|
|
$ |
16,839 |
|
DSW revolving credit facility |
|
$ |
134,289 |
|
|
$ |
136,552 |
|
On July 5, 2005, Retail Ventures amended, or amended and restated, its prior 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 consisted of
three separate credit facilities: (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
wholly-owned subsidiaries of Retail Ventures (other than DSW and DSWSW) were 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
$50.0 million senior non-convertible loan facility, which was held equally by Cerberus and SSC (the
Non-Convertible Loan), under which Value City is the borrower and Retail Ventures and certain
wholly-owned subsidiaries of Retail Ventures (other than DSW and DSWSW) were co-guarantors. On January 23,
2008, Filenes Basement entered into a five-year $100.0 million revolving credit facility (the
Filenes Basement Revolving Loan) under which Filenes Basement is the borrower and Retail
Ventures and certain of its other wholly-owned subsidiaries are the co-guarantors. The final maturity date of the remaining $0.25 million Non-Convertible Loan
held by SSC is the earlier of (i) June 10, 2009, or (ii) the date that the Conversion Warrants held
by SSC are exercised.
On August 16, 2006, Retail Ventures issued $125 million of 6.625% Mandatorily Exchangeable Notes
due September 15, 2011, or 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. RVI used a portion of the net proceeds of the offering to repay 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 the Non-Convertible Loan. The Filenes
Basement Revolving Loan, DSW Revolving Loan, Non-Convertible Loan and PIES are sometimes referred
to collectively as the Credit Facilities.
The Company is not subject to any financial covenants; however, its 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
$100 Million Secured Revolving Credit Facility The Filenes Basement Revolving Loan
In connection with RVIs disposition of its 81% ownership of its Value City business effective
January 23, 2008, Value City was released from its obligations under the $275 million VCDS
Revolving Loan, which was terminated, and any collateral security granted by Value City to secure
such obligations was also released. Effective January 23, 2008, Filenes Basement entered into the
$100
F-22
million Filenes Basement Revolving Loan through an amendment and restatement of its indebtedness
and obligations as a co-borrower under the VCDS Revolving Loan.
Under the Filenes Basement Revolving Loan, Filenes Basement is named as the borrower. The
Filenes Basement Revolving Loan is guaranteed by Retail Ventures and certain of its wholly-owned
subsidiaries. Neither DSW nor DSWSW are borrowers or guarantors under the Filenes Basement
Revolving Loan. The Filenes Basement 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 Filenes
Basement Revolving Loan are secured by a lien on substantially all of the personal property of
Filenes Basement, and of Retail Ventures and its other wholly-owned subsidiaries, excluding shares
of DSW owned by Retail Ventures. At February 2, 2008, $27.0 million was available under the
Filenes Basement Revolving Loan. Direct borrowings aggregated $22.5 million and $3.4 million
letters of credit were issued and outstanding. There were no borrowings or letters of credit under
the Filenes Basement Revolving Loan as of February 3, 2007. The maturity date of the Filenes
Basement Revolving Loan is January 23, 2013.
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
Under the DSW Revolving Loan, 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 February 2, 2008, $134.3 million was available under the DSW Revolving Loan and no direct
borrowings were outstanding. At February 2, 2008 and February 3, 2007, $15.7 million and $13.4
million, respectively in letters of credit were issued and outstanding. At February 3, 2007 $136.6
million was available under the DSW Revolving Loan and no direct borrowings were outstanding. The
maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans Related Parties
The principal balances of the $100 million Term Loans were 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 one of the Term
Loans. The Term Loan Warrants are 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 lenders registration
rights with respect to the shares issuable upon exercise of the Term Loan Warrants. The $6.1
million value ascribed to the Term Loan Warrants was estimated as of the date of issuance using the
Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 5.6%;
expected life of 10 years; expected volatility of 47%; illiquidity discount of 10%; and an expected
dividend yield of 0%. The related debt discount was amortized into interest expense over the life
of the debt.
Payment of and Amendment to Term Loans
Pursuant to the July 2005 Fourth Amendment to Financing Agreement, (i) DSW was released from its
obligations as a co-borrower under the Term Loans, (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.
F-23
Non-Convertible Loan Related Parties
$75 Million Senior Subordinated Convertible Loan
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 the Companys option,
up to 50% of the interest due may be PIK until maturity. Prior to its amendment and restatement in
July 2006, the Convertible Loan was guaranteed by all the Companys principal subsidiaries and was
secured by a lien on assets junior to liens granted in favor of the lenders on the VCDS Revolving
Loan and Term Loans. All interest was paid in cash.
$50 Million Second Amended and Restated Senior Loan Agreement The Non-Convertible Loan
Pursuant to the Non-Convertible Loan, (i) DSW was released from its obligations as a co-guarantor,
(ii) Value City repaid $25 million of the Convertible Loan, (iii) the remaining $50 million
Convertible Loan was converted into a non-convertible loan, (iv) the capital stock of DSW held by
Retail Ventures continues to secure the 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 is June 10, 2009 and 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.
$0.25 Million Senior Non-Convertible Loan
On August 16, 2006, the Non-Convertible Loan was again amended and restated 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 Conversion Warrants, and (iv) obtained a release of the capital stock of
DSW held by RVI used to secure the Non-Convertible Loan. On June 11, 2007, the outstanding
principal balance of the Non-Convertible Loan of $0.25 million owed to Cerberus was prepaid,
together with accrued interest thereon, when Cerberus completed the exercise of its remaining
Conversion Warrants. The final maturity date of the $0.25 million Non-Convertible Loan held by SSC
is the earlier of (i) June 10, 2009 or (ii) the date that the Conversion Warrants held by SSC are
exercised. This loan and cash collateral was assumed by RVI in connection with the disposition of
Value City on January 23, 2008.
$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 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 $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 $50.00 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
F-24
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 a portion of 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. An additional $0.25 million of the Non-Convertible Loan
was paid by Value City to Cerberus, together with interest, in fiscal 2007. During fiscal 2007,
RVI assumed the remaining $0.25 million Convertible Loan still held by SSC, and SSC continues to
hold restricted cash of $0.25 million as collateral for the remaining balance of the
Non-Convertible 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 fiscal 2007, the Company recorded a reduction of expenses related to the change in fair
value of the conversion feature of the PIES of $93.6 million. During fiscal 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 of $51.1 million. As of February 2,
2008, the fair value asset recorded
for the conversion feature was $30.8 million as estimated using the Black-Scholes pricing model
with the following assumptions: risk-free rate of 4.2%, expected life of 3.6 years, expected
volatility of 44.0% and an expected dividend yield of 0.0%. As of February 3, 2007, the fair value
liability recorded for the conversion feature was $62.8 million as estimated using the
Black-Scholes pricing model with the following assumptions: risk-free rate of 5.2%, expected life
of 4.6 years, expected volatility of 39.7% and an expected dividend yield of 0.0%.
Other Debt Items
The weighted average interest rate on borrowings under the Companys credit facilities during
fiscal year 2007, 2006 and 2005 was 6.8%, 7.0% and 5.2%, respectively.
The book value of notes payable and long-term debt approximates fair value at February 2, 2008. The
carrying amount of the revolving line of credit approximates fair value as a result of the variable
rate-based borrowings. The carrying amount of the term loan and subordinated debt also approximates
fair value, as this was the available financing in the marketplace during the fiscal year.
At February 2, 2008, future annual long-term debt payments are as follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
Amount |
|
2008 |
|
|
|
|
2009 |
|
$ |
250 |
|
2010 |
|
|
|
|
2011 |
|
|
143,750 |
|
2012 |
|
|
|
|
Future Years |
|
|
22,500 |
|
|
Total |
|
$ |
166,500 |
|
8. PENSION BENEFIT PLANS
The Company has one qualified defined benefit pension plan assumed at the time of acquisition of
Filenes Basement. The Companys funding policy is to contribute annually the amount required to
meet ERISA funding standards and to provide not only for benefits attributed to service to date but
also for those anticipated to be earned in the future. The Company uses a January 31 measurement
date for its plan.
F-25
The following provides a reconciliation of projected benefit obligations, plan assets and funded
status of the plan for the years as noted below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
15,848 |
|
|
$ |
15,685 |
|
Interest cost |
|
|
907 |
|
|
|
861 |
|
Benefits paid |
|
|
(1,169 |
) |
|
|
(635 |
) |
Actuarial
gain (loss) |
|
|
721 |
|
|
|
(63 |
) |
|
Projected benefit obligation at end of year |
|
$ |
16,307 |
|
|
$ |
15,848 |
|
|
Accumulated benefit obligation at end of year |
|
$ |
16,307 |
|
|
$ |
15,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair market value at beginning of year |
|
$ |
15,464 |
|
|
$ |
13,794 |
|
Actual (loss) return on plan assets |
|
|
(449 |
) |
|
|
1,409 |
|
Employer contributions |
|
|
900 |
|
|
|
1,000 |
|
Benefits paid |
|
|
(1,169 |
) |
|
|
(635 |
) |
Other |
|
|
(183 |
) |
|
|
(104 |
) |
|
Fair market value at end of year |
|
$ |
14,563 |
|
|
$ |
15,464 |
|
|
The Company made contributions of $0.9 million during fiscal 2007 and $1.0 million in fiscal 2006
to the pension plan. The Companys funding policy is to contribute an amount annually that
satisfies the minimum funding requirements of ERISA and that is tax deductible under the Internal
Revenue Code of 1986, as amended. The Company anticipates contributing approximately $0.5 million
in fiscal 2008 to meet minimum funding requirements.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid in the years indicated (in thousands):
|
|
|
|
|
Fiscal Year |
|
Amount |
|
2008 |
|
$ |
717 |
|
2009 |
|
|
722 |
|
2010 |
|
|
725 |
|
2011 |
|
|
733 |
|
2012 |
|
|
791 |
|
2013 - 2018 |
|
|
4,808 |
|
Amounts recognized in the Consolidated Balance Sheets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
|
February 3, |
|
|
|
2008 |
|
|
2007 |
|
Deferred income tax asset long term |
|
$ |
884 |
|
|
$ |
150 |
|
Other non-current liabilities |
|
|
(1,744 |
) |
|
|
(383 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(860 |
) |
|
$ |
(233 |
) |
The components of net periodic benefit cost are comprised of the following for the years indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
Interest cost |
|
$ |
907 |
|
|
$ |
861 |
|
|
$ |
858 |
|
Expected return on plan assets |
|
|
(1,212 |
) |
|
|
(1,077 |
) |
|
|
(938 |
) |
Amortization of transition (asset) obligation |
|
|
(38 |
) |
|
|
(38 |
) |
|
|
(38 |
) |
Amortization of net loss |
|
|
244 |
|
|
|
290 |
|
|
|
342 |
|
|
Net periodic benefit cost |
|
$ |
(99 |
) |
|
$ |
36 |
|
|
$ |
224 |
|
|
F-26
Of the amounts in accumulated other comprehensive income as of February 2, 2008, we expect the
following to be recognized as net pension costs in fiscal 2008 (in thousands):
|
|
|
|
|
Remaining unrecognized benefit obligation existing at transition |
|
$ |
(38 |
) |
Unrecognized net loss |
|
|
442 |
|
|
Total |
|
$ |
404 |
|
|
The expected long-term rate of return was based on historical average annual returns for S&P 500,
Russell 2000 and LB Intermediate Term Government for 10 years and since inception of the assets.
Assumptions used in each year of the actuarial computations were:
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Discount rate |
|
|
6.0 |
% |
|
|
6.0 |
% |
Expected long-term rate of return |
|
|
8.0 |
% |
|
|
8.0 |
% |
The Companys investment strategy is to meet the liabilities of the plan as they are due and to
maximize the return on invested assets within appropriate risk tolerances. The weighted average
allocation of plan assets by category is as follows:
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Equity securities |
|
|
55.0 |
% |
|
|
55.0 |
% |
Fixed securities |
|
|
44.4 |
% |
|
|
44.5 |
% |
Other |
|
|
0.6 |
% |
|
|
0.5 |
% |
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
9. OTHER BENEFIT PLANS
The Company maintains a 401(k) Plan for its employees. Eligible employees may contribute up to
thirty percent of their compensation to the plan on a pre tax basis, subject to IRS 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 plan, the Company matches employee deferrals into the 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
plan each year. The Company incurred costs associated with the 401(k) Plan of $3.1 million, $2.7
million and $2.2 million for fiscal years 2007, 2006 and 2005, respectively. The Company made no
discretionary profit sharing contributions during the last three fiscal years.
10. SHAREHOLDERS EQUITY AND WARRANT LIABILITY
The Company issued restricted common shares to certain key employees pursuant to individual
employment agreements and certain other grants has 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 February 2, 2008 the Company
did not have any outstanding restricted shares. As of February 3, 2007, the Company had outstanding
500 restricted shares.
Warrants
VCHI Acquisition Co. Warrants
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City
Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition
Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. As part of the transaction,
Retail Ventures issued warrants (the VCHI Warrants) to VCHI Acquisition Co. to purchase 150,000
RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of
January 23, 2008. At the date of issuance, January 23, 2008, the closing price of Retail Ventures
Common Shares was $6.09. Upon exercise of the VCHI Warrants, Retail Ventures will deliver the
shares via net-share or physical settlement at the election of the warrant holder.
F-27
The VCHI Warrants are not derivative instruments as defined under SFAS No. 133. The warrants were
measured at fair value on the date of the transaction, January 23, 2008, and recorded within
equity. The $0.1 million value ascribed to the VCHI Warrants was estimated as of January 23, 2008
using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of
2.1%; expected life of 1.5 years; expected volatility of 58.4% and an expected dividend yield of
0.0%.
Term Loan Warrants and Conversion Warrants
As a result of the previously discussed Credit Facilities modifications made on July 5, 2005 (see
Note 7, 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 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 fiscal 2006, the Company recorded a charge of $124.8 million for the change in fair
value of Warrants. For fiscal 2007, the Company recorded a reduction of expenses of $154.6 million,
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. The Term
Loan Warrants expire on June 11, 2012 while the Conversion Warrants expire on June 10, 2009.
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 the Warrants was $42.2 million and $216.4 million at February 2, 2008 and
February 3, 2007, respectively.
The $26.6 million value ascribed to the Conversion Warrants was estimated as of February 2, 2008
using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of
2.1%; expected life of 1.4 years; expected volatility of 55.5% and an expected dividend yield of
0.0%.
The $15.6 million value ascribed to the Term Loan Warrants was estimated as of February 2, 2008 using
the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 2.7%;
expected life of 4.4 years; expected volatility of 55.4% and an expected dividend yield of 0.0%. As
the Warrants may be exercised for either common shares of Retail Ventures or common shares of DSW
owned by Retail Ventures, the settlement of the Warrants will not result in a cash outlay by the
Company.
During fiscal 2007, Retail Ventures issued 1,333,333 of its common shares at an exercise price of
$4.50 per share to Cerberus in connection with Cerberus exercise of its remaining Conversion
Warrants. In connection with this exercise, Retail Ventures received $6.0 million and reclassified
$19.6 million from the warrant liability to paid in capital during fiscal 2007. During fiscal 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 Cerberus exercise of a portion of its outstanding Conversion Warrants.
In connection with these exercises, Retail Ventures received $31.5 million and reclassified $78.8
million from the warrant liability to paid in capital during fiscal 2006.
11. 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 DSWs 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 cooperated with law enforcement and other authorities with
regard to this matter. DSW is involved in a putative class action lawsuit which seeks unspecified
monetary damages, credit monitoring and other relief. The lawsuit seeks to certify a class of
consumers that is limited geographically to consumers who made purchases at certain stores in Ohio.
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 its defenses and possible claims against others.
F-28
DSW estimated 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 possible settlement of claims 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, the Company 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 to DSWs results of
operations or financial condition. As of February 2, 2008, the balance of the associated accrual
for potential exposure was $0.5 million.
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 of the 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 most likely estimated liability related to the claim. In the opinion
of management, the amount of any potential liability with respect to these proceedings will not be
material to the Companys results of operations or financial condition. As additional information
becomes available, the Company will assess the potential liability related to its pending
litigation and revise the estimates as needed. Revisions in its estimates and potential liability
could materially impact the Companys results of operations and financial condition.
Guarantees
As discussed above, RVI completed the disposition of an 81% ownership interest in its Value City
business segment on January 23, 2008. Retail Ventures or its wholly-owned subsidiary, Retail
Ventures Services, Inc. (RVS), has guaranteed and in certain circumstances may be responsible for
certain liabilities of Value City including, but not limited to: amounts owed under certain
guarantees with various financing institutions; amounts owed under guarantees of Value Citys
operations regarding certain equipment leases; amounts owed under certain income tax liabilities;
amounts owed under certain employee benefit plans and amounts owed by RVS under certain service
agreements through which Value City obtains general services or information technology equipment or
licenses. As of February 2, 2008, RVI had recorded a liability of $26.6 million for the guarantees
of Value City commitments.
Contractual
Obligations
During
fiscal 2007, the Company has continued to enter into various
construction commitments, including capital items to be purchased for
projects that were under construction or for which a lease has been
signed. The obligations under these commitments aggregated
approximately $5.8 million at February 2, 2008. In addition DSW and
Filenes Basement Collectively have signed lease agreements for
38 new store locations with annual aggregate rent of $14.0 million
and average terms of approximately 10 years. Associated with the new
lease agreements, the Company will receive approximately $10.6
million of tenant improvement allowances which will offset future
capital expenditures.
12. INCOME TAXES
The income tax expense (benefit) for continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
30,260 |
|
|
$ |
37,050 |
|
|
$ |
18,602 |
|
State and local |
|
|
6,538 |
|
|
|
7,051 |
|
|
|
4,944 |
|
|
Total current tax expense |
|
|
36,798 |
|
|
|
44,101 |
|
|
|
23,546 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
47,476 |
|
|
|
(18,010 |
) |
|
|
(4,271 |
) |
State and local |
|
|
2,333 |
|
|
|
(218 |
) |
|
|
4,470 |
|
|
Total deferred tax expense (benefit) |
|
|
49,809 |
|
|
|
(18,228 |
) |
|
|
199 |
|
|
Income tax expense |
|
$ |
86,607 |
|
|
$ |
25,873 |
|
|
$ |
23,745 |
|
|
F-29
A reconciliation of the expected income taxes based upon the statutory rate is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
Income tax (benefit) expense at federal statutory rate of 35% |
|
$ |
108,136 |
|
|
$ |
(27,797 |
) |
|
$ |
(33,855 |
) |
Warrant liability marked to market |
|
|
(54,058 |
) |
|
|
43,685 |
|
|
|
50,473 |
|
Jobs credit |
|
|
(485 |
) |
|
|
(357 |
) |
|
|
(685 |
) |
State and local taxes, net |
|
|
6,362 |
|
|
|
3,193 |
|
|
|
4,018 |
|
Tax exempt interest |
|
|
(1,476 |
) |
|
|
(498 |
) |
|
|
|
|
Non-deductible interest |
|
|
|
|
|
|
|
|
|
|
222 |
|
Valuation allowance |
|
|
23,188 |
|
|
|
1,694 |
|
|
|
2,148 |
|
Federal reserve |
|
|
|
|
|
|
1,895 |
|
|
|
|
|
Provision to return adjustments |
|
|
29 |
|
|
|
(2,889 |
) |
|
|
101 |
|
Change in subsidiary basis |
|
|
4,013 |
|
|
|
6,025 |
|
|
|
910 |
|
Other |
|
|
898 |
|
|
|
922 |
|
|
|
413 |
|
|
Income tax expense |
|
$ |
86,607 |
|
|
$ |
25,873 |
|
|
$ |
23,745 |
|
|
The components of the net deferred tax asset (liability) as of February 2, 2008 and February 3,
2007, are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Basis differences in inventory |
|
$ |
5,394 |
|
|
$ |
10,587 |
|
Basis differences in property and equipment |
|
|
(576 |
) |
|
|
12,311 |
|
Deferred compensation |
|
|
6,587 |
|
|
|
5,667 |
|
Intangible assets |
|
|
4,318 |
|
|
|
2,441 |
|
State net operating loss & credits |
|
|
23,272 |
|
|
|
15,263 |
|
Federal net operating loss |
|
|
97,614 |
|
|
|
22,496 |
|
Federal tax credit |
|
|
14,682 |
|
|
|
13,621 |
|
FIN 45 reserves |
|
|
10,371 |
|
|
|
|
|
Unrealized tax benefit |
|
|
2,446 |
|
|
|
|
|
Tenant allowance |
|
|
1,598 |
|
|
|
1,415 |
|
Capital leases |
|
|
|
|
|
|
3,462 |
|
Workers compensation |
|
|
1,283 |
|
|
|
7,160 |
|
Deferred revenue |
|
|
|
|
|
|
4,663 |
|
Accrued expenses |
|
|
3,725 |
|
|
|
5,294 |
|
Accrued rent |
|
|
16,006 |
|
|
|
14,788 |
|
PIES |
|
|
(8,949 |
) |
|
|
24,354 |
|
Other |
|
|
3,791 |
|
|
|
4,365 |
|
|
Total deferred tax assets |
|
|
181,562 |
|
|
|
147,887 |
|
Less: Valuation allowance |
|
|
(100,546 |
) |
|
|
(15,648 |
) |
|
|
|
|
81,016 |
|
|
|
132,239 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis in subsidiary |
|
|
(76,493 |
) |
|
|
(72,480 |
) |
Prepaid expenses |
|
|
(5,705 |
) |
|
|
(6,816 |
) |
Deferred Revenue CAT Credit |
|
|
(250 |
) |
|
|
(1,092 |
) |
|
Total deferred tax liabilities |
|
|
(82,448 |
) |
|
|
(80,388 |
) |
|
Total net |
|
$ |
(1,432 |
) |
|
$ |
51,851 |
|
|
F-30
The net deferred tax asset (liability) is recorded in the Companys consolidated balance sheet as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
|
2008 |
|
2007 |
Current deferred tax asset |
|
$ |
28,225 |
|
|
$ |
25,737 |
|
Non current deferred tax (liability) asset |
|
|
(29,657 |
) |
|
|
26,114 |
|
|
Net deferred tax asset (liability) |
|
$ |
(1,432 |
) |
|
$ |
51,851 |
|
|
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 it is more likely than not that future taxable income will not be sufficient to
fully utilize deferred tax assets, state net operating losses and charitable contribution carry
forwards which expire in future years at various dates depending on the state jurisdiction. As a
result, the Company has recorded an addition to the valuation allowance in the current period of
$84.9 million. The ending balances of the valuation allowance at February 2, 2008 and at February
3, 2007 were $100.5 million and $15.6 million, respectively. The Company believes it is more likely
than not that the remaining deferred tax assets will be realized.
The net operating loss deferred tax asset consists of a federal and state component. The federal
component is $97.6 million and the state component is $22.8 million. These net operating losses are
available to reduce federal and state taxable income for the fiscal
years 2008 to 2027.
Consistent with its historical financial reporting, the Company has elected to classify interest
expense related to income tax liabilities, when applicable, as part of the interest expense in its
condensed consolidated statement of income rather than income tax expense. The Company will
continue to classify income tax penalties as part of operating expenses in its condensed
consolidated statements of income. As of February 2, 2008 and February 4, 2007, $0.9 million and
$0.3 million, respectively, were accrued for the payment of interest and penalties.
Effective February 4, 2007, the Company adopted the provisions of FIN 48. As of February 4, 2007
and February 2, 2008, unrecognized tax benefits of $2.0 million and $3.0 million, respectively,
would affect the Companys effective tax rate if recognized. As of February 2, 2008, the
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(amounts in thousands):
|
|
|
|
|
|
|
Unrecognized Tax |
|
|
Benefits |
Balance at February 4, 2007 |
|
$ |
2,004 |
|
Decreases Tax Positions taken in a prior period |
|
|
(1,123 |
) |
Increases Tax Positions taken in the current period |
|
|
2,147 |
|
|
Balance at February 2, 2008 |
|
$ |
3,028 |
|
|
13. SEGMENT REPORTING
The Company is operated in three segments: DSW, Filenes Basement and Corporate. All of the
operations are located in the United States. In fiscal 2007, as a result of RVIs disposition of an
81% ownership interest in its Value City Department Stores operations, the results of the
previously disclosed Value City segment are included in discontinued operations (see Note 2 to the
Consolidated Financial Statements) and Value City is therefore no longer included as a reportable
segment of the Company. The Company has identified such segments based on chief operating decision
maker responsibilities and measures segment profit (loss) as operating profit (loss), which is
defined as profit (loss) before interest expense, income taxes
and minority interest. The goodwill balance of $25.9 million
outstanding at February 2, 2008 and February 3, 2007 is recorded in
the DSW segment. The Corporate
segment includes activities that are not allocated to individual segments. Capital expenditures in
brackets represent assets transferred to other segments.
F-31
The tables below present segment statement of operations information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
As of and for the year ended
February 2, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,405,615 |
|
|
$ |
466,289 |
|
|
|
|
|
|
|
|
|
|
$ |
1,871,904 |
|
Operating profit (loss) |
|
|
81,321 |
|
|
|
(17,848 |
) |
|
$ |
248,193 |
|
|
|
|
|
|
|
311,666 |
|
Depreciation and amortization |
|
|
25,055 |
|
|
|
12,487 |
|
|
|
3,243 |
|
|
|
|
|
|
|
40,785 |
|
Interest expense |
|
|
1,178 |
|
|
|
7,936 |
|
|
|
12,718 |
|
|
$ |
(8,284 |
) |
|
|
13,548 |
|
Interest income |
|
|
7,148 |
|
|
|
124 |
|
|
|
11,484 |
|
|
|
(8,284 |
) |
|
|
10,472 |
|
Income tax expense |
|
|
(33,516 |
) |
|
|
(14,205 |
) |
|
|
(38,886 |
) |
|
|
|
|
|
|
(86,607 |
) |
Capital expenditures |
|
|
102,451 |
|
|
|
17,152 |
|
|
|
(715 |
) |
|
|
|
|
|
|
118,888 |
|
Total assets |
|
|
693,882 |
|
|
|
162,099 |
|
|
|
222,361 |
|
|
|
(126,377 |
) |
|
|
951,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
As of and for the year ended
February 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,279,060 |
|
|
$ |
427,473 |
|
|
|
|
|
|
|
|
|
|
$ |
1,706,533 |
|
Operating profit (loss) |
|
|
100,714 |
|
|
|
(1,225 |
) |
|
$ |
(175,955 |
) |
|
|
|
|
|
|
(76,466 |
) |
Depreciation and amortization |
|
|
20,686 |
|
|
|
9,282 |
|
|
|
3,103 |
|
|
|
|
|
|
|
33,071 |
|
Interest expense |
|
|
614 |
|
|
|
6,791 |
|
|
|
7,873 |
|
|
$ |
(5,835 |
) |
|
|
9,443 |
|
Interest income |
|
|
7,527 |
|
|
|
40 |
|
|
|
5,574 |
|
|
|
(5,835 |
) |
|
|
7,306 |
|
Income tax (expense) benefit |
|
|
(42,164 |
) |
|
|
2,215 |
|
|
|
14,076 |
|
|
|
|
|
|
|
(25,873 |
) |
Capital expenditures |
|
|
42,407 |
|
|
|
16,118 |
|
|
|
(317 |
) |
|
|
|
|
|
|
58,208 |
|
Total assets |
|
|
603,785 |
|
|
|
175,287 |
|
|
|
437,750 |
|
|
|
(278,962 |
) |
|
|
937,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
For the year ended January 28,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,144,061 |
|
|
$ |
389,335 |
|
|
|
|
|
|
|
|
|
|
$ |
1,533,396 |
|
Operating profit (loss) |
|
|
70,112 |
|
|
|
(10,727 |
) |
|
$ |
(144,209 |
) |
|
|
|
|
|
|
(84,824 |
) |
Depreciation and amortization |
|
|
19,443 |
|
|
|
8,662 |
|
|
|
2,892 |
|
|
|
|
|
|
|
30,997 |
|
Interest expense |
|
|
8,892 |
|
|
|
3,743 |
|
|
|
6,928 |
|
|
$ |
(8,031 |
) |
|
|
11,532 |
|
Interest income |
|
|
1,388 |
|
|
|
57 |
|
|
|
6,586 |
|
|
|
(8,031 |
) |
|
|
|
|
Income tax (expense) benefit |
|
|
(25,426 |
) |
|
|
3,526 |
|
|
|
(1,845 |
) |
|
|
|
|
|
|
(23,745 |
) |
Capital expenditures |
|
|
25,537 |
|
|
|
4,112 |
|
|
|
1,434 |
|
|
|
|
|
|
|
31,083 |
|
The following sets forth sales by each major merchandise category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
Apparel and ready to wear |
|
$ |
323,977 |
|
|
$ |
298,477 |
|
|
$ |
284,525 |
|
Jewelry, hard goods and home furnishings |
|
|
69,105 |
|
|
|
68,525 |
|
|
|
65,186 |
|
Shoes and other footwear |
|
|
1,478,822 |
|
|
|
1,339,531 |
|
|
|
1,183,685 |
|
|
Total |
|
$ |
1,871,904 |
|
|
$ |
1,706,533 |
|
|
$ |
1,533,396 |
|
|
F-32
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Year Ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen weeks ended |
|
|
May 5, |
|
August 4, |
|
November |
|
February |
(in thousands except per share data) |
|
2007 |
|
2007 |
|
3, 2007 |
|
2, 2008 |
Net sales |
|
$ |
465,839 |
|
|
$ |
464,638 |
|
|
$ |
489,394 |
|
|
$ |
452,033 |
|
Cost of sales |
|
|
(266,426 |
) |
|
|
(288,028 |
) |
|
|
(284,445 |
) |
|
|
(282,000 |
) |
|
Gross profit |
|
|
199,413 |
|
|
|
176,610 |
|
|
|
204,949 |
|
|
|
170,033 |
|
Selling, general and administrative expenses |
|
|
(172,687 |
) |
|
|
(171,674 |
) |
|
|
(177,193 |
) |
|
|
(172,554 |
) |
Change in fair value of derivative instruments |
|
|
14,596 |
|
|
|
26,953 |
|
|
|
43,497 |
|
|
|
11,230 |
|
Change in fair value of derivative instruments related party |
|
|
(2,047 |
) |
|
|
97,831 |
|
|
|
47,850 |
|
|
|
8,283 |
|
License fees and other income |
|
|
1,753 |
|
|
|
1,316 |
|
|
|
1,872 |
|
|
|
1,635 |
|
|
Operating profit |
|
|
41,028 |
|
|
|
131,036 |
|
|
|
120,975 |
|
|
|
18,627 |
|
Non-related parties interest expense |
|
|
(3,064 |
) |
|
|
(3,129 |
) |
|
|
(3,177 |
) |
|
|
(4,166 |
) |
Related parties interest expense |
|
|
(4 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
Total interest expense |
|
|
(3,068 |
) |
|
|
(3,132 |
) |
|
|
(3,179 |
) |
|
|
(4,169 |
) |
Interest income |
|
|
2,640 |
|
|
|
2,945 |
|
|
|
2,633 |
|
|
|
2,254 |
|
|
Interest expense, net |
|
|
(428 |
) |
|
|
(187 |
) |
|
|
(546 |
) |
|
|
(1,915 |
) |
|
Income from continuing operations before income taxes and
minority interest |
|
|
40,600 |
|
|
|
130,849 |
|
|
|
120,429 |
|
|
|
16,712 |
|
Income tax expense |
|
|
(18,723 |
) |
|
|
(12,877 |
) |
|
|
(29,701 |
) |
|
|
(25,306 |
) |
|
Income
(loss) from continuing operations before minority interest |
|
|
21,877 |
|
|
|
117,972 |
|
|
|
90,728 |
|
|
|
(8,594 |
) |
Minority interest |
|
|
(8,775 |
) |
|
|
(2,411 |
) |
|
|
(8,295 |
) |
|
|
(398 |
) |
|
Income
(loss) from continuing operations |
|
|
13,102 |
|
|
|
115,561 |
|
|
|
82,433 |
|
|
|
(8,992 |
) |
Loss from discontinued operations, net of tax |
|
|
(10,362 |
) |
|
|
(9,343 |
) |
|
|
(14,211 |
) |
|
|
(116,746 |
) |
|
Net income (loss) |
|
$ |
2,740 |
|
|
$ |
106,218 |
|
|
$ |
68,222 |
|
|
$ |
(125,738 |
) |
|
Earnings (loss) per share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share from continuing operations |
|
$ |
0.28 |
|
|
$ |
2.40 |
|
|
$ |
1.70 |
|
|
$ |
(0.19 |
) |
Diluted
earnings (loss) per share from continuing operations |
|
$ |
0.22 |
|
|
$ |
1.97 |
|
|
$ |
1.45 |
|
|
$ |
(0.19 |
) |
Basic loss per share from discontinued operations |
|
$ |
(0.22 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.29 |
) |
|
$ |
(2.40 |
) |
Diluted loss per share from discontinued operations |
|
$ |
(0.17 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.25 |
) |
|
$ |
(2.40 |
) |
Basic earnings (loss) per share |
|
$ |
0.06 |
|
|
$ |
2.21 |
|
|
$ |
1.40 |
|
|
$ |
(2.59 |
) |
Diluted earnings (loss) per share |
|
$ |
0.05 |
|
|
$ |
1.81 |
|
|
$ |
1.20 |
|
|
$ |
(2.59 |
) |
F-33
Year Ended February 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourteen |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weeks |
|
|
Thirteen weeks ended |
|
ended |
|
|
April 29, |
|
July 29, |
|
October 28, |
|
February 3, |
(in thousands except per share data) |
|
2006 |
|
2006 |
|
2006 |
|
2007 |
Net sales |
|
$ |
407,086 |
|
|
$ |
394,146 |
|
|
$ |
446,414 |
|
|
$ |
458,887 |
|
Cost of sales |
|
|
(236,989 |
) |
|
|
(229,202 |
) |
|
|
(257,288 |
) |
|
|
(274,188 |
) |
|
Gross profit |
|
|
170,097 |
|
|
|
164,944 |
|
|
|
189,126 |
|
|
|
184,699 |
|
Selling, general and administrative expenses |
|
|
(146,393 |
) |
|
|
(143,671 |
) |
|
|
(163,001 |
) |
|
|
(160,950 |
) |
Change in fair value of derivative instruments |
|
|
(926 |
) |
|
|
(311 |
) |
|
|
(28,009 |
) |
|
|
(23,766 |
) |
Change in fair value of derivative instruments related party |
|
|
(63,883 |
) |
|
|
(15,032 |
) |
|
|
(2,565 |
) |
|
|
(41,463 |
) |
License fees and other income |
|
|
542 |
|
|
|
657 |
|
|
|
1,001 |
|
|
|
2,438 |
|
|
Operating (loss) profit |
|
|
(40,563 |
) |
|
|
6,587 |
|
|
|
(3,448 |
) |
|
|
(39,042 |
) |
Non-related parties interest expense |
|
|
(701 |
) |
|
|
(835 |
) |
|
|
(2,579 |
) |
|
|
(3,044 |
) |
Related parties interest expense |
|
|
(430 |
) |
|
|
(430 |
) |
|
|
(1,420 |
) |
|
|
(4 |
) |
|
Total interest expense |
|
|
(1,131 |
) |
|
|
(1,265 |
) |
|
|
(3,999 |
) |
|
|
(3,048 |
) |
Interest income |
|
|
646 |
|
|
|
1,390 |
|
|
|
1,969 |
|
|
|
3,301 |
|
|
Interest (expense) income, net |
|
|
(485 |
) |
|
|
125 |
|
|
|
(2,030 |
) |
|
|
253 |
|
|
(Loss) income from continuing operations before income taxes
and minority interest |
|
|
(41,048 |
) |
|
|
6,712 |
|
|
|
(5,478 |
) |
|
|
(38,789 |
) |
Income tax (expense) benefit |
|
|
(9,755 |
) |
|
|
(8,759 |
) |
|
|
(11,700 |
) |
|
|
4,341 |
|
|
Loss from continuing operations before minority interest |
|
|
(50,803 |
) |
|
|
(2,047 |
) |
|
|
(17,178 |
) |
|
|
(34,448 |
) |
Minority interest |
|
|
(6,464 |
) |
|
|
(5,660 |
) |
|
|
(5,909 |
) |
|
|
(6,133 |
) |
|
Loss from continuing operations |
|
|
(57,267 |
) |
|
|
(7,707 |
) |
|
|
(23,087 |
) |
|
|
(40,581 |
) |
(Loss) income from discontinued operations, net of tax |
|
|
(7,681 |
) |
|
|
(8,294 |
) |
|
|
(10,987 |
) |
|
|
4,691 |
|
|
Net loss |
|
$ |
(64,948 |
) |
|
$ |
(16,001 |
) |
|
$ |
(34,074 |
) |
|
$ |
(35,890 |
) |
|
(Loss) earnings per share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share from continuing operations |
|
$ |
(1.39 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.86 |
) |
Diluted loss per share from continuing operations |
|
$ |
(1.39 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.86 |
) |
Basic (loss) earnings per share from discontinued operations |
|
$ |
(0.19 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.23 |
) |
|
$ |
0.10 |
|
Diluted (loss) earnings per share from discontinued
operations |
|
$ |
(0.19 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.23 |
) |
|
$ |
0.10 |
|
Basic loss per share |
|
$ |
(1.58 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.72 |
) |
|
$ |
(0.76 |
) |
Diluted loss per share |
|
$ |
(1.58 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.72 |
) |
|
$ |
(0.76 |
) |
|
|
|
|
(1) |
|
Earnings (loss) per share calculations for each quarter are based on the
applicable weighted average shares outstanding for each period and may not necessarily
be equal to the full year per share amount. |
F-34
15. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in thousands) |
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest to non related parties |
|
$ |
14,101 |
|
|
$ |
5,045 |
|
|
$ |
1,394 |
|
Income taxes |
|
$ |
35,537 |
|
|
$ |
40,530 |
|
|
$ |
14,767 |
|
Noncash investing and operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in accounts payable due to asset purchases |
|
$ |
3,463 |
|
|
$ |
(752 |
) |
|
$ |
958 |
|
Additional paid in capital transferred from warrant liability
for warrant exercises |
|
$ |
19,612 |
|
|
$ |
78,817 |
|
|
|
|
|
Reclassification of SARs from noncurrent liability to equity |
|
$ |
1,934 |
|
|
|
|
|
|
|
|
|
Issuance of
VCHI Warrants |
|
$ |
124 |
|
|
|
|
|
|
|
|
|
F-35
RETAIL VENTURES, INC.
SCHEDULE I Condensed Financial Information of Registrant
(dollars in thousands)
|
|
|
|
|
Description |
|
Amount |
Dividend paid to registrant from DSW Inc.: |
|
|
|
|
January 28, 2006 |
|
$ |
190,000 |
|
February 3, 2007 |
|
None |
February 2, 2008 |
|
None |
S-1
RETAIL VENTURES, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charges to |
|
Charges to |
|
|
|
|
|
|
|
|
Beginning of |
|
Costs and |
|
Other |
|
|
|
|
|
Balance at |
Description |
|
Period |
|
Expenses |
|
Accounts |
|
Deductions(1) |
|
End of Period |
Allowance deducted from asset to which it applies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006 |
|
$ |
20,147 |
|
|
$ |
6,427 |
|
|
|
|
|
|
$ |
3,029 |
|
|
$ |
23,545 |
|
February 3, 2007 |
|
|
23,545 |
|
|
|
3,643 |
|
|
|
|
|
|
|
2,156 |
|
|
|
25,032 |
|
February 2, 2008 |
|
|
25,032 |
|
|
|
17,933 |
|
|
|
|
|
|
|
11,212 |
|
|
|
31,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Sales Returns |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006 |
|
$ |
1,732 |
|
|
$ |
2,148 |
|
|
|
|
|
|
$ |
1,821 |
|
|
$ |
2,059 |
|
February 3, 2007 |
|
|
2,059 |
|
|
|
2,075 |
|
|
|
|
|
|
|
1,472 |
|
|
|
2,662 |
|
February 2, 2008 |
|
|
2,662 |
|
|
|
1,896 |
|
|
|
|
|
|
|
2,796 |
|
|
|
1,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Closing Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006 |
|
$ |
532 |
|
|
$ |
86 |
|
|
|
|
|
|
$ |
250 |
|
|
$ |
368 |
|
February 3, 2007 |
|
|
368 |
|
|
|
653 |
|
|
|
|
|
|
|
946 |
|
|
|
75 |
|
February 2, 2008 |
|
|
75 |
|
|
|
3,175 |
|
|
|
|
|
|
|
2,846 |
|
|
|
404 |
|
|
|
|
(1) |
|
The deductions are amounts written off against the reserve.
|
S-2
INDEX TO EXHIBITS
Exhibits marked with an asterisk (*) are filed herewith.
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
2.1
|
|
Agreement and Plan of Merger among Value City Department Stores, Inc., Retail Ventures, Inc. (the Company)
and Value City Merger Sub, Inc., effective as of October 8, 2003. Incorporated by reference to Exhibit 2 to
Form 8-K (file no. 1-10767) filed on October 8, 2003. |
|
|
|
2.2
|
|
Purchase Agreement, dated as of January 23, 2008, by and between Retail Ventures, Inc. and VCHI Acquisition
Co. Incorporated herein by reference to Exhibit 2.1 to Form 8-K (file no 1-10767) filed January 24, 2008. |
|
|
|
3.1
|
|
Amended Articles of Incorporation of the Company. Incorporated by reference to Exhibit 3(a) to Form 8-K (file
No. 1-10767) filed on October 8, 2003. |
|
|
|
3.2
|
|
Amended Code of Regulations of the Company. Incorporated by reference to Exhibit 3(b) to Form 8-K (file No.
1-10767) filed on October 8, 2003. |
|
|
|
4.1
|
|
Amended Common Stock Purchase Warrant issued by Retail Ventures, Inc. to Cerberus Partners, L.P. Incorporated
by reference to Exhibit 4.1 to Form 8-K (file no. 1-10767) filed October 19, 2005. |
|
|
|
4.2
|
|
Amended Common Stock Purchase Warrant issued by Retail Ventures, Inc. to Schottenstein Stores Corporation.
Incorporated by reference to Exhibit 4.2 to Form 8-K (file no. 1-10767) filed October 19, 2005. |
|
|
|
4.3
|
|
Form of Term Loan Warrant issued by Retail Ventures, Inc. to Millennium Partners, L.P. Incorporated by
reference to Exhibit 4.1 to Form 10-Q (file no. 1-10767) filed December 8, 2005. |
|
|
|
4.4
|
|
Form of Conversion Warrant issued by Retail Ventures, Inc. issued to Cerberus Partners, L.P. and
Schottenstein Stores Corporation. Incorporated by reference to Exhibit 4.1 to Form 8-K (file no. 1-10767)
filed July 11, 2005. |
|
|
|
4.5
|
|
Exchange Agreement, dated July 5, 2005, between Retail Ventures, Inc. and DSW Inc. Incorporated by reference
to Exhibit 10.4 to Form 8-K (file no. 1-10767) filed July 11, 2005. |
|
|
|
4.6
|
|
Second Amended and Restated Registration Rights Agreement, dated July 5, 2005, among Retail Ventures, Inc.,
Cerberus Partners, L.P., Schottenstein Stores Corporation and Back Bay Capital Funding LLC. Incorporated by
reference to Exhibit 4.2 to Form 8-K (file no. 1-10767) filed July 11, 2005. |
|
|
|
4.7
|
|
Specimen of Common Share Certificate. Incorporated by reference to Exhibit 4.7 to Form 10-K (file no.
1-10767) filed April 13, 2006. |
|
|
|
4.8
|
|
Indenture, dated as of August 16, 2006, by and between Retail Ventures, Inc. and HSBC Bank USA, National
Association, as indenture trustee (Form of 6.625% Mandatorily Exchangeable Notes Due September 15, 2011 filed
as Exhibit A thereto). Incorporated by reference to Exhibit 4.1 to Form 8-K (file no. 001-10767) filed on
August 22, 2006. |
|
|
|
4.9
|
|
Collateral Agreement, dated as of August 16, 2006, by and between Retail Ventures, Inc., as pledgor, and HSBC
Bank USA, National Association, as collateral agent, indenture trustee and securities intermediary.
Incorporated by reference to Exhibit 4.2 to Form 8-K (file no. 001-10767) filed on August 22, 2006. |
|
|
|
4.10
|
|
Form of Exchange Request by Retail Ventures, Inc. to DSW Inc. Incorporated by reference to Exhibit 4.5 to
Registration Statement on Form S-3/A (file no. 333-134225) filed on July 17, 2006. |
|
|
|
4.11
|
|
Pledge Agreement, dated as of August 16, 2006, made by Retail Ventures, Inc. with and in favor of Cerberus
Partners, L.P. Incorporated by reference to Exhibit 10.4 to Form 8-K (file no. 001-10767) filed on August
22, 2006. |
|
|
|
4.12
|
|
Pledge Agreement, dated as of August 16, 2006, made by Retail Ventures, Inc. with and in favor of
Schottenstein Stores Corporation. Incorporated by reference to Exhibit 10.5 to Form 8-K (file no. 001-10767)
filed on August 22, 2006. |
|
|
|
4.13*
|
|
Common Stock Purchase Warrant, dated January 23, 2008, issued by Retail Ventures, Inc. to VCHI Acquisition Co. |
|
|
|
10.1
|
|
Corporate Services Agreement, dated June 12, 2002, between the Company and SSC. Incorporated by reference to
Exhibit 10.6 to Form 10-Q (file no. 1-10767) filed June 18, 2002. |
|
|
|
10.1.1
|
|
Amendment to Corporate Services Agreement, dated July 5, 2005, among Schottenstein Stores Corporation, Retail
Ventures, Inc. and Schottenstein Management Company, together with Side Letter Agreement, dated July 5, 2005,
among DSW Inc., Schottenstein Stores Corporation, Retail Ventures, Inc. and Schottenstein Management Company.
Incorporated by reference to Exhibit 10.5 to Form 8-K (file no. 1-10767) filed July 11, 2005. |
E-1
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.2*
|
|
License Agreement, dated
January 23, 2008, between Value City of Michigan, Inc. and
Retail Ventures Licensing, Inc.
|
|
|
|
10.3
|
|
Master Separation Agreement, dated July 5, 2005, between Retail Ventures, Inc. and DSW Inc. Incorporated by
reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed July 11, 2005. |
|
|
|
10.4
|
|
Amended and Restated Shared Services Agreement, dated as of October 29, 2006, between Retail Ventures, Inc.
and DSW Inc. Incorporated by reference to Exhibit 10.8 to form 10-Q (file no. 1-10767) filed December 6.
2006. |
|
|
|
10.5
|
|
Tax Separation Agreement, dated July 5, 2005, among Retail Ventures, Inc. and its affiliates and DSW Inc. and
its affiliates. Incorporated by reference to Exhibit 10.3 to Form 8-K (file no. 1-10767) filed July 11, 2005. |
|
|
|
10.6
|
|
Supply Agreement, effective as of January 30, 2005, between DSW Inc. and Filenes Basement, Inc. Incorporated
by reference to Exhibit 10.6 to Form 8-K (file no. 1-10767) filed July 11, 2005. |
|
|
|
10.7#
|
|
Form of Indemnification Agreement entered into on December 22, 2005 between Retail Ventures, Inc. and each of
its directors and executive officers. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no.
1-10767) filed December 23, 2005 |
|
|
|
10.8#
|
|
Amended and Restated Retail Ventures, Inc. 1991 Stock Option Plan. Incorporated by reference to Exhibit 4(a)
to Amendment No. 1 to Form S-8 Registration Statement (file no. 333-45852) filed October 16, 2003. |
|
|
|
10.10#
|
|
Retail Ventures, Inc. Amended and Restated 2000 Stock Incentive Plan (the 2000 Stock Incentive Plan).
Incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Form S-8 Registration Statement (file no.
333-100398) filed on October 16, 2003. |
|
|
|
10.11#
|
|
Amended and Restated Retail Ventures, Inc. Non-Employee Director Stock Option Plan. Incorporated by reference
to Exhibit 4(a) to Form S-8 Registration Statement (file no. 333-45856) filed October 16, 2003. |
|
|
|
10.12**
|
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Baltimore, MD
(Eastpoint) furniture store location. Incorporated by reference to Exhibit 10.15.1 to Registration Statement
on Form S-1 (file no. 33-40214) filed April 29, 1991. |
|
|
|
10.13**
|
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Baltimore, MD
(Westview) furniture store location. Incorporated by reference to Exhibit 10.15.2 to Registration Statement
on Form S-1 (file no. 33-40214) filed April 29, 1991. |
|
|
|
10.14**
|
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Lansing, MI
furniture store location. Incorporated by reference to Exhibit 10.15.3 to Registration Statement on Form S-1
(file no. 33-40214) filed April 29, 1991. |
|
|
|
10.15**
|
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Louisville, KY
(Preston Highway) furniture store location. Incorporated by reference to Exhibit 10.15.4 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. |
|
|
|
10.16**
|
|
Form of Assignment and Assumption Agreement between the Company, as assignee, and SSC, as assignor, re: |
|
|
separate assignments of leases for 31 stores. Incorporated by reference to Exhibit 10.16 to Registration
Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. |
|
|
|
10.17**
|
|
Lease Agreement, dated July 1, 1988, between the Company, by assignment from SSC, dated April 25, 1991, as
sublessee, and SSC, as sublessor, re: Benwood, WV store location. Incorporated by reference to Exhibit 10.19
to Form 10-K (file no.1-10767) filed October 24, 1991. |
|
|
|
10.18#
|
|
Form of Restricted Stock Agreement between the Company and certain employees. Incorporated by reference to
Exhibit 10.27 to Amendment No. 1 to Form S-1 Registration Statement (file no. 33-47252) filed April 27, 1992. |
|
|
|
10.19**
|
|
Lease, dated September 1, 1992, between the Company, as lessee, and SSC, as lessor, re: South Bend/Mishawaka,
IN store. Incorporated by reference to Exhibit 10.29 to Form 10-K (file no.1-10767) filed October 22, 1992. |
|
|
|
10.20
|
|
Lease, dated January 27, 1992, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of
SSC, as lessor, re: 3080 Alum Creek Drive, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.30
to Form 10-K (file no.1-10767) filed October 22, 1992. |
E-2
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.20.1
|
|
Exercise of the first five-year renewal option commencing February 1, 1997 under lease, dated January 27,
1992, as amended, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC, as lessor,
re: 3080 Alum Creek Drive, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.30.1 to Form 10-Q
(file no. 1-10767) filed March 19, 1996. |
|
|
|
10.21
|
|
Lease, dated July 29, 1992, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC,
as lessor, re: 3232 Alum Creek Drive, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.31 to
Form 10-K (file no.1-10767) filed October 22, 1992. |
|
|
|
10.22**
|
|
Ground lease, dated April 15, 1994, between the Company, as lessee, and J.A.L. Realty Company, an affiliate
of SSC, as lessor, re: 19 acres (Westerville Rd., Columbus, OH). Incorporated by reference to Exhibit 10.35
to Form 10-K (file no. 1-10767) filed October 26, 1994. |
|
|
|
10.23**
|
|
Agreement of Lease, dated March 1, 1994, between the Company, as tenant, and Jubilee Limited Partnership, an
affiliate of SSC, as landlord, re: Hobart, IN store. Incorporated by reference to Exhibit 10.37 to Form 10-Q
(file no. 1-10767) filed December 12, 1994. |
|
|
|
10.24**
|
|
Agreement of Lease, dated January 13, 1995, between the Company, as tenant, and Westland Partners, an
affiliate of SSC, as landlord, re: Westland, MI store. Incorporated by reference to Exhibit 10.39 to Form
10-Q, (file no. 1-10767) filed March 14, 1995. |
|
|
|
10.25**
|
|
Agreement of Lease, dated January 13, 1995, between the Company, as tenant, and Taylor Partners, an affiliate
of SSC, as landlord, re: Taylor, MI store. Incorporated by reference to Exhibit 10.40 to Form 10-Q, (file no.
1-10767) filed March 14, 1995. |
|
|
|
10.26**
|
|
Lease, dated September 2, 1997, between the Company, as lessee, and SSC-Fort Wayne L.L.C., an affiliate of
SSC, as lessor. Incorporated by reference to Exhibit 10.33.1 to Form 10-K (file no. 1-10767) filed April 29,
2002. |
|
|
|
10.27**
|
|
Agreement of Lease, dated April 10, 1995, between the Company, as tenant, and Independence Limited Liability
Company, an affiliate of SSC, as landlord, re: Charlotte, NC store. Incorporated by reference to Exhibit
10.45 to Form 10-Q (file no. 1-10767) filed December 12, 1995. |
|
|
|
10.28**
|
|
Sublease and Occupancy Agreement, dated December 15, 1995, between the Company, SSC and SSC, dba Value City
Furniture, re: Louisville, KY (Preston Highway) store. Incorporated by reference to Exhibit 10.46 to Form
10-Q (file no. 1-10767) filed March 19, 1996. |
|
|
|
10.29**
|
|
Agreement of Lease, dated October 4, 1996, between the Company, as tenant, and Hickory Ridge Pavilion, Ltd.,
an affiliate of SSC, as landlord, re: Memphis, TN store. Incorporated by reference to Exhibit 10.50 to Form
10-K (file no. 1-10767) filed November 1, 1996. |
|
|
|
10.30**
|
|
Agreement of Lease, dated October 30, 1998, between the Company, as lessee, and Jubilee Limited Partnership,
an affiliate of SSC, as lessor, re: Calumet City, IL store. Incorporated by reference to Exhibit 10.56 to
Form 10-K (file no. 1-10767) filed April 30, 1999. |
|
|
|
10.31**
|
|
Agreement of Lease, dated September 29, 1998, between the Company, as tenant, and Valley Fair Irvington, LLC,
an affiliate of SSC, as landlord, re: Irvington, NJ. Incorporated by reference to Exhibit 10.57 to Form 10-K
(file no. 1-10767) filed April 30, 1999. |
|
|
|
10.32
|
|
Industrial Space Lease-Net, dated March 22, 2000, between 4300 East Fifth Avenue, LLC, an affiliate of SSC,
as landlord, and Shonac Corporation, as tenant, re: Building 6, Columbus International Aircenter, Columbus,
OH. Incorporated by reference to Exhibit 10.60 to Form 10-K (file no. 1-10767) filed April 28, 2000. |
|
|
|
10.33
|
|
Lease, dated August 30, 2002, by and between Jubilee Limited Partnership, an affiliate of SSC, and Shonac
Corporation, re: Troy, MI DSW store. Incorporated by reference to Exhibit 10.44 to Form 10-K (file no.
1-10767) filed April 29, 2004. |
|
|
|
10.33.1
|
|
Assignment and Assumption Agreement, dated October 23, 2002, between Shonac Corporation, as assignor, and DSW
Shoe Warehouse, Inc., as assignee, re: Troy, MI DSW store. Incorporated by reference to Exhibit 10.29.1 to
Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. |
|
|
|
10.34
|
|
Lease, dated October 8, 2003, by and between Jubilee Limited Partnership, an affiliate of SSC, and Shonac
Corporation, re: Denton, TX DSW store. Incorporated by reference to Exhibit 10.46 to Form 10-K (file no.
1-10767) filed April 29, 2004. |
|
10.34.1
|
|
Assignment and Assumption Agreement, dated December 18, 2003 between Shonac Corporation, as assignor, and DSW
Shoe Warehouse, Inc., as assignee, re: Denton, TX DSW store. Incorporated by reference to Exhibit 10.30.1 to
Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. |
E-3
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.35
|
|
Lease, dated October 28, 2003, by and between JLP-RICHMOND LLC, an affiliate of SSC, and Shonac Corporation,
re: Richmond, VA DSW store. Incorporated by reference to Exhibit 10.47 to Form 10-K (file no. 1-10767) filed
April 29, 2004. |
|
|
|
10.35.1
|
|
Assignment and Assumption Agreement, dated December 18, 2003,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: Richmond, VA DSW store. Incorporated by
reference to Exhibit 10.31.1 to Form 10-K/A Amendment No. 2
(file no. 1-10767) filed May 12, 2005. |
|
|
|
10.36#
|
|
Employment Agreement, dated June 21, 2000, between James A.
McGrady and the Company. Incorporated by reference to Exhibit
10.46 (also listed as Exhibit 10.61) to Form 10-K (file no.
1-10767) filed May 4, 2001. |
|
|
|
10.37#
|
|
Employment Agreement, dated as of April 29, 2004, between Julia
A. Davis and the Company. Incorporated by reference to Exhibit
10.51 to Form 10-K (file no. 1-10767) filed April 29, 2004. |
|
|
|
10.38**
|
|
Amended and Restated Loan and Security Agreement, dated July 5,
2005, by and among National City Business Credit, Inc., as
Administrative Agent for the ratable benefit of the Revolving
Credit Lenders, National City Business Credit, Inc., as
Collateral Agents for the ratable benefit of the Revolving
Credit Lenders, the Revolving Credit Lenders and Value City
Department Stores LLC (in such capacity, the Lead Borrower),
as agent for the Borrower and collectively the Borrowers.
Incorporated by reference to Exhibit 10.7 to Form 8-K (file no.
1-10767) filed July 11, 2005. |
|
|
|
10.38.1**
|
|
First Amendment to Amended and Restated Loan and Security
Agreement, dated as of August 16, 2006, by and among Value City
Department Stores LLC, as lead borrower, the other borrowers
named therein, the revolving credit lenders party thereto and
National City Business Credit, Inc., as administrative agent and
collateral agent. Incorporated by reference to Exhibit 10.6 to
Form 8-K (file no. 001-10767) filed on August 22, 2006. |
|
|
|
10.38.2**
|
|
Second Amendment to Amended and Restated Loan and Security
Agreement, dated October 3, 2007. Incorporated herein by
reference to Exhibit 10.2 to Form 8-K (file no. 1-10767) filed
October 4, 2007. |
|
|
|
10.39**
|
|
Third Amended and Restated Senior Loan Agreement, dated as of
August 16, 2006, among Value City Department Stores LLC, as
borrower, and Cerberus Partners, L.P., as lender. Incorporated
by reference to Exhibit 10.1 to Form 8-K (file no. 001-10767)
filed on August 22, 2006. |
|
|
|
10.40**
|
|
Third Amended and Restated Senior Loan Agreement, dated as of
August 16, 2006, among Value City Department Stores LLC, as
borrower, and Schottenstein Stores Corporation, as lender.
Incorporated by reference to Exhibit 10.2 to Form 8-K (file no.
001-10767) filed on August 22, 2006. |
|
|
|
10.41#**
|
|
Value City Department Stores, Inc. 2003 Incentive Compensation
Plan. Incorporated by reference to Exhibit 10.41 to Form 10-K
(file no. 1-10767) filed April 14, 2005. |
|
|
|
10.42#
|
|
Employment Agreement, effective November 1, 2004, between Retail
Ventures, Inc. and Heywood Wilansky. Incorporated by reference
to Exhibit 10.1 to Form 8-K/A (file no. 1-10767) filed November
24, 2004. |
|
|
|
10.43#
|
|
Employment Agreement, effective October 10, 2003, between Value
City Department Stores, Inc. and Steven E. Miller. Incorporated
by reference to Exhibit 10.43 to Form 10-K (file no. 1-10767)
filed April 14, 2005. |
|
|
|
10.44**
|
|
Agreement of Lease, dated March 1, 1994, between Jubilee Limited
Partnership, an affiliate of SSC, and Value City Department
Stores, Inc., as modified by First Lease Modification, dated
November 1, 1994, re: Merrilville, IN Value City store.
Incorporated by reference to Exhibit 10.44 to Form 10-K (file
no. 1-10767) filed April 14, 2005. |
|
|
|
10.45**
|
|
Lease Agreement, dated July 7, 1987, by and between
Schottenstein Trustees, an affiliate of SSC, and Schottenstein
Stores Corp. dba Schottensteins Department Store, as modified
by Lease Extension and Modification Agreement, dated March 12,
1998, by and between Schottenstein Trustees and Value City
Department Stores, Inc. dba Schottensteins East Department
Store, re: 6055 E. Main Street, Columbus, OH Value City store.
Incorporated by reference to Exhibit 10.45 to Form 10-K (file
no. 1-10767) filed April 14, 2005. |
|
|
|
10.46**
|
|
Industrial Space Lease Net, dated May 18, 2000, by and between
4300 East Fifth Avenue LLC, an affiliate of SSC, and Value City
Department Stores, Inc., re: 4320-30 East Fifth Avenue,
Columbus, OH warehouse. Incorporated by reference to Exhibit
10.47 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
|
|
|
10.47
|
|
Sublease, dated May 2000, by and between SSC, as sublessor, and
Shonac Corporation dba DSW Shoe Warehouse, as sublessee, |
|
|
re: Pittsburgh, PA DSW store. Incorporated by reference to Exhibit
10.48 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
E-4
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.47.1
|
|
Assignment and Assumption Agreement, dated January 8, 2001,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: 451 Clariton Boulevard, Pittsburgh, PA
DSW store. Incorporated by reference to Exhibit 10.48.1 to Form
10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. |
|
|
|
10.48
|
|
Lease, dated May 2000, by and between Jubilee-Richmond LLC, an
affiliate of SSC, and DSW Shoe Warehouse, Inc. (as assignee of
Shonac Corporation), re: Glen Allen, VA DSW store. Incorporated
by reference to Exhibit 10.49 to Form 10-K (file no. 1-10767)
filed April 14, 2005. |
|
|
|
10.49
|
|
Lease, dated February 28, 2001, by and between
Jubilee-Springdale, LLC, an affiliate of SSC, and Shonac
Corporation dba DSW Shoe Warehouse, re: Springdale, OH DSW
store. Incorporated by reference to Exhibit 10.50 to Form 10-K
(file no. 1-10767) filed April 14, 2005. |
|
|
|
10.49.1
|
|
Assignment and Assumption Agreement, dated May 11, 2001, between
Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc.,
as assignee, re: Springdale, OH DSW store. Incorporated by
reference to Exhibit 10.50.1 to Form 10-K/A Amendment No. 2
(file no. 1-10767) filed May 12, 2005. |
|
|
|
10.50
|
|
Agreement of Lease, dated 1997, between Shoppes of Beavercreek
Ltd., an affiliate of SSC, and Shonac Corporation (assignee of
SSC d/b/a Value City Furniture through Assignment of Tenanyt
Leasehold Interst and Amendment No. 1 to Agreement of Lease,
dated February 28, 2001), re: Beavercreek, OH DSW store.
Incorporated by reference to Exhibit 10.51 to Form 10-K (file
no. 1-10767) filed April 14, 2005. |
|
|
|
10.50.1
|
|
Assignment and Assumption Agreement, dated May 11, 2001, between
Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc.,
as assignee, re: Beavercreek, OH DSW store. Incorporated by
reference to Exhibit 10.51.1 to Form 10-K/A Amendment No. 2
(file no. 1-10767) filed May 12, 2005. |
|
|
|
10.51
|
|
Lease, dated February 28, 2001, by and between JLP-Chesapeake,
LLC, an affiliate of SSC, and Shonac Corporation, re: |
|
|
Chesapeake, VA DSW store. Incorporated by reference to Exhibit
10.52 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
|
|
|
10.51.1
|
|
Assignment and Assumption Agreement, dated May 11, 2001, between
Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc.,
as assignee, re: Chesapeake, VA DSW store. Incorporated by
reference to Exhibit 10.52.1 to Form 10-K/A Amendment No. 2
(file no. 1-10767) filed May 12, 2005. |
|
|
|
10.52
|
|
Ground Lease Agreement, dated April 30, 2002, by and between
Polaris Mall, LLC, a Delaware limited liability company, and
SSC-Polaris LLC, an affiliate of SSC, as modified by Sublease
agreement, dated April 30, 2002, by and between SSC-Polaris LLC,
as sublessor, and DSW Shoe Warehouse, Inc. as sublease (assignee
of Shonac Corporation), re: Columbus, OH (Polaris) DSW store.
Incorporated by reference to Exhibit 10.53 to Form 10-K (file
no. 1-10767) filed April 14, 2005. |
|
|
|
10.52.1
|
|
Assignment and Assumption Agreement, dated August 6, 2002,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: Columbus, OH (Polaris) DSW store.
Incorporated by reference to Exhibit 10.53.1 to Form 10-K/A
Amendment No. 2 (file no. 1-10767) filed May 12, 2005. |
|
|
|
10.53
|
|
Lease, dated August 30, 2002, by and between JLP-Cary LLC, an
affiliate of SSC, and Shonac Corporation, re: Cary, NC DSW
store. Incorporated by reference to Exhibit 10.54 to Form 10-K
(file no. 1-10767) filed April 14, 2005. |
|
|
|
10.53.1
|
|
Assignment and Assumption Agreement, dated October 23, 2002,
between Shonac Corporation, as assignor and DSW Shoe Warehouse,
Inc., as assignee, re: Cary, NC DSW store. Incorporated by
reference to Exhibit 10.54.1 to Form 10-K/A Amendment No. 2
(file no. 1-10767) filed May 12, 2005. |
|
|
|
10.54
|
|
Lease, dated August 30, 2002, by and between JLP-Madison LLC, an
affiliate of SSC, and Shonac Corporation, re: Madison, TN DSW
store. Incorporated by reference to Exhibit 10.55 to Form 10-K
(file no. 1-10767) filed April 14, 2005. |
|
|
|
10.54.1
|
|
Assignment and Assumption Agreement, dated October 23, 2002,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: Madison, TN DSW store. Incorporated by
reference to Exhibit 10.55.1 to Form 10-K/A Amendment No. 2
(file no. 1-10767) filed May 12, 2005. |
|
|
|
10.55
|
|
Lease, dated July 19, 2000, by and between Jubilee Limited
Partnership, an affiliate of SSC, and Value City Department
Stores, Inc., as modified by Lease Modification Agreement, dated
November 2, 2000, re: 3704 W. Dublin-Granville Rd., Columbus, OH
DSW/Filenes combo store. Incorporated by reference to Exhibit
10.56 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
|
|
|
10.55.1*
|
|
Assignment and Assumption of Lease
Agreement, dated January 22, 2008,
between Value City Department Stores LLC, Retail Ventures, Inc. and
Jubilee - Sawmill LLC, an affiliate of SSC, re: 3704 W.
Dublin-Granville Rd., Columbus, OH DSW/Filenes combo store.
|
|
|
|
10.56**
|
|
Master Store Lease, dated April 25, 1991, by and between SSC and
Value City Department Stores, Inc., as modified by First
Amendment to Master Store Lease, dated February 3, 1992, and
Second Amendment to Master Store Lease, dated March 18, 2005, by
and between SSC and Value City Department Stores LLC and Value
City of Michigan, Inc., re: 4 |
E-5
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
store locations (Clarksville, IN,
Springdale, OH, Louisville, KY (Dixie Highway), and Beckley,
WV). Incorporated by reference to Exhibit 10.57 to Form 10-K
(file no. 1-10767) filed April 14, 2005. |
|
|
|
10.57
|
|
Lease, dated September 24, 2004, by and between K&S Maple Hill
Mall, L.P., an affiliate of SSC, and Shonac Corporation, re: |
|
|
Kalamazoo, MI DSW store. Incorporated by reference to Exhibit
10.58 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
|
|
|
10.57.1
|
|
Assignment and Assumption Agreement, dated February 28, 2005, between Shonac Corporation, as assignor, and
DSW Shoe Warehouse, Inc., as assignee, re: Kalamazoo, MI DSW store. Incorporated by reference to Exhibit
10.58.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. |
|
|
|
10.58
|
|
Lease, dated November 2004, by and between KSK Scottsdale Mall, L.P., an affiliate of SSC, and Shonac
Corporation, re: South Bend, IN DSW store. Incorporated by reference to Exhibit 10.59 to Form 10-K (file no.
1-10767) filed April 14, 2005. |
|
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10.58.1
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|
Assignment and Assumption Agreement, dated March 18, 2005, between Shonac Corporation, as assignor, and DSW
Shoe Warehouse, Inc., as assignee, re: South Bend, IN DSW store. Incorporated by reference to Exhibit 10.59.1
to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. |
|
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10.59**
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|
Lease Agreement, dated March 18, 2005, by and between SSC and Value City of Michigan, Inc., re: Flint, MI DSW
store. Incorporated by reference to Exhibit 10.60 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
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10.60**
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|
Lease Agreement, dated September 2, 1997, by and between SSC-Barboursville, L.L.C., an affiliate of SSC, and
Value City Department Stores, Inc. Incorporated by reference to Exhibit 10.61 to Form 10-K (file no. 1-10767)
filed April 14, 2005. |
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10.61#
|
|
Sample Nonqualified Stock Option Award Agreement issued by the Company pursuant to the 2000 Stock Incentive
Plan. Incorporated by reference to Exhibit 10.62 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
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10.62#
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|
Sample Price Protected Stock Option Award Agreement issued by the Company pursuant to the 2000 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.63 to Form 10-K (file no. 1-10767) filed April 14,
2005. |
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10.63#
|
|
Sample Equity Compensation Approval Notice and Agreement issued by the Company to certain employees.
Incorporated by reference to Exhibit 10.64 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
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10.64**
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|
Master Sublease, dated April 25, 1991, between the Company, as sublessee, and SSC, as sublessor, re: two
stores (Covington, KY and Greenwood, IN). Incorporated by reference to Exhibit 10.11 to Registration
Statement on Form S-1 (file no. 33-402144) filed April 29, 1991. |
|
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10.65#
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|
Form of Indemnification Agreement between the Company and its directors and officers. Incorporated by
reference to Exhibit 10(b) to Registration Statement on Form S-8 (file no. 333-117341) filed July 13, 2004. |
|
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10.66**
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|
Lease Agreement, dated November 5, 1992, by and between Value City Department Stores, Inc. (successor to SSC
d/b/a Elyria Value City Shopping Center), as sublessor, and SSC d/b/a Value City Furniture #17, as sublessee,
as modified by Sublease Extension and Modification Agreement, dated October 11, 2001, re: Elyria, OH store.
Incorporated by reference to Exhibit 10.67.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12,
2005. |
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10.67**
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|
Agreement of Lease, dated March 6, 1996, between Value City of Michigan, Inc. (assignee of MRSLV Saginaw,
L.L.C.), as sublessor, and SSC d/b/a Value City Furniture, as sublessee, re: Saginaw Michigan store.
Incorporated by reference to Exhibit 10.68.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12,
2005. |
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10.68
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|
Agreement of Sublease, dated June 12, 2000, between Jubilee Limited Partnership, an affiliate of SSC, and DSW
Shoe Warehouse, Inc. (assignee of DSW Inc.), re: Baileys Crossroads, VA DSW Store. Incorporated by reference
to Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed June 9, 2005. |
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10.70**
|
|
License Agreement, dated August 30, 2002, by and between Value City Department Stores, Inc. and Shonac
Corporation, re: Merrillville, IN DSW store. Incorporated by reference to Exhibit 10.1 to Form 10-Q (file no.
1-10767) filed September 13, 2005. |
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10.71#
|
|
Employment Agreement, effective as of January 29, 2006, by and between Jed L. Norden and the Company.
Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed February 2, 2006. |
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10.72
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|
Agreement of Lease, dated April 7, 2006, by and between JLP Harvard Park, LLC, an affiliate of SSC, as
landlord, and DSW Inc., as tenant, re: Chagrin Highlands, Warrensville, Ohio DSW store. Incorporated by
reference to Exhibit 10.72 to Form 10-K (file no. 1-10767) filed April 13, 2006. |
E-6
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Exhibit |
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|
No. |
|
Description |
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10.74#
|
|
Summary of Director Compensation. Incorporated by reference to Exhibit 10.74 to Form 10-K (file no. 1-10767)
filed April 13, 2006. |
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10.75
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|
Loan and Security Agreement, between DSW Inc. and DSW Shoe Warehouse, Inc., as the Borrowers, and National
City Business Credit, Inc., as Administrative Agent and Collateral Agent for the Revolving Credit Lenders.
Incorporated by reference to Exhibit 10.11 to DSW Inc.s Form 10-K (file no. 001-32545) filed on April 13,
2006. |
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10.76
|
|
Agreement of Lease, dated April 13, 2006, between JLP Harvard Park, LLC, an affiliate of SSC, as landlord,
and Filenes Basement, Inc. as tenant, re: Chagrin, OH Filenes Basement store. Incorporated by reference to
Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed June 8, 2006. |
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10.77
|
|
Agreement of Lease, dated June 30, 2006, between JLPK Levittown NY LLC, an affiliate of Schottenstein
Stores Corporation and DSW Inc., re: Levittown, NY DSW store. Incorporated by reference to Exhibit 10.1 to
Form 10-Q (file no. 1-10767) filed December 6, 2006. |
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10.78
|
|
Agreement of Lease, dated November 27, 2006, between JLP Lynnhaven VA LLC, an affiliate of Schottenstein
Stores Corporation and DSW Inc., re: Lynnhaven, Virginia DSW store. Incorporated by reference to Exhibit 10.2
to Form 10-Q (file no. 1-10767) filed December 6, 2006. |
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10.79
|
|
Agreement of Lease, dated November 30, 2006, between 4300 Venture 34910 LLC, an affiliate of Schottenstein
Stores Corporation, and DSW Inc., re: Home office. Incorporated by reference to Exhibit 10.3 to Form 10-Q
(file no. 1-10767) filed December 6, 2006. |
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10.80
|
|
Agreement of 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. Incorporated by
reference to Exhibit 10.4 to Form 10-Q (file no. 1-10767) filed December 6, 2006. |
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10.81
|
|
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. Incorporated by reference to Exhibit
10.5 to Form 10-Q (file no. 1-10767) filed December 6, 2006. |
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10.82
|
|
Agreement of 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. Incorporated by
reference to Exhibit 10.6 to Form 10-Q (file no. 1-10767) filed December 6, 2006. |
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10.83
|
|
IT Transfer and Assignment Agreement dated October 29, 2006. Incorporated by reference to Exhibit 10.7 to
Form 10-Q (file no. 1-10767) filed December 6, 2006. |
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|
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10.84
|
|
Agreement of Lease, dated December 15, 2006, between American Signature, Inc., an affiliate of SSC, and DSW
Shoe Warehouse, Inc., re: Langhorne, Pennsylvania DSW store. Incorporated herein by reference to Exhibit
10.84 to Form 10-K (file no. 1-10767) filed April 5, 2007. |
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|
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10.85#
|
|
Sample Restricted Stock Unit Award Agreement issued by the Company to certain employees. Incorporated herein
by reference to Exhibit 10.85 to Form 10-K (file no. 1-10767) filed April 5, 2007. |
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|
10.86#
|
|
Sample Stock Appreciation Right Award Agreement issued by the Company to certain employees. Incorporated
herein by reference to Exhibit 10.86 to Form 10-K (file no. 1-10767) filed April 5, 2007. |
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|
|
10.87
|
|
Agreement of Lease, dated July 9, 2007, between Jubilee Limited Partnership, an affiliate of Schottenstein
Stores Corporation, and Filenes Basement, re: Aventura, FL Filenes Basement store. Incorporated herein by
reference to Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed September 13, 2007. |
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10.88
|
|
Second Amended and Restated Senior Loan and Security Agreement, dated as of January 23, 2008, by and among
Filenes Basement, as borrower, the revolving credit lenders party thereto and National City Business Credit,
Inc. as administrative agent and collateral agent. Incorporated herein by reference to Exhibit 10.1 to Form
8-K (file no. 1-10767) filed on January 24, 2008. |
|
|
|
10.89
|
|
Agreement to Acquire Leases and Lease Properties, dated October 3, 2007. Incorporated herein by reference to
Exhibit 10.1 to Form 8-K (file no. 1-10767) filed October 4, 2007. |
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|
|
10.89.1
|
|
First Amendment to Agreement to Acquire Leases and Lease Properties, dated effective as of February 15, 2008.
Incorporated herein by reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed January 28, 2008. |
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10.90#*
|
|
2007 Retail Ventures, Inc. Cash Incentive Compensation Plan. |
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|
|
10.91*
|
|
Supply Agreement (Combo Stores), effective as of January 30, 2005, between DSW Inc. and Filenes Basement Inc. |
E-7
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|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.92*
|
|
Assignment and Assumption of Lease, effective January 15, 2008, between Retail Ventures, Inc., American
Signature, Inc., an affiliate of SSC and SSC Alum Creek, LLC, an affiliate of SSC. |
|
|
|
12*
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
21*
|
|
List of Subsidiaries. |
|
|
|
23*
|
|
Consent of Independent Registered Public Accounting Firm. |
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|
|
24*
|
|
Power of Attorney. |
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|
|
31.1*
|
|
Rule 13a-14(a)/15d-14(a) Certification Principal Executive Officer. |
|
|
|
31.2*
|
|
Rule 13a-14(a)/15d-14(a) Certification Principal Financial Officer. |
|
|
|
32.1*
|
|
Section 1350 Certification Principal Executive Officer. |
|
|
|
32.2*
|
|
Section 1350 Certification Principal Financial Officer. |
|
|
|
* |
|
Filed herewith. |
|
# |
|
Management contract or compensatory plan or arrangement. |
|
** |
|
Indicates an agreement or contract relating to the Companys Value City Department Stores
business segment. Effective January 23, 2008, the Company disposed of an 81% ownership
interest in its Value City segment to VCHI Acquisition Co. |
E-8