FORM 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 January 31, 2009
OR
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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
organization)
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(I.R.S. Employer Identification No.) |
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4150 E. Fifth Avenue, Columbus, Ohio
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43219 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (614) 238-4148
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o 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
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
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
2, 2008, was $125,546,302.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date: 48,683,729 Common Shares were outstanding at March 31, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Retail Ventures, Inc.s fiscal 2008 Proxy Statement, which will be filed no later than
120 days after January 31, 2009, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
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TABLE OF CONTENTS TO FINANCIAL STATEMENTS |
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F-1 |
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F-3 |
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F-5 |
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F-6 |
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F-8 |
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F-9 |
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E-1 |
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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), which was wholly-owned until April 21, 2009, and DSW Inc. (DSW), a controlled
subsidiary, and DSWs wholly-owned subsidiaries 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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DSWs success in opening and operating new stores on a timely and profitable basis; |
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continuation of DSWs supply agreements and the financial condition of its leased
business partners; |
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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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the effect of the bankruptcy filing made by Value City and any such filing which may be made by Filenes Basement; |
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the impact of the disposition of Filenes Basement and 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 and Filenes Basement not paying us or its other creditors,
for which Retail Ventures may have some liability; |
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the impact of Value City and Filenes Basement on our liquidity; |
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disruption of our distribution operations; |
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our dependence on DSW for key services; |
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the success of dsw.com; |
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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 and investment risks related to our investments; and |
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DSWs ability to secure additional credit upon the termination of its existing credit
facility. |
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.
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 January 31, 2009, Retail Ventures owned
Class B Common Shares of DSW representing approximately 62.9% of DSWs outstanding common shares
and approximately 93.1% of the combined voting power of such shares. DSW is a controlled subsidiary
of Retail Ventures and its Class A Common Shares are listed for trading 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 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. On October 26, 2008,
Value City filed for bankruptcy protection and announced that it would close its remaining stores.
We have negotiated an agreement with Value City to continue to provide services post bankruptcy
filing, including risk management, financial services, benefits administration, payroll, and
information technology services, in exchange for a weekly payment.
As of January 31, 2009, SSC and its affiliates, in the aggregate, owned approximately 52.3% of the
outstanding RVI Common Shares and beneficially owned approximately 60.7% (assumes the issuance of
(i) 8,333,333 RVI Common Shares issuable upon the exercise of conversion warrants held by SSC, (ii)
1,731,460 RVI Common Shares issuable upon the exercise of term loan warrants held by Schottenstein
RVI, LLC and (iii) 342,709 RVI Common Shares issuable upon the exercise of the term loan warrants
held by Schottenstein RVI, LLC). In addition to SSC and its affiliates 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.
Retail Ventures has begun reviewing its available options to the extent it may become necessary to
manage and enhance its liquidity position. Although RVIs plan to enhance liquidity could include,
among other things, the sale or collateralization of shares of common stock of DSW or a sale
of equity by RVI, no assurance can be given that any such transaction can be completed on favorable
terms or that such a transaction would satisfy all of RVIs liquidity requirements.
In
January 2009, Retail Ventures announced that it was exploring
strategic alternatives for Filenes Basement, and as a result, as
of January 31, 2009, Filenes Basement met the criteria set forth in Financial Accounting
5
Standards Board (FASB)
Statement No. 144 Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144) to be
classified as held for sale. The applicable criteria includes the following: management has
committed to a plan to sell the asset; the
asset is available for immediate sale; an active program to locate a buyer and other actions
required to complete the plan to sell the asset have been initiated; the sale of the asset is
probable and the transfer of the asset is expected to qualify as a complete sale within one year;
the asset is being actively marketed for sale at a price that is reasonable in relation to its
current fair value; and actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn. For reporting
purposes, the results of Filenes Basement are reported as discontinued operations.
On April 21, 2009, we sold all of the outstanding capital stock of Filenes Basement and certain related entities to FB II
Acquisition Corp., a newly formed entity owned by Buxbaum Holdings, Inc. As of January 31, 2009,
there were 36 Filenes Basement stores in operation; however, in January 2009, Filenes Basement
determined to close 11 underperforming stores. The final determination to close these
underperforming stores was due to decreased sales and operating profit during the fourth fiscal
quarter, as well as the continued negative outlook for the United States retail segment generally
and Filenes Basement in particular. The store closings were complete in February 2009.
General
DSW. DSW is a leading U.S. branded footwear specialty retailer operating 298 shoe stores in 37
states as of January 31, 2009. 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 combined with the
convenience and value they desire. The stores average approximately 23,000 square feet and carry
approximately 27,000 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 341 stores and in 36 stores as of January 31, 2009 for
Filenes Basement, which until April 21, 2009 was a wholly owned subsidiary of RVI. DSW also sells
shoes and accessories through dsw.com.
Filenes Basement. On April 21, 2009, RVI sold all of the outstanding capital stock of Filenes
Basement and certain related entities to FB II Acquisition Corp., a newly formed entity owned by Buxbaum Holdings, Inc. As of
January 31, 2009, there were 36 Filenes Basement stores in operation; however, in January 2009,
Filenes Basement determined to close 11 underperforming stores. The final determination to close
these underperforming stores was due to decreased sales and operating profit during the fourth
fiscal quarter, as well as the continued negative outlook for the United States retail segment
generally and Filenes Basement in particular. The store closings were complete in February 2009.
The 36 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
had 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.
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 15 of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for
detailed financial information regarding our operating segments.
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.
6
DSW operates leased departments for three non-affiliated retailers and one affiliated retailer,
Filenes Basement. DSW has renewable supply agreements to merchandise the non-affiliated shoe
departments in Stein Mart, Inc., Gordmans, Inc., and Frugal Fannies Fashion Warehouse stores
through December 2012, January 2013, and April 2012, respectively. DSW operates leased shoe
departments for Filenes Basement under a renewable supply agreement through January 2010. 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 January 31, 2009, DSW supplied merchandise to 275 Stein Mart
stores, 65 Gordmans stores, one Frugal Fannies store and 36 Filenes Basement stores (however, in
February 2009, Filenes Basement closed 11 underperforming stores). DSWs leased shoe department
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 selection of shoes that fulfill a broad
range of style and fashion needs. DSW stores and dsw.com 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 27,000 pairs of shoes in over 2,000
styles compared to a significantly smaller product offering at typical department stores.
DSWs merchandising group constantly monitors current fashion trends as well as historical sales
trends to identify popular styles and styles that may become popular in the upcoming season. DSW
tracks store performance and sales trends on a weekly basis and has a flexible incremental buying
process that enables DSW to order styles frequently throughout each season, in contrast to
department stores, which typically make one large purchase at the beginning of the season. To keep
their product mix fresh and on target, DSW tests new fashions and actively monitors sell-through
rates in their stores. DSW also aims to increase the quality and breadth of existing vendor
offerings and identify new vendor opportunities. In addition to their merchandising initiative,
DSW will continue to invest in planning, allocation and distribution to continue improving its
inventory and markdown management.
DSW separates its merchandise into four primary categories womens footwear; mens 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. The largest principal
categories as a percentage of the consolidated RVI revenue from continuing operations were:
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Womens |
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Athletic |
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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 and dsw.com in which program members earn reward certificates that result in
discounts on future 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.
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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.
DSW target markets to DSW Rewards members throughout the year. DSW classifies these members by
frequency and spend and uses direct mail and e-mail communications to stimulate further sales and
traffic. As of January 31, 2009, over 10.4 million members enrolled in the DSW Rewards loyalty
program have made at least one purchase over the course of the last two fiscal years, up from
approximately 8.6 million members as of February 2, 2008. In fiscal 2008, approximately 76% of DSW
store and dsw.com net sales were generated by shoppers in the loyalty program, up from
approximately 69% of DSW store net sales in fiscal 2007.
Demonstrated Ability to Consistently Deliver Growth
DSWs operating model is focused on selection, convenience and value. DSW believes that the growth
it has achieved in the past is attributable to its operating model and managements focus on
store-level profitability and economic payback. Over the five fiscal years ended January 31, 2009,
DSWs net sales have grown at a compound annual growth rate of 13.1%. DSW intends to continue to
focus on net sales, operating profit and operating cash flows as it pursues its growth strategy.
Cash generated from DSW operations, together with its current levels of cash and investments of
$157.5 million, will be sufficient to maintain its ongoing operations, support seasonal working
capital requirements and fund capital expenditures related to projected business growth. In
addition to its cash and investments, DSW has no debt, however, DSW does have significant long-term
obligations under its leases.
Expansion
DSW plans to open approximately 10 stores in fiscal 2009 and increase dsw.com sales. DSWs plan is
to open stores in both new and existing markets with the primary focus on power strip centers as
well as repositioning existing stores. DSW also plans to continue to pursue opportunities in
regional malls, lifestyle centers and urban street locations in appropriate markets. 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, 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 its markets.
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. 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 stores bypassing the Columbus distribution center facility. DSW will continue to
evaluate expansion of this process for applicability in other parts of the country. DSW also
operates a fulfillment center in Columbus, Ohio to process orders for dsw.com, which are shipped
directly to customers using a third party shipping provider.
Leased Departments and Supply Agreements
DSW has operated leased shoe departments for Filenes Basement since March 2000. The intercompany
activity has been 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 January 31, 2009, DSW operated leased shoe departments in 36 Filenes
Basement locations. In February 2009, Filenes Basement closed 11 underperforming stores. See Risk
Factors Risk Factors Relating to DSW for certain risk factors relating to DSWs contractual
relations with Filenes Basement.
As of January 31, 2009, DSW also supplied merchandise to 275 Stein Mart stores, 65 Gordmans stores
and one Frugal Fannies store, as discussed in greater detail above.
8
dsw.com
DSW launched dsw.com in the first half of fiscal 2008 to provide customers with the opportunity to
purchase shoes and related accessories through its website and to gain market share by serving
customers in regions where it currently does not have stores. DSW has entered into a ten-year
lease agreement for space to serve as a fulfillment center for dsw.com sales. To provide service
to both dsw.com and DSW stores, DSW has a call center to address its customer service needs.
Segment Seasonality
DSWs business is subject to seasonal trends. The sales in DSW stores have typically been higher in
the first and third quarters, 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
On April 21, 2009, we sold all of the outstanding capital stock of Filenes Basement and certain related entities to FB II
Acquisition Corp., a newly formed entity owned by Buxbaum Holdings, Inc. As of January 31, 2009,
there were 36 Filenes Basement stores in operation; however, in January 2009, Filenes Basement
determined to close 11 underperforming stores. The final determination to close these
underperforming stores was due to decreased sales and operating profit during the fourth fiscal
quarter, as well as the continued negative outlook for the United States retail segment generally
and Filenes Basement in particular. The store closings were complete in February 2009.
Filenes Basements mission has been to be the premier 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 had 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.
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
has believed that up-front purchasing would promote a reliable flow of branded merchandise to its
stores for opening season assortments in February and August. Accordingly, Filenes Basement placed
a significant portion of its purchases up front. Filenes Basement also had been placing purchases
of make-up goods in Europe, such as sweaters, knits and cold weather goods. The remaining branded
goods have been 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
received quality buying opportunities at competitive prices prior to its current liquidity
difficulties. Filenes Basement has purchased merchandise from approximately 1,000 suppliers.
During fiscal 2008 and fiscal 2007, merchandise supplied by Filenes Basements three top vendors
accounted for approximately 10.1% and 12.4%, respectively, of Filenes Basements net sales.
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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 have allowed Filenes Basement to achieve its value pricing. First, it
historically had excellent, longstanding relationships with its suppliers. This made 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 imported directly
from Europe, cutting out middleman costs. Third, Filenes Basement understands the market for these
high-end brands and had 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 and e-mail media. The primary method of communicating with the market throughout the
year has been 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 became
a growing part of the advertising mix.
Filenes Basement is not typically an item advertiser. Instead, Filenes Basement has focused 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 has been relatively low,
typically around 2.3%, excluding grand openings.
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
30,000 square feet of selling space per store (approximately 43,000 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 January 31, 2009, Filenes Basement operated 36 stores in ten 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. We
cannot anticipate when the renovations will be completed. 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. 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% of Filenes Basements segment sales
during fiscal 2006.
10
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 and Store Closures. We opened one new Filenes Basement store and closed one store during
fiscal 2008. We charged pre-opening expenses to operations as incurred.
We continually updated the stores by changing or repositioning the merchandise displays and
in-store signage. The annual cost of updating 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. 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.
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 2008 fiscal year were
approximately $10.6 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 (however, in February
2009, Filenes Basement closed 11 underperforming stores). Beginning in November 2007, the fine
jewelry departments in the Filenes Basement stores are operated by a third party as a leased
department.
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, 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 two 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.
11
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. Effective March 17, 2008, we entered into an Amended and Restated Shared
Services Agreement (the Amended Shared Service Agreement) with our subsidiary, DSW. 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, 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. In fiscal 2008, DSW made a significant investment in upgrading its Point of Sale (POS)
system to a consistent platform. In DSW stores, DSW utilizes POS registers with full scanning
capabilities to increase speed and accuracy at customer checkouts and facilitate inventory
restocking. 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.
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.
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 January 31, 2009, we had approximately 12,500 associates across all segments of which
approximately 3,400 were full-time and the remaining balance were part-time and seasonal. None of
our associates are covered by any collective bargaining agreement. We offer competitive wages,
comprehensive medical and dental insurance, vision care, company-paid and supplemental life
insurance programs, associate-paid long-term and short-term disability insurance and a 401(k) plan
to our full-time associates and some of our part-time associates. We have not experienced any work
stoppages, and we consider our relations with our associates to be good.
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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 retailers, factory outlet stores and other off-price
stores. DSW and Filenes Basement have different target customers and different strategies, but
each focuses on this basic principle: the value to the customer is the result of the quality of the
merchandise in relationship to the price paid.
DSW believes shoppers prefer its remarkable selection of on-trend merchandise compared to product
offerings of 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 initial prices, in a less convenient format than DSW does
and without the membership benefits of the DSW Rewards program. In addition, DSW also believes that
it successfully competes against retailers who have attempted to duplicate its format because they
typically offer assortments with fewer recognizable brands and more styles from prior seasons.
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. 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 or
furnished to 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 be adversely effected.
Introductory Note
As described below, RVI is a holding company and all of our operations have been conducted through
our subsidiaries. In January 2008, we disposed of our Value City subsidiary. On April 21, 2009 we
disposed of our Filenes Basement subsidiary and certain related entities. As a result, to the extent cash on hand or other forms of capital
generating transactions are not sufficient to meet our operating cash
flow needs, we may seek other sources to provide the funds necessary for operations. Set forth below are certain risk factors
relating to DSW, risk factors relating to our discontinued operations, certain other corporate
risks of RVI and risk factors relating to our PIES.
Risk Factors Relating to DSW
DSW plans to open approximately 10 DSW stores in fiscal 2009 and is currently evaluating its
strategy for fiscal 2010 and beyond, which could strain its resources and have a material adverse
effect on its business and financial performance.
DSWs continued and future growth largely depends on its ability to successfully open and operate
new DSW stores on a profitable basis. During fiscal 2008, fiscal 2007 and fiscal 2006, DSW opened
41, 37, and 29 new stores, respectively. DSW plans to open approximately 10 stores in fiscal 2009
and is currently evaluating its strategy for fiscal 2010 and beyond. As of January 31, 2009, DSW
has signed leases for an additional 14 stores opening in fiscal 2009 and fiscal 2010. During fiscal
2008, the average investment required to open a typical new DSW store was approximately $1.6
million. This continued expansion could place increased demands on DSWs financial, managerial,
operational and administrative resources. For example, DSWs planned expansion will require DSW to
increase investments in management information systems and distribution facilities. These increased
demands and operating complexities could cause DSW to operate its business less efficiently, have a
material adverse effect on DSWs operations and financial performance and slow its growth.
DSW may be unable to open all the DSW stores contemplated by its growth strategy on a timely basis,
and new stores it opens 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 DSWs business, financial
condition and results of operations.
DSW plans to open approximately 10 DSW stores in fiscal 2009. However, DSW may not achieve its
planned expansion on a timely and profitable basis or achieve results in new locations similar to
those achieved in existing locations in prior periods. DSWs ability to open and operate new DSW
stores on a timely and profitable basis depends on many factors, including, among others, its
ability to:
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identify suitable markets and sites for new store locations with financially stable
co-tenants and landlords; |
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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
operating cash flows from operations to fund growth; |
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open new stores at costs not significantly greater than those anticipated; |
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successfully open new DSW stores in markets in which it currently has few or no stores; |
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control the costs of other capital investments associated with store openings; |
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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, management and distribution systems or adapt such infrastructure,
operations and systems to accommodate DSWs growth. |
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As a result, DSW may be unable to open new stores at the rates expected or at all. If DSW fails to
successfully implement its growth strategy, the opening of new DSW stores could be delayed or
prevented, could cost more than anticipated and could divert resources from other areas of DSWs
business, any of which could have a material adverse effect on DSWs business, financial condition
and results of operations.
To the extent that DSW opens new DSW stores in its existing markets, DSW may experience reduced net
sales in existing stores in those markets. As the number of DSW stores increases, DSW stores will
become more concentrated in the markets it serves. As a result, the number of customers and
financial performance of individual stores may decline and the average sales per square foot at DSW
stores may be reduced. This could have a material adverse effect on DSWs business, financial
condition and results of operations.
DSW has entered into Supply Agreements with Stein Mart, Gordmans and Filenes Basement. If Stein
Mart, Gordmans or Filenes Basement were to terminate their supply agreements, close a significant
number of stores, declare bankruptcy or liquidate, it could have a material adverse effect on DSWs
business and financial performance.
DSWs supply agreements are typically for multiple years with automatic renewal options as long as
either party does not give notice of intent not to renew. For Stein Mart, Gordmans and Filenes
Basement, DSWs contractual termination dates are December 2012, January 2013 and January 2010,
respectively. In addition, the agreements contain provisions that may trigger an earlier
termination. In the event of the loss of one of these leased departments, it is unlikely that DSW
would be able to proportionately reduce expenses to the reduction of sales.
The performance of DSWs leased departments is highly dependant on the performance of Stein Mart,
Gordmans and Filenes Basement. In February 2009, Filenes Basement closed 11 underperforming
stores. In addition, on April 21, 2009, we disposed of our entire interest in Filenes Basement
and certain related entities. If Filenes Basement files for protection under the federal bankruptcy laws, it would have the right, should it choose to do so, to reject its DSW supply agreements.
RVI has no control over whether or not Filenes Basement elects to do so. Any Filenes Basement
bankruptcy, store closings and possible rejection of DSW supply agreements could have a material
adverse effect on our business and financial performance. In addition, if Stein Mart or Gordmans
were to terminate DSWs supply agreements, close a significant number of stores, declare bankruptcy
or liquidate, it could have a material adverse effect on DSWs business and financial performance.
DSW launched dsw.com 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 launched dsw.com to sell shoes and related accessories through its website in fiscal 2008. In
addition, DSW has entered into a ten-year lease agreement for space to serve as a fulfillment
center for dsw.com distribution. The continued development of such a business channel could
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 has purchased inventory based upon anticipated sales. In the event that DSWs actual
sales are lower than planned, DSW will likely take markdowns on inventory which will adversely
affect gross margin. In the event that DSW loses focus on its core business, impacts sales in its
existing store base or is unsuccessful in the execution of dsw.com, it may have a material adverse
effect on DSWs business, results of operations, financial condition or result in asset impairment
charges related to assets used specifically by dsw.com.
DSW relies on its good relationships with vendors to purchase better-branded merchandise at
favorable prices. If these relationships were to be impaired, DSW may not be able to obtain a
sufficient selection of merchandise at attractive prices, and it may not be able to respond
promptly to changing fashion trends, either of which could have a material adverse effect on DSWs
competitive position, and business and financial performance.
DSW does not have long-term supply agreements or exclusive arrangements with any vendors and,
therefore, its success depends on maintaining good relations with its vendors. DSWs growth
strategy depends to a significant extent on the willingness and ability of its vendors to supply
DSW with sufficient inventory to stock DSWs stores. If DSW fails to strengthen its relations with
its existing vendors or to enhance the quality of merchandise they supply DSW, and if DSW cannot
maintain or acquire new vendors of in-season better-branded merchandise, its ability to obtain a
sufficient amount and variety of merchandise at favorable prices may be limited, which could have a
negative impact on DSWs competitive position. In addition, DSWs inability to stock DSW stores
with in-season merchandise at attractive prices could result in lower net sales and decreased
customer interest in DSW stores, which could adversely affect DSWs financial performance.
15
During fiscal 2008, merchandise supplied to DSW by three key vendors accounted for approximately
20% of its net footwear sales. The loss of or a reduction in the amount of merchandise made
available to DSW by any one of these vendors could have an adverse effect on DSWs business.
DSW may be unable to anticipate and respond to fashion trends and consumer preferences in the
markets in which it operates, which could have a material adverse effect on its business, financial
condition and results of operations.
DSWs merchandising strategy is based on identifying each regions customer base and having the
proper mix of products in each store to attract its target customers in that region. This requires
DSW to anticipate and respond to numerous and fluctuating variables in fashion trends and other
conditions in the markets in which DSW stores are situated. A variety of factors will affect DSWs
ability to maintain the proper mix of products in each store, including:
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variations in local economic conditions, which could affect DSWs customers
discretionary spending and their price sensitivity; |
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unanticipated fashion trends; |
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DSWs success in developing and maintaining vendor relationships that provide
DSW access to in-season merchandise at attractive prices; |
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DSWs success in distributing merchandise to DSW stores in an efficient manner;
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changes in weather patterns, which in turn affect consumer preferences. |
If DSW is unable to anticipate and fulfill the merchandise needs of each region, it may experience
decreases in its 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 DSWs business, financial
condition and results of operations.
DSWs operations are affected by seasonal variability.
DSWs net sales have typically been higher in the first and third quarters. As a result of
seasonality, any factors negatively affecting DSW during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have a material adverse
effect on DSWs financial condition, operating cash flow and results of operations for the entire
year.
DSWs sales and quarterly financial performance may fluctuate for a variety of reasons, which could
result in a decline in the price of the DSW Class A Common Shares.
DSWs 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.
DSWs comparable store sales and quarterly results of operations have fluctuated in the past, and
DSW expects them to continue to fluctuate in the future. A variety of other factors affect DSWs
sales and quarterly financial performance, including:
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challenging U.S. economic conditions and, in particular, the retail sales
environment. |
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changes in DSWs merchandising strategy; |
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timing and concentration of new DSW store openings and related pre-opening and
other start-up costs; |
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levels of pre-opening expenses associated with new DSW stores; |
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changes in DSWs 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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seasonal fluctuations due to weather conditions; and |
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actions by DSWs competitors. |
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Accordingly, DSWs and 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. DSWs future financial performance may fall below the expectations of
securities analysts and investors. In that event, the price of DSWs Class A Common Shares and our
shares would likely decline.
DSW is reliant on its information systems and the loss or disruption of services could affect its
ability to implement its growth strategy and have a material adverse effect on DSWs business.
DSWs information systems are an integral part of its growth strategy in efficiently operating its
stores, in managing the operations of a growing store base and resolving security risks related to
its electronic processing and transmission of confidential customer information. The capital
required to keep its information systems operating at peak performance may be higher than
anticipated and could strain DSWs capital resources, its management of any upgrades and ability to
protect itself from any future security breaches. In addition, any significant disruption of DSWs
data centers could have a material adverse effect on those operations dependent on those systems,
most specifically, store operations, DSWs distribution center and DSWs merchandising team.
While DSW maintains business interruption and property insurance, in the event either of its
information centers were to be shut down, its insurance may not be sufficient to cover the impact
to the business, or insurance proceeds may not be timely paid to DSW.
The loss or disruption of DSWs distribution and fulfillment centers could have a material adverse
effect on its business and operations.
For DSW stores and leased departments, most of DSWs inventory is shipped directly from suppliers
to its primary distribution center in Columbus, Ohio, where the inventory is then processed, sorted
and shipped to one of its pool locations located throughout the country and then on to its stores.
Through a third party, DSW also operates a west coast bypass. For dsw.com, inventory is shipped
directly from DSWs fulfillment center to customers homes. DSWs operating results depend on the
orderly operation of its receiving and distribution process, which in turn depends on third-party
vendors adherence to shipping schedules and DSWs effective management of its distribution
facilities. DSW may not anticipate all the changing demands that its expanding operations will
impose on its receiving and distribution system, and events beyond its 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 DSW stores.
While DSW maintains business interruption and property insurance, in the event DSWs distribution
and fulfillments centers were to be shut down for any reason or if it were to incur higher costs
and longer lead times in connection with a disruption at its distribution and fulfillment centers,
its insurance may not be sufficient, and insurance proceeds may not be timely paid to DSW.
DSWs failure to retain its existing senior management team and to continue to attract qualified
new personnel could adversely affect its business.
DSWs business requires disciplined execution at all levels of its organization to ensure that it
continually has sufficient inventories of assorted brand name merchandise at below traditional
retail prices. This execution requires an experienced and talented management team. If DSW were to
lose the benefit of the experience, efforts and abilities of any of its key executive and buying
personnel, its business could be materially adversely affected. DSW has entered into employment
agreements with several of these officers. Furthermore, DSWs ability to manage its retail
expansion will require it to continue to train, motivate and manage its employees and to attract,
motivate and retain additional qualified managerial and merchandising personnel. Competition for
these types of personnel is intense, and DSW may not be successful in attracting, assimilating and
retaining the personnel required to grow and operate its business profitably.
DSW may be unable to compete favorably in its highly competitive market.
The retail footwear market is highly competitive with few barriers to entry. DSW competes against a
diverse group of retailers, both small and large, including department stores, mall-based company
stores, national chains, independent shoe retailers, single-brand specialty retailers, online shoe
retailers, multi-channel specialty retailers and brand-oriented discounters. Some of DSWs
competitors are larger and have substantially greater resources than it does. DSWs success depends
on its ability to remain competitive with respect to style, price, brand availability and customer
service. The performance of DSWs competitors, as well as a change in their pricing policies as a
result of the current economic environment, marketing activities and other business strategies,
could have a material adverse effect on DSWs business, financial condition, results of operations
and its market share.
17
The current slowdown in the United States economy has adversely affected consumer confidence and
consumer spending habits.
The current slowdown in the United States economy has adversely affected consumer confidence and
consumer spending habits, which may result in further reductions in customer traffic and comparable
store sales in DSWs existing stores with the resultant increase in inventory levels and markdowns.
Reduced sales may result in reduced operating cash flows if DSW is not able to appropriately manage
inventory levels or leverage expenses. These negative economic conditions may also affect future
profitability and may cause DSW to reduce the number of future store openings, impair long-lived
assets or impair goodwill.
Consumer spending habits, including spending for the footwear and related accessories that DSW
sells, 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.
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 an economic
slowdown, DSW could experience lower net sales than expected on a quarterly or annual basis and be
forced to delay or slow its retail expansion plans.
The current economic slowdown is also impacting credit card processors and financial institutions
which hold DSWs credit card receivables. DSW depends on credit card processors to obtain payments
for it. In the event a credit card processor ceases operations or the financial institution holding
DSWs funds fails, there can be no assurance that DSW would be able to access funds due to it on a
timely basis, which could have a material adverse effect on DSWs business, financial condition,
results of operations and cash flows.
DSW relies on foreign sources for its merchandise, and its business is therefore subject to risks
associated with international trade.
DSW purchases merchandise from domestic and foreign vendors. In addition, many of DSWs domestic
vendors import a large portion of their merchandise from abroad, primarily from China, Brazil and
Italy. DSW believes that almost all the merchandise it purchased during fiscal 2008 was
manufactured outside the United States. For this reason, DSW 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 DSWs merchandise is sourced; |
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increases in shipping costs; |
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transportation delays and interruptions, including 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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U.S. laws 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. |
DSW requires its vendors to operate in compliance with applicable laws and regulations and DSWs
internal requirements. However, DSW does not control its vendors or their labor and business
practices. The violation of labor or other laws by one of DSWs vendors could have an adverse
effect on DSWs business.
18
Restrictions in DSWs secured revolving credit facility could limit its operational flexibility.
DSW has entered into a $150 million secured revolving credit facility with a term expiring July
2010. Under this facility, DSW and its subsidiaries 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 its personal property and a pledge of DSWs shares of DSW
Shoe Warehouse, Inc. In addition, the secured revolving credit facility contains usual and
customary restrictive covenants relating to DSWs management and the operation of its business.
These covenants, among other things, restrict DSWs ability to grant liens on its assets, incur
additional indebtedness, open or close stores, pay cash dividends and redeem its stock, enter into
transactions with affiliates and merge or consolidate with another entity. In addition, if at any
time DSW utilizes over 90% of its borrowing capacity under this facility, it 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 its
payment obligations would limit its ability to borrow under the secured revolving credit facility
and, in certain circumstances, may allow the lenders thereunder to require repayment.
DSW may be unable to secure additional credit upon the termination of its existing credit facility
in July 2010 or the terms of additional credit could be materially different than the terms DSW has
today.
DSWs current credit facility expires in July 2010. While DSW does not currently have borrowings
under its credit facility, DSW had approximately $17.7 million of letters of credit outstanding at
January 31, 2009. Based upon the current credit markets, DSW may be unable to secure additional
credit, or if DSW is able to secure additional credit, the terms of such additional credit may be
materially different from DSWs current terms. Such revised terms or the price of credit could have
a material adverse effect on DSWs business, financial condition or results of operations. Further,
in the event DSW is unable to secure additional credit, DSWs future liquidity may be impacted,
which could have a material adverse effect on DSWs financial condition or results of operations.
The liquidity of DSWs investments could fluctuate based on adverse market conditions.
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. DSW has been unable to sell certain
auction rate securities at their scheduled auction dates. As of January 31, 2009, $4.3 million, net
of impairments of $1.8 million, of DSWs $102.7 million in total investments was invested in
auction rate securities. DSW has reduced its investment in auction rate securities with a temporary
impairment of $0.7 million and other-than-temporary impairments of $1.1 million. Due to auction
failures limiting the liquidity of its investments, DSW has presented all of its investment in
auction rate securities that have undergone a failed auction and have not been called as long-term
investments as of January 31, 2009.
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 securities undergo a distribution of the
underlying securities or successfully settle at auction. Further, in the event that it is unlikely
that DSW will be able to receive the full proceeds from these investments when the securities
undergo a distribution of the underlying securities or successfully settle at auction, DSW may be
required to impair the securities. Based on the nature of the impairments, DSW would record
temporary impairments as unrealized losses in other comprehensive income or other-than-temporary
impairments in earnings, which could materially impact DSWs results of operations.
The bankruptcy of Value City and any future bankruptcy of Filenes Basement
could adversely impact DSWs operations.
On
October 26, 2008, Value City commenced proceedings
under Chapter 11 of the U.S. Bankruptcy Code. Both Value City and Filenes Basement are former
subsidiaries of RVI. See Filenes Basement is currently experiencing material operational and
liquidity difficulties and has been disposed of by RVI and Retail
Ventures is subject to various risks associated with the Value City bankruptcy proceedings.
DSW is party to an Amended and Restated Shared Services Agreement with RVI whereby it provides
information technology services to RVI and its subsidiaries. DSW recently entered into a separate
agreement with Filenes Basement. Through the RVI agreement, DSW provides the cash related to
capital expense for certain information technology assets for RVI and its subsidiaries.
Historically, DSW has recouped its expenditures by charging depreciation to RVI based on the
expected lives of the assets. With the disposition of Filenes Basement and in light
of the terms of the recent agreement with Filenes Basement, there is no assurance that DSW can
collect all or any of the amounts owed.
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For discussion regarding DSWs Supply Agreement with Filenes Basement, refer to Risk Factor titled
DSW has entered into Supply Agreements with Stein Mart, Gordmans and Filenes Basement. If Stein
Mart, Gordmans or Filenes Basement were to terminate their supply agreements, close a significant
number of stores, declare bankruptcy or liquidate, it could have a material adverse effect on DSWs
business and financial performance.
Risk Factors Relating to Our Discontinued Operations
Filenes
Basement is currently experiencing material operational and liquidity
difficulties and has
been disposed of by RVI.
In January 2009, Filenes Basement announced its determination to close 11 underperforming stores.
Filenes Basements final determination to close these underperforming stores was due to the
continued negative outlook for the United States retail segment generally and Filenes Basement in
particular. The performance of Filenes Basement has continued to deteriorate significantly since
that time. On April 21, 2009, we disposed of all of the outstanding capital stock of Filenes
Basement and certain related entities. On April 28, 2009, the Administrative Agent under the Filenes
Basement Revolving Loan delivered a
notice to Filenes Basement alleging that certain Events of Default had occurred under the Revolving
Loan and stating that the loan commitments were thereby terminated and all liabilities under the
Revolving Loan are due and payable. As a result, the Filenes Basement Revolving Loan has been accelerated
and all amounts thereunder are immediately due and payable.
Without additional capital, we do not believe
that Filenes Basement will be able to meet all of its obligations, some of which RVI has
guaranteed or may otherwise be liable for. See RVI may be required to satisfy its
guarantee of Filenes Basement Revolving Loan and other obligations of Filenes Basement, which
could adversely affect RVIs liquidity.
There are
risks and uncertainties inherent in any bankruptcy of Filenes Basement and RVI is unable
to predict the precise effect of any Filenes Basement reorganization and/or liquidation process on
RVIs operations and financial condition. Creditors of Filenes Basement 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, 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 a bankruptcy proceeding and to incur expenses and
liabilities associated with a bankruptcy proceeding. Additionally, a Filenes Basement 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 an
adverse impact on RVIs financial condition and results of operations. Risks relating to RVIs
liquidity are discussed below under Certain Other Risk Factors Relating to RVI.
RVI may
be required to satisfy its guarantee of the Filenes Basement Revolving Loan and other
obligations of Filenes Basement, which could adversely affect RVIs liquidity.
The Filenes Basement Revolving Loan is guaranteed by RVI and certain of our wholly-owned
subsidiaries. As of April 21, 2009, there were outstanding borrowings of $13.8 million, which
includes direct borrowings and letters of credit, against this credit
facility. Although the Revolving Loan
is secured by certain assets of Filenes Basement, there can be no assurance as to the
amount that could be realized from the sale of such collateral or whether the Revolving Credit
lenders would seek remedies against such collateral or would instead elect to recover from RVI
under RVIs ongoing guarantee of all of the obligations of
Filenes Basement under the Revolving Loan. As noted above, all amounts
due under the Revolving Loan have been accelerated. Under the terms of the guarantee, the lenders have the right to
collect directly from RVI in this event if they choose to do so, without first seeking to collect
from Filenes Basement subject to the forbearance agreement discussed below. In addition, under its guarantee of the Revolving Loan, RVI has waived
certain rights of subrogation that would otherwise entitle it to seek repayment from Filenes
Basement in the event the lenders collected directly from RVI, unless and until all liabilities to
the Revolving Credit lenders have been paid in full. On April 21, 2009, the Revolving Loan lenders
entered into an agreement with RVI and certain other persons pursuant to which the lenders agreed,
subject to certain terms and conditions, to forbear making demand upon RVI for payment under this
guarantee until the substantial completion of the sale and/or liquidation of Filenes Basements
business and assets. There can be no assurance that all of the terms and conditions to the
forbearance agreement, some of which are not within the control of RVI, will be satisfied and, in
addition, RVI does not currently have forbearance agreements with respect to certain other
obligations of Filenes Basement which RVI has guaranteed.
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In addition, in February 2009, Filenes Basement entered into an amendment to the Revolving Loan.
At the same time, RVI entered into a Last Out participation agreement with the lenders under the
Revolving Loan. The participation agreement required RVI to make an aggregate of $7.5 million
available to the lenders. As a result of the acceleration of the
Revolving Loan, this amount may be drawn upon by the lenders and RVI
would acquire a subordinated right to repayment of any such
amount; however, RVI may not recover this amount unless and until all amounts owed to the lenders under the
Revolving Loan are repaid in full and certain costs and expenses of National City Business Credit
Inc. related to the Revolving Loan are reimbursed. There can be no assurance as to the amount that
could be realized from the sale of collateral under the Revolving Loan. As part of the above
referenced forbearance agreement, RVI has also agreed to maintain an additional $2.5 million in an
account at and controlled by one of the lenders until the lenders have been paid in full. Under
certain circumstances, the bank in which such funds are held would have the right to set-off this
amount against RVIs obligations under its guarantee.
RVI has also guaranteed certain other obligations of Filenes Basement, including obligations to
vendors and their factors and under lease agreements and under certain laws, it may have
liabilities under certain employee benefit plans. In certain cases, the beneficiaries may seek
satisfaction of such obligations from RVI without first seeking to recover from Filenes Basement
directly. Certain creditors of Filenes Basement have demanded immediate payment and threatened to initiate collection actions against Filenes
Basement for failure to pay certain obligations when due. Certain of Filenes Basements creditors
have demanded payment from RVI for certain Filenes Basement obligations guaranteed by RVI.
Risks relating to RVIs liquidity are discussed below under Certain Other Risk Factors Relating to
RVI.
Value City Department Stores filed for bankruptcy protection and closed its remaining stores. Value
City owes us approximately $7.3 million as of January 31, 2009 and we may not be able to collect
this amount from Value City.
In January 2008, Retail Ventures announced the disposition of an 81% ownership interest in Value
City. As a part of this transaction, Retail Ventures agreed to provide certain transition services
to Value City. On October 26, 2008, Value City filed for bankruptcy protection and announced that
it would close its remaining stores. We have negotiated an agreement with Value City to continue to
provide services post bankruptcy filing, including risk management, financial services, benefits
administration, payroll, and information technology services, in exchange for a weekly payment.
As of January 31, 2009, Value City owed RVI and DSW an aggregate of approximately $7.3 million for
services rendered by us prior to the filing of bankruptcy. Of these unpaid amounts, we have not
recognized revenue or a receivable related to those services other than a fully reserved receivable
of approximately $1.0 million. We have submitted a proof of claim in the bankruptcy proceeding
seeking payment in full for all amounts owed to us. However, there is no assurance that we will be
able to collect all or any of the amounts owed to us.
Retail Ventures is subject to various risks associated with the Value City 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. On October 26, 2008 Value
City filed for bankruptcy and has discontinued operations. RVI may become subject to risks
associated with the bankruptcy filing by Value City, if creditors whose obligations RVI has
guaranteed are not paid. There are risks and uncertainties inherent in such events and RVI is
unable to predict what claims may be made or the precise effect of the Value City liquidation
process on RVIs operations and financial condition. RVI may also be required to record impairment
charges or writeoffs as a result of any bankruptcy proceeding and to incur expenses and liabilities
associated with any bankruptcy proceeding. Additionally, the 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.
Certain Other Risk Factors Relating to RVI
Retail Ventures is a holding company and has generally relied 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 and our cash on hand 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 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.
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On January 23, 2008, we disposed of 81% of our ownership interest in the Value City subsidiary. In
addition, in April of 2009 we disposed of all of the outstanding capital stock of Filenes
Basement and certain related entities. As a result, to the extent cash on hand or other forms of capital generating transactions
are not sufficient to meet our operating cash flow needs we may seek other sources to provide the funds
necessary for operations. We do not anticipate DSW funds will be available for obligations at the
RVI level. Even though, we could receive cash from DSW in the form of dividends, loans or
otherwise. DSW has indicated that it does not intend to pay dividends in the foreseeable future and
RVI does not have a current arrangement for loans or other funding with DSW. DSW is a separate and
distinct legal entity and has no obligation, contingent or otherwise, to distribute cash to us or
to make funds available to service debt. In addition, the ability of DSW to pay dividends or make
loans to us are subject to contractual limitations under certain financing agreements and laws of
the state of Ohio in which DSW is organized.
Moreover, DSW will need to absorb certain costs previously paid by Value City and Filenes
Basement. DSW, Filenes Basement and Value City receive or received shared services from and
through RVI, and DSW provides services to RVI and its subsidiaries and to Value City and Filenes
Basement. The costs associated with many of these shared services had been allocated among the
entities based upon the percent of an entitys sales compared to total sales, or, in some cases, a
usage based charge, although with the bankruptcy of Value City and
the developments with Filenes Basement that has
changed. The disposition of our interest in Value City has had, and the disposition of Filenes
Basement may have, an adverse effect on the ability of DSW and RVI to recover payment for such
services.
We could have significant liquidity issues at the RVI level which may require us to issue
additional debt or equity or to sell assets, and there can be no assurance that such transactions
can be completed on favorable terms or that such transactions would satisfy all of RVIs liquidity
requirements.
As noted above, with the disposition of Filenes Basement, RVI may seek other sources to provide
substantially all of the funds necessary to make payments on our consolidated indebtedness and meet
our operating cash flow needs, except to the extent RVI raises additional capital or has cash on
hand. DSW, however, has stated that it anticipates that future earnings will be used principally to
finance its retail expansion and thus it does not intend to pay cash dividends on its common shares
in the foreseeable future. Without cash dividends or distributions of cash from DSW via loans or
otherwise, we will need to obtain cash from other resources to satisfy our obligations,
particularly any payment obligations arising from RVIs guarantee of obligations of Filenes
Basement and Value City, expenses and any ongoing operating or other payments. Retail Ventures has
begun reviewing its available options to the extent it may become necessary to manage and enhance
its liquidity position. Although RVIs plan to enhance liquidity could include, among other things,
the sale or collateralization of shares of common stock of DSW Inc. or a sale of equity by RVI, no
assurance can be given that any such transaction can be completed on favorable terms or that such a
transaction would satisfy all of RVIs liquidity requirements.
A sale of equity by RVI to seek to address our significant liquidity issues would dilute existing
shareholders, which dilution could be increased by certain anti-dilution protections under existing
warrants issued by RVI.
In the event that RVI issues additional RVI Common Shares (other than in a distribution or offering
in which all shareholders participate pro rata), such sale would dilute the percentage equity
interest of existing shareholders. In addition, certain sales of RVI Common Shares, or securities
directly or indirectly convertible into or exchangeable for RVI Common Shares, will trigger
provisions in RVIs outstanding warrants that protect warrant holders against dilution. As
described under the heading Liquidity and Capital Resources, RVI has issued Term Loan Warrants
and Conversion Warrants to Cerberus, Millennium and affiliates of SSC at an initial exercise price
of $4.50 per RVI Common Share, and, as part of the disposition of Value City, RVI has issued
warrants to VCHI Acquisition Co. at an initial exercise price of $10.00 per RVI Common Share.
Under the Term Loan Warrants and the warrant held by VCHI Acquisition Co., if the price per RVI
Common Share in certain new issuances by RVI is less than the warrant exercise price, then such
warrants require so-called full ratchet adjustment to the exercise price for RVI Common Shares
and the number of RVI Common Shares issuable upon exercise would increase to preserve the aggregate
purchase price. Under the Conversion Warrant held by SSC, if the price per RVI Common Share in
certain new issuances is less than the exercise price under the Conversion Warrant, then such
warrant requires a weighted average adjustment to the exercise price for RVI Common Shares. If the
price per RVI Common Shares in certain new issuances by RVI is also less than fair value (as
determined pursuant to the terms of the Conversion Warrant) of RVI Common Shares, then the number
of RVI Common Shares issuable upon exercise of the Conversion Warrant would increase in proportion
to the decrease in the exercise price resulting from the weighted average adjustment. If one or
more of the holders of outstanding warrants determined to exercise for RVI Common Shares following
such adjustments, this could result in significant dilution to existing RVI shareholders.
In addition, a sale of equity by RVI to seek to address liquidity needs and the possible exercise
of outstanding warrants for RVI Common Shares following anti-dilution adjustments triggered by such
sale could increase the likelihood of an ownership change within the meaning of section 382 of the
Internal Revenue Code. An ownership change within the meaning of section 382 could limit RVIs use
of its net operating loss carryforwards, as described under the risk factor titled Our ability to
use net operating loss carryforwards to reduce future tax payments may be limited if there is a
change in ownership of Retail Ventures.
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We may be unable to quickly monetize our investment in DSW Common Shares.
As of January 31, 2009, Retail Ventures owned DSW Class B Common Shares representing approximately
62.9% of DSWs outstanding Common Shares and approximately 93.1% of the combined voting power of
such shares (of which 11.9% of the outstanding DSW common shares have been pledged in connection
with the PIES). 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 at any time. 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.
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.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if
there is a change in ownership of Retail Ventures.
We have significant net operating loss carryforwards, or NOLs, and other income tax attributes
available to reduce taxable income in future years. Our ability to utilize our NOLs may be limited
by section 382 of the Internal Revenue Code if we undergo an ownership change as a result of
changes in the ownership of our outstanding stock. An ownership change occurs if 5% shareholders of
an issuers stock, collectively, increase their ownership percentage by more than fifty percentage
points within any three-year period. In the event of an ownership change, section 382 imposes an
annual limitation on the amount of post-ownership change taxable income a corporation may offset
with pre-ownership change NOLs. Based upon our review of the aggregate change in percentage
ownership during the current testing period, we do not believe that we have experienced a change in
ownership within the meaning of section 382 to date. However, such a determination is complex and
there can be no assurance that the Internal Revenue Service could not successfully challenge our
conclusion. Even if we have not undergone an ownership change we may not be able to engage in
transactions involving the issuance of stock (such as certain capital raising transactions) without
triggering an ownership change within the meaning of section 382. In addition, there are
circumstances beyond our control, such as market purchases of our stock by investors who are
existing 5% shareholders or become 5% shareholders as a result of such purchase, which could result
in an ownership change with respect to our stock. Thus, there can be no assurance that our future
actions or future actions by our stockholders will not result in the occurrence of an ownership
change, which may limit our use of the NOLs and put us at risk of having to pay cash taxes
notwithstanding the existence of sizeable NOLs. See Settling the PIES with DSW Class A Common
Shares may result in a material amount of taxable income to Retail Ventures.
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.
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.
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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. In addition, in the cases of certain bankruptcy
or insolvency defaults, the outstanding indebtedness would automatically become immediately due and
payable upon such a default. We cannot be sure that our lenders would waive a default or that we
could pay the indebtedness in full if it were accelerated.
Our stock price may fluctuate significantly.
The market price of our common shares has fluctuated significantly in the past and may likely
continue to fluctuate in the future. 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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continuing issues relating to Value City and Filenes Basement; |
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transactions entered into to enhance liquidity at Retail Ventures; |
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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. |
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/or its affiliates and RVI or DSW. SSC is under no obligation to
communicate or offer any corporate opportunity to RVI or DSW. In addition, Retail Ventures and SSC
and/or its affiliates have the right to engage in similar activities as RVI and DSW, do business
with DSWs suppliers and customers and employ or otherwise engage any of RVIs or DSWs officers or
employees. SSC and its affiliates engage in a variety of businesses, including, but not limited to,
business and inventory liquidations, apparel companies and real estate acquisitions. Neither SSC
nor any of its affiliates are obligated to communicate or offer any corporate opportunity to us or
DSW.
Retail Ventures continues 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. 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 Retail
Ventures and several of our subsidiaries with key services relating to information technology
services, financial and certain other administrative functions. 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. Effective March 17, 2008, we entered into a new amendment
to the shared services agreement with DSW. Pursuant to the terms of the amended shared services
agreement, DSW provides RVI and Filenes Basement with key services relating to risk management,
tax, financial services, shared benefits administration, payroll, and information technology. 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 2009 and will be extended automatically for
additional one-year terms unless terminated by one of the parties. We expect some of these services
to be provided for longer or shorter periods than the current term. 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.
24
We are controlled by SSC and its affiliates, whose interests may differ from our other
shareholders.
As of January 31, 2009, SSC and its affiliates, in the aggregate, owned approximately 52.3% of the
outstanding RVI Common Shares and beneficially owned approximately 60.7% of the outstanding RVI
Common Shares (assumes the issuance of (i) 8,333,333 RVI Common Shares issuable upon the exercise
of conversion warrants held by SSC, (ii) 1,731,460 RVI Common Shares issuable upon the exercise of
term loan warrants held by Schottenstein RVI, LLC and (iii) 342,709 RVI Common Shares issuable upon
the exercise of the term loan warrants held by Schottenstein RVI, LLC). SSC and its affiliates that
own RVI Common Shares are privately held entities controlled by Jay L. Schottenstein, the Chairman
of our Board of Directors, and members of his immediate family. Given their ownership interests,
SSC and its affiliates 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
and its affiliates 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, Chairman of the
Board of Directors of DSW and Chief Executive Officer of DSW; Heywood Wilansky is a director of
Retail Ventures and 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; and
James A. McGrady is our Chief Executive Officer, 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.
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.
25
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 such arbitrage could, in turn, affect the market prices of the PIES and the DSW Class A Common
Shares.
The PIES may adversely affect the market price for DSW Class A Common Shares.
The market price of the DSW Class A Common Shares is likely to be influenced by the PIES. For
example, the market price of the DSW Class A Common Shares could become more volatile and could be
depressed by (a) investors anticipation of the potential resale in the market of a substantial
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.
26
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.
Substantially all of our operations are conducted through our DSW subsidiary. 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 DSW, including trade creditors, and claims
of preferred shareholders, if any, of DSW 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.
Even though RVI has disposed of Filenes Basement, until the Filenes Basement Revolving Loan is
repaid it 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. In addition, the Filenes Basement Revolving Loan prevents us from granting any collateral
for the PIES (other than DSW Class B Common Shares required to be pledged under the PIES) without
the prior consent of the Filenes Basement senior lenders. Accordingly, we would need to obtain the
consent of such 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 (for example, upon certain events of bankruptcy, insolvency or reorganization
relating to us or our significant subsidiaries), to pay the yield maintenance premium in cash or,
if so elected by RVI, in DSW Class A Common Shares. We cannot provide any assurances that such
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 as a result of net operating loss carryforwards; 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. See Our ability to use net operating loss carryforwards to reduce
future tax payments may be limited if there is a change in ownership of Retail Ventures.
27
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 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 (or, at our election and in
accordance with the indenture and collateral agreement for the PIES, in DSW Class A Common Shares),
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 or DSW Class A Common Shares 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, and such delivery will require the consent of
the senior lenders under the Filenes Basement Revolving Loan.
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 Relating to DSW in this Annual Report on Form 10-K 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.
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. 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. For example, if RVI or a significant subsidiary commences a
proceeding seeking liquidation, reorganization or similar relief under any bankruptcy law, or fails
generally to pay its debts as they become due, 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 (collectively yield maintenance premium) would also
be due and payable in cash, the amount of which varies depending on when the acceleration occurs,
but is currently estimated to be $25.2 million. However, in lieu of paying cash, at our election
and in accordance with the indenture and collateral agreement for the PIES, this amount could be
payable in 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
volume weighted average market price of the DSW Class A Common Shares during the 10 consecutive
trading days prior to the acceleration. PIES holders would bear the entire risk of a decline in
the market price of the DSW Class A Common Shares so deliverable. 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 the principal amount of the 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 DSW Class A Shares delivered to the holders of the PIES and, if the
yield maintenance premium were paid in cash, such payment would materially adversely affect our
liquidity. In addition, the payment of the yield maintenance premium, whether in cash or in DSW
Class A Common Shares, would require the consent of the senior lenders under the Filenes Basement
Revolving Loan. We cannot provide any assurances that the senior lenders will provide any such
consent.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
28
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores we operated as of January 31, 2009:
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|
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Filenes |
|
|
|
|
DSW |
|
Basement |
|
Total |
Alabama |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Arizona |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
California |
|
|
32 |
|
|
|
|
|
|
|
32 |
|
Colorado |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Connecticut |
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|
3 |
|
|
|
|
|
|
|
3 |
|
Delaware |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Florida |
|
|
22 |
|
|
|
1 |
|
|
|
23 |
|
Georgia |
|
|
14 |
|
|
|
1 |
|
|
|
15 |
|
Illinois |
|
|
15 |
|
|
|
4 |
|
|
|
19 |
|
Indiana |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Iowa |
|
|
1 |
|
|
|
|
|
|
|
1 |
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Kansas |
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|
2 |
|
|
|
|
|
|
|
2 |
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Kentucky |
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|
2 |
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|
|
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|
2 |
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Louisiana |
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2 |
|
|
|
|
|
|
|
2 |
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Maine |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Maryland |
|
|
9 |
|
|
|
5 |
|
|
|
14 |
|
Massachusetts |
|
|
12 |
|
|
|
8 |
|
|
|
20 |
|
Michigan |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Minnesota |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Missouri |
|
|
4 |
|
|
|
|
|
|
|
4 |
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Nebraska |
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|
2 |
|
|
|
|
|
|
|
2 |
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Nevada |
|
|
3 |
|
|
|
|
|
|
|
3 |
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New Hampshire |
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|
1 |
|
|
|
|
|
|
|
1 |
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New Jersey |
|
|
10 |
|
|
|
3 |
|
|
|
13 |
|
New York |
|
|
18 |
|
|
|
6 |
|
|
|
24 |
|
North Carolina |
|
|
6 |
|
|
|
|
|
|
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6 |
|
Ohio |
|
|
14 |
|
|
|
2 |
|
|
|
16 |
|
Oklahoma |
|
|
2 |
|
|
|
|
|
|
|
2 |
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Oregon |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Pennsylvania |
|
|
15 |
|
|
|
2 |
|
|
|
17 |
|
Rhode Island |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Tennessee |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Texas |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
Utah |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
Virginia |
|
|
13 |
|
|
|
1 |
|
|
|
14 |
|
Washington |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Washington D.C. |
|
|
|
|
|
|
3 |
|
|
|
3 |
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Wisconsin |
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
298 |
|
|
|
36 |
|
|
|
334 |
|
|
|
|
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 leased by DSW.
Filenes Basement operates one distribution facility in Auburn, Massachusetts. DSWs primary
distribution facility, principal executive office and dsw.com fulfillment center are located in
Columbus, Ohio. The lease for DSWs distribution center and its executive office space expires in
December 2021 and has three renewal options with terms of five years each. The lease for the
dsw.com fulfillment center has an initial term of ten years with two renewal options with terms of
five years each.
29
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, DSWs corporate office,
DSWs primary distribution center, a trailer parking lot and the dsw.com fulfillment center. 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.
In February 2009, Filenes Basement closed 11 underperforming stores. In April 2009, RVI sold all
of the outstanding capital stock of Filenes Basement and
certain related entities.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings that are incidental to the conduct of its
business. The Company estimates the range of liability related to pending litigation where the
amount 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, except as set forth in the
last three sentences of this paragraph. 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. See Certain Liquidity Issues of RVI in
Item 7 of this Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
30
PART II
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ITEM 5. |
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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, 2009, there were
929 holders of record of our common shares.
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High |
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Low |
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 |
|
$ |
7.46 |
|
|
$ |
3.77 |
|
Second Quarter |
|
|
5.58 |
|
|
|
3.29 |
|
Third Quarter |
|
|
5.17 |
|
|
|
1.35 |
|
Fourth Quarter |
|
|
3.53 |
|
|
|
0.90 |
|
Fiscal 2009: |
|
|
|
|
|
|
|
|
First Quarter (through March 31, 2009) |
|
$ |
2.98 |
|
|
$ |
1.45 |
|
Retail Ventures made no purchases of its common shares during the fourth quarter of the 2008 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 2009. 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 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 January 31, 2004 through January 31, 2009.
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.
The comparison of the cumulative total returns for each investment assumes that $100 was invested
on January 31, 2004, and that all dividends earned on such investment were reinvested.
31
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Company / Index |
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31-Jan-04 |
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29-Jan-05 |
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28-Jan-06 |
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03-Feb-07 |
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02-Feb-08 |
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31-Jan-09 |
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RETAIL VENTURES, INC. |
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$100.00 |
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$110.35 |
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$212.52 |
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$337.06 |
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$118.53 |
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$39.30 |
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RUSSELL 2000 |
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$100.00 |
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$106.75 |
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$129.02 |
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$144.32 |
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$131.84 |
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$81.30 |
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S&P GENERAL MERCHANDISE STORES |
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$100.00 |
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$119.21 |
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$124.43 |
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$146.36 |
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$132.96 |
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$80.72 |
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32
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
Filenes Basement meeting the criteria to be classified as held for sale during fiscal 2008, the
results of Filenes Basement operations are included in discontinued operations. 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 also included in discontinued operations.
|
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|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended(1) |
|
|
|
|
|
|
February 2, |
|
February 3, |
|
January 28, |
|
January 29, |
|
|
January 31, 2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
|
(dollars in thousands, except per share amounts and net sales per selling square foot) |
Net sales |
|
$ |
1,462,944 |
|
|
$ |
1,405,615 |
|
|
$ |
1,279,060 |
|
|
$ |
1,144,061 |
|
|
$ |
961,089 |
|
Operating profit before change in fair value
of derivative instruments (2) |
|
$ |
42,813 |
|
|
$ |
81,321 |
|
|
$ |
100,714 |
|
|
$ |
70,112 |
|
|
$ |
58,925 |
|
Change in fair value of derivative instruments |
|
$ |
85,235 |
|
|
$ |
248,193 |
|
|
$ |
(175,955 |
) |
|
$ |
(144,209 |
) |
|
|
|
|
Operating profit (loss) |
|
$ |
128,048 |
|
|
$ |
329,514 |
|
|
$ |
(75,241 |
) |
|
$ |
(74,097 |
) |
|
$ |
58,925 |
|
Income (loss) from continuing operations |
|
$ |
99,220 |
|
|
$ |
241,967 |
|
|
$ |
(122,880 |
) |
|
$ |
(116,216 |
) |
|
$ |
36,747 |
|
Loss from discontinued operations |
|
$ |
(48,379 |
) |
|
$ |
(190,525 |
) |
|
$ |
(28,033 |
) |
|
$ |
(67,202 |
) |
|
$ |
(56,195 |
) |
Net income (loss) |
|
$ |
50,841 |
|
|
$ |
51,442 |
|
|
$ |
(150,913 |
) |
|
$ |
(183,418 |
) |
|
$ |
(19,448 |
) |
Basic earnings (loss) per share from
continuing operations |
|
$ |
2.04 |
|
|
$ |
5.02 |
|
|
$ |
(2.73 |
) |
|
$ |
(3.01 |
) |
|
$ |
1.08 |
|
Diluted earnings (loss) per share from
continuing operations |
|
$ |
2.00 |
|
|
$ |
4.26 |
|
|
$ |
(2.73 |
) |
|
$ |
(3.01 |
) |
|
$ |
0.77 |
|
Basic loss per share from discontinued
operations |
|
$ |
(0.99 |
) |
|
$ |
(3.96 |
) |
|
$ |
(0.62 |
) |
|
$ |
(1.74 |
) |
|
$ |
(1.65 |
) |
Diluted loss per share from discontinued
operations |
|
$ |
(0.98 |
) |
|
$ |
(3.35 |
) |
|
$ |
(0.62 |
) |
|
$ |
(1.74 |
) |
|
$ |
(0.96 |
) |
Basic earnings (loss) per share |
|
$ |
1.04 |
|
|
$ |
1.07 |
|
|
$ |
(3.35 |
) |
|
$ |
(4.75 |
) |
|
$ |
(0.57 |
) |
Diluted earnings (loss) per share |
|
$ |
1.03 |
|
|
$ |
0.91 |
|
|
$ |
(3.35 |
) |
|
$ |
(4.75 |
) |
|
$ |
(0.28 |
) |
Total assets |
|
$ |
953,762 |
|
|
$ |
951,966 |
|
|
$ |
1,301,658 |
|
|
$ |
1,175,154 |
|
|
$ |
1,270,227 |
|
Working capital |
|
$ |
307,776 |
|
|
$ |
295,862 |
|
|
$ |
274,439 |
|
|
$ |
147,746 |
|
|
$ |
179,767 |
|
Current ratio |
|
|
2.20 |
|
|
|
1.98 |
|
|
|
1.45 |
|
|
|
1.25 |
|
|
|
1.43 |
|
Long-term obligations, continuing operations |
|
$ |
127,576 |
|
|
$ |
135,293 |
|
|
$ |
133,053 |
|
|
$ |
49,678 |
|
|
$ |
55,001 |
|
Number of DSW Stores:(3) |
|
|
298 |
|
|
|
259 |
|
|
|
223 |
|
|
|
199 |
|
|
|
172 |
|
DSW net sales per average gross square
foot(4) |
|
$ |
196 |
|
|
$ |
212 |
|
|
$ |
218 |
|
|
$ |
217 |
|
|
$ |
217 |
|
DSW comparable store sales change(5) |
|
|
(5.9 |
)% |
|
|
(0.8 |
)% |
|
|
2.5 |
% |
|
|
5.4 |
% |
|
|
5.0 |
% |
|
|
|
(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. Average gross square
footage represents the monthly average of square feet for DSW stores only for each period
presented and consequently reflects the effect of opening stores in different months
throughout the period. Net sales per average gross square foot is the result of dividing net
sales for DSW stores only for the period presented, by average gross square footage. |
|
(5) |
|
Comparable DSW stores and comparable leased departments are those units that have
been in operation for at least 14 months at the beginning of the fiscal year. Stores or
leased departments, as the case may be, are added to the comparable base at the beginning of
the year and are dropped for comparative purposes in the quarter that they are closed. |
33
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 two operating segments: DSW and Corporate, and one
segment classified as held for sale, Filenes Basement, as of January 31, 2009. DSW is a United
States specialty branded footwear retailer operating 298 shoe stores in 37 states as of January 31,
2009. 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. 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.
Associated with this transaction, a deferred tax liability of
$65.5 million was recorded.
As
of January 31, 2009, Retail Ventures owned Class B Common Shares of DSW representing approximately
62.9% of DSWs outstanding Common Shares and approximately 93.1% 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.
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 $0.5 million 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. On October 26, 2008, Value City filed for bankruptcy
protection and announced that it would close its remaining stores. DSW negotiated an agreement with
Value City to continue to provide services post bankruptcy filing until the liquidation is
complete, including risk management, financial services, benefits administration, payroll and
information technology services, in exchange for a weekly payment.
Pursuant to an amendment to the existing shared services agreement between Retail Ventures and DSW,
Retail Ventures transferred the following shared service departments to DSW during fiscal 2008:
finance; internal audit; tax; human resource information systems; and risk management. The
employees in these departments were transferred to DSW during fiscal 2008. Due to the disposition
of an 81% ownership interest in Value City, the allocation of shared service expenses has had, and
will continue to have, an increased expense impact on DSW and Filenes Basement.
In January 2009,
Retail Ventures announced that it was exploring strategic
alternatives for Filenes Basement, and as a result as of
January 31, 2009,
Filenes Basement met the criteria set forth within SFAS 144 to be classified as held for sale.
The applicable criteria includes the following: management has committed to a plan to sell the
asset; the asset is available for immediate sale; an active program to locate a buyer and other
actions required to complete the plan to sell the asset have been initiated; the sale of the asset
is probable and the transfer of the asset is expected to qualify as a complete sale within one
year; the asset is being actively marketed for sale at a price that is reasonable in relation to
its current fair value; and actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn. For reporting
purposes, the results of operations are reported in discontinued operations.
34
On April 21, 2009, we sold all of the outstanding stock of Filenes Basement
and certain related entities
to FB II Acquisition
Corp., a newly formed entity owned by Buxbaum Holdings, Inc. Except as otherwise indicated, the description of
the Filenes Basement business in this Annual Report on Form 10-K, including this Item 7, is of the
business as operated in the fiscal year ended January 31, 2009.
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.
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 2008 and prior years, we considered comparable store sales to be sales at stores that
have been in operation for at least 14 months at the beginning of the fiscal year. 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, through sales from new
stores, and through sales from dsw.com. In fiscal 2008, DSW opened 41 new stores and closed two
stores. For fiscal 2009, DSW plans to open approximately 10 new stores.
Although continued expansion could place increased demands on our financial, managerial,
operational and administrative resources and result in increased demands on management, we do not
believe that our anticipated growth plan will have an unfavorable impact on our operations or
liquidity. The current slowdown in the United States economy has adversely affected consumer
confidence and consumer spending habits, which has resulted in further reductions in customer
traffic and comparable store sales in our existing stores with the resultant increase in inventory
levels and markdowns. These negative economic conditions may also affect future profitability and
may cause us to reduce the number of future store openings, impair goodwill or impair long-lived
assets.
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.
35
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 upon customer receipt
of merchandise, net of returns and exclude sales tax and are not recognized until
collectability is reasonably assured. For dsw.com, we estimate a time lag for shipments to
record revenue when the customer receives the goods. We believe a one day change in our
estimate would not materially impact our revenue. Net sales also include revenue from
shipping and handling while the related costs are included in cost of sales. |
|
|
|
|
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.
Miscellaneous income is included in selling, general and administrative expenses. We
recognized $0.8 million and $0.3 million as miscellaneous income from gift card breakage in
fiscal 2008 and fiscal 2007, respectively, excluding discontinued operations. 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 markdowns, which are reductions in
prices due to customers perception of value. Accordingly, earnings are negatively impacted
as merchandise is marked down prior to sale. |
|
|
|
|
Inherent in the calculation of inventories are certain significant management judgments and
estimates, including setting the original merchandise retail value or markon, markups of
initial prices established, 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 profit.
If our estimate of shrinkage were to increase or decrease 0.5% as a percentage of net sales,
it would result in approximately $1.9 million decrease or increase to operating profit. |
|
|
|
|
Investments. DSW determines the appropriate balance sheet classification of its
investments at time of purchase and evaluates the classification at each balance sheet date.
If DSW has the intent and ability to hold the investments to maturity, investments are
classified as held-to-maturity. Held-to-maturity securities are stated at amortized cost
plus accrued interest. Otherwise, DSW investments are classified as available-for-sale. |
|
|
|
|
DSWs investments in auction rate securities are recorded at fair value under FAS 157 using an
income approach valuation model that uses level 3 inputs such as the financial condition of
the issuers of the underlying securities, expectations regarding the next successful auction,
risks in the auction rate securities market and other various assumptions. DSWs other types
of investments are valued using a market based approach using level 2 inputs such as prices of
similar assets in active markets. DSW believes that changes in its valuation model would not
result in a material change to earnings. |
|
|
|
|
DSW evaluates its investments for impairment and whether an impairment 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. Based on the nature of the
impairment(s), DSW would record a temporary impairment as an unrealized loss in other
comprehensive income or an other-than-temporary impairment in earnings. The investment is
written down to its current market value at the time the impairment is deemed to have
occurred. |
36
|
|
|
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 2008, 2007 and 2006, we recorded, excluding discontinued operations,
impairment losses of $3.3 million, $2.1 million, and $0.8 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. We do not believe that
there will be material changes in the estimates or assumptions we use to calculate asset
impairments. To the extent these future projections or our strategies change, the
conclusion regarding impairment may differ from our current estimates. |
|
|
|
|
Self-insurance reserves. We record estimates for certain health and welfare, workers
compensation and casualty insurance costs that are self-insured programs. 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, 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 approximately $0.1 million. The self-insurance
reserves, excluding discontinued operations, were $2.5 million and $2.1 million at the end
of fiscal 2008 and 2007, respectively. The decrease in self-insurance reserves was
principally associated with the decrease in general liability. |
|
|
|
|
Pension. The obligations and related assets of the Filenes Basement defined benefit
retirement plan are included in the operations held for sale at January 31, 2009 and are
presented in Note 10 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 January 31, 2009,
the weighted-average actuarial assumptions applied to our plan were a discount rate of 6.3%
and long-term rate of return on plan assets of 7.0%. At 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. |
|
|
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Customer loyalty program. DSW maintains a customer loyalty program for the DSW stores and
dsw.com in which program members earn reward certificates that result in discounts on future
purchases. Upon reaching the target-earned threshold, the members receive reward
certificates for these discounts which must be redeemed within six months. 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
January 31, 2009 and February 2, 2008 was $7.3 million and $6.4 million, respectively. |
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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. |
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For the fiscal years ended January 31, 2009 and February 2, 2008, the Company recorded a
benefit of $35.9 million and $154.6 million, respectively, related to the change in fair value
of warrants. For the fiscal years ended January 31, 2009 and February 2, 2008, the Company
recorded a benefit of $49.3 million and $93.6 million, respectively, related to the change in
the fair value of the conversion feature of the PIES. At January 31, 2009, if the estimated
discount rate were to have increased by 1%, the effect on the fair value of the warrants would
have been less than $0.1 million and would have decreased the fair value of the conversion
feature of the PIES by approximately $3.1 million. |
37
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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 2008, a decrease in
valuation reserve of $22.6 million for deferred tax assets was recorded. During fiscal 2007,
we established an additional valuation reserve of $61.1 million for deferred tax assets. |
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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. |
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Sale of subsidiary stock. Sales of stock by a subsidiary are accounted for by Retail
Ventures as capital transactions. |
RESULTS OF OPERATIONS
We operate two business segments, DSW and Corporate, and have one segment classified as held for
sale, Filenes Basement. Our DSW segment is a specialty branded footwear retailer. As of January
31, 2009, a total 298 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 of January 31, 2009, Filenes Basement met the criteria set forth in SFAS
144 to be classified as held for sale. For reporting purposes, the results of the Filenes Basement
operations are included in discontinued operations. 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 also included in discontinued operations.
Seasonality
Our business is affected by the pattern of seasonality common to most retail businesses. DSW net
sales have typically been higher in the first and third quarters, when DSWs customers interest in
new seasonal styles increases. 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.
Fiscal Year
We follow a 52/53-week fiscal year that ends on the Saturday nearest to January 31. Fiscal years
2008 and 2007 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.
38
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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Fifty-two |
|
Fifty-two |
|
Fifty-three |
|
|
Weeks |
|
Weeks |
|
Weeks |
|
|
Ended |
|
Ended |
|
Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(57.5 |
) |
|
|
(58.5 |
) |
|
|
(56.9 |
) |
|
Gross profit |
|
|
42.5 |
|
|
|
41.5 |
|
|
|
43.1 |
|
Selling, general and administrative expenses |
|
|
(39.5 |
) |
|
|
(35.8 |
) |
|
|
(35.2 |
) |
Change in fair value of derivative instruments |
|
|
5.8 |
|
|
|
17.7 |
|
|
|
(13.8 |
) |
|
Operating profit (loss) |
|
|
8.8 |
|
|
|
23.4 |
|
|
|
(5.9 |
) |
Interest expense |
|
|
(0.9 |
) |
|
|
(1.0 |
) |
|
|
(0.6 |
) |
Interest income |
|
|
0.7 |
|
|
|
1.3 |
|
|
|
1.0 |
|
|
Interest (expense) income, net |
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
0.4 |
|
|
Income (loss) from continuing operations
before income taxes and minority interest |
|
|
8.6 |
|
|
|
23.7 |
|
|
|
(5.5 |
) |
Income tax expense |
|
|
(1.1 |
) |
|
|
(5.1 |
) |
|
|
(2.2 |
) |
|
Income (loss) from continuing operations
before minority interest |
|
|
7.5 |
|
|
|
18.6 |
|
|
|
(7.7 |
) |
Minority interest |
|
|
(0.7 |
) |
|
|
(1.4 |
) |
|
|
(1.9 |
) |
|
Net income (loss) from continuing operations |
|
|
6.8 |
% |
|
|
17.2 |
% |
|
|
(9.6 |
)% |
|
Fiscal Year Ended January 31, 2009 (fiscal 2008) Compared To Fiscal Year Ended February 2, 2008
(fiscal 2007)
Sales. DSW sales for fiscal 2008 increased by 4.1% to $1.46 billion from $1.41 billion for fiscal
2007. DSW comparable store sales decreased 5.9% and 0.8% for fiscal 2008 and fiscal 2007,
respectively. The increase in net sales included a net increase of 9.4% from new and closed
locations and dsw.com, partially offset by a decrease of 5.3% from comparable store sales.
The decrease in comparable sales of 5.9% was primarily a result of the challenging economic
environment evidenced by a decrease in customer traffic and units per transaction. For fiscal 2008,
DSW stores comparable sales decreased in womens by 6.0%, mens by 5.1%, accessories by 7.6%, and
the athletic category by 5.4%. Leased department sales comprised 11.2% of DSW segment sales in
fiscal 2008, compared to 12.5% in fiscal 2007.
Gross Profit. DSW gross profit increased $37.6 million, or 6.4%, from $583.8 million to $621.4
million. Gross profit, as a percentage of sales, increased to 42.5% compared to 41.5% for the prior
years period. The gross profit for DSW for fiscal 2008 increased as a percentage of sales compared
to fiscal 2007 due to a decrease in markdowns as a result of managing inventory as well as the
result of enhancements to the clearance markdown process in the DSW leased departments.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses
increased $76.1 million, or 15.1%, from $502.4 million in fiscal 2007 to $578.5 million in fiscal
2008. SG&A expenses, as a percentage of sales, increased to 39.5% compared to 35.8% for the prior
years period.
The increase in SG&A as a percent of sales was driven by increases in DSW home office expenses,
distribution expenses and expenses related to the start-up and operation of dsw.com. DSW home
office expenses increased due to increases in personnel and bonus costs, a one-time severance
charge related to the fourth quarter headcount reduction, and expenses related to unreimbursed
services provided to Value City. The increase in distribution expense was a result of expenses
related to our dsw.com fulfillment center, which was not operating in fiscal 2007.
Change in Fair Value of Derivatives. During fiscal 2008 and fiscal 2007, the Company recorded a
non-cash benefit of $35.9 million and $154.6 million, respectively, representing the changes in
fair value of Conversion Warrants and Term Loan Warrants. During fiscal 2008 and fiscal 2007, $49.3
million and $93.6 million, respectively, was recorded as a benefit from the change in the fair
value of the conversion feature of the PIES. 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.
39
Operating Profit. The operating profit for fiscal 2008 was $128.0 million compared to $329.5
million in fiscal 2007, a decrease of $201.5 million. The operating profit as a percentage of sales
was 8.8% in fiscal 2008 compared to 23.4% in fiscal 2007.
The operating profit for the Corporate segment decreased $163.0 million to an operating profit of
$85.2 million in fiscal 2008 from an operating profit of $248.2 million in fiscal 2007, primarily
due to the change in fair value of derivative instruments.
The operating profit for DSW was $42.8 million in fiscal 2008 compared to $81.3 million in fiscal
2007 and decreased as a percentage of net sales to 2.9% in fiscal 2008 from 5.8% in fiscal 2007.
The decrease in operating profit as a percentage of net sales was primarily due to the increase in SG&A expenses as a percentage of sales.
Interest Expense. Interest expense was $13.6 million in fiscal 2008, a $0.3 million decrease from
fiscal 2007. Interest expense included the amortization of debt discount of $2.0 million in both
fiscal 2008 and fiscal 2007.
Interest Income. During fiscal 2008, interest income decreased $7.3 million to $11.3 million due
to the replacement of DSWs short-term investments in favor of lower risk money market funds and
other investments with lower yields. In addition, the Corporate segments interest income
decreased as a result of the write-off of the note receivable from Value City during fiscal 2007.
Non-operating Income. Fiscal 2008 non-operating income consisted of a $1.5 million gain related to
the repurchase of 200,000 units of PIES, partially offset by a $1.1 million other-than-temporary
impairment on investments.
Income Taxes. Fiscal 2008 reflects a 13.4% effective tax rate as compared to a 21.7% fiscal 2007
effective rate. The 2008 and 2007 tax rates reflect the impact of $35.9 million and $154.6 million,
respectively, for the change in fair value on the mark to market accounting for the warrants.
Minority Interest. Fiscal 2008 net income decreased $10.0 million compared to $19.9 million in
fiscal 2007, to reflect that portion of the income attributable to DSW minority shareholders.
Income from Continuing Operations. The fiscal 2008 income from continuing operations decreased
$142.7 million compared to fiscal 2007 and represents 6.8% versus 17.2% of net sales, respectively.
Major contributing elements to this decrease are the $163.0 million decrease in the income from the
change in the fair value of derivatives and the $7.3 million decrease in interest income, partially
offset by the $9.9 decrease in minority interest.
Income (Loss) from Discontinued Operations Value City Department Stores. The $163.9 million
decrease in the loss from discontinued operations is primarily due to $90.0 million of losses on
the disposition of the 81% ownership interest in the Value City operations. In addition, during
fiscal 2007, Retail Ventures recorded a loss of $60.7 million from Value City operations. During
fiscal 2008, Retail Ventures recorded income of $13.2 million related to adjustments to the loss on
the disposition of the Value City operations due to Value City payments on guaranteed items,
passage of time and the updated valuation of the guarantees.
Loss from Discontinued Operations Filenes Basement. The loss from the Filenes Basement
operations increased $21.7 million from $39.9 million in fiscal 2007 to $61.6 million in fiscal
2008. The increase in the loss was primarily due to a decrease in gross profit and an increase in
SG&A expenses partially offset by a decrease in income tax expenses. The decrease in gross profit
was primarily due to decreases in sales of $44.2 million primarily due to a comparable store sales
decrease of 2.6%. The increase in SG&A expenses of $17.7 million was primarily due to impairment
charges recorded on long-lived property and equipment assets of $13.3 million during fiscal 2008
compared to $3.5 million during fiscal 2007. Included in the fiscal 2008 impairment charges were
$3.2 million of non-cash impairment charges recorded in the fourth quarter related to the
impairment of certain fixed assets related to the 11 stores which closed during February 2009. In
addition, during fiscal 2008 Filenes Basement recorded $8.1 million of impairment charges for a
tradename and favorable lease asset. The increases in impairment charges of $17.9 million were
partially offset by a decrease of $3.6 million in salaries and personnel related expenses. The
changes in tax rates from fiscal 2007 to fiscal 2008 is primarily due to increases in valuation
allowances of $22.2 million.
Fiscal Year Ended February 2, 2008 (fiscal 2007) Compared To Fiscal Year Ended February 3, 2007
(fiscal 2006)
Sales. DSW sales for fiscal 2007 increased by 9.9% to $1.41 billion from $1.28 billion for fiscal
2006. DSW comparable store sales decreased 0.8% and increased 2.5% for fiscal 2007 and fiscal 2006,
respectively. The 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 DSW segment 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.
40
DSW comparable store sales in fiscal 2007 decreased 0.8%, or $8.9 million, compared to the previous
fiscal year. 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.
Gross Profit. DSW gross profit increased $33.1 million to $583.8 million in fiscal 2007 from $550.7
million in fiscal 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 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.
Selling, General and Administrative Expenses. SG&A expenses increased $52.4 million, or 11.6%, from
$450.0 million in fiscal 2006 to $502.4 million in fiscal 2007. SG&A expenses, as a percentage of
sales, increased to 35.8% compared to 35.2% for the prior years period. Total SG&A expense
associated with new DSW 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.
The increase in SG&A expenses was a result of increases in home office expenses (excluding bonus
expense and dsw.com 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 the
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.
Change in Fair Value of Derivatives. During fiscal 2007 and fiscal 2006, the Company recorded a
non-cash benefit 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 benefit 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.
Operating Profit (Loss). The operating profit for 2007 was $329.5 million compared to an operating
loss of $75.2 million in 2006, an improvement of $404.7 million. The operating profit as a
percentage of sales was 23.4% in 2007 compared to an operating loss as a percentage of sales of
5.9% in 2006.
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 benefit 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 $144.7 million between the benefit of $93.6 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.
Operating profit for DSW was $81.3 million in fiscal 2007, compared to $100.7 million in fiscal
2006, and decreased as a percentage of net sales from 7.9% in fiscal 2006 to 5.8% in fiscal 2007.
As a percent of sales, the decrease in operating profit was primarily due to the result of a
decrease in gross profit.
Interest Expense. Interest expense was $13.9 million in fiscal 2007, a $5.4 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 $5.5 million to $18.6 million primarily
due to the issuance of $25.0 million of notes by Retail Ventures to Filenes Basement in fiscal
2007, as well as investments held by the DSW segment and an overall increase in cash and cash
equivalents.
Income Taxes. Fiscal 2007 reflects a 21.7% effective tax rate as compared to a negative 39.8%
fiscal 2006 effective rate. The 2007 tax rate of 21.7% 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 $61.1 million.
Minority Interest. Fiscal 2007 net income decreased $19.9 million compared to $24.2 million in
fiscal 2006, to reflect that portion of the income attributable to DSW minority shareholders.
41
Income (Loss) from Continuing Operations. The fiscal 2007 income from continuing operations
improved $364.9 million compared to fiscal 2006 and represents 17.2% versus a negative 9.6% of net
sales, respectively. Major contributing elements to this
improvement are the $424.1 million increase in fair value of derivatives and the $5.5 million
increase in interest income, offset by the $4.3 million decrease in minority interest.
Income (Loss) from Discontinued Operations Value City. The $128.4 million increase in the loss from the
Value City 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 was 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.
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 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.
Loss from Discontinued Operations Filenes Basement. The $34.1 million increase in the loss from
the Filenes Basement operations from $5.8 million in fiscal 2006 to $39.9 million in fiscal 2007
is primarily due to the increase in SG&A expense of $25.8 million to $185.1 million in fiscal 2007
from $159.3 million in fiscal 2006. Personnel expense, occupancy expense and other operating
expenses each increased $2.0 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. Included in SG&A expenses for the 2007 fiscal year are the closed
store costs for the Downtown Crossing Boston location which increased $1.8 million from fiscal
2006.
In addition, included in the increase in the loss from the Filenes Basement operations was an
increase in the income tax expense of $16.4 million from a benefit of $2.2 million in fiscal 2006
to an expense of $14.2 million in fiscal 2007. The increase in the income tax expense was primarily
due to an increase in the valuation allowance provided for federal and state deferred tax assets of
$23.8 million.
Inflation and Deflation
The results of operations and financial condition are presented based upon historical cost. While
it is difficult to accurately measure the impact of inflation or deflation because of the nature of
the estimates required, management believes that the effect of inflation or deflation, 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 or deflation in the future.
Liquidity and Capital Resources
Retail Ventures has begun reviewing its available options to the extent it may become necessary to
manage and enhance its liquidity position. Although RVIs plan to enhance liquidity could include,
among other things, the sale or collateralization of shares of common stock of DSW Inc. or a sale
of equity by RVI, no assurance can be given that any such transaction can be completed on favorable
terms or that such a transaction would satisfy all of RVIs liquidity requirements.
Our primary ongoing cash requirements are for debt service plus seasonal and new store inventory
purchases, capital expenditures in connection with store expansion, improving our information
systems, the development of dsw.com, the remodeling of existing stores and infrastructure growth.
The primary sources of funds for these liquidity needs are cash flow from operations and credit
facilities. For DSW, their working capital and inventory levels typically build seasonally. DSW
believes that they have sufficient financial resources and access to financial resources at this
time. DSW is committed to a cash management strategy that maintains liquidity to adequately
support the operations of the business, its growth strategy and to withstand unanticipated business
volatility. DSW believes that cash generated from DSW operations, together with its current levels
of cash and equivalents and short-term investments, as well as availability under its revolving
credit facility, will be sufficient to maintain its ongoing operations, support seasonal working
capital requirements and fund capital expenditures related to projected business growth.
Except as noted, the following discussion is based upon the consolidated liquidity position of RVI.
See below under Certain Liquidity Issues of RVI.
Net
working capital was $307.8 million and $295.9 million at January 31, 2009 and February 2, 2008,
respectively. Current ratios at those dates were 2.2 and 2.0 respectively.
42
Operating Activities
Net cash provided by operating activities from continuing operations totaled $94.0 million and
$67.3 million in fiscal 2008 and fiscal 2007, respectively. The fiscal 2008 increase of $26.7
million in net cash provided by operating activities is primarily due to (i) a
$163.0 million increase from the non-cash change in the fair value of derivative instruments, (ii)
a $53.4 million increase from the change in working capital assets and liabilities partially offset
by (iii) the $142.7 million decrease in income from continuing operations and the $52.6 million
decrease from the change in deferred income taxes and other noncurrent liabilities.
Net cash provided by operating activities from continuing operations totaled $67.3 million and
$100.5 million in fiscal 2007 and 2006, respectively. The fiscal 2007 decrease of $33.2 million in
net cash provided by operating activities is primarily due to the (i) $424.1 million decrease in
the non cash change in the fair value of derivatives, (ii) $32.2 million decrease from the change
in accrued expenses partially offset by (iii) $364.8 million increase in the fiscal 2007 net income
from continuing operations and (iv) $65.0 million increase from the change in deferred income taxes
and other noncurrent liabilities.
Investing Activities
For fiscal 2008, cash used in investing activities from continuing operations was $101.6 million
compared to $82.2 million for fiscal 2007. During the year ended January 31, 2009, $207.6 million
of cash was used to purchase available-for-sale and held-to-maturity securities while $185.6
million of cash was generated by the sale of available-for-sale and held-to-maturity securities.
During fiscal 2008, we had capital expenditures of $78.6 million and payments on capital
expenditures of $80.0 million, including amounts accrued during fiscal 2007. Of the fiscal 2008
capital expenditures, we incurred $53.8 million for new stores and remodels of existing stores,
$11.9 million related to the warehouses, $5.0 million related to dsw.com and $7.9 million related
to information technology equipment upgrades and new systems, excluding dsw.com.
For fiscal 2007, cash used in investing activities from continuing operations was $82.2 million
compared to $141.2 million for fiscal 2006. During the year ended February 2, 2008, $209.9 million
of cash was used to purchase available-for-sale securities while $226.0 million of cash was
generated by the sale of available-for-sale securities. During fiscal 2007, we had capital
expenditures of $101.8 million, of which $98.3 million was paid during fiscal 2007. Of this amount,
we incurred $45.7 million for new stores and remodels of existing stores, $15.1 million related to
the corporate office expansion and warehouses, $26.3 million related to the start up of dsw.com and
$14.7 million related to information technology equipment upgrades and new systems, excluding
dsw.com. Cash used for capital expenditures was $42.5 million for fiscal 2006. In fiscal 2006,
costs were primarily related to new stores, DSWs additional home office space, DSW store remodels
and fixtures for the additional Stein Mart leased department locations.
DSW expects to spend approximately $35 million for capital expenditures in fiscal 2009. 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 2008, DSW opened 41 new stores. DSW plans to open approximately 10 stores
in fiscal 2009. During fiscal 2008, 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 $0.5 million, fixtures and leasehold improvements typically
accounted for $1.0 million and pre-opening advertising and other pre-opening expenses typically
accounted for $0.1 million.
Although continued expansion could place increased demands on our financial, managerial,
operational and administrative resources and result in increased demands on management, we do not
believe that our anticipated growth plan will have an unfavorable impact on our operations or
liquidity. The current slowdown in the United States economy has adversely affected consumer
confidence and consumer spending habits, which has resulted in further reductions in customer
traffic and comparable store sales in our existing stores with the resultant increase in inventory
levels and markdowns. These negative economic conditions may also affect future profitability and
may cause us to reduce the number of future store openings, impair goodwill or impair long-lived
assets.
Financing Activities
During fiscal 2008, cash used in financing activities by continuing operations was $5.4 million
compared to $18.9 million in fiscal 2007. During fiscal 2008, the cash used for financing
activities was primarily due to the $5.6 million cash used to repurchase a portion of the
outstanding PIES. During fiscal 2007, the cash used for financing activities was due to the
issuance of $25.0 million of intercompany notes from Retail Ventures to Filenes Basement,
partially offset by the proceeds of $6.0 million from the exercise of conversion warrants.
43
The
Company is not subject to any financial covenants; however, the
Filenes Basement Revolving Loan, DSW Revolving Loan,
Non-Convertible Loan and PIES, sometimes referred to as 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 January 31, 2009, Filenes Basement was in an over loan
position of negative $7.8 million under Revolving Loan with no availability. At February 2, 2008,
$27.0 million was available under the Filenes Basement Revolving Loan. At January 31, 2009 and
February 2, 2008, direct borrowings aggregated $39.6 million and $22.5 million, respectively.
Letters of credit of $2.9 million and $3.4 million, respectively, were issued and outstanding at
January 31, 2009 and February 2, 2008. The maturity date of the Filenes Basement Revolving Loan is
January 23, 2013. On April 28, 2009, the Administrative Agent
under the Filenes Basement Revolving Loan delivered a notice to
Filenes Basement alleging that certain Events of Default had
occurred under the Revolving Loan and stating that the loan
commitments were thereby terminated and all liabilities under the
Revolving Loan are due and payable. As a result, the Filenes Basement
Revolving Loan has been accelerated and all amounts thereunder are
immediately due and payable.
In February 2009, Filenes Basement entered into an amendment to the Filenes Basement Revolving
Loan. At the same time, RVI entered into a Last Out participation agreement with the lenders
under the Filenes Basement Revolving Loan. The participation agreement required RVI to make an
aggregate of $7.5 million available to the lenders to be used to, among other things, fund
overadvances beyond the applicable borrowing base provided under the Filenes Basement Revolving
Loan. As a result of the acceleration of the Revolving Loan, this
amount may be drawn upon by the lenders and RVI would acquire a subordinated right to repayment of any such amount; however, RVI may not recover this
amount unless and until all amounts owed to the lenders under the Filenes Basement Revolving Loan are repaid
in full and certain costs and expenses of National City Business Credit Inc. related to the
Filenes Basement Revolving Loan are reimbursed.
Although the Filenes Basement Revolving Loan has been accelerated, and all amounts thereunder are due and payable by RVI as a result of
its guaranty of the obligations under the Revolving Loan, the Revolving Loan lenders have agreed to
forbear from making demand on RVI under such guarantee until the substantial completion of the sale
and/or liquidation of Filenes Basements business and assets, subject to certain terms and
conditions. There can be no assurance that these terms and conditions (some of which are outside
of the control of Retail Ventures) will be met.
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
DSW has a $150 million secured revolving credit facility that expires July 5, 2010. Under the DSW
Revolving Loan, DSW and its subsidiaries 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. In addition, the DSW revolving loan
contains usual and customary restrictive covenants relating to DSWs management and the operation
of its business. These covenants, among other things, restrict DSWs ability to grant liens on its
assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem its
stock, enter into transactions with affiliates and merge or consolidate with another entity. At
January 31,
44
2009 and February 2, 2008, $132.3 million and $134.3 million, respectively, was
available under the DSW Revolving Loan and no
direct borrowings were outstanding. At January 31,
2009 and February 2, 2009, $17.7 million and
$15.7 million, respectively, in letters of credit were issued and outstanding.
DSW is currently seeking a new secured revolving credit facility as DSWs current credit facility
will expire on July 5, 2010. Based upon the current credit markets, the terms of the new credit
facility may be materially different from DSWs current facility.
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. 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.
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
45
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.
During fiscal 2008 and fiscal 2007, the Company recorded a benefit related to the change in fair
value of the conversion feature of the PIES of $49.3 million and $93.6 million, respectively. As
of January 31, 2009, the fair value asset recorded for the conversion feature of the PIES was $77.8
million.
During fiscal 2008, Retail Ventures repurchased 200,000 units of PIES for an aggregate purchase
price of $5.6 million, which resulted in a reduction of the long-term obligation of $10.0 million.
Retail Ventures recorded a $1.5 million gain on the repurchase, which is included in non-operating
income on the statements of operations.
46
Auction Rate Securities
As of January 31, 2009, $4.3 million, net of a $0.7 million unrealized loss and $1.1 million
other-than-temporary impairments, of DSWs $102.7 million in total investments was invested in
auction rate securities. Due to auction failures limiting the liquidity of DSWs investments, DSW
has presented $1.3 million, net of $1.1 million other-than-temporary impairments, of its investment
in
auction rate securities as long-term investments as of January 31, 2009. DSW believes that the
current lack of liquidity and the other-than-temporary impairment charges 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 for Value City inventory purchases made prior to the disposition date; amounts owed
for guaranteed severance for certain Value City employees; amounts owed under lease obligations for
certain equipment leases; amounts owed under certain employee benefit plans if the plans are not
fully funded on a termination basis; amounts owed for certain workers compensation claims for
events prior to the disposition date; amounts owed under certain income tax liabilities and the
guarantee of the amount of unpaid management fees from Value City to VCHI for a period of one year
following the transaction.
As of January 31, 2009 and February 2, 2008, RVI had recorded liabilities of $12.9 million and
$26.6 million, respectively, for the guarantees of Value City commitments. On October 26, 2008,
Value City filed for bankruptcy protection and announced that it would close its remaining stores.
RVI may become subject to risks associated with the bankruptcy filing by Value City, if creditors
whose obligations RVI has guaranteed are not paid.
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. We have negotiated an agreement with Value City
to continue to provide services post bankruptcy filing until the liquidation is complete, including
risk management, financial services, benefits administration, payroll and information technology
services, in exchange for a weekly payment. We have submitted a proof of claim in the bankruptcy
proceeding seeking payment in full for all amounts owed to us. However, there is no assurance that
we will be able to collect all or any of the amounts owed to us.
Liquidity and Capital Resources Considerations Relating to the Filenes Basement Disposition
On
April 21, 2009, we sold all of the outstanding capital stock of
Filenes Basement and certain related entities to FB II
Acquisition Corp., a newly formed entity owned by Buxbaum Holdings, Inc. On April 28, 2009, the Administrative Agent under the Filenes Basement Revolving Loan delivered a
notice to Filenes Basement alleging that certain Events of Default had occurred under the
Revolving Loan and stating that the loan commitments were thereby terminated and all liabilities
under the Revolving Loan are due and payable. As a result, the Filenes Basement Revolving Loan has
been accelerated and all amounts thereunder are immediately due and payable. Filenes Basement is
experiencing material operational and liquidity difficulties which may materially impact its
ability to operate.
As of the
transaction date for the sale of Filenes Basement, RVI estimates an amount of $42.5 million for the guarantees of
Filenes Basement commitments, including but not limited to $13.8 million of outstanding borrowings
against the Filenes Basement Revolving Loan; $6.6 million of payments to factors for inventory
purchases made prior to the disposition date; $12.6 million under lease obligations; and $9.5
million under certain laws related to certain employee benefit plans.
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 had been making payments to Filenes Basement while the premises are
being renovated. The payments ceased during the fourth quarter of fiscal 2008 and Filenes Basement
cannot predict if, or when, the landlord will resume making payments.
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.
47
The following table provides aggregated information about known contractual obligations and other
long-term liabilities as of January 31, 2009 (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 |
Continuing Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Longterm debt |
|
$ |
134,000 |
|
|
$ |
250 |
|
|
$ |
133,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments on longterm debt(1) |
|
|
24,381 |
|
|
|
8,875 |
|
|
|
15,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations (2) |
|
|
1,024,985 |
|
|
|
135,614 |
|
|
|
258,216 |
|
|
$ |
223,548 |
|
|
$ |
407,607 |
|
|
|
|
|
Construction commitments DSW(3) |
|
|
893 |
|
|
|
893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (4) |
|
|
2,996 |
|
|
|
1,602 |
|
|
|
1,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 (5) |
|
|
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354 |
|
|
|
|
|
|
Total continuing operations |
|
$ |
1,189,609 |
|
|
$ |
147,234 |
|
|
$ |
408,866 |
|
|
$ |
223,548 |
|
|
$ |
409,961 |
|
|
|
|
|
|
Held for sale operations (7) |
|
$ |
366,706 |
|
|
$ |
83,747 |
|
|
$ |
74,441 |
|
|
$ |
61,927 |
|
|
$ |
146,591 |
|
|
|
|
|
|
Total |
|
$ |
1,556,315 |
|
|
$ |
230,981 |
|
|
$ |
483,307 |
|
|
$ |
285,475 |
|
|
$ |
556,552 |
|
|
|
|
|
|
|
|
|
(1) |
|
Projected interest payments are for the PIES and Non-Convertible Loan and are based
on the outstanding principal amount at January 31, 2009 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 January 31, 2009. |
|
(4) |
|
Other contractual obligations include purchase commitments, guarantees and
indemnifications. 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 January 31, 2009, is $2.4 million,
including approximately $1.1 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. |
|
(7) |
|
Projected interest payments for the Filenes Basement Revolving Loan are based on
the outstanding principal amount at January 31, 2009 and
interest rate per the agreement. |
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.
At January 31, 2009, the Company has outstanding $133.8 million of PIES, $39.6 million of direct
borrowings under the Filenes Basement Revolving Loan and $0.25 million under the assumed
Non-Convertible Loan. At February 2, 2008, the Company had 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.
The Company had outstanding letters of credit on the DSW Revolving Loan of $17.7 million and $15.7
million at January 31, 2009 and February 2, 2008, respectively. The Company had outstanding
letters of credit on the Filenes Basement Revolving Loan of $2.9 million and $3.4 million at
January 31, 2009 and February 2, 2008, respectively. 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.
48
During the current year, DSW 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 $0.9
million at January 31, 2009. In addition, DSW has signed 14 lease agreements for new store
locations opening in fiscal 2009 and fiscal 2010 with annual aggregate rent of $4.2 million and
average terms of approximately 10 years. Associated with the new lease agreements, we will receive
approximately $5.8 million of tenant improvement allowances which will offset future capital
expenditures.
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.
See Note 6 to Consolidated Financial Statements for the minimum payments due under operating or
capital leases.
Additional information regarding our financial commitments as of January 31, 2009 is provided in
Notes 7 and 13 to Consolidated Financial Statements.
Certain Liquidity Issues of RVI
Except as otherwise noted, the above discussion relates to the consolidated financial position of
RVI. However, RVI is a holding company and has no net sales on a standalone basis and DSW has
indicated that it does not intend to declare dividends for the foreseeable future. RVI also does
not have any credit facilities under which it can borrow funds. RVI has continuing cash obligations
in connection with its operations, including the coupon on the PIES. In addition, as indicated
above, RVI has guaranteed certain obligations of Filenes Basement and Value City. Value City filed for bankruptcy on October 26, 2008.
Retail Ventures has begun reviewing its available options to the extent it may become necessary to
manage and enhance its liquidity position. Although RVIs plan to enhance liquidity could include,
among other things, the sale or collateralization of shares of common stock of DSW Inc. or a sale
of equity by RVI, no assurance can be given that any such transaction can be completed on favorable
terms or that such a transaction would satisfy all of RVIs liquidity requirements.
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 January 31, 2009, 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.
Investments
Our cash and equivalents have maturities of 90 days or less. DSWs investments in auction rate
securities have variable interest rates that typically come up for auction every 91 to 182 days.
DSW also has investments in tax exempt bonds, tax advantaged bonds, variable rate demand notes, tax
exempt commercial paper, and certificates of deposit. Tax exempt commercial paper and certificates
of deposit mature every 28 to 91 days. DSWs other types of short-term investments generally have
interest reset dates of every 7 days. These financial instruments may be subject to interest rate
risk through lost income should interest rates increase during their limited term to maturity or
resetting of interest rates and thus may limit DSWs ability to invest in higher interest
investments.
DSW has $14.0 million invested in certificates of deposit and participate in the Certificate of
Deposit Account Registry Service® (CDARS). CDARS provides FDIC insurance on deposits of up to
$50.0 million.
49
As of January 31, 2009, DSWs long-term investments, $1.3 million, net of $1.1 million
other-than-temporary impairments, were in auction rate securities. Due to auction failures limiting
the liquidity of these investments, DSW has presented investments in auction
rate securities that have undergone a failed auction as long-term investments as of January 31,
2009. In fiscal 2008, DSW believes that certain auction rate securities have undergone an
other-than-temporary impairment of $1.1 million, and DSW also recorded a temporary impairment of
$0.7 million related to another auction rate security. Although DSW has impaired certain auction
rate securities, DSW expects to continue to earn interest at the prevailing rates on their 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 January 31, 2009,
direct borrowings on the Filenes Basement Revolving Loan was $39.6 million and an additional $2.9
million of letters of credit were outstanding against this credit facility. A hypothetical 100
basis point increase in interest rates on Filenes Basements variable rate debt outstanding for
the year ended January 31, 2009, net of income taxes, would have had an approximate $0.2 million
impact on our financial position, liquidity and results of operations. At January 31, 2009, DSW
had no direct borrowings under its credit facility and had $17.7 million of letters of credit
outstanding. Because DSW has no outstanding debt, DSW does not believe that a hypothetical adverse
change of 1% in interest rates would have a material effect on its financial position.
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 (subject to adjustment) at an exercise price of $10.00 per share, and exercisable
within 18 months of January 23, 2008. 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.
As of January 31, 2009, the VCHI Warrants did not qualify as 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%.
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 2008, the Company recorded a benefit related to the change in the fair value of the
Conversion Warrants and Term Loan Warrants of $35.9 million. As of January 31, 2009, the aggregate
fair value liability recorded relating to both the Term Loan Warrants and Conversion Warrants is
$6.3 million. The $1.8 million value ascribed to the Conversion Warrants was estimated as of
January 31, 2009 using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 0.3%; expected life of 0.4 years; expected volatility of 114.3%; and an expected
dividend yield of 0.0%. The $4.5 million value ascribed to the Term Loan Warrants was estimated as
of January 31, 2009 using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 1.3%; expected life of 3.4 years; expected volatility of 95.9% 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.
At January 31, 2009, if the estimated discount rate were to have
increased by 1%, the effect on the fair value of the warrants would
have been less than $0.1 million.
Conversion Feature of PIES
During fiscal 2008, the Company recorded a benefit related to the change in fair value of the
conversion feature of the PIES of $49.3 million. As of January 31, 2009, the fair value asset
recorded for the conversion feature was $77.8 million. The fair value was estimated using the
Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 3.0%;
expected life of 2.6 years; expected volatility of 58.0%; 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. At January 31, 2009, if the estimated discount rate were to have
increased by 1%, the fair value of the conversion feature of the PIES
would have decreased by approximately $3.1 million.
50
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 January 31,
2009. 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 January 31, 2009.
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-2 of this Annual Report on Form 10-K.
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 January 31, 2009 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
On April 28, 2009, the Administrative Agent under the Filenes Basement Revolving Loan delivered a
notice to Filenes Basement alleging that certain Events of Default had occurred under the
Revolving Loan and stating that the loan commitments were thereby terminated and all liabilities
under the Revolving Loan are due and payable. As a result, the Filenes Basement Revolving Loan has
been accelerated and all amounts thereunder are immediately due and payable. RVI has guaranteed
all of Filenes Basements obligations under that secured credit agreement which had a balance of
$13.8 million as of the date of disposition of Filenes
Basement by RVI. As previously disclosed, RVI had an arrangement with
the lenders under the Filenes Basements Revolving Loan pursuant to which RVI has agreed to
acquire a $7.5 million Last Out Participation in that secured credit agreement, which is included
in the loan balance referred to above.
In connection with the disposition of Filenes Basement and related transactions, RVI and Filenes
Basement obtained consent from the lenders under the Filenes
Basement Revolving Loan. In that consent, although the Filenes Basement Revolving Loan has been accelerated, and all amounts
thereunder are due and payable by RVI as a result of its guaranty, the Revolving Credit Lenders
agreed to forbear from making demand on RVI under such guaranty until the
substantial completion of the sale and/or liquidation of Filenes Basements business and assets,
subject to certain terms and conditions. As part of the agreement, RVI has reaffirmed its existing
guaranty of the Filenes Basement Revolving Loan, provided that the aggregate principal amount of
the guaranteed debt will not be increased following the commencement of any Filenes Basement
bankruptcy case, except to the extent the increase arises as a result of a drawing on an existing
letter of credit under the facility or the incurrence of any costs of collection. In addition, RVI
has paid a consent fee of $0.1 million to the Revolving Credit Lenders and has agreed to maintain
an additional $2.5 million in an account at and controlled by one of the lenders until the lenders
have been paid in full. Under certain circumstances, the bank in which such funds are held would
have the right to set-off this amount against RVIs obligations under its guaranty. There can be no
assurance that all of the terms and conditions to the Consent Agreement with the lenders, some of
which are not within the control of RVI, will be satisfied.
51
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 July 9, 2009, 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. McGrady, Chief Executive Officer, Executive Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company, has 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, former Chief Executive Officer and President of the Company, submitted his annual
certification to the New York Stock Exchange (NYSE) on June 5, 2008, 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.
52
The following table sets forth certain information as of January 31, 2009 about the Companys
existing equity compensation plans and arrangements. The information includes the number of common
shares covered by, and the weighted average exercise price of, outstanding options, warrants and
other rights and the number of common shares remaining available for future grants, excluding the
common shares to be issued upon exercise of outstanding options, warrants and other rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
Number of securities to be |
|
|
|
|
|
|
remaining available for issuance |
|
|
|
issued upon exercise of |
|
|
Weighted-average exercise |
|
|
under equity compensation plans |
|
|
|
outstanding options, |
|
|
price of outstanding options, |
|
|
(excluding securities reflected in |
|
Plan Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders
(1) |
|
|
1,642,450 |
|
|
$ |
6.82 |
|
|
|
5,575,493 |
(2) |
Equity compensation
plans not approved
by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,642,450 |
|
|
$ |
6.82 |
|
|
|
5,575,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Equity compensation plans approved by shareholders include the 1991 Plan and the 2000
Plan. |
|
(2) |
|
The number of common shares remaining available for issuance under the 2000 Plan
includes the common shares underlying outstanding SARs included in column (a) as such SARs
do not reduce the number of available common shares unless and until the Company elects to
exercise the Option Price Protection Provision and settle the SARs in common shares. No
further common shares may be granted under the 1991 Plan, excluding the common shares to
be issued upon exercise of outstanding options, warrants and other rights. |
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, COMMITTEES 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.
53
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
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Page in |
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Form 10-K |
15(a)(1) Financial Statements |
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|
|
The documents listed below are filed as part of this Form 10-K: |
|
|
Report of Independent Registered Public Accounting Firm |
|
F-1 |
Consolidated Balance Sheets at January 31, 2009 and February 2, 2008 |
|
F-3 |
Consolidated Statements of Operations for the years ended January 31, 2009, February 2, 2008
and February 3, 2007 |
|
F-5 |
Consolidated Statements of Shareholders Equity for the years ended January 31, 2009, February 2, 2008
and February 3, 2007 |
|
F-6 |
Consolidated Statements of Cash Flows for the years ended January 31, 2009, February 2, 2008
and February 3, 2007 |
|
F-8 |
Notes to Consolidated Financial Statements |
|
F-9 |
15(a)(2) Consolidated Financial Statement Schedules:
Schedules not filed 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.
While the Company did not file Schedule II, there are immaterial reserves related to a lower of
cost or market inventory valuation and allowance for doubtful accounts.
15(a)(3) and (b) Exhibits:
See Index to Exhibits which begins on page E-1.
15(c) Additional Financial Statement Schedules:
None.
54
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 29, 2009 |
By: |
/s/ James A. McGrady
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James A. McGrady, Executive Vice President, Chief |
|
|
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Executive Officer, Chief Financial Officer, Treasurer
and Secretary |
|
|
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 |
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Date |
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|
|
*
|
|
Chairman of the Board of Directors
|
|
April 29, 2009 |
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|
|
|
|
|
|
|
|
/s/ James A. McGrady
|
|
Executive Vice President, Chief Executive Officer, Chief Financial Officer,
|
|
April 29, 2009 |
|
|
Treasurer
and Secretary (Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
*
|
|
Director
|
|
April 29, 2009 |
|
|
|
|
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|
|
|
*
|
|
Director
|
|
April 29_, 2009 |
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|
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|
*
|
|
Director
|
|
April 29, 2009 |
|
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|
|
|
*
|
|
Director
|
|
April 29, 2009 |
|
|
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|
|
|
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|
|
*
|
|
Director
|
|
April 29, 2009 |
|
|
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|
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|
|
|
|
|
*
|
|
Director
|
|
April 29, 2009 |
|
|
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|
|
|
|
|
*
|
|
Director
|
|
April 29, 2009 |
|
|
|
|
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|
|
|
|
|
*
|
|
Director
|
|
April 29, 2009 |
|
|
|
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|
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*By:
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/s/ James A. McGrady |
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|
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James A. McGrady (Attorney-in-fact)
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|
|
55
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 January 31, 2009 and February 2, 2008, and the related
consolidated statements of operations, shareholders equity, and cash flows for each of the three
years in the period ended January 31, 2009. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on the financial statements
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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Retail Ventures, Inc. and subsidiaries as of January 31, 2009 and
February 2, 2008, and the results of their operations and their cash flows for each of the three
years in the period ended January 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
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 Operation to VCHI Acquisition Co. on January 23, 2008. The loss on the sale and
operating results prior to the sale of the Value City Segment are included in loss from
discontinued operations in the accompanying consolidated financial statements. The Company also
determined that the Filenes Basement segment met the criteria set forth in Statement of Financial
Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets to be
classified as held for sale as of January 31, 2009. As discussed in Note 18 to the consolidated
financial statements, the Company disposed of its interest in Filenes Basement on April 21, 2009.
The operating results of the Filenes Basement segment are included in loss from discontinued
operations in the accompanying consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of January 31,
2009, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated April 28, 2009 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
April 28, 2009
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Retail Ventures, Inc.
Columbus, Ohio
We have audited the internal control over financial reporting of Retail Ventures, Inc. and
subsidiaries (the Company) as of January 31, 2009 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 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 the Companys internal control
over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit 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,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
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 Company maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2009, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended January
31, 2009 of the Company and our report dated April 28, 2009 expressed an unqualified opinion on
those financial statements and included an explanatory paragraph regarding the presentation of the
Companys discontinued operations.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
April 28, 2009
F-2
RETAIL
VENTURES, INC.
CONSOLIDATED BALANCE SHEETS
January 31, 2009 and February 2, 2008
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
February 2, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
94,308 |
|
|
$ |
107,260 |
|
Restricted cash |
|
|
261 |
|
|
|
257 |
|
Short-term investments, net |
|
|
101,404 |
|
|
|
70,005 |
|
Accounts receivable, net |
|
|
7,142 |
|
|
|
12,126 |
|
Accounts receivable from related parties |
|
|
332 |
|
|
|
2,246 |
|
Inventories |
|
|
244,008 |
|
|
|
262,037 |
|
Prepaid expenses and other current assets |
|
|
27,249 |
|
|
|
25,843 |
|
Deferred income taxes |
|
|
22,243 |
|
|
|
20,421 |
|
Current assets held for sale |
|
|
66,678 |
|
|
|
98,414 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
563,625 |
|
|
|
598,609 |
|
|
|
|
|
|
|
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment |
|
|
233,616 |
|
|
|
205,313 |
|
Leasehold improvements |
|
|
158,294 |
|
|
|
132,448 |
|
|
|
|
|
|
|
|
|
|
|
391,910 |
|
|
|
337,761 |
|
Accumulated depreciation and amortization |
|
|
(155,555 |
) |
|
|
(135,763 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
236,355 |
|
|
|
201,998 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
25,899 |
|
|
|
25,899 |
|
Long-term investments, net |
|
|
1,266 |
|
|
|
12,500 |
|
Tradenames and other intangibles, net |
|
|
3,668 |
|
|
|
4,522 |
|
Conversion feature of long-term debt |
|
|
77,761 |
|
|
|
30,848 |
|
Deferred income taxes |
|
|
805 |
|
|
|
|
|
Other assets |
|
|
5,590 |
|
|
|
8,592 |
|
Non current assets held for sale |
|
|
38,793 |
|
|
|
68,998 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
953,762 |
|
|
$ |
951,966 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-3
RETAIL VENTURES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
January 31, 2009 and February 2, 2008
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
February 2, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
93,088 |
|
|
$ |
116,242 |
|
Accounts payable to related parties |
|
|
3,125 |
|
|
|
1,433 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Compensation |
|
|
12,632 |
|
|
|
5,424 |
|
Taxes |
|
|
14,857 |
|
|
|
18,635 |
|
Gift cards and merchandise credits |
|
|
15,491 |
|
|
|
14,231 |
|
Guarantees from discontinued operations |
|
|
2,909 |
|
|
|
17,477 |
|
Other |
|
|
31,175 |
|
|
|
34,714 |
|
Warrant liability |
|
|
2,360 |
|
|
|
936 |
|
Warrant liability-related parties |
|
|
3,932 |
|
|
|
41,277 |
|
Current maturities of long-term debt |
|
|
250 |
|
|
|
|
|
Current liabilities held for sale |
|
|
76,030 |
|
|
|
52,378 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
255,849 |
|
|
|
302,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations |
|
|
127,576 |
|
|
|
135,293 |
|
Other noncurrent liabilities |
|
|
109,290 |
|
|
|
101,885 |
|
Deferred income taxes |
|
|
29,806 |
|
|
|
23,155 |
|
Noncurrent liabilities held for sale |
|
|
36,055 |
|
|
|
55,614 |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
172,572 |
|
|
|
160,349 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common shares, without par value; 160,000,000
authorized; issued and outstanding, including
7,551 treasury shares, 48,691,280 and 48,623,430
outstanding, respectively |
|
|
306,868 |
|
|
|
305,254 |
|
Accumulated deficit |
|
|
(76,930 |
) |
|
|
(130,577 |
) |
Treasury shares, at cost, 7,551 shares |
|
|
(59 |
) |
|
|
(59 |
) |
Warrants |
|
|
124 |
|
|
|
124 |
|
Accumulated other comprehensive loss |
|
|
(655 |
) |
|
|
|
|
Accumulated other comprehensive loss held for sale |
|
|
(6,734 |
) |
|
|
(1,819 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
222,614 |
|
|
|
172,923 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
953,762 |
|
|
$ |
951,966 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
February 2, |
|
|
February 3, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
Net sales |
|
$ |
1,462,944 |
|
|
$ |
1,405,615 |
|
|
$ |
1,279,060 |
|
Cost of sales |
|
|
(841,593 |
) |
|
|
(821,847 |
) |
|
|
(728,361 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
621,351 |
|
|
|
583,768 |
|
|
|
550,699 |
|
Selling, general and administrative expenses |
|
|
(578,538 |
) |
|
|
(502,447 |
) |
|
|
(449,985 |
) |
Change in fair value of derivative instruments |
|
|
55,226 |
|
|
|
96,276 |
|
|
|
(53,012 |
) |
Change in fair value of derivative instruments- related parties |
|
|
30,009 |
|
|
|
151,917 |
|
|
|
(122,943 |
) |
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
128,048 |
|
|
|
329,514 |
|
|
|
(75,241 |
) |
Interest expense |
|
|
(13,603 |
) |
|
|
(13,896 |
) |
|
|
(8,487 |
) |
Interest income |
|
|
11,269 |
|
|
|
18,631 |
|
|
|
13,101 |
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net |
|
|
(2,334 |
) |
|
|
4,735 |
|
|
|
4,614 |
|
Non-operating income |
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
and minority interest |
|
|
126,066 |
|
|
|
334,249 |
|
|
|
(70,627 |
) |
Income tax expense |
|
|
(16,886 |
) |
|
|
(72,403 |
) |
|
|
(28,087 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority interest |
|
|
109,180 |
|
|
|
261,846 |
|
|
|
(98,714 |
) |
Minority interest |
|
|
(9,960 |
) |
|
|
(19,879 |
) |
|
|
(24,166 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
99,220 |
|
|
|
241,967 |
|
|
|
(122,880 |
) |
Income (loss) from discontinued operations, net of tax Value City |
|
|
13,223 |
|
|
|
(150,662 |
) |
|
|
(22,271 |
) |
Loss from discontinued operations, net of tax Filenes Basement |
|
|
(61,602 |
) |
|
|
(39,863 |
) |
|
|
(5,762 |
) |
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations, net of tax |
|
|
(48,379 |
) |
|
|
(190,525 |
) |
|
|
(28,033 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
50,841 |
|
|
$ |
51,442 |
|
|
$ |
(150,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continuing operations |
|
$ |
2.04 |
|
|
$ |
5.02 |
|
|
$ |
(2.73 |
) |
Diluted earnings (loss) per share from continuing operations |
|
$ |
2.00 |
|
|
$ |
4.26 |
|
|
$ |
(2.73 |
) |
Basic loss per share from discontinued operations |
|
$ |
(0.99 |
) |
|
$ |
(3.96 |
) |
|
$ |
(0.62 |
) |
Diluted loss per share from discontinued operations |
|
$ |
(0.98 |
) |
|
$ |
(3.35 |
) |
|
$ |
(0.62 |
) |
Basic earnings (loss) per share |
|
$ |
1.04 |
|
|
$ |
1.07 |
|
|
$ |
(3.35 |
) |
Diluted earnings (loss) per share |
|
$ |
1.03 |
|
|
$ |
0.91 |
|
|
$ |
(3.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
48,669 |
|
|
|
48,165 |
|
|
|
45,088 |
|
Diluted shares |
|
|
49,526 |
|
|
|
56,794 |
|
|
|
45,088 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-5
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Shares in |
|
|
Common |
|
|
|
|
|
|
(Accumulated |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Treasury |
|
|
Shares |
|
|
Warrants |
|
|
Deficit) |
|
|
Expense |
|
|
Shares |
|
|
Loss |
|
|
Total |
|
|
|
|
Balance, January
28, 2006 |
|
|
39,865 |
|
|
|
8 |
|
|
$ |
159,617 |
|
|
$ |
|
|
|
$ |
(36,082 |
) |
|
$ |
(1 |
) |
|
$ |
(59 |
) |
|
$ |
(6,929 |
) |
|
$ |
116,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,880 |
) |
Loss from
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,033 |
) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,967 |
|
Loss from
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,525 |
) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Continued)
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Shares in |
|
|
Common |
|
|
|
|
|
|
(Accumulated |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Treasury |
|
|
Shares |
|
|
Warrants |
|
|
Deficit) |
|
|
Expense |
|
|
Shares |
|
|
Loss |
|
|
Total |
|
|
|
|
Balance, February
2, 2008 |
|
|
48,623 |
|
|
|
8 |
|
|
$ |
305,254 |
|
|
$ |
124 |
|
|
$ |
(130,577 |
) |
|
$ |
|
|
|
$ |
(59 |
) |
|
$ |
(1,819 |
) |
|
$ |
172,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,220 |
|
Loss from
discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,379 |
) |
Change in minimum
pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,245 |
) |
|
|
(2,245 |
) |
Valuation allowance
on pension deferred
tax asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,670 |
) |
|
|
(2,670 |
) |
Unrealized loss on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(655 |
) |
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
transactions of
subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,806 |
|
Stock based
compensation
expense, before
related tax effects |
|
|
|
|
|
|
|
|
|
|
1,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,407 |
|
Exercise of stock
options |
|
|
68 |
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January
31, 2009 |
|
|
48,691 |
|
|
|
8 |
|
|
$ |
306,868 |
|
|
$ |
124 |
|
|
$ |
(76,930 |
) |
|
$ |
|
|
|
$ |
(59 |
) |
|
$ |
(7,389 |
) |
|
$ |
222,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-7
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 2009, February 2, 2008 and February 3, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
February 2, |
|
|
February 3, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
50,841 |
|
|
$ |
51,442 |
|
|
$ |
(150,913 |
) |
Less: Loss from discontinued operations, net of tax |
|
|
48,379 |
|
|
|
190,525 |
|
|
|
28,033 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations |
|
|
99,220 |
|
|
|
241,967 |
|
|
|
(122,880 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and discount on debt |
|
|
3,369 |
|
|
|
3,339 |
|
|
|
1,666 |
|
Stock based compensation expense |
|
|
1,407 |
|
|
|
947 |
|
|
|
634 |
|
Capital transactions of subsidiary |
|
|
2,806 |
|
|
|
3,083 |
|
|
|
2,534 |
|
Depreciation and amortization |
|
|
38,466 |
|
|
|
28,298 |
|
|
|
23,790 |
|
Change in fair value of derivative instruments (($30,009), ($151,917) and
$122,943 - related party) |
|
|
(85,235 |
) |
|
|
(248,193 |
) |
|
|
175,955 |
|
Gain on the repurchase of the Premium Income Exchangeable Securities |
|
|
(1,486 |
) |
|
|
|
|
|
|
|
|
Deferred income taxes and other noncurrent liabilities |
|
|
(6,263 |
) |
|
|
46,379 |
|
|
|
(18,585 |
) |
Impairment charges on long-lived assets |
|
|
3,339 |
|
|
|
2,081 |
|
|
|
832 |
|
Loss on disposal of assets |
|
|
2,235 |
|
|
|
261 |
|
|
|
809 |
|
Other-than-temporary impairment charges on long-term investments, net |
|
|
1,134 |
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary |
|
|
9,960 |
|
|
|
19,879 |
|
|
|
24,166 |
|
Other |
|
|
2,263 |
|
|
|
(185 |
) |
|
|
1,866 |
|
Change in working capital, assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,314 |
|
|
|
(5,624 |
) |
|
|
(3,492 |
) |
Inventories |
|
|
18,029 |
|
|
|
(24,300 |
) |
|
|
(21,039 |
) |
Prepaid expenses and other assets |
|
|
(53 |
) |
|
|
(3,606 |
) |
|
|
(8,726 |
) |
Accounts payable |
|
|
(17,566 |
) |
|
|
16,419 |
|
|
|
30,795 |
|
Proceeds from lease incentives |
|
|
16,106 |
|
|
|
14,002 |
|
|
|
7,490 |
|
Accrued expenses |
|
|
1 |
|
|
|
(27,469 |
) |
|
|
4,713 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
94,046 |
|
|
|
67,278 |
|
|
|
100,528 |
|
Net cash (used in) provided by operating activities from discontinued
operations |
|
|
(13,984 |
) |
|
|
21,897 |
|
|
|
(3,548 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for property and equipment |
|
|
(79,651 |
) |
|
|
(98,335 |
) |
|
|
(42,533 |
) |
Purchases of available-for-sale investments |
|
|
(205,558 |
) |
|
|
(209,855 |
) |
|
|
(188,250 |
) |
Purchases of held-to-maturity investments |
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
Maturities and sales of available-for-sale investments |
|
|
183,604 |
|
|
|
226,000 |
|
|
|
89,600 |
|
Maturities and sales of held-to-maturity investments |
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Acquisition of tradename |
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations |
|
|
(101,605 |
) |
|
|
(82,211 |
) |
|
|
(141,183 |
) |
Net cash used in investing activities from discontinued operations |
|
|
(4,014 |
) |
|
|
(17,731 |
) |
|
|
(23,532 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on notes to discontinued operations |
|
|
|
|
|
|
(25,000 |
) |
|
|
(111,678 |
) |
Proceeds from issuance of Premium Income Exchangeable Securities |
|
|
|
|
|
|
|
|
|
|
143,750 |
|
Repurchase of Premium Income Exchangeable Securities |
|
|
(5,600 |
) |
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
(6,156 |
) |
Proceeds from exercise of warrants |
|
|
|
|
|
|
6,000 |
|
|
|
31,500 |
|
Proceeds from exercise of stock options |
|
|
207 |
|
|
|
71 |
|
|
|
2,934 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities from continuing operations |
|
|
(5,393 |
) |
|
|
(18,929 |
) |
|
|
60,350 |
|
Net cash
provided by (used in) financing activities from discontinued operations |
|
|
17,083 |
|
|
|
(17,574 |
) |
|
|
28,875 |
|
Net (decrease) increase in cash and equivalents from continuing operations |
|
$ |
(12,952 |
) |
|
$ |
(33,862 |
) |
|
$ |
19,695 |
|
Cash and equivalents from continuing operations, beginning of year |
|
|
107,260 |
|
|
|
141,122 |
|
|
|
121,427 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents from continuing operations, end of year |
|
$ |
94,308 |
|
|
$ |
107,260 |
|
|
$ |
141,122 |
|
Net (decrease) increase in cash and equivalents from discontinued operations |
|
$ |
(915 |
) |
|
$ |
(13,408 |
) |
|
$ |
1,795 |
|
Cash and equivalents from discontinued operations, beginning of year |
|
|
5,691 |
|
|
|
19,099 |
|
|
|
17,304 |
|
Cash and equivalents from discontinued operations, end of year |
|
$ |
4,776 |
|
|
$ |
5,691 |
|
|
$ |
19,099 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-8
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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) including one segment
classified as held for sale as of January 31, 2009. 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 January 31, 2009, there were 298 DSW stores located 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 341 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 January 31, 2009,
Retail Ventures owned Class B Common Shares of DSW representing approximately 62.9% of DSWs
outstanding Common Shares and approximately 93.1% 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. On October 26, 2008, Value City filed for
bankruptcy protection and announced that it would close its remaining stores. The Company
negotiated an agreement with Value City to continue to provide services post bankruptcy filing,
including risk management, financial services, benefits administration, payroll and information
technology services, in exchange for a weekly payment.
In
January 2009, Retail Ventures announced that it was exploring
strategic alternatives for Filenes Basement, and as a result, as of January 31, 2009, Filenes Basement met the criteria set forth in
Financial Accounting Standards Board (FASB) Statement No. 144 Accounting for Impairment or
Disposal of Long-Lived Assets (SFAS 144) to be classified as held for sale. The applicable
criteria includes the following: management has committed to a plan to sell the asset; the asset is
available for immediate sale; an active program to locate a buyer and other actions required to
complete the plan to sell the asset have been initiated; the sale of the asset is probable and the
transfer of the asset is expected to qualify as a complete sale within one year; the asset is being
actively marketed for sale at a price that is reasonable in relation to its current fair value; and
actions required to complete the plan indicate that it is unlikely that significant changes to the
plan will be made or that the plan will be withdrawn.
See Note 18 for a discussion of the subsequent events regarding the Filenes Basement operations.
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 Filenes Basement meeting the criteria set forth
in SFAS 144 to be classified as held for sale on January 31, 2009, the results of the Filenes
Basement operations are included in discontinued operations. 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 for a discussion of the held for sale and discontinued operations.
F-9
Fiscal Year
The Companys fiscal year ends on the Saturday nearest to January 31. Fiscal years 2008 and 2007
consisted of 52 weeks and fiscal year 2006 consisted of 53 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 accounting principles generally accepted
in the United States of America 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. The carrying amounts approximate fair value.
Investments
Investments, which include tax exempt bonds, tax advantaged bonds, variable rate demand notes,
auction rate securities, tax exempt commercial paper and certificates of deposit, are classified as
available-for-sale securities. 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. In fiscal 2008, the Company recognized other-than-temporary impairments
of $1.1 million in non-operating expense and recorded a temporary impairment of $0.7 million
in other comprehensive income. The Company did not recognize any impairment on investments
during fiscal 2007 or 2006. Please see Note 5 for additional discussion of the Companys
investments.
Accounts Receivable
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.
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 2008, 2007, and 2006, merchandise supplied to DSW by three key vendors
accounted for approximately 20%, 21%, and 22% of net sales, respectively. During fiscal 2008 and
fiscal 2007, merchandise supplied to the Filenes Basement segment by three key vendors accounted
for approximately 10.1% and 12.4%, respectively, of Filenes Basements net sales.
Allowance for Doubtful Accounts
We monitor exposure for credit losses and record related allowances for doubtful accounts.
Allowances are estimated based upon specific accounts receivable balances, where a risk of default
has been identified. The allowance for doubtful accounts, excluding discontinued operations, was
$1.2 million and $0.4 million at January 31, 2009 and February 2, 2008, respectively.
F-10
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, which are reductions in prices due to
customers perception of value. Hence, earnings are negatively impacted as the merchandise is
marked down prior to sale.
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, 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 related to DSW were $6.2 million, $6.3 million and $7.2 million for
fiscal 2008, 2007 and 2006, respectively. The Company opened 41, 37, and 29 DSW stores in fiscal
2008, 2007 and 2006, respectively
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 a discounted cash flow analysis using a discount rate
determined by management. 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, excluding
discontinued operations, were $3.3 million, $2.1 million and $0.8 million in fiscal 2008, 2007 and
2006, respectively, and were recorded within the DSW segment.
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.
Management evaluates the fair value of the reporting unit using market based analysis to review
market capitalization as well as reviewing a discounted cash flow analysis using managements
assumptions. Several factors could result in an impairment charge. Failure to achieve sufficient
levels of cash flow at the reporting unit level or a significant and sustained decline in the stock
price of the reporting unit could result in goodwill impairment charges. Significant judgment is
required to determine the underlying cause of the decline and whether stock price declines are
related to the market or specifically to the reporting unit. The Company did not record any
goodwill impairments in fiscal 2008, 2007 or 2006.
Tradenames and Other Intangible Assets
Tradenames and other intangible assets are comprised of values assigned to names and leases the
Company acquired. During each of fiscal 2008 and fiscal 2007, the Company wrote-off a tradename in
its entirety. In addition, during fiscal 2008, the Company wrote-off one favorable lease in its
entirety. The impact of these write-offs is included in discontinued operations in the statement of
operations.
F-11
The tradenames and other intangible assets included in continuing operations as of January 31, 2009
and February 2, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
February 2, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Not subject to amortization |
|
|
|
|
|
|
|
|
Domain names |
|
$ |
21 |
|
|
$ |
21 |
|
|
|
|
|
|
|
|
|
|
Subject to amortization |
|
|
|
|
|
|
|
|
Tradenames: |
|
|
|
|
|
|
|
|
Gross asset |
|
$ |
12,750 |
|
|
$ |
12,750 |
|
Accumulated amortization |
|
|
(9,138 |
) |
|
|
(8,287 |
) |
|
|
|
|
|
|
|
Subtotal |
|
$ |
3,612 |
|
|
$ |
4,463 |
|
Useful life |
|
15 years |
|
|
15 years |
|
|
|
|
|
|
|
|
|
|
Favorable leases: |
|
|
|
|
|
|
|
|
Gross asset |
|
$ |
140 |
|
|
$ |
140 |
|
Accumulated amortization |
|
|
(105 |
) |
|
|
(102 |
) |
|
|
|
|
|
|
|
Subtotal |
|
$ |
35 |
|
|
$ |
38 |
|
Useful life |
|
14 years |
|
|
14 years |
|
|
|
|
|
|
|
|
|
|
Tradenames and other intangible assets, net |
|
$ |
3,668 |
|
|
$ |
4,522 |
|
Aggregate amortization expense for fiscal 2008 and each of the five succeeding years is as follows:
|
|
|
|
|
Fiscal Year |
|
(in thousands) |
2008 |
|
$ |
854 |
|
2009 |
|
$ |
854 |
|
2010 |
|
$ |
854 |
|
2011 |
|
$ |
854 |
|
2012 |
|
$ |
854 |
|
2013 |
|
$ |
216 |
|
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, 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, excluding discontinued operations, were $2.5
million and $2.1 million at the end of fiscal 2008 and 2007, 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
F-12
lease location by the lessor. The amounts included in the other noncurrent liabilities caption,
excluding discontinued operations, were $33.5 million and $30.6 million, at January 31, 2009 and
February 2, 2008, respectively.
Construction and Tenant Allowances
The Company receives cash allowances from landlords, which are deferred and amortized on a
straight-line basis over the original terms of the lease as a reduction of rent expense. These
allowances are included in the other non-current liabilities caption, excluding discontinued
operations, were $63.7 million and $58.8 million, at January 31, 2009 and February 2, 2008,
respectively.
Accumulated Other Comprehensive Loss
The accumulated other comprehensive loss was $7.4 million and $1.8 million at January 31, 2009 and
February 2, 2008, respectively, and includes the Filenes Basement minimum pension liability and
the unrealized loss on available-for-sale securities. As of January 31, 2009, the Company believes
it is more likely than not that it would not be able to utilize any resulting deferred tax assets
and recorded a full valuation allowance against the resulting deferred tax assets. For the year
ended January 31, 2009 and February 2, 2008, the comprehensive income was $45.3 million and $50.2
million, respectively.
Sales and Revenue Recognition
Revenues from merchandise sales are recognized upon customer receipt of merchandise, are net of
returns and sales tax and are not recognized until collectability is reasonably assured. For
dsw.com, the Company estimates a time lag for shipments to record revenue when the customer
receives the goods. The Company believes that a one day change in this estimate would not
materially impact revenue. Net sales also include revenue from shipping and handling while the
related costs are included in cost of sales.
Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift card.
The Companys 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, it was determined that
there was enough historical data to recognize income from gift card breakage. The Company,
excluding discontinued operations, recognized $0.8 million and $0.3 million as miscellaneous income
from gift card breakage in fiscal 2008 and fiscal 2007, respectively.
Customer Loyalty Program
DSW maintains a customer loyalty program for the DSW stores in which program members earn reward
certificates that result in discounts 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 January 31, 2009 and February 2, 2008 was
$7.3 million and $6.4 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 January 31, 2009 or February 2, 2008. 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.
F-13
Earnings Per Share
Basic earnings (loss) 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. See Note 9 for a detailed discussion of earnings per share.
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.
Legal Proceedings and Claims
The Company is involved in various legal proceedings that are incidental to the conduct of its
business. In accordance with SFAS No. 5, Accounting for Contingencies, the Company records a
reserve for estimated losses when the loss is probable and the amount can be reasonably estimated.
Income Taxes
Income taxes are accounted for using the asset and liability method as required by SFAS 109,
Accounting for Income Taxes (FAS 109). The Company is required to determine the aggregate amount
of income tax expense to accrue and the amount which will be currently payable based upon tax
statutes of each jurisdiction in which we do business. In making these estimates, income is
adjusted 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 the Companys 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 management had made these determinations on a different basis, the tax expense, assets
and liabilities could be different. During fiscal 2008, a decrease in valuation reserve of $22.6
million for deferred tax assets was recorded. During fiscal 2007, an additional valuation reserve
of $61.1 million was established for deferred tax assets.
Sale of subsidiary stock
Sales of stock by a subsidiary are accounted for by Retail Ventures as capital transactions.
Recent Accounting Pronouncements
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 was effective for financial assets and liabilities for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Refer to Note 8, Fair Value
Measurements for additional information regarding the fair value measurement of the Companys
investment portfolio.
In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157, (FSP 157-2), which delays the effective date of SFAS 157 for non-financial assets and
liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008. We have not applied the provisions of FAS 157 to
the Companys non-financial assets and non-financial liabilities in accordance with FSP No.
157-2. The Company does not expect the adoption of FAS 157 for non-financial assets and
liabilities to have a material impact on its financial position and results of operations.
F-14
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset in
a Market That is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of FAS 157
when the market for a financial asset is not active, specifically regarding consideration of
managements internal assumptions in measuring fair value when observable data are not present, how
observable market information from an inactive market should be taken into account, and the use of
broker quotes or pricing services in assessing the relevance of observable and unobservable data.
This FSP was effective immediately. The Company considered the guidance provided by FSP FAS 157-3
in its determination of estimated fair values of its investment portfolio as of January 31, 2009.
Refer to Note 8 for additional information regarding the fair value measurement of the Companys
investment portfolio.
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 adoption of this standard in
fiscal 2008 had no impact on Retail Ventures financial position or results of operations. Retail
Ventures has not currently elected the fair value provisions for any assets or liabilities, but
Retail Ventures may elect to measure certain assets and liabilities using the fair value option in
the future.
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 the Companys
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
impact of the adoption of this statement will result in enhanced disclosures regarding the minority
interests of DSW as well as some presentation changes of minority interests within the balance
sheets, statements of operations and statements of changes in shareholders equity.
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 derivative instruments.
In June 2008, the FASB issued Emerging Issues Task Force (EITF) Issue 07-5 Determining whether an
Instrument (or Embedded Feature) is indexed to an Entitys Own Stock (EITF No. 07-5). This Issue
is effective for financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a)
of Statement of Financial Accounting Standard No. 133, Accounting for Derivatives and Hedging
Activities (SFAS 133), specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Companys own stock and (b) classified in stockholders
equity in the statement of financial position would not be considered a derivative financial
instrument. EITF No. 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuers own stock and thus able to
qualify for the SFAS 133 paragraph 11(a) scope exception. The adoption of EITF No. 07-5 will result
in the redesignation and reclassification of the VCHI Warrants from Equity to Liability within the
balance sheets. In addition, the VCHI Warrants will be marked to market as of the date of the
adoption of EITF No. 07-5 and thereafter.
In November 2008, the FASB issued EITF Issue 08-8 Accounting for an Instrument (or an Embedded
Feature) with a Settlement Amount That Is Based on the Stock of an Entitys Consolidated Subsidiary
(EITF No. 08-8). This Issue is effective for fiscal years beginning on or after December 15,
2008, and interim periods within those fiscal years. Early application is not permitted. EITF No.
08-8 supersedes EITF No. 00-6 and amends EITF 00-19 such that provided that the subsidiary is a
substantive entity, instruments indexed to the stock of a subsidiary could be considered indexed to
the entitys own stock within the consolidated financial statements. The instruments should be
evaluated using EITF No. 07-5 and other applicable guidance to determine the classification of the
instrument. Due to the complex nature of this accounting pronouncement, the Company is still
evaluating the impact the adoption of EITF No. 08-8 may have on the consolidated financial
statements.
F-15
In April 2008, the FASB issued FASB Staff Position (FSP) SFAS142-3, Determination of the Useful
Life of Intangible Assets, (FSP SFAS 142-3). FSP SFAS 142-3 amends factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. The intent of this FSP is to improve consistency between the useful
life of a recognized intangible asset and the period of expected cash flows used to measure its
fair value. This FSP is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Earlier adoption is prohibited.
The guidance within FSP SFAS 142-3 should be prospectively applied to intangible assets acquired
after the effective date. The disclosure requirements of FSP SFAS 142-3 should be applied
prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The
adoption of FSP SFAS 142-3 will not have any impact on the consolidated financial statements.
In May 2008, the FASB issued FSP APB14-1, Accounting for Convertible Debt Instruments that May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1
applies to convertible debt instruments that may be settled in cash (including partial cash
settlement) unless the embedded conversion option is required to be separately accounted for as a
derivative under SFAS 133. FSP APB 14-1 requires that the convertible debt instrument is separated
into a liability-classified component and an equity-classified component in a manner that will
reflect the entitys nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of
FSP APB 14-1 will not have any impact on the consolidated financial statements.
In June 2008, the FASB issued EITF No. 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities (FSP EITF No. 03-6-1). FSP EITF No
03-6-1 addresses whether awards granted in unvested share-based payment transactions that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and therefore need to be included in computing earnings per share under
the two-class method, as described in SFAS No. 128, Earnings Per Share. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years, and will be applied retrospectively in accordance with the FSP. The
adoption of FSP EITF No. 03-6-1 will not have any impact on the consolidated financial statements.
In November 2008, the Securities and Exchange Commission (SEC) released a proposed roadmap
regarding the potential mandatory adoption of International Financial Reporting Standards (IFRS).
Under the proposed roadmap, the Company, as an accelerated filer, may be required to prepare
financial statements in accordance with IFRS as early as 2015. In 2011, the SEC will decide on the
mandatory adoption of IFRS. The Company is currently investigating the implications should it be
required to adopt IFRS in the future.
2. DISCONTINUED OPERATIONS AND HELD FOR SALE OPERATIONS
Value City
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. 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. Retail Ventures received
no net cash proceeds from the sale and paid a fee of $500,000 to the purchaser.
Retail Ventures recognized an aggregate after-tax loss related to the Value City disposition of
$76.8 million as of January 31, 2009, including a reduction in the loss of $13.2 million recognized
in the year ended January 31, 2009. The fiscal 2008 reduction of the loss consisted primarily of
revaluations of the liabilities for the guarantees recorded by Retail Ventures partially offset by
additional expenses relating to the transaction. As of January 31, 2009, Retail Ventures is still
providing Value City with limited transaction services.
The fiscal 2007 loss from discontinued operations Value City of $150.7 million is comprised of
$60.7 million of after-tax net loss for the Value City operations through January 22, 2008 and
$90.0 million for the loss on the sale of the Value City operations. The after-tax loss as of
February 2, 2008 of $90.0 million was comprised of $26.6 million for the recording of guarantees,
$35.1 million for the write off of a note receivable from Value City to RVI and related accrued
interest, $13.8 million for the write off of receivables from Value City to RVI, $10.6 million for
the write-off of RVIs remaining investment in the discontinued operations, $3.8 million related to
the transfer of assets and $0.1 million for the issuance of warrants to VCHI.
See Note 13 for additional discussion regarding the guarantees.
F-16
The
following table presents the significant components of the loss from
discontinued operations attributed to Value City:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Net sales |
|
|
|
|
|
$ |
1,172,687 |
|
|
$ |
1,361,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
|
|
|
$ |
(60,653 |
) |
|
$ |
(33,514 |
) |
Income tax
benefit |
|
|
|
|
|
|
|
|
|
|
11,243 |
|
Income (Loss) on
disposal |
|
$ |
13,223 |
|
|
|
(90,009 |
) |
|
|
|
|
|
Income (Loss) from discontinued operations, net of tax - Value City |
|
$ |
13,223 |
|
|
$ |
(150,662 |
) |
|
$ |
(22,271 |
) |
|
Filenes Basement
In
January 2009, Retail Ventures announced that it was exploring
strategic alternatives for Filenes Basement, and as a result, as of January 31, 2009,
Filenes Basement met the criteria set forth in SFAS 144 to be classified as held for sale. The
applicable criteria includes the following: management has committed to a plan to sell the asset;
the asset is available for immediate sale; an active program to locate a buyer and other actions
required to complete the plan to sell the asset have been initiated; the sale of the asset is
probable and the transfer of the asset is expected to qualify as a complete sale within one year;
the asset is being actively marketed for sale at a price that is reasonable in relation to its
current fair value; and actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.
On August 16, 2006, Filenes Basement entered into a Promissory Note with Retail Ventures for $27.6
million, due August 16, 2013. In addition, on January 3, 2008, Filenes Basement entered into a
Promissory Note with Retail Ventures for $25.0 million, due February 1, 2013. The interest on each
note between Filenes Basement and Retail Ventures accrues at 13% per annum. These notes were eliminated in the consolidated financial statements as of January 31, 2009.
The following table presents the significant components of Filenes Basement operating results
included in discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Net sales |
|
$ |
422,099 |
|
|
$ |
466,289 |
|
|
$ |
427,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
$ |
(62,003 |
) |
|
$ |
(25,658 |
) |
|
$ |
(7,977 |
) |
Income tax benefit (expense) |
|
|
401 |
|
|
|
(14,205 |
) |
|
|
2,215 |
|
|
Loss from
discontinued operations, net of tax - Filenes Basement |
|
$ |
(61,602 |
) |
|
$ |
(39,863 |
) |
|
$ |
(5,762 |
) |
|
F-17
The
following table presents the financial classification of assets and liabilities of Filenes Basement reflected as held for
sale in the Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Cash |
|
$ |
4,776 |
|
|
$ |
5,691 |
|
Accounts receivable, net |
|
|
1,670 |
|
|
|
2,248 |
|
Inventories |
|
|
58,384 |
|
|
|
77,283 |
|
Prepaid expenses and other |
|
|
1,848 |
|
|
|
5,388 |
|
Deferred Income Taxes |
|
|
|
|
|
|
7,804 |
|
|
|
|
Total current assets |
|
|
66,678 |
|
|
|
98,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
33,590 |
|
|
|
52,662 |
|
Tradenames and intangibles, net |
|
|
4,255 |
|
|
|
15,405 |
|
Other non current assets |
|
|
948 |
|
|
|
931 |
|
|
|
|
Total non current assets |
|
|
38,793 |
|
|
|
68,998 |
|
|
|
|
Total assets |
|
$ |
105,471 |
|
|
$ |
167,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, net |
|
$ |
18,805 |
|
|
$ |
34,657 |
|
Accrued expenses |
|
|
17,642 |
|
|
|
17,721 |
|
Revolving
credit facility |
|
|
39,583 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
76,030 |
|
|
|
52,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current maturities |
|
|
|
|
|
|
22,500 |
|
Other non current liabilities |
|
|
36,055 |
|
|
|
26,613 |
|
Deferred income taxes |
|
|
|
|
|
|
6,501 |
|
|
|
|
Total non current liabilities |
|
|
36,055 |
|
|
|
55,614 |
|
|
|
|
Total liabilities |
|
$ |
112,085 |
|
|
$ |
107,992 |
|
|
|
|
As of
January 31, 2009 and February 2, 2008, Filenes
Basement had other comprehensive loss of
$6.7 million and $1.8 million, respectively related to the minimum pension liability.
3. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from affiliates of Schottenstein Stores Corporation (SSC). As
of January 31, 2009, SSC and its affiliates, in the aggregate, owned approximately 52.3% of the
outstanding RVI Common Shares and beneficially owned approximately 60.7% (assumes the issuance of
(i) 8,333,333 RVI Common Shares issuable upon the exercise of conversion warrants held by SSC, (ii)
1,731,460 RVI Common Shares issuable upon the exercise of term loan warrants held by Schottenstein
RVI, LLC and (iii) 342,709 RVI Common Shares issuable upon the exercise of the term loan warrants
held by Schottenstein RVI, LLC. The amount of purchases from SSC and its affiliates, excluding
discontinued operations, was $0.1 million in fiscal 2008. There were no purchases made from SSC and
its affiliates in fiscal 2007 or fiscal 2006.
The Company also leases certain store and warehouse locations owned by SSC and its affiliates.
Accounts receivable from and payable to SSC and its affiliates principally result from commercial
transactions with entities owned or affiliated with 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 Filenes Basement Downtown Crossing Boston store,
resulting in expense to the Company of $0.7 million, which is included in the loss from
discontinued operations.
See Notes 6, 7 and 12 to the consolidated financial statements for additional related party
disclosures.
F-18
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 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 2008, fiscal 2007 and fiscal 2006, included in income from continuing operations is
stock based compensation expense of approximately $5.9 million, $5.1 million and $3.9 million,
which includes approximately $4.5 million, $4.2 million and $3.4 million, respectively, of expenses
recorded by DSW. In fiscal 2008, the impact of SFAS 123R on the Companys basic and diluted
earnings per share was a negative $0.05. In both fiscal 2007 and fiscal 2006, the impact of SFAS
123R on the Companys basic and diluted earnings per share was a negative $0.04.
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.
F-19
The weighted-average grant date fair value of options granted in fiscal 2008, 2007 and 2006 was
$1.52 per share, $8.00 per share and $9.18 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 |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.2 |
% |
|
|
4.4 |
% |
|
|
4.6 |
% |
Expected volatility of Retail Ventures Common Shares |
|
|
66.5 |
% |
|
|
56.1 |
% |
|
|
62.5 |
% |
Expected option term |
|
5.0 years |
|
5.0 years |
|
4.8 years |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The following table summarizes the Companys stock options for fiscal 2008, 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):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31, 2009 |
|
Shares |
|
|
WAEP |
|
|
Outstanding beginning of year |
|
|
1,312 |
|
|
$ |
5.97 |
|
Granted |
|
|
250 |
|
|
$ |
2.89 |
|
Exercised |
|
|
(68 |
) |
|
$ |
3.05 |
|
Canceled |
|
|
(247 |
) |
|
$ |
7.95 |
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
1,247 |
|
|
$ |
5.13 |
|
Options exercisable end of year |
|
|
1,045 |
|
|
$ |
5.74 |
|
Shares available for additional grants |
|
|
5,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
Fiscal Year Ended January 31, 2009 |
|
Shares |
|
WAEP |
|
GDFV |
|
Contract Life |
|
Value |
|
Options outstanding |
|
|
1,247 |
|
|
$ |
5.13 |
|
|
$ |
3.10 |
|
|
4 years |
|
$ |
331 |
|
Options vested or expected to vest |
|
|
1,232 |
|
|
$ |
5.17 |
|
|
$ |
3.13 |
|
|
4 years |
|
$ |
315 |
|
Options exercisable |
|
|
1,045 |
|
|
$ |
5.74 |
|
|
$ |
3.49 |
|
|
3 years |
|
$ |
119 |
|
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 2008, 2007 and 2006 was $0.2 million, $0.3 million and $3.5 million, respectively.
As of the end of fiscal 2008, the total compensation cost related to nonvested options not yet
recognized was $0.2 million with a weighted average expense recognition period remaining of 1.7
years. The total fair value of options that vested during fiscal 2008, 2007 and 2006 was $0.5
million, $0.6 million and $ 1.9 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 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.
F-20
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 $0.9 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 $1.1 million, negative $2.8
million and $6.3 million were recorded in continuing operations during fiscal 2008, fiscal 2007 and
fiscal 2006, respectively, relating to SARs. Included in the SARs expense for fiscal 2006 are
expenses relating to the accelerated vesting of some performance based SARs. During fiscal 2007
and fiscal 2006 approximately $0.2 million and $4.3 million, respectively, was paid to settle
exercised SARs by continuing operations. Compensation costs of $0.2 million and $3.1 million was
recorded by the discontinued operations in fiscal 2007 and fiscal 2006, respectively. During
fiscal 2007 and fiscal 2006, the discontinued operations paid $0.2 million and $2.1 million,
respectively, to settle exercised SARs.
The following table summarizes the Companys SARs for the year ended January 31, 2009 (shares in
thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31, 2009 |
|
Shares |
|
|
WAEP |
|
|
Outstanding beginning of year |
|
|
725 |
|
|
$ |
11.66 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Canceled |
|
|
(330 |
) |
|
$ |
11.04 |
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
395 |
|
|
$ |
12.18 |
|
|
|
|
|
|
|
|
|
Exercisable end of year |
|
|
251 |
|
|
$ |
9.41 |
|
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 from continuing operations related to the restricted
stock units in fiscal 2008, fiscal 2007 and fiscal 2006 was less than $0.1 million, negative $0.5
million and $1.6 million, respectively. The amount of restricted stock units attributable to
continuing operations accrued at January 31, 2009 and February 2, 2008 was less than $0.1 million
and $0.1 million, respectively. The Company paid $0.1 million, $0.7 million and $1.5 million to
settle vested restricted stock units in fiscal 2008, fiscal 2007 and fiscal 2006 respectively from
continuing operations.
The discontinued operations recorded compensation expense related to the restricted stock units in
fiscal 2008, fiscal 2007 and fiscal 2006 of less than $0.1 million, negative $0.4 million and $1.2
million, respectively. The amount of restricted stock units accrued by discontinued operations at
February 2, 2008 was $0.1 million. The discontinued operations paid $0.1 million, $0.5 million and
$1.0 million to settle vested restricted stock units in fiscal 2008, fiscal 2007 and fiscal 2006,
respectively.
The following table summarizes the Companys outstanding restricted stock units for fiscal 2008 and
2007 (units in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
Outstanding beginning of year |
|
|
57 |
|
|
|
170 |
|
Granted |
|
|
|
|
|
|
47 |
|
Exercised/Vested |
|
|
(35 |
) |
|
|
(160 |
) |
Forfeited |
|
|
(10 |
) |
|
|
|
|
|
Outstanding end of year |
|
|
12 |
|
|
|
57 |
|
|
F-21
Restricted Shares
The Company issued restricted common shares to certain key employees pursuant to individual
employment agreements and certain other grants from time to time, which are approved by the Board
of Directors. The agreements condition the vesting of the shares generally upon continued
employment with the Company with such restrictions generally expiring over three 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 January 31, 2009, the Company had 50,000 restricted
common shares outstanding, which were all attributed to the discontinued operations. As of
February 2, 2008, the Company had no outstanding restricted common shares outstanding.
DSW Stock Compensation Plan
The Company 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, restricted stock units to
management and director stock units, key employees of the Company and affiliates, consultants as
defined, and directors of the Company. 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, the Company 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. Expected volatility is based on the historical volatility of the DSW Common Shares. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.7 |
% |
|
|
4.5 |
% |
|
|
4.6 |
% |
Expected volatility of Retail Ventures Common Shares |
|
|
48.5 |
% |
|
|
39.4 |
% |
|
|
39.9 |
% |
Expected option term |
|
4.9 years |
|
5.0 years |
|
4.8 years |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The weighted average grant date fair value of each DSW option granted in fiscal years 2008, 2007
and 2006 was $5.77, $17.27 and $13.01, respectively. As of January 31, 2009, the total compensation
cost related to nonvested options not yet recognized was approximately $10.1 million, with a
weighted average expense recognition period remaining of 3.5 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):
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 31, 2009 |
|
Shares |
|
|
WAEP |
|
|
Outstanding beginning of year |
|
|
1,520 |
|
|
$ |
28.65 |
|
Granted |
|
|
1,112 |
|
|
$ |
12.87 |
|
Exercised |
|
|
(1 |
) |
|
$ |
12.92 |
|
Canceled |
|
|
(506 |
) |
|
$ |
21.85 |
|
|
|
|
|
|
|
|
|
Outstanding end of year |
|
|
2,125 |
|
|
$ |
22.04 |
|
Options exercisable end of year |
|
|
533 |
|
|
$ |
24.77 |
|
Shares available for additional grants |
|
|
2,102 |
|
|
|
|
|
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
Fiscal Year Ended January 31, 2009 |
|
Shares |
|
WAEP |
|
GDFV |
|
Contract Life |
|
Value |
|
Options outstanding |
|
|
2,125 |
|
|
$ |
22.04 |
|
|
$ |
9.47 |
|
|
8 years |
|
$ |
124 |
|
Options vested or expected to vest |
|
|
2,007 |
|
|
$ |
22.10 |
|
|
$ |
9.49 |
|
|
8 years |
|
$ |
115 |
|
Options exercisable |
|
|
533 |
|
|
$ |
24.77 |
|
|
$ |
10.56 |
|
|
7 years |
|
$ |
0 |
|
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 and February 3, 2007 was $0.2 million and $0.5 million,
respectively. The amount was immaterial for fiscal 2008. The total fair value of options that
vested during the years ended January 31, 2009, February 2, 2008 and February 3, 2007 was $3.6
million, $2.0 million and $1.6 million, respectively.
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 was $2.3 million,
$3.0 million and $5.5 million for fiscal 2008, 2007 and 2006, respectively. As of January 31, 2009,
the total compensation cost related to nonvested restricted stock units not yet recognized was $2.0
million with a weighted average expense recognition period remaining of 2.0 years. 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 |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Units |
|
GDFV |
|
Units |
|
GDFV |
|
Units |
|
GDFV |
|
|
|
Outstanding beginning of year |
|
|
151 |
|
|
$ |
23.92 |
|
|
|
135 |
|
|
$ |
22.03 |
|
|
|
131 |
|
|
$ |
20.46 |
|
Granted |
|
|
158 |
|
|
$ |
12.61 |
|
|
|
29 |
|
|
$ |
28.69 |
|
|
|
23 |
|
|
$ |
30.91 |
|
Exercised/Vested |
|
|
(8 |
) |
|
$ |
26.61 |
|
|
|
(10 |
) |
|
$ |
24.85 |
|
|
|
(10 |
) |
|
$ |
24.85 |
|
Forfeited |
|
|
(75 |
) |
|
$ |
19.08 |
|
|
|
(3 |
) |
|
$ |
27.96 |
|
|
|
(9 |
) |
|
$ |
19.00 |
|
|
Outstanding end of year |
|
|
226 |
|
|
$ |
17.51 |
|
|
|
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
January 31, 2009, February 2, 2008 and February 3, 2007, DSW granted 45,265, 10,398 and 10,525
director stock units, respectively, and expensed $0.6 million, $0.3 million and $0.3 million,
respectively, 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 January 31, 2009, 83,201 director stock units had been issued and no director stock
units had been settled.
F-23
5. INVESTMENTS
DSW determines the appropriate balance sheet classification of its investments at the time of
purchase and evaluates the classification at each balance sheet date. If the Company has the
intent and ability to hold the investments to maturity, investments are classified as
held-to-maturity. Held-to-maturity securities are stated at amortized cost plus accrued interest.
Otherwise, investments are classified as available-for-sale.
DSWs short-term investments at January 31, 2009 and February 2, 2008 include tax exempt bonds, tax
advantaged bonds, variable rate demand notes, tax exempt commercial paper, certificates of deposit
and auction rate securities. Tax exempt commercial paper and certificates of deposit mature every
28 to 91 days. Excluding the auction rate securities, the other types of short-term investments
generally have interest reset dates of every 7 days. Despite the long-term nature of the stated
contractual maturities of the bonds, tax exempt commercial paper and variable rate demand notes,
DSW has the ability to quickly liquidate these securities. As a result, DSW has classified these
securities as available for sale.
There are two auction rate securities classified as short term investments. One auction rate
security will not undergo auction until November 2009 and was reclassified from long term
investments to short term investments in fiscal 2008. DSW recorded a temporary impairment of $0.7
million related to this security. DSW believes the impairment is temporary as the security is a
perpetual preferred security that possesses certain debt-like characteristics and the Company
believes that it has the ability to hold the security until it can recover in value. This belief is
based on the strong credit ratings of the underlying issuer. The second auction rate security
included in short-term investments experienced a call at par subsequent to year end and there was
no unrealized loss recorded related to this security.
The long-term investments balance at both January 31, 2009 and February 2, 2008 includes auction
rate securities that failed at auction subsequent to February 2, 2008 and are presented as
long-term as it is unknown if DSW will be able to liquidate these securities within one year. As a
result, for fiscal 2008, DSW recorded other-than-temporary impairments of approximately $1.1
million related to these auction rate securities. DSW believes the impairments are
other-than-temporary due to current economic conditions, the financial condition and future
business prospects of the underlying issuer and the duration of the impairments.
The following table discloses the major categories of DSWs investments as of January 31, 2009 and
February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Investments, net |
|
|
Long-term Investments, net |
|
|
|
Fiscal Year Ended |
|
|
Fiscal Year Ended |
|
|
|
January 31, |
|
|
February 2, |
|
|
January 31, |
|
|
February 2, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt bonds |
|
$ |
64,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax advantaged bonds |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate demand notes |
|
|
16,580 |
|
|
$ |
44,505 |
|
|
|
|
|
|
|
|
|
Tax exempt commercial paper |
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
|
|
14,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
3,650 |
|
|
|
25,500 |
|
|
$ |
2,400 |
|
|
$ |
12,500 |
|
Other-than-temporary impairment included in earnings |
|
|
|
|
|
|
|
|
|
|
(1,134 |
) |
|
|
|
|
Unrealized losses included in accumulated other |
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale investments |
|
$ |
101,404 |
|
|
$ |
70,005 |
|
|
$ |
1,266 |
|
|
$ |
12,500 |
|
|
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 2008 or 2007 in continuing operations.
F-24
Future minimum lease payments required under the aforementioned leases, exclusive of real estate
taxes, insurance and maintenance costs, at January 31, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
Unrelated |
|
Related |
|
Filenes |
Fiscal Year |
|
Total |
|
Party |
|
Party |
|
Basement |
|
2009 |
|
$ |
135,614 |
|
|
$ |
123,321 |
|
|
$ |
12,293 |
|
|
$ |
39,062 |
|
2010 |
|
|
132,853 |
|
|
|
120,128 |
|
|
|
12,725 |
|
|
|
37,692 |
|
2011 |
|
|
125,363 |
|
|
|
112,508 |
|
|
|
12,855 |
|
|
|
35,976 |
|
2012 |
|
|
116,013 |
|
|
|
102,907 |
|
|
|
13,106 |
|
|
|
31,514 |
|
2013 |
|
|
107,535 |
|
|
|
94,995 |
|
|
|
12,540 |
|
|
|
30,412 |
|
Future Years |
|
|
407,607 |
|
|
|
333,261 |
|
|
|
74,346 |
|
|
|
146,591 |
|
|
Total minimum lease payments |
|
$ |
1,024,985 |
|
|
$ |
887,120 |
|
|
$ |
137,865 |
|
|
$ |
321,247 |
|
The composition of rental expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rentals: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties |
|
$ |
103,382 |
|
|
$ |
92,396 |
|
|
$ |
82,536 |
|
Related parties |
|
|
11,178 |
|
|
|
10,561 |
|
|
|
8,796 |
|
Contingent rentals: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties |
|
|
28,261 |
|
|
|
25,391 |
|
|
|
17,721 |
|
Related parties |
|
|
11,967 |
|
|
|
|
|
|
|
|
|
|
Total continuing operations |
|
$ |
154,788 |
|
|
$ |
128,348 |
|
|
$ |
109,053 |
|
Filenes Basement |
|
|
36,940 |
|
|
|
35,369 |
|
|
|
27,748 |
|
|
Total |
|
$ |
191,728 |
|
|
$ |
163,717 |
|
|
$ |
136,801 |
|
|
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 2008 and 2007, the
balance of deferred rent, excluding discontinued operations, was $33.5 million and $30.6 million,
respectively, and is included in other noncurrent liabilities. Certain store and warehouse leases
provided landlord incentives totaling $63.7 million and $58.8 million in fiscal 2008 and 2007,
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.
7. LONG TERM OBLIGATIONS
Long term obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Continuing
Operations: |
|
|
|
|
|
|
|
|
Credit facilities: |
|
|
|
|
|
|
|
|
Senior Loan Agreement related parties |
|
$ |
250 |
|
|
$ |
250 |
|
Premium Income Exchangeable Securities (PIES) |
|
|
133,750 |
|
|
|
143,750 |
|
Discount on PIES |
|
|
(6,174 |
) |
|
|
(8,707 |
) |
|
|
|
|
127,826 |
|
|
|
135,293 |
|
Less: current maturities |
|
|
(250 |
) |
|
|
|
|
|
Total long term obligations of continuing operations |
|
$ |
127,576 |
|
|
$ |
135,293 |
|
Discontinued
Operations: |
|
|
|
|
|
|
|
|
Filenes Basement revolving credit facility |
|
$ |
39,583 |
|
|
$ |
22,500 |
|
Less: current
maturities |
|
|
(39,583 |
) |
|
|
|
|
|
Total long
term obligations of discontinued operations |
|
|
|
|
|
$ |
22,500 |
|
|
Total |
|
$ |
127,576 |
|
|
$ |
157,793 |
|
|
F-25
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Letters of credit outstanding: |
|
|
|
|
|
|
|
|
Filenes Basement revolving credit facility |
|
$ |
2,947 |
|
|
$ |
3,360 |
|
DSW revolving credit facility |
|
$ |
17,709 |
|
|
$ |
15,711 |
|
Availability under revolving credit facilities: |
|
|
|
|
|
|
|
|
Filenes Basement revolving credit facility |
|
|
|
|
|
$ |
26,996 |
|
DSW revolving credit facility |
|
$ |
132,291 |
|
|
$ |
134,289 |
|
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 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 January 31, 2009, Filenes Basement was in an over loan
position of $7.8 million under Filenes Basement Revolving Loan with no availability. At February
2, 2008, $27.0 million was available under the Filenes Basement Revolving Loan. At January 31,
2009 and February 2, 2008, direct borrowings aggregated $39.6 million and $22.5 million,
respectively. Letters of credit of $2.9 million and
F-26
$3.4 million, were issued and outstanding at January 31, 2009 and February 2, 2008, respectively.
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 subsidiaries 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. In addition, the DSW
Revolving Loan contains usual and customary restrictive covenants relating to the management and
operation of the business. These covenants, among other things, restrict DSWs ability to grant
liens on its assets, incur additional indebtedness, open or close stores, pay cash dividends and
redeem its stock, enter into transactions with affiliates and merge or consolidate with another
entity. At January 31, 2009 and February 2, 2008, $132.3 million and $134.3 million, respectively,
was available under the DSW Revolving Loan and no direct borrowings were outstanding. At January
31, 2009 and February 2, 2009, $17.7 million and $15.7 million, respectively, in letters of credit
were issued and outstanding. The maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans Related Parties
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 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. 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, $4.50, (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, $19.00,
(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 the Convertible Loan bore interest at 10% per annum. At the
Companys option, interest could be PIK during the first two years, and thereafter, at the
Companys option, up to 50% of the interest due may be PIK until maturity. Prior to its amendment
and restatement in July 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.
F-27
$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. 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, $4.50, (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, $19.00, (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 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.
F-28
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 2008 and fiscal 2007, the Company recorded a benefit related to the change in fair
value of the conversion feature of the PIES of $49.3 million and $93.6 million. respectively.
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 January 31, 2009,
the fair value asset recorded for the conversion feature was $77.8 million as estimated using the
Black-Scholes pricing model with the following assumptions: risk-free rate of 3.0%, expected life
of 2.6 years, expected volatility of 58.0% and an expected dividend yield of 0.0%. 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%.
On October 10, 2008, Retail Ventures repurchased 200,000 units of PIES for an aggregate purchase
price of $5.6 million, which resulted in a reduction of the long-term obligation of $10.0 million.
Retail Ventures recorded a gain of $1.5 million on the repurchase which is included in
non-operating income on the statements of operations.
Other Debt Items
The weighted average interest rate on borrowings under the Companys credit facilities, excluding
discontinued operations, during the fiscal years 2008, 2007 and 2006 was 6.6%.
The book value of notes payable and long-term debt approximates fair value at January 31, 2009. 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.
At January 31, 2009, future annual long-term debt payments of the continuing operations are as
follows.
|
|
|
|
|
Fiscal Year |
|
Amount |
(in thousands) |
2009 |
|
$ |
250 |
|
2010 |
|
|
|
|
2011 |
|
|
133,750 |
|
2012 |
|
|
|
|
2013 |
|
|
|
|
Future Years |
|
|
|
|
|
Total |
|
$ |
134,000 |
|
|
F-29
8. FAIR VALUE MEASUREMENTS OF FINANCIAL ASSETS AND LIABILITIES
Although the adoption of SFAS 157 standard for financial assets and liabilities as of February 3,
2008, had no impact on Retail Ventures financial position or results of operations, it did result
in additional disclosures regarding fair value measurements. SFAS 157 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Therefore, fair value is a
market-based measurement based on assumptions of the market participants. As a basis for these
assumptions, SFAS 157 establishes the following three level fair value hierarchy:
|
|
|
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or
liabilities that are publicly accessible. Active markets have frequent transactions with
enough volume to provide ongoing pricing information. |
|
|
|
|
Level 2 inputs are other than level 1 inputs that are directly or indirectly observable.
These can include unadjusted quoted prices for similar assets or liabilities in active
markets, unadjusted quoted prices for identical assets or liabilities in inactive markets,
or other observable inputs. |
|
|
|
|
Level 3 inputs are unobservable inputs. |
Financial assets and liabilities measured at fair value on a recurring basis, excluding financial
assets and liabilities held for sale, as of January 31, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
(in thousands) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
94,308 |
|
|
$ |
94,308 |
|
|
|
|
|
|
|
|
|
Restricted Cash |
|
|
261 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
Short-term investments, net |
|
|
101,404 |
|
|
|
|
|
|
$ |
99,559 |
|
|
$ |
1,845 |
|
Long-term investments, net |
|
|
1,266 |
|
|
|
|
|
|
|
|
|
|
|
1,266 |
|
Conversion feature of long-term debt |
|
|
77,761 |
|
|
|
|
|
|
|
77,761 |
|
|
|
|
|
|
|
|
|
|
$ |
275,000 |
|
|
$ |
94,569 |
|
|
$ |
177,320 |
|
|
$ |
3,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability |
|
$ |
6,292 |
|
|
|
|
|
|
$ |
6,292 |
|
|
|
|
|
|
|
|
|
|
$ |
6,292 |
|
|
|
|
|
|
$ |
6,292 |
|
|
|
|
|
|
|
|
Cash and equivalents primarily represent cash deposits and investments in money market funds held
with financial institutions, as well as credit card receivables that settle in less than three
days. DSWs investments in auction rate securities are recorded at fair value under SFAS
157 using an income approach valuation model that uses level 3 inputs such as the financial
condition of the issuers of the underlying securities, expectations regarding the next successful
auction, risks in the auction rate securities market and other various assumptions. DSWs
other types of investments are valued using a market based approach using level 2 inputs such as
prices of similar assets in active markets.
The activity related to level 3 investments for the year ended January 31, 2009 is summarized
below:
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
Long-term |
|
|
Investments, net |
|
Investments, net |
|
|
(in thousands) |
Carrying value as of February 2, 2008 |
|
$ |
70,005 |
|
|
$ |
12,500 |
|
Maturities and sales |
|
|
(68,855 |
) |
|
|
(7,600 |
) |
Transfers into short-term investments |
|
|
2,500 |
|
|
|
|
|
Transfers from long-term investments |
|
|
|
|
|
|
(2,500 |
) |
Transfers out of level 3 |
|
|
(1,150 |
) |
|
|
|
|
Other-than-temporary impairment included in earnings |
|
|
|
|
|
|
(1,134 |
) |
|
|
|
|
|
|
|
|
|
Unrealized losses included in accumulated other comprehensive loss |
|
|
(655 |
) |
|
|
|
|
|
Carrying value as of January 31, 2009 |
|
$ |
1,845 |
|
|
$ |
1,266 |
|
|
F-30
9. 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 |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Assumed exercise of dilutive weighted average shares outstanding |
|
|
48,669 |
|
|
|
48,165 |
|
|
|
45,088 |
|
Assumed exercise of dilutive stock appreciation rights |
|
|
6 |
|
|
|
227 |
|
|
|
|
|
Assumed exercise of dilutive stock options |
|
|
144 |
|
|
|
527 |
|
|
|
|
|
Assumed exercise of dilutive term loan warrants |
|
|
245 |
|
|
|
2,607 |
|
|
|
|
|
Assumed exercise of dilutive conversion warrants |
|
|
462 |
|
|
|
5,268 |
|
|
|
|
|
|
Number of shares for computation of dilutive earnings per share |
|
|
49,526 |
|
|
|
56,794 |
|
|
|
45,088 |
|
|
The amount of securities outstanding at January 31, 2009, February 2, 2008 and February 3, 2007
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
VCHI warrants |
|
|
150 |
|
|
|
150 |
|
|
|
|
|
Stock options |
|
|
974 |
|
|
|
334 |
|
|
|
1,335 |
|
SARs |
|
|
445 |
|
|
|
499 |
|
|
|
978 |
|
Term loan warrants |
|
|
|
|
|
|
|
|
|
|
4,413 |
|
Conversion warrants |
|
|
|
|
|
|
|
|
|
|
9,667 |
|
|
Total of all potentially dilutive instruments |
|
|
1,569 |
|
|
|
983 |
|
|
|
16,393 |
|
|
10. PENSION BENEFIT PLANS
The Company has one qualified defined benefit pension plan assumed at the time of acquisition of
Filenes Basement and it is included in the operations held for sale at January 31, 2009. 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.
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):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
16,307 |
|
|
$ |
15,848 |
|
Interest cost |
|
|
935 |
|
|
|
907 |
|
Benefits paid |
|
|
(715 |
) |
|
|
(1,169 |
) |
Actuarial gain (loss) |
|
|
(186 |
) |
|
|
721 |
|
|
Projected benefit obligation at end of year |
|
$ |
16,341 |
|
|
$ |
16,307 |
|
|
Accumulated benefit obligation at end of year |
|
$ |
16,341 |
|
|
$ |
16,307 |
|
F-31
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair market value at beginning of year |
|
$ |
14,563 |
|
|
$ |
15,464 |
|
Actual loss
on plan assets |
|
|
(2,661 |
) |
|
|
(449 |
) |
Employer contributions |
|
|
500 |
|
|
|
900 |
|
Benefits paid |
|
|
(715 |
) |
|
|
(1,169 |
) |
Other |
|
|
(139 |
) |
|
|
(183 |
) |
|
Fair market value at end of year |
|
$ |
11,548 |
|
|
$ |
14,563 |
|
|
Filenes Basement made contributions of $0.5 million and $0.9 million during fiscal 2008 and fiscal
2007 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. Filenes Basement does not anticipate contributing funds in
fiscal 2009.
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 |
|
2009 |
|
|
760 |
|
2010 |
|
|
764 |
|
2011 |
|
|
762 |
|
2012 |
|
|
818 |
|
2013 |
|
|
868 |
|
2014 2019 |
|
|
5,211 |
|
Amounts recognized in the Consolidated Balance Sheets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Deferred income tax asset long term |
|
|
|
|
|
$ |
884 |
|
Other non-current liabilities |
|
$ |
(4,793 |
) |
|
|
(1,744 |
) |
|
Total |
|
$ |
(4,793 |
) |
|
$ |
(860 |
) |
|
The components of net periodic benefit cost are comprised of the following for the years indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Interest cost |
|
$ |
935 |
|
|
$ |
907 |
|
|
$ |
861 |
|
Expected return on plan assets |
|
|
(1,125 |
) |
|
|
(1,212 |
) |
|
|
(1,077 |
) |
Amortization of transition (asset) obligation |
|
|
(38 |
) |
|
|
(38 |
) |
|
|
(38 |
) |
Amortization of net loss |
|
|
442 |
|
|
|
244 |
|
|
|
290 |
|
|
Net periodic benefit cost |
|
$ |
214 |
|
|
$ |
(99 |
) |
|
$ |
36 |
|
|
Of the amounts in accumulated other comprehensive income held for sale as of January 31, 2009, we
expect the following to be recognized as net pension costs in fiscal 2010 (in thousands):
|
|
|
|
|
Remaining unrecognized benefit obligation existing at transition |
|
|
(37 |
) |
Unrecognized net loss |
|
|
570 |
|
|
Total |
|
|
533 |
|
|
F-32
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:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Discount rate |
|
|
6.3 |
% |
|
|
6.0 |
% |
Expected long-term rate of return |
|
|
7.0 |
% |
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Equity securities |
|
|
52.4 |
% |
|
|
55.0 |
% |
Fixed securities |
|
|
47.1 |
% |
|
|
44.4 |
% |
Other |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
11. 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, excluding discontinued
operations, of $2.0 million, $2.3 million and $1.9 million for fiscal years 2008, 2007 and 2006,
respectively. The Company made no discretionary profit sharing contributions during the last three
fiscal years.
12. 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. 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 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 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. For fiscal 2008 and fiscal 2007, the
Company recorded a benefit of $35.9 million and $154.6 million, respectively, for the change in
fair value of Warrants. For fiscal 2006, the Company recorded a charge of $124.8 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 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.
F-33
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 $6.3 million and $42.2 million at January 31, 2009 and February 2,
2008, respectively.
The $1.8 million value ascribed to the 8,333,333 outstanding Conversion Warrants was estimated as
of January 31, 2009 using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 0.3%; expected life of 0.4 years; expected volatility of 114.3% and an expected
dividend yield of 0.0%. The $4.5 million value ascribed to the 3,683,959 outstanding Term Loan
Warrants was estimated as of January 31, 2009 using the Black-Scholes Pricing Model with the
following assumptions: risk-free interest rate of 1.3%; expected life of 3.4 years; expected
volatility of 95.9% 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.
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental to the conduct of its
business. The Company estimates the range of liability related to pending litigation where the
amount 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. If Value City does not pay creditors whose obligations RVI and
RVS had guaranteed, RVI may become subject to various risks associated with such refusal to pay
creditors or any insolvency or bankruptcy proceedings.
As of January 31, 2009, RVI had recorded an estimated maximum potential liability of $12.9 million,
of which $2.9 million is classified as short-term, for the guarantees of Value City commitments
including, but not limited to: guaranteed severance for certain Value City employees of $0.5
million; amounts recognized under certain income tax liabilities of approximately $5.0 million;
amounts owed under certain employee benefit plans of approximately $4.1 million for the amount that
may be due if the plans are not fully funded on a termination basis; approximately $0.9 million for
the guarantee of certain workers compensation claims for events prior to the disposition date and
other amounts totaling
$2.4 million. As of February 2, 2008, RVI had recorded an
estimated maximum liability of $26.6 million for the guarantees of Value City commitments described
above as well as guarantees with various financing institutions for Value City inventory purchases
made prior to the disposition date. The reduction in the liability through January 31, 2009 is due
to Value City payments to factors, passage of time and revaluation of guarantees. Changes in the
amount of guarantees are included in the loss from discontinued operations on the statements of
operations.
As the guaranteed underlying obligations are paid down or otherwise liquidated by Value City,
subject to certain statutory requirements, RVI will recognize a reduction of the associated
liability. In certain instances, RVI or RVS may have the ability to reduce the estimated maximum
potential liability of $12.9 million. The amount of any reduction is not reasonably estimable.
Contractual Obligations
During fiscal 2008, DSW 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
F-34
approximately $0.9 million at January 31, 2009. In addition, as of January 31, 2009, DSW has signed lease agreements for 14 new
store locations opening in fiscal 2009 and fiscal 2010 with annual aggregate rent of $4.2 million
and average terms of approximately 10 years. Associated with the new lease agreements, the Company
will receive approximately $5.8 million of construction and tenant allowances which will offset
future capital expenditures.
14. INCOME TAXES
The income tax expense (benefit) for continuing operations consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
16,178 |
|
|
$ |
30,259 |
|
|
$ |
32,750 |
|
State and local |
|
|
(1,231 |
) |
|
|
6,528 |
|
|
|
7,041 |
|
|
Total current tax expense |
|
|
14,947 |
|
|
|
36,787 |
|
|
|
39,791 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,779 |
|
|
|
33,133 |
|
|
|
(10,508 |
) |
State and local |
|
|
(1,840 |
) |
|
|
2,483 |
|
|
|
(1,196 |
) |
|
Total deferred tax expense (benefit) |
|
|
1,939 |
|
|
|
35,616 |
|
|
|
(11,704 |
) |
|
Income tax expense |
|
$ |
16,886 |
|
|
$ |
72,403 |
|
|
$ |
28,087 |
|
|
A reconciliation of the expected income taxes based upon the statutory rate is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Income tax expense (benefit) at federal statutory rate of 35% |
|
$ |
43,978 |
|
|
$ |
116,987 |
|
|
$ |
(24,719 |
) |
Warrant liability marked to market |
|
|
(12,572 |
) |
|
|
(54,058 |
) |
|
|
43,685 |
|
Jobs credit |
|
|
(198 |
) |
|
|
(232 |
) |
|
|
(164 |
) |
State and local taxes, net |
|
|
273 |
|
|
|
7,461 |
|
|
|
2,958 |
|
Tax exempt interest |
|
|
(550 |
) |
|
|
(1,476 |
) |
|
|
(498 |
) |
Valuation allowance |
|
|
(16,034 |
) |
|
|
(780 |
) |
|
|
|
|
Fin 48 reserve |
|
|
56 |
|
|
|
|
|
|
|
2,112 |
|
Provision to return adjustments |
|
|
(2,359 |
) |
|
|
183 |
|
|
|
(2,443 |
) |
Change in subsidiary basis |
|
|
3,644 |
|
|
|
4,013 |
|
|
|
6,025 |
|
Other |
|
|
648 |
|
|
|
305 |
|
|
|
1,131 |
|
|
Income tax expense |
|
$ |
16,886 |
|
|
$ |
72,403 |
|
|
$ |
28,087 |
|
|
F-35
The components of the net deferred tax liability as of January 31, 2009 and February 2, 2008 for
continuing operations are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Basis differences in inventory |
|
$ |
4,074 |
|
|
$ |
3,321 |
|
Construction and tenant allowances |
|
|
2,335 |
|
|
|
1,645 |
|
Stock compensation |
|
|
6,417 |
|
|
|
3,725 |
|
State net operating loss & credits |
|
|
18,883 |
|
|
|
20,639 |
|
Federal net operating loss |
|
|
81,467 |
|
|
|
87,262 |
|
Federal tax credit |
|
|
14,886 |
|
|
|
13,888 |
|
Benefit from unrecognized tax position |
|
|
794 |
|
|
|
2,199 |
|
Guarantees Value City |
|
|
5,131 |
|
|
|
10,371 |
|
Workers compensation |
|
|
1,390 |
|
|
|
874 |
|
Accrued expenses |
|
|
4,284 |
|
|
|
3,356 |
|
Accrued rent |
|
|
13,157 |
|
|
|
11,846 |
|
Other |
|
|
3,616 |
|
|
|
2,466 |
|
|
Total deferred tax assets |
|
|
156,434 |
|
|
|
161,592 |
|
Less: Valuation allowance |
|
|
(50,721 |
) |
|
|
(73,353 |
) |
|
|
|
|
105,713 |
|
|
|
88,239 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis in subsidiary |
|
|
(80,137 |
) |
|
|
(76,493 |
) |
PIES |
|
|
(23,298 |
) |
|
|
(9,072 |
) |
Basis differences in property and equipment |
|
|
(4,007 |
) |
|
|
(759 |
) |
Prepaid expenses |
|
|
(4,773 |
) |
|
|
(4,399 |
) |
Other |
|
|
(256 |
) |
|
|
(250 |
) |
|
Total deferred tax liabilities |
|
|
(112,471 |
) |
|
|
(90,973 |
) |
|
Total net |
|
$ |
(6,758 |
) |
|
$ |
(2,734 |
) |
|
The net deferred tax liability is recorded in the Companys consolidated balance sheet for
continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Current deferred tax asset |
|
$ |
22,243 |
|
|
$ |
20,421 |
|
Non current deferred tax asset |
|
|
805 |
|
|
|
|
|
Non current deferred tax liability |
|
|
(29,806 |
) |
|
|
(23,155 |
) |
|
Net deferred tax liability |
|
$ |
(6,758 |
) |
|
$ |
(2,734 |
) |
|
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
recorded a reduction to the valuation allowance in the current period of $22.6 million. The ending
balances of the valuation allowance at January 31, 2009 and at February 2, 2008 were $50.7 million
and $73.3 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. At January 31,
2009, the federal component is $81.5 million and the state component is $17.9 million. These net
operating losses are available to reduce federal and state taxable income for the fiscal years 2009
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
F-36
Company will continue to classify income tax penalties as part of operating expenses in its condensed
consolidated statements of income. As of January 31, 2009 and February 2, 2008, $1.1 million and
$0.9 million, respectively, were accrued for the payment of interest and penalties for continuing
operations.
Effective February 4, 2007, the Company adopted the provisions of 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. As of January 31, 2009 and February 2, 2008,
unrecognized tax benefits of $0.9 million and $3.0 million, respectively, would affect the
Companys effective tax rate if recognized. As of January 31, 2009 and February 2, 2008, the
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
February 2, |
|
|
2009 |
|
2008 |
|
|
|
Beginning Balance |
|
$ |
3,028 |
|
|
$ |
2,004 |
|
(Decreases) Tax Positions taken in the prior period |
|
|
(1,760 |
) |
|
|
(1,123 |
) |
Increases Tax positions taken in the current period |
|
|
9 |
|
|
|
2,147 |
|
|
Ending Balance |
|
$ |
1,277 |
|
|
$ |
3,028 |
|
|
While it is expected that the amount of unrecognized tax benefits will change in the next 12
months, any change is not expected to have a material impact on the Companys financial position,
results of operations or cash flows.
15. SEGMENT REPORTING
The Company is operated in two segments: DSW and Corporate. All of the operations are located in
the United States. As a result of Filenes Basement meeting the criteria to be classified as held
for sale during fiscal 2008, the results of the previously disclosed Filenes Basement segment are
included in discontinued operations (see Note 2 to the Consolidated Financial Statements) and
Filenes Basement is therefore no longer included as a reportable segment of the Company. 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 its 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 January 31, 2009 and February 2, 2008 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.
DSW separates its merchandise into four primary categories womens footwear; mens 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. The largest principal
categories as a percentage of the consolidated RVI revenue from continuing operations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Category |
|
Fiscal 2008 |
|
Fiscal 2007 |
|
Fiscal 2006 |
Womens |
|
|
66 |
% |
|
|
65 |
% |
|
|
65 |
% |
Mens |
|
|
15 |
% |
|
|
16 |
% |
|
|
16 |
% |
Athletic |
|
|
14 |
% |
|
|
14 |
% |
|
|
14 |
% |
F-37
The tables below present segment statement of operations information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
Continuing |
|
|
DSW |
|
Corporate |
|
Eliminations |
|
Operations |
As of and for the year ended
January 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,462,944 |
|
|
|
|
|
|
|
|
|
|
$ |
1,462,944 |
|
Operating profit |
|
|
42,813 |
|
|
$ |
85,235 |
|
|
|
|
|
|
|
128,048 |
|
Depreciation and amortization |
|
|
36,336 |
|
|
|
2,130 |
|
|
|
|
|
|
|
38,466 |
|
Interest expense |
|
|
794 |
|
|
|
12,809 |
|
|
|
|
|
|
|
13,603 |
|
Interest income |
|
|
3,400 |
|
|
|
7,869 |
|
|
|
|
|
|
|
11,269 |
|
Income tax expense |
|
|
(17,383 |
) |
|
|
497 |
|
|
|
|
|
|
|
(16,886 |
) |
Capital expenditures |
|
|
80,974 |
|
|
|
20 |
|
|
|
(2,336 |
) |
|
|
78,658 |
|
Total assets |
|
|
719,615 |
|
|
|
128,676 |
|
|
|
|
|
|
|
848,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
Continuing |
|
|
DSW |
|
Corporate |
|
Eliminations |
|
Operations |
As of and for the year ended
February 2, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,405,615 |
|
|
|
|
|
|
|
|
|
|
$ |
1,405,615 |
|
Operating profit |
|
|
81,321 |
|
|
$ |
248,193 |
|
|
|
|
|
|
|
329,514 |
|
Depreciation and amortization |
|
|
25,055 |
|
|
|
3,243 |
|
|
|
|
|
|
|
28,298 |
|
Interest expense |
|
|
1,178 |
|
|
|
12,718 |
|
|
|
|
|
|
|
13,896 |
|
Interest income |
|
|
7,148 |
|
|
|
11,483 |
|
|
|
|
|
|
|
18,631 |
|
Income tax expense |
|
|
(33,516 |
) |
|
|
(38,887 |
) |
|
|
|
|
|
|
(72,403 |
) |
Capital expenditures |
|
|
102,451 |
|
|
|
(715 |
) |
|
|
|
|
|
|
101,736 |
|
Total assets |
|
|
693,882 |
|
|
|
90,672 |
|
|
|
|
|
|
|
784,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
Continuing |
|
|
DSW |
|
Corporate |
|
Eliminations |
|
Operations |
For the year ended February 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,279,060 |
|
|
|
|
|
|
|
|
|
|
$ |
1,279,060 |
|
Operating profit (loss) |
|
|
100,714 |
|
|
$ |
(175,955 |
) |
|
|
|
|
|
|
(75,241 |
) |
Depreciation and amortization |
|
|
20,686 |
|
|
|
3,104 |
|
|
|
|
|
|
|
23,790 |
|
Interest expense |
|
|
614 |
|
|
|
7,873 |
|
|
|
|
|
|
|
8,487 |
|
Interest income |
|
|
7,527 |
|
|
|
5,574 |
|
|
|
|
|
|
|
13,101 |
|
Income tax (expense) benefit |
|
|
(42,164 |
) |
|
|
14,077 |
|
|
|
|
|
|
|
(28,087 |
) |
Capital expenditures |
|
|
42,407 |
|
|
|
(317 |
) |
|
|
|
|
|
|
42,090 |
|
F-38
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
In the Companys opinion, the unaudited quarterly information reflects all normal and recurring
accruals and adjustments necessary for a fair presentation of the Companys net income (loss) for
interim periods. Quarterly results are not necessarily indicative of a full years operations
because of various factors. The Companys unaudited quarterly financial information is as follows:
Year Ended January 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 3, |
|
August 2, |
|
November |
|
January 31, |
|
|
2008 |
|
2008 |
|
1, 2008 |
|
2009 |
|
|
(in thousands except per share data) |
Net sales |
|
$ |
366,264 |
|
|
$ |
357,175 |
|
|
$ |
391,355 |
|
|
$ |
348,150 |
|
Cost of sales |
|
|
(211,098 |
) |
|
|
(198,515 |
) |
|
|
(218,946 |
) |
|
|
(213,034 |
) |
|
Gross profit |
|
|
155,166 |
|
|
|
158,660 |
|
|
|
172,409 |
|
|
|
135,116 |
|
Selling, general and administrative expenses |
|
|
(139,160 |
) |
|
|
(140,981 |
) |
|
|
(151,492 |
) |
|
|
(146,905 |
) |
Change in fair value of derivative instruments |
|
|
21,944 |
|
|
|
9,463 |
|
|
|
(669 |
) |
|
|
24,488 |
|
Change in fair value of derivative instruments related party |
|
|
15,224 |
|
|
|
7,270 |
|
|
|
8,527 |
|
|
|
(1,012 |
) |
|
Operating profit |
|
|
53,174 |
|
|
|
34,412 |
|
|
|
28,775 |
|
|
|
11,687 |
|
Interest expense |
|
|
(3,541 |
) |
|
|
(3,649 |
) |
|
|
(3,241 |
) |
|
|
(3,172 |
) |
Interest income |
|
|
2,898 |
|
|
|
2,676 |
|
|
|
2,894 |
|
|
|
2,801 |
|
|
Interest expense, net |
|
|
(643 |
) |
|
|
(973 |
) |
|
|
(347 |
) |
|
|
(371 |
) |
Non-operating income (expense) |
|
|
|
|
|
|
|
|
|
|
1,486 |
|
|
|
(1,134 |
) |
|
Income from continuing operations before income taxes and
minority interest |
|
|
52,531 |
|
|
|
33,439 |
|
|
|
29,914 |
|
|
|
10,182 |
|
Income tax (expense) benefit |
|
|
(6,622 |
) |
|
|
(7,617 |
) |
|
|
(10,410 |
) |
|
|
7,763 |
|
|
Income from continuing operations before minority interest |
|
|
45,909 |
|
|
|
25,822 |
|
|
|
19,504 |
|
|
|
17,945 |
|
Minority interest |
|
|
(3,806 |
) |
|
|
(3,954 |
) |
|
|
(4,988 |
) |
|
|
2,788 |
|
|
Income from continuing operations |
|
|
42,103 |
|
|
|
21,868 |
|
|
|
14,516 |
|
|
|
20,733 |
|
(Loss) income from discontinued operations, net of tax Value
City |
|
|
(3,621 |
) |
|
|
10,494 |
|
|
|
2,035 |
|
|
|
4,315 |
|
Loss from discontinued operations, net of tax Filenes
Basement |
|
|
(9,331 |
) |
|
|
(14,628 |
) |
|
|
(6,562 |
) |
|
|
(31,081 |
) |
|
Net income (loss) |
|
$ |
29,151 |
|
|
$ |
17,734 |
|
|
$ |
9,989 |
|
|
$ |
(6,033 |
) |
|
Earnings (loss) per share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.87 |
|
|
$ |
0.45 |
|
|
$ |
0.30 |
|
|
$ |
0.43 |
|
Diluted earnings per share from continuing operations |
|
$ |
0.82 |
|
|
$ |
0.45 |
|
|
$ |
0.30 |
|
|
$ |
0.43 |
|
Basic loss per share from discontinued operations |
|
$ |
(0.27 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.55 |
) |
Diluted loss per share from discontinued operations |
|
$ |
(0.25 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.55 |
) |
Basic earnings (loss) per share |
|
$ |
0.60 |
|
|
$ |
0.36 |
|
|
$ |
0.21 |
|
|
$ |
(0.12 |
) |
Diluted earnings (loss) per share |
|
$ |
0.56 |
|
|
$ |
0.36 |
|
|
$ |
0.20 |
|
|
$ |
(0.12 |
) |
|
|
|
(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-39
Year Ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended |
|
|
May 5, |
|
August 4, |
|
November |
|
February 2, |
|
|
2007 |
|
2007 |
|
3, 2007 |
|
2008 |
|
|
(in thousands except per share data) |
Net sales |
|
$ |
356,997 |
|
|
$ |
348,718 |
|
|
$ |
367,380 |
|
|
$ |
332,520 |
|
Cost of sales |
|
|
(196,721 |
) |
|
|
(215,392 |
) |
|
|
(205,794 |
) |
|
|
(203,940 |
) |
|
Gross profit |
|
|
160,276 |
|
|
|
133,326 |
|
|
|
161,586 |
|
|
|
128,580 |
|
Selling, general and administrative expenses |
|
|
(123,058 |
) |
|
|
(125,000 |
) |
|
|
(126,781 |
) |
|
|
(127,608 |
) |
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 |
|
|
Operating profit |
|
|
49,767 |
|
|
|
133,110 |
|
|
|
126,152 |
|
|
|
20,485 |
|
Interest expense |
|
|
(3,362 |
) |
|
|
(3,296 |
) |
|
|
(3,305 |
) |
|
|
(3,933 |
) |
Interest income |
|
|
4,655 |
|
|
|
4,967 |
|
|
|
4,600 |
|
|
|
4,409 |
|
|
Interest income, net |
|
|
1,293 |
|
|
|
1,671 |
|
|
|
1,295 |
|
|
|
476 |
|
Income from continuing operations before income taxes and
minority interest |
|
|
51,060 |
|
|
|
134,781 |
|
|
|
127,447 |
|
|
|
20,961 |
|
Income tax expense |
|
|
(22,661 |
) |
|
|
(13,995 |
) |
|
|
(32,278 |
) |
|
|
(3,469 |
) |
|
Income from continuing operations before minority interest |
|
|
28,399 |
|
|
|
120,786 |
|
|
|
95,169 |
|
|
|
17,492 |
|
Minority interest |
|
|
(8,776 |
) |
|
|
(2,411 |
) |
|
|
(8,295 |
) |
|
|
(397 |
) |
|
Income from continuing operations |
|
|
19,623 |
|
|
|
118,375 |
|
|
|
86,874 |
|
|
|
17,095 |
|
Loss from discontinued operations, net of tax Value City |
|
|
(10,362 |
) |
|
|
(9,343 |
) |
|
|
(14,211 |
) |
|
|
(116,746 |
) |
Loss from discontinued operations, net of tax Filenes
Basement |
|
|
(6,521 |
) |
|
|
(2,814 |
) |
|
|
(4,441 |
) |
|
|
(26,087 |
) |
|
Net income (loss) |
|
$ |
2,740 |
|
|
$ |
106,218 |
|
|
$ |
68,222 |
|
|
$ |
(125,738 |
) |
|
Earnings (loss) per share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.42 |
|
|
$ |
2.46 |
|
|
$ |
1.79 |
|
|
$ |
0.35 |
|
Diluted earnings per share from continuing operations |
|
$ |
0.33 |
|
|
$ |
2.01 |
|
|
$ |
1.53 |
|
|
$ |
0.33 |
|
Basic loss per share from discontinued operations |
|
$ |
(0.36 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.38 |
) |
|
$ |
(2.94 |
) |
Diluted loss per share from discontinued operations |
|
$ |
(0.28 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.33 |
) |
|
$ |
(2.73 |
) |
Basic earnings (loss) per share |
|
$ |
0.06 |
|
|
$ |
2.21 |
|
|
$ |
1.40 |
|
|
$ |
(2.59 |
) |
Diluted earnings (loss) per share |
|
$ |
0.05 |
|
|
$ |
1.81 |
|
|
$ |
1.20 |
|
|
$ |
(2.40 |
) |
|
|
|
(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-40
17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
|
January 31, |
|
February 2, |
|
February 3, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
(in thousands) |
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest to non related parties |
|
$ |
9,358 |
|
|
$ |
9,523 |
|
|
$ |
3,148 |
|
Income taxes |
|
$ |
12,804 |
|
|
$ |
35,401 |
|
|
$ |
40,498 |
|
Noncash investing and operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in accounts payable due to asset purchases |
|
$ |
(4,271 |
) |
|
$ |
3,384 |
|
|
$ |
(746 |
) |
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 |
|
|
|
|
|
18. SUBSEQUENT EVENTS
On April 21, 2009, RVI announced it had entered into, and consummated the transactions contemplated
by, a definitive agreement dated April 21, 2009 (the Purchase Agreement) to dispose of Filenes
Basement, Inc. and certain related entities to FB II Acquisition Corp., a newly formed entity owned
by Buxbaum Holdings, Inc. (Buxbaum). RVI will not realize any cash proceeds from this transaction
and will pay a fee of $1.3 million to Buxbaum and has reimbursed $0.4 million of Buxbaums costs
associated with the transaction. RVI has also agreed to indemnify Buxbaum, FB II Acquisition Corp.
and their owners against certain liabilities. As of the transaction date, RVI estimates an amount of $42.5 million for the guarantees of Filenes Basement commitments, including but not limited to
$13.8 million of outstanding borrowings against the Filenes Basement Revolving Loan; $6.6 million
of payments to factors for inventory purchases made prior to the disposition date; $12.6 million
under lease obligations; and $9.5 million under certain laws, related to certain employee benefit
plans. The Company cannot reasonably estimate the impact of the disposition of Filenes
Basement on our consolidated financial statements at this time.
In connection with the disposition and related transactions, RVI and Filenes Basement obtained
consent from the lenders under Filenes Basements secured credit facility led by National City
Business Credit, Inc. (the Filenes Basement Revolving Loan), pursuant to a Consent and
Ratification Agreement, dated as of April 21, 2009, by and among National City Business Credit,
Inc., as Administrative Agent and Collateral Agent, the Revolving Credit Lenders (as defined in the
Filenes Basement Revolving Loan), Filenes Basement, RVI, and FB II Acquisition Corp. (the
Consent Agreement).
On April
28, 2009, the Administrative Agent under the Filenes Basement
Revolving Loan delivered a notice to Filenes Basement alleging
that certain Events of Default had occurred under the Revolving Loan
and stating that the loan commitments were thereby terminated and all
liabilities under the Revolving Loan are due and payable. As a result,
the Filenes Basement Revolving Loan has been accelerated and
all amounts thereunder are immediately due and payable. RVI has guaranteed all of Filenes Basements obligations under that
secured credit agreement which had a balance of $13.8 million as
of the date of disposition. RVI has an arrangement with the lenders under Filenes Basements Revolving Loan pursuant to which
RVI has agreed to acquire a $7.5 million Last Out Participation in that secured credit agreement,
which is included in the loan balance referred to above.
Although the Filenes Basement Revolving Loan has been accelerated, and all amounts thereunder are due and payable by RVI as a result of its guaranty, pursuant
to the Consent Agreement, the Revolving Credit Lenders have agreed to forbear from making demand on
RVI under such guaranty until the substantial completion of the sale and/or liquidation of Filenes
Basements business and assets, subject to certain terms and conditions. As part of the agreement,
RVI has reaffirmed its existing guaranty of the Filenes Basement Revolving Loan, provided that the
aggregate principal amount of the guaranteed debt will not be increased following the commencement
of any bankruptcy case by Filenes Basement, except to the extent the increase arises as a result of a
drawing on an existing letter of credit under the facility or the incurrence of any costs of
collection. In addition, RVI has paid a consent fee of $0.1 million to the Revolving Credit Lenders
and has agreed to maintain an additional $2.5 million in an account at and controlled by one of the
lenders until the lenders have been paid in full. Under certain circumstances, the bank in which
such funds are held would have the right to set-off this amount against RVIs obligations under its
guaranty. There can be no assurance that all of the terms and conditions to the Consent Agreement,
some of which are not within the control of RVI, will be satisfied.
F-41
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. |
|
|
|
2.3
|
|
Purchase Agreement, dated as of April 21, 2009 by and between Retail Ventures, Inc. and FB II Acquisition
Corp. Incorporated herein by reference to Exhibit 2.1 to Form 8-K (file no 1-10767) filed April 27, 2009. |
|
|
|
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. Incorporated by reference to Exhibit 4.13 to Form 10-K (file no. 1-10767) filed April 25, 2008. |
E-1
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
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. |
|
|
|
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. |
|
|
|
10.4.1
|
|
Amendment No. 1 to Amended and Restated Shared Services Agreement between DSW, Inc. and Retail Ventures,
Inc., dated as of March 17, 2008. Incorporated by reference to Exhibit 10.2 to Form 8-K (file no. 1-10767)
filed August 28, 2008. |
|
|
|
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. |
|
|
|
10.5.1
|
|
Amendment No. 1 to Tax Separation Agreement between DSW Inc. and Retail Ventures, Inc., dated as of March 17,
2008. Incorporated by reference to Exhibit 10.3 to Form 8-K (file no. 1-10767) filed August 28, 2008. |
|
|
|
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 |
|
|
|
10.18#
|
|
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. |
|
|
|
10.32
|
|
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. |
|
|
|
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. |
E-2
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
10.36.1#
|
|
Amendment to June 22, 2000 employment agreement between the Company and James A. McGrady effective June 22,
2008. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed July 3, 2008. |
|
|
|
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. |
|
|
|
10.42#
|
|
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. |
|
|
|
10.42.1#
|
|
Amendment to November 1, 2004 employment agreement between the Company and Heywood Wilansky effective
December 9, 2008. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed December
15, 2008. |
|
|
|
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. |
|
|
|
10.47
|
|
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. |
|
|
|
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 Tenants Leasehold Interest 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 |
E-3
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
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. Incorporated by reference to Exhibit 10.55.1 to Form 10-K (file no.
1-10767) filed April 25, 2008. |
|
|
|
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. |
|
|
|
10.58.1
|
|
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. |
|
|
|
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. |
|
|
|
10.62#
|
|
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. |
|
|
|
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. |
|
|
|
10.65#
|
|
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. |
|
|
|
10.68
|
|
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. |
|
|
|
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. |
|
|
|
10.72
|
|
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. |
|
|
|
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. |
|
|
|
10.75
|
|
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. |
E-4
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
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. |
|
|
|
10.88.1
|
|
First Amendment to Second Amended and Restated Loan and Security Agreement entered into by and among Filenes
Basement, Inc., National City Business Credit, Inc., Wells Fargo Retail Finance LLC and Wachovia Capital
Finance Corporation (Central) on September 12, 2008. Incorporated herein by reference to Exhibit 10.1 to
Form 8-K (file no. 1-10767) filed September 18, 2008. |
|
|
|
10.88.2
|
|
Second Amendment to Second Amended and Restated Loan and Security Agreement entered into by and among
Filenes Basement, Inc., National City Business Credit, Inc., Wells Fargo Retail Finance, LLC and Wachovia
Capital Finance Corporation (Central) on February 11, 2009. Incorporated herein by reference to Exhibit 10.1
to Form 8-K (file no. 1-10767) filed February 13, 2009. |
|
|
|
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. |
E-5
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
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. |
|
|
|
10.90#
|
|
2007 Retail Ventures, Inc. Cash Incentive Compensation Plan. Incorporated by reference to Exhibit 10.90 to
Form 10-K (file no. 1-10767) filed April 25, 2008. |
|
|
|
10.91
|
|
Supply Agreement (Combo Stores), effective as of January 30, 2005, between DSW Inc. and Filenes Basement
Inc. Incorporated by reference to Exhibit 10.91 to Form 10-K (file no. 1-10767) filed April 25, 2008. |
|
|
|
10.93
|
|
Last Out Participation Agreement entered into by and among National City Business Credit, Inc. and Retail
Ventures, Inc. on February 11, 2009. Incorporated herein by reference to Exhibit 10.2 to Form 8-K (file no.
1-10767) filed February 13, 2009. |
|
|
|
10.94#*
|
|
Second Amended and Restated Retail Ventures, Inc. 1991 Stock Option Plan. |
|
|
|
10.95#*
|
|
Retail Ventures, Inc. Second Amended and Restated 2000 Stock Incentive Plan (the 2000 Stock Incentive Plan). |
|
|
|
10.96#*
|
|
Second Amended and Restated Retail Ventures, Inc. Non-Employee Director Stock Option Plan. |
|
|
|
10.97*
|
|
Second Amended and Restated Guaranty, dated as of January 23, 2008, by and among Retail Ventures, Inc.,
Retail Ventures Services, Inc., Retail Ventures Licensing, Inc. and Retail Ventures Imports, Inc., as
guarantors, the revolving credit lenders party thereto and National City Business Credit, Inc., as
administrative and collateral agent. |
|
|
|
10.98
|
|
Consent and Ratification Agreement, dated as of April 21, 2009, by and among Filenes Basement, Inc. as
borrower, Retail Ventures, Inc., FB II Acquisition Corp. as purchaser, the revolving credit lenders party
thereto and National City Business Credit, Inc., as administrative and collateral agent. Incorporated herein
by reference to Exhibit 10.1 to Form 8-K (file no 1-10767) filed April 27, 2009. |
|
|
|
10.99*
|
|
Sub-license Agreement between Retail Ventures Licensing, Inc. and Filenes Basement, Inc., effective January
23, 2008. |
|
|
|
12*
|
|
Ratio of Earnings to Fixed Charges. |
|
|
|
21*
|
|
List of Subsidiaries. |
|
|
|
23*
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
24*
|
|
Power of Attorney. |
|
|
|
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. |
E-6