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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 1-10767
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RETAIL VENTURES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Ohio 20-0090238
- ------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
- ------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(614) 471-4722
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Registrant's telephone number, including area code
Not applicable
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of outstanding Common Shares, without par value, as of June 2, 2004
was 34,014,656.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at May 1, 2004
and January 31, 2004.................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended May 1, 2004 and May 3, 2003.......................... 4
Condensed Consolidated Statements of Shareholders' Equity
at May 1, 2004 and January 31, 2004..................................... 5
Condensed Consolidated Statements of Cash Flows
for the three months ended May 1, 2004 and May 3, 2003.................. 6
Notes to Condensed Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 24
Item 4. Controls and Procedures..................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 25
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.................................................... 25
Item 3. Defaults Upon Senior Securities............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders......................... 25
Item 5. Other Information........................................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................ 25
Signature................................................................................. 26
Index to Exhibits......................................................................... 27
Exhibit 31.1...................................................................... 28
Exhibit 31.2...................................................................... 30
Exhibit 32.1...................................................................... 32
Exhibit 32.2...................................................................... 33
-2-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
May 1, January 31,
2004 2004
------------ ------------
ASSETS
Cash and equivalents $ 13,679 $ 14,226
Accounts receivable, net 10,078 8,969
Receivables from related parties 1,014 137
Inventories 468,970 420,338
Prepaid expenses and other assets 20,262 10,651
Deferred income taxes 50,146 44,933
------------ ------------
Total current assets 564,149 499,254
------------ ------------
Property and equipment, net 253,943 251,818
Goodwill 37,619 37,619
Tradenames and other intangibles, net 46,612 43,638
Other assets 31,430 31,616
------------ ------------
$ 933,753 $ 863,945
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 200,777 $ 147,771
Accounts payable to related parties 933 3,335
Accrued expenses 113,815 112,550
Current maturities of long-term obligations 672 741
------------ ------------
Total current liabilities 316,197 264,397
------------ ------------
Long-term obligations, net of current maturities
Non-related 169,582 154,724
Related parties 172,722 172,216
Other noncurrent liabilities 59,864 55,841
Commitments and contingencies -- --
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 34,014,707 and
33,990,707 shares, respectively 143,150 143,077
Warrants 6,074 6,074
Retained earnings 72,774 74,321
Deferred compensation expense, net (540) (635)
Treasury shares, at cost, 7,551 shares (59) (59)
Accumulated other comprehensive loss (6,011) (6,011)
------------ ------------
215,388 216,767
------------ ------------
$ 933,753 $ 863,945
------------ ------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended
-----------------------------
May 1, May 3,
2004 2003
------------ ------------
Net sales, excluding sales of licensed departments $ 646,300 $ 588,532
Cost of sales (386,867) (371,812)
------------ ------------
Gross profit 259,433 216,720
Selling, general and administrative expenses (255,259) (231,041)
License fees and other income 1,557 1,501
------------ ------------
Operating profit (loss) 5,731 (12,820)
Interest expense, net
Non-related (2,149) (3,651)
Related parties (6,191) (5,932)
------------ ------------
Loss before income taxes (2,609) (22,403)
Benefit for income taxes 1,062 9,230
------------ ------------
Net loss $ (1,547) $ (13,173)
============ ============
Basic and diluted loss per share:
Net loss $ (0.05) $ (0.39)
------------ ------------
Shares used in per share calculations:
Basic 33,860 33,712
Diluted 33,860 33,712
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
Number of Shares
---------------- Accumulated
Common Deferred Other
Common Shares Common Retained Compensation Treasury Comprehensive
Shares in Treasury Shares Warrants Earnings Expense Shares Loss Total
------ ----------- -------- -------- -------- ------------ -------- ------------- --------
BALANCE, JANUARY 31, 2004 33,991 8 $143,077 $ 6,074 $ 74,321 $ (635) $ (59) $ (6,011) $216,767
Net loss (1,547) (1,547)
Exercise of stock options 24 73 73
Amortization of deferred
compensation expense 95 95
------ ----- -------- -------- -------- ------------ -------- ------------- --------
BALANCE, MAY 1, 2004 34,015 8 $143,150 $ 6,074 $ 72,774 $ (540) $ (59) $ (6,011) $215,388
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended
-----------------------------
May 1, May 3,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (1,547) $ (13,173)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of discount on debt 506 497
Amortization of deferred compensation 95 96
Depreciation and amortization 13,269 13,804
Deferred income taxes and other noncurrent liabilities (4,507) 13,025
Loss on disposal of asset 727 7
Change in working capital, assets and liabilities:
Receivables (1,986) (13,804)
Inventories (48,632) (63,067)
Prepaid expenses and other assets (9,239) 3,866
Accounts payable 50,604 48,221
Accrued expenses 1,260 (27,576)
------------ ------------
Net cash provided by (used in) operating activities 550 (38,104)
------------ ------------
Cash flows from investing activities:
Capital expenditures (14,018) (10,847)
Proceeds from sale of assets 17 13
Other assets and acquisitions (4,034) --
Proceeds from lease incentives 2,076 1,904
------------ ------------
Net cash used in investing activities (15,959) (8,930)
------------ ------------
Cash flows from financing activities:
Principal payments of capital lease obligations
and other debt (211) (201)
Net increase in revolving credit facility 15,000 65,000
Proceeds from issuance of common shares 73 --
------------ ------------
Net cash provided by financing activities 14,862 64,799
------------ ------------
Net (decrease) increase in cash and equivalents (547) 17,765
Cash and equivalents, beginning of period 14,226 11,059
------------ ------------
Cash and equivalents, end of period $ 13,679 $ 28,824
------------ ------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OPERATIONS
Retail Ventures, Inc. and its wholly owned subsidiaries are herein
referred to collectively as the Company. The Company operates three
segments. Value City Department Stores ("Value City") and Filene's
Basement, Inc. ("Filene's Basement") segments operate full-line, off-price
department stores. The DSW Shoe Warehouse, Inc. ("DSW") segment sells
better-branded off-price shoes and accessories. As of May 1, 2004, there
is a total of 116 Value City Department Stores located principally in the
Midwestern, Eastern and Southern states, 151 DSW stores located throughout
the United States and 24 Filene's Basement stores located primarily in
major metropolitan areas.
On October 8, 2003, the Company reorganized its corporate structure into a
holding company form whereby Retail Ventures, Inc., an Ohio corporation,
became the successor issuer to Value City Department Stores, Inc. As a
result of the reorganization, Value City Department Stores, Inc. became a
wholly-owned subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of Value
City became holders of an identical number of common shares of Retail
Ventures, Inc. The reorganization was effected by a merger which was
previously approved by the Company's shareholders. Since October 8, 2003,
the Company's common shares have been listed for trading under the ticker
symbol "RVI" on the New York Stock Exchange.
VALUE CITY. We operate a chain of 116 off-price department stores located
in the Midwestern, Eastern and Southern states, principally under the name
Value City. For over 80 years, our strategy has been to provide
exceptional value by offering a broad selection of brand name merchandise
at prices substantially below conventional retail prices.
DSW. We operate a chain of 151 DSW stores located throughout the
United States. The DSW stores are upscale shoe stores offering a wide
selection of branded dress and casual footwear below traditional retail
prices. Additionally, Shonac Corporation, the parent company of DSW,
pursuant to license agreements with Value City and Filene's Basement,
operates licensed shoe departments in most Value City and Filene's
Basement stores. Results of operations of the licensed shoe departments
are included with the Value City and Filene's Basement segments. Shonac
Corporation has also entered into agreements to supply merchandise to
third parties' shoe departments. Results are included with the DSW segment
and represent substantially all of the leased operations of the segment.
FILENE'S BASEMENT. We operate 24 Filene's Basement stores located
primarily in major metropolitan areas such as Boston, New York City,
Atlanta, Chicago and Washington, D.C. Filene's Basement focuses on
providing the top tier brand names at everyday low prices for men's and
women's apparel, jewelry, shoes, accessories and home goods.
-7-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. BASIS OF PRESENTATION
The accompanying financial statements reflect all adjustments consisting
of only normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the consolidated financial
position and results of operations for the periods presented. To
facilitate comparisons with the current year, certain previously reported
balances have been reclassified to conform to the current period
presentation.
3. TRADENAMES AND OTHER INTANGIBLES
The Company acquired during the three months ended May 1, 2004, the
"Leslie Fay" tradename for approximately $4.0 million. The anticipated
life of the amortizing asset has been initially assigned 15 years.
4. PENSION BENEFIT PLANS
The Company has three qualified defined benefit pension plans assumed at
the time of acquisition of three separate companies. The Company's 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 plans.
The components of net periodic benefit cost are comprised of the following
(in thousands):
Three Months Ended
-----------------------------
May 1, 2004 May 3, 2003
------------ ------------
Service cost $ 11 $ 9
Interest cost 350 323
Expected return on plan assets (359) (321)
Amortization of transition (asset) obligation (9) (19)
Amortization of net loss 145 149
------------ ------------
Net periodic benefit cost $ 138 $ 141
------------ ------------
The Company's funding policy is to contribute an amount annually that
satisfies the minimum funding requirements of ERISA and that is tax
deductible under the Internal Revenue Code. The Company had anticipated
contributing approximately $1.5 million in fiscal 2004 to meet minimum
funding requirements but due to passing of recent legislation in April
2004 the anticipated funding requirement will be approximately $0.9
million in fiscal 2004.
5. SHAREHOLDERS' EQUITY
On September 26, 2002, the Company issued 2,954,792 warrants ("Warrants")
to purchase common shares, at an initial exercise price of $4.50 per
share, to Cerberus Partners, L.P., Schottenstein Stores Corporation and
Back Bay Capital Funding LLC (the "Term Loan C Lenders"). The Warrants are
exercisable at any time prior to June 11, 2012. The Company
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
has granted the Term Loan C Lenders registration rights with respect to
the shares issuable upon exercise of the Warrants. The $6.1 million value
ascribed to the Warrants was estimated as of the date of issuance using
the Black-Scholes pricing model with the following assumptions: risk-free
interest rate of 5.6%; expected life of 10 years; expected volatility of
47%; illiquidity discount of 10%; and an expected dividend yield of 0%.
The related debt discount is amortized into interest expense over the life
of the debt.
The number of shares issuable varies upon the occurrence of the following:
(i) the issuance of additional common shares without consideration or for
a consideration per share less than the Warrant exercise price; (ii) the
declaration of any dividend; (iii) the combination or consolidation of the
outstanding common shares into a lesser number of shares; (iv) the
issuance or sale of additional shares at a price per share less than the
current market price but greater than the Warrant exercise price; (v) the
issuance of convertible securities which are convertible into common
shares; and/or (vi) the exchange of shares in a merger or other business
combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties
The Company amended and restated its $75.0 million Senior Subordinated
Convertible Loan Agreement on June 11, 2002 (the "Convertible Loan"). As
amended, borrowings under the Convertible Loan will bear interest at 10%
per annum. At the Company's option, interest may be paid-in-kind ("PIK"),
from the closing date to the second anniversary thereof, and thereafter,
at the option of the Company, up to 50% of the interest due may be PIK
until maturity. PIK interest accrued with respect to the Convertible Loan
is added to the outstanding principal balance, on a quarterly basis and is
payable in cash upon the maturity of the debt. The Convertible Loan is
guaranteed by all principal subsidiaries and is secured by a lien on
assets junior to liens granted in favor of the lenders on the Revolving
Credit Agreement and Term Loans. The Convertible Loan is not subject to
prepayment until June 11, 2007. The agent has the right to designate two
observers to the Board of Directors for so long as the agent is the
beneficial owner of at least 50% of the advances initially made by it and
has the right to designate two individuals to the Board of Directors for
so long as the agent is the beneficial owner of at least 50% of the
conversion shares issued or issuable upon conversion of the advances
initially made by it.
The Convertible Loan is convertible at the option of the holders into
common shares of the Company and has a conversion price of $4.50. The
maturity date is June 10, 2009.
6. EARNINGS PER SHARE
Basic earnings per share are based on the net loss and a simple weighted
average of common shares outstanding. Diluted earnings per share reflects
the potential dilution of common shares, related to both outstanding stock
options and warrants, calculated using the treasury stock method and
convertible debt calculated using the if-converted method. The numerator
for the diluted earnings per share calculation is the net loss adjusted to
remove the effect of
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
interest, adjusted for tax, on the convertible debt. For the three months
ended May 1, 2004 and May 3, 2003 all potentially dilutive instruments:
stock options, warrants and convertible debt, were anti-dilutive.
7. VALUATION ACCOUNT
Reserves established and used for severance costs are as follows (in
thousands):
Twelve months
ended
----------------
January 31, 2004
----------------
Balance at beginning of period $ 3,996
Provisions to establish reserves --
Reductions for intended purposes (3,996)
----------------
Balance at end of period --
----------------
8. ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which
require implementation by a date falling within or after the close of the
fiscal year.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
certain entities considered to be variable interest entities (VIEs). An
entity is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital
is insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of
the VIE's expected losses or residual returns if they occur. FIN 46
provides certain exceptions to these rules, relating to qualifying special
purpose entities (QSPE's) subject to the requirements of SFAS No. 140.
Upon its original issuance, FIN 46 required that VIEs created after
January 31, 2003 would be consolidated immediately, while VIEs created
prior to February 1, 2003 were to be consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of
VIEs created prior to February 1, 2003 to December 31, 2003 for calendar
year-end companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of the original interpretation and to
exempt certain entities from its requirements. FIN 46R provides special
effective date provisions to enterprises that fully or partially applied
to FIN 46 prior to the issuance of the revised interpretation. In
particular, entities that have already adopted FIN 46 are not required to
adopt FIN 46R until the quarterly reporting period
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ended May 1, 2004. Adoption of the required sections of FIN 46, as
modified and interpreted, including the provisions of FIN 46R, did not
have any effect on the Company's consolidated financial statements or
disclosures.
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive loss represents net loss plus the results of certain
non-shareholders' equity changes not reflected in the Consolidated
Statement of Operations. The components of comprehensive loss, net of tax
are as follows (in thousands):
Three months ended
-----------------------------
May 1, 2004 May 3, 2003
------------ ------------
Net loss $ (1,547) $ (13,173)
Net unrealized gain on
derivative financial instruments
net of income tax -- 620
------------ ------------
Other comprehensive loss $ (1,547) $ (12,553)
------------ ------------
The balance sheet caption accumulated other comprehensive loss of $6.0
million at May 1, 2004 and January 31, 2004, respectively. Such loss
relates to the minimum pension liability, net of income tax.
The Company's interest rate swap expired during the three months ended May
3, 2003 and was not renewed.
10. STOCK BASED COMPENSATION
The Company has various stock-based employee compensations plans. The
Company accounts for those plans in accordance with APB No. 25.
"Accounting For Stock Issued to Employees," and related Interpretations.
No stock-based employee compensation cost is reflected in net loss, as no
options granted under those plans had an exercise price less than the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition of SFAS 123,
"Accounting for Stock-Based Compensation."
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended
-----------------------------
May 1, 2004 May 3, 2003
------------ ------------
Net loss, as reported $ (1,547) $ (13,173)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (651) (1,029)
------------ ------------
Pro forma net loss $ (2,198) $ (14,202)
------------ ------------
Loss per share:
Basic and diluted as reported $ (0.05) $ (0.39)
Basic and diluted pro forma $ (0.06) $ (0.42)
11. TAX VALUATION
The Company establishes valuation allowances for deferred tax assets when
the amount of expected future taxable income is not likely to support the
use of the deduction or credit. For the three months ended May 1, 2004, no
additional allowance has been provided. During the previous fiscal year
ended January 31, 2004 an allowance of $1.5 million was provided for as
the Company determined that there was a probability that future taxable
income may not be sufficient to fully utilize deferred tax assets.
The tax rate of 40.7% reflects the impact of the non-deductible warrant
amortization included for book income but not tax.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities is
presented below (in thousands):
Three months ended
-----------------------------
May 1, May 3,
2004 2003
------------ ------------
Cash paid during the period for:
Interest
Non-related $ 1,222 $ 4,930
Related parties 5,375 5,336
Income taxes $ 5,523 $ 556
-12-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SEGMENT REPORTING
The Company is managed in three operating segments: Value City, DSW and
Filene's Basement. All of the operations are located in the United States.
The Company has identified such segments based on management
responsibility and measures segment profit as operating (loss) profit,
which is defined as income before interest expense and income taxes.
Three-month period ended May 1, 2004 (in thousands):
Filene's
Value City DSW Basement Total
------------ ------------ ------------ ------------
Net sales $ 339,096 $ 227,277 $ 79,927 $ 646,300
Operating (loss) profit (4,361) 12,990 (2,898) 5,731
Identifiable assets 492,374 302,157 139,222 933,753
Capital expenditures 4,114 5,558 4,346 14,018
Depreciation and amortization 7,273 4,304 1,692 13,269
Three-month period ended May 3, 2003 (in thousands):
Filene's
Value City DSW Basement Total
------------ ------------ ------------ ------------
Net sales $ 342,894 $ 183,051 $ 62,587 $ 588,532
Operating (loss) profit (13,354) 2,601 (2,067) (12,820)
Identifiable assets 544,964 256,571 108,380 909,915
Capital expenditures 4,026 6,193 628 10,847
Depreciation and amortization 9,098 3,105 1,601 13,804
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental
to the conduct of its business. The Company estimates the range of
liability related to pending litigation where the amount and range of loss
can be estimated. The Company records its best estimate of a loss when the
loss is considered probable. Where a liability is probable and there is a
range of estimated loss, the Company records the minimum estimated
liability related to the claim. In the opinion of management, the amount
of any liability with respect to these proceedings will not be material.
As additional information becomes available, the Company assesses the
potential liability related to its pending litigation and revises the
estimates. Revisions in the Company's estimates and potential liability
could materially impact its results of operations.
-13-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RISK FACTORS AND SAFE HARBOR STATEMENT
We caution that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Report
and/or other risk factors that may be described in the Safe Harbor Statement and
Business Risks section of the Company's Annual Report on Form 10-K for the year
ended January 31, 2004, or contained in other filings with the Securities and
Exchange Commission or made by our management involve risks and uncertainties,
and are subject to change based on various important factors. The following
factors, among others, in some cases have affected the matters discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. These same factors could cause our future financial performance in
fiscal 2004 and beyond to differ materially from those expressed or implied in
any such forward-looking statements. These factors include: decline in demand
for our merchandise, our ability to achieve our business plans, expected cash
flow from operations, vendor and their factor relations, flow of merchandise,
compliance with our credit agreements, our ability to strengthen our liquidity
and increase our credit availability, the availability of desirable store
locations on suitable terms, changes in consumer spending patterns, marketing
strategies, consumer preferences and overall economic conditions, the impact of
competition and pricing, changes in weather patterns, changes in existing or
potential duties, tariffs or quotas, paper and printing costs, the ability to
hire and train associates and development of management information systems.
Our operations have been historically seasonal, with a disproportionate amount
of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons for Value City and Filene's Basement. DSW seasonal
sales occur both in early Spring and Fall. As a result of seasonality, any
factors negatively affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have
a material adverse effect on our financial condition and results of operations
for the entire year.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of operations and
financial condition as reflected in our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles.
As discussed in Notes to Consolidated Financial Statements that are included in
our Annual Report on Form 10-K for the year ended January 31, 2004 that is filed
with the Securities and Exchange Commission, 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
-14-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
reserves for health and welfare, workers' compensation and casualty insurance,
income taxes, contingencies, litigation and revenue recognition. Management
bases its estimates and judgments on its historical experience and other
relevant factors, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The process of determining significant estimates is fact specific
and takes into account factors such as historical experience, current and
expected economic conditions, product mix, and in some cases, actuarial and
appraisal techniques. We constantly re-evaluate these significant factors and
make adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered
provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated statements, we cannot guarantee that our
estimates and assumptions will be accurate. As the determination of these
estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe the following represent the most critical estimates and assumptions,
among others, used in the preparation of our consolidated financial statements.
We have discussed the selection, application and disclosure of the critical
accounting policies with our audit committee.
- Revenue recognition. Revenues from our retail operations are
recognized at the latter of point of sale or the delivery of goods
to the customer. Retail revenues are reduced by a provision for
anticipated returns based on historical trends.
- Cost of sales and merchandise inventories. We use the retail method
of accounting for substantially all of our merchandise inventories.
Merchandise inventories are stated at the lower of cost, determined
using the first-in, first-out basis, or market, using the retail
inventory method. The retail method is widely used in the retail
industry due to its practicality. Under the retail inventory method,
the valuation of inventories at cost and the resulting gross margins
are calculated by applying a calculated cost to retail ratio to the
retail value of inventories. The cost of the inventory reflected on
our consolidated balance sheet is decreased by charges to cost of
sales at the time the retail value of the inventory is lowered
through the use of markdowns. Hence, earnings are negatively
impacted as merchandise is marked down prior to sale. Reserves to
value inventory at the lower of cost or market were $38.4 million on
May 1, 2004 and $34.2 million at the end of fiscal 2003.
Inherent in the calculation of inventories are certain significant
management judgments and estimates including, setting the original
merchandise retail value or markon, markups of initial prices
established, reduction of pricing due to customer's value perception
or perceived value known as markdowns, and estimates of losses
between physical inventory counts or shrinkage, which, combined with
the averaging process within the retail method, can significantly
impact the ending inventory valuation at cost and the resulting
gross margins.
-15-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- Long-lived assets. In evaluating the fair value and future benefits
of long-lived assets, we perform an analysis of the anticipated
undiscounted future cash flows of the related long-lived asset and
reduce the carrying value by the excess where the recorded value
exceeds the fair value. Goodwill is tested on an annual basis using
a fair value based approach.
For the three months ended May 1, 2004 we recorded an impairment of
$0.7 million related to the Value City segment for store assets. For
the period ended May 3, 2003, we recorded no impairments related to
long-lived assets.
We believe at this time that the remaining long-lived assets'
carrying values and useful lives continue to be appropriate. To the
extent these future projections or our strategies change, the
conclusion regarding impairment may differ from our current
estimates.
- Self-insurance reserves. We record estimates for certain health and
welfare, workers compensation and casualty insurance costs that are
self-insured programs. These estimates are based on actuarial
assumptions and are subject to change based on actual results.
Should a greater amount of claims occur compared to what was
estimated for costs of certain health and welfare, workers
compensation and casualty insurance increase beyond what was
anticipated, reserves recorded may not be sufficient and to the
extent actual results vary from assumptions, earnings would be
impacted.
- Pension. The obligations and related assets of defined benefit
retirement plans are included in the Company's Annual Report on Form
10-K Notes to Condensed Consolidated Financial Statements for the
year ended January 31, 2004. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued using market
quotations. Plan obligations and the annual pension expense are
determined by independent actuaries and through the use of a number
of assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of salary increases and the
estimated future return on plan assets. In determining the discount
rate, we utilize the yield on fixed-income investments currently
available with maturities corresponding to the anticipated timing of
the benefit payments. Salary increase assumptions are based upon
historical experience and anticipated future management actions.
Asset returns are based upon the anticipated average rate of
earnings expected on the invested funds of the plans. At May 1,
2004, the actual assumption of our plans has remained unchanged from
our Annual Report on Form 10-K for the year ended January 31, 2004
filed with the Securities and Exchange Commission. To the extent
actual results vary from assumptions, earnings would be impacted.
- Customer loyalty program. We maintain a customer loyalty program for
our DSW operations in which customers receive a future discount on
qualifying purchases. The "Reward Your Style" program is designed to
promote customer
-16-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
awareness and loyalty plus provide the Company with the ability to
communicate with our customers and enhance our understanding of
their spending trends. Upon reaching the target level, customers may
redeem these discounts on a future purchase. Generally, these future
discounts must be redeemed within one year. We accrue the estimated
costs of the anticipated redemptions of the discount earned at the
time of the initial purchase and charge such costs to selling,
general and administrative expense based on historical experience.
The estimates of the costs associated with the loyalty program
require us to make assumptions related to customer purchase levels
and redemption rates. Accrued liability as of May 1, 2004 and
January 31, 2004 was $3.0 million and $3.0 million, respectively. To
the extent assumptions of purchases and redemption rates vary from
actual results, earnings would be impacted.
- Income taxes. We do business in numerous jurisdictions that impose
taxes. Management is required to determine the aggregate amount of
income tax expense to accrue and the amount which will be currently
payable based upon tax statutes of each jurisdiction. The estimation
process involves adjusting income determined by the application of
generally accepted accounting principles for items that are treated
differently by the applicable taxing authorities. Deferred tax
assets and liabilities are reflected on our balance sheet for
temporary differences that will reverse in subsequent years. If
different management judgments had been made, our tax expense,
assets and liabilities could be different. During fiscal 2003, we
established a reserve for deferred income tax assets of $1.5 million
for carry forwards related to state and local net operating losses
and for excess contribution carry forwards.
-17-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
Three months ended (1)
--------------------------
May 1, 2004 May 3, 2003
----------- -----------
Net sales, excluding sales of
licensed departments 100.0% 100.0%
Cost of sales (59.9) (63.2)
----- -----
Gross profit 40.1 36.8
Selling, general and administrative
expenses (39.5) (39.3)
License fees and other income 0.3 0.3
----- -----
Operating profit (loss) 0.9 (2.2)
Interest expense, net (1.3) (1.6)
----- -----
Loss before income taxes (0.4) (3.8)
Benefit for income taxes 0.2 1.6
----- -----
Net loss (0.2)% (2.2)%
----- -----
(1) Because of the seasonal nature of our retail business cycle, the results of
operations for the 13 weeks ended May 1, 2004 and May 3, 2003 (which do not
include the Christmas holiday season) are not necessarily indicative of such
results for the fiscal year.
THREE MONTHS ENDED MAY 1, 2004 COMPARED TO THREE MONTHS ENDED MAY 3, 2003
Net sales increased $57.8 million, or 9.8%, from $588.5 million to $646.3
million. Comparable store sales increased 4.2% and were by segment:
Three months ended
--------------------------
May 1, 2004 May 3, 2003
----------- -----------
Value City Department Stores (1.1)% (4.0)%
DSW 10.6% (3.6)%
Filene's Basement 15.8% (8.1)%
---- ----
Total 4.2% (4.4)%
---- ----
Value City comparable stores sales for the quarter were negative 1.1% due to a
weaker Easter selling season. DSW and Filene's Basement sales increased for the
same period above expectations due to early presentation of spring merchandise
and improved merchandise mix in the stores. Comparative sales for the segments
were compared against the prior year's weak retail environment and severe
weather conditions that existed in our market areas.
Value City's sales decreased $3.8 million to $339.1 million, a 1.1% decrease in
the quarter. The decrease in comparable sales is comprised of a decrease in
non-apparel hardlines of (0.8)%, a
-18-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
decrease in apparel of (1.8)% and an increase of 0.9% in jewelry. The
merchandise categories of men's and ladies had decreases of (1.8%) and (4.9%),
respectively while children's increased 7.1%. Shoe sales in the Value City
segment were a positive 0.5% in the quarter.
DSW segment sales were $227.3 million a 24.2% increase in the quarter which
includes a net increase of 22 stores over the comparable period along with the
comparable store sales increase of 10.6%. The women's categories of dress,
casual and sandals and the accessories category had favorable results in the
period. During the quarter we had a net decrease of 10 leased shoe departments
due to store reductions under the supply agreement.
Filene's Basement sales increased 27.7% in the quarter to $79.9 million which
includes a net increase of 4 stores over the prior year's period and comparable
store sales increased 15.8%. Merchandise categories of men's, ladies and
children's had comparative increases of 15.5%, 10.3% and 37.4%, respectively,
while other categories of jewelry, shoes and home had increases of 9.6%, 22.9%
and 7.5%, respectively.
Gross profit, as a percentage of sales, increased to 40.1% compared to 36.8% for
the prior year. The increase in our overall margin rate is attributable to
higher initial markups in Value City, DSW and Filene's Basement operations. The
Value City segment improved average unit retail and initial retail markup to
obtain the gross margin increase. The improvement in comparative sales in DSW
and Filene's Basement segments reduced the need for promotional markdowns during
the period. Total gross profit increased $42.7 million to $259.4 million or
19.7%. Gross profit, as a percent of sales by segment in the first quarter, was:
Three months ended
--------------------------
May 1, 2004 May 3, 2003
----------- -----------
Value City Department Stores 39.0% 36.6%
DSW 43.5% 38.6%
Filene's Basement 35.4% 32.8%
---- ----
Total 40.1% 36.8%
---- ----
Selling, general and administrative expenses ("SG&A") increased $24.2 million
from $231.0 to $255.3 million. Approximately, $3.6 million is associated with
the pre-opening expenses for 9 new DSW stores and the 3 new Filene's Basement
stores since year end. Total SG&A expense associated with stores opened
subsequent to May 3, 2003 and through May 1, 2004 was $13.3 and represents
approximately 55% of the increase in SG&A expense. Other costs increasing from
the previous year include employee related health and welfare costs for medical
and retirement. As a percentage of sales SG&A was 39.5% compared to 39.3% in the
1st quarter of 2003. SG&A as a percent of sales by segment in the first quarter
were:
-19-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended
--------------------------
May 1, 2004 May 3, 2003
----------- -----------
Value City Department Stores 40.6% 40.8%
DSW 37.8% 37.3%
Filene's Basement 39.5% 36.7%
---- ----
Total 39.5% 39.3%
---- ----
License fees and other income were $1.6 million and $1.5 million for the
comparative periods. License fees and other income are comprised of fees from
licensees, layaway fees and vending income. These sources of income can vary
based on customer traffic and contractual arrangements.
Operating profit increased to a $5.7 million profit, from a loss of $12.8
million and increased as a percentage of sales from a loss of 2.2% to a profit
of 0.9%.
Net interest expense for the quarter decreased $1.2 million to $8.3 million. The
decrease is due primarily to a decrease in our weighted average borrowing rate
offset by an increase of $33.6 million in average borrowings from last year to
this year.
The effective tax rate for the three months ended May 1, 2004 was 40.7% as
compared to 41.2% for the three months ended May 3, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for seasonal and new store inventory
purchases, capital expenditures in connection with expansion, remodeling and
infrastructure growth, primarily information technology development. The primary
sources of funds for these liquidity needs are cash flow from operations and
credit facilities. Our working capital and inventory levels typically build
throughout the year and reach the highest level in the fall, peaking during the
holiday selling season.
Net working capital was $248.0 million and $242.5 million at May 1, 2004 and May
3, 2003, respectively. Current ratios at those dates were 1.8 for both periods.
Net cash provided by operations was $0.6 million in year-to-date fiscal 2004 as
compared to $38.1 million used in operations in year-to-date fiscal 2003.
Net cash used for capital expenditures was $14.0 million and $10.8 million for
the three months ended May 1, 2004 and May 3, 2003, respectively. During the
three months ended May 1, 2004, capital expenditures included $7.4 million for
new stores, $4.2 million for improvements in existing stores and $2.4 million
for information technology equipment upgrades and new systems. In addition to
the capital expenditures during the three month period, we acquired a tradename
for $4.0 million. A source of cash from investing activities is the proceeds
from lease incentives which are amortized as a reduction of rent expense over
the life of the lease.
On June 11, 2002, Value City Department Stores, Inc., together with certain
other principal subsidiaries of Retail Ventures, Inc., entered into a $525.0
million refinancing that consists of three
-20-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
separate credit facilities (collectively, the "Credit Facilities"): (i) a
three-year $350.0 million revolving credit facility (the "Revolving Credit
Facility"), (ii) two $50.0 million term loan facilities provided equally by
Cerberus Partners, L.P. and Schottenstein Stores Corporation (the "Term Loans"),
and (iii) an amended and restated $75.0 million senior subordinated convertible
loan, initially entered into by us on March 15, 2000, which is held equally by
Cerberus Partners, L.P. and SSC (the "Convertible Loan"). These Credit
Facilities are guaranteed by Retail Ventures, Inc. and substantially all of its
subsidiaries.
We are not subject to any financial covenants under these credit facilities,
however, there are numerous restrictive covenants relating to our management and
operation. These non-financial covenants include, among other restrictions,
limitations on indebtedness, guarantees, mergers, acquisitions, fundamental
corporate changes, financial reporting requirements, budget approval,
disposition of assets, investments, loans and advances, liens, dividends, stock
purchases, transactions with affiliates, issuance of securities and the payment
of and modification to debt instruments. These Credit Facilities are also
subject to an Intercreditor Agreement, which provides for an established order
of payment of obligations from the proceeds of collateral upon default (the
"Intercreditor Agreement").
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is structured in
a manner that allows us and our subsidiaries availability based on the value of
inventories and receivables. Primary security for the Revolving Credit Facility
is provided by a first priority lien on all of our inventory and accounts
receivable, as well as certain intercompany notes and payment intangibles.
Subject to the Intercreditor Agreement, the Revolving Credit Facility also has a
second priority perfected interest in all of the collateral securing the Term
Loans. Interest on borrowings is calculated at the bank's base rate or
Eurodollar rate plus 2.00% to 2.75%, depending upon the level of average excess
availability we maintain. The maturity date is June 11, 2005. At May 1, 2004 and
January 31, 2004, $161.1 million and $137.7 million were available under the
Revolving Credit Facility, respectively. Direct borrowings aggregated $140.0
million and $125.0 million at May 1, 2004 and at January 31, 2004, respectively,
while $13.9 million and $23.4 million letters of credit were issued and
outstanding at May 1, 2004 and January 31, 2004, respectively.
$100 Million Term Loans - Related Parties
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0 million
Term Loan C. All obligations under the Term Loans are senior debt and, subject
to the Intercreditor Agreement, have the same rights and privileges as the
Revolving Credit Facility and the Convertible Loan. We and our principal
subsidiaries are obligated on the facility. The maturity date is June 11, 2005.
The Term Loans' stated rate of interest per annum during the initial two years
is 14% if paid in cash and 15% if we elect a paid-in-kind ("PIK") option. During
the first two years of the Term Loans, we may pay all interest in PIK. During
the final year of the Term Loans, the stated rate of interest is 15.0% if paid
in cash or 15.5% if PIK and the PIK option is limited to 50% of the interest
due. At the three months ended May 1, 2004 and for the year ended January 31,
2004, we elected to pay interest in cash.
-21-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We issued 2,954,792 warrants ("Warrants") to purchase shares of common stock, at
an initial exercise price of $4.50 per share, to the Term Loan C Lenders. The
Warrants are exercisable at any time prior to June 11, 2012. We have granted the
Term Loan C Lenders registration rights with respect to the shares issuable upon
exercise of the Warrants. The $6.1 million value ascribed to the Warrants was
estimated as of the date of issuance using the Black-Scholes Pricing Model with
the following assumptions: risk-free interest rate of 5.6%; expected life of 10
years; expected volatility of 47%; illiquidity discount of 10%; and an expected
dividend yield of 0%. The related debt discount is amortized into interest
expense over the life of the debt.
The number of shares issuable varies upon the occurrence of the following: (i)
the issuance of additional shares of common stock without consideration or for a
consideration per share less than the Warrant exercise price; (ii) the
declaration of any dividend; (iii) the combination or consolidation of the
outstanding shares of common stock into a lesser number of shares; (iv) the
issuance or sale of additional shares at a price per share less than the current
market price but greater than the Warrant exercise price; (v) the issuance of
convertible securities which are convertible into shares of common stock; and/or
(vi) the exchange of shares in a merger or other business combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties
We have amended and restated our $75.0 million Convertible Loan dated March 15,
2000. As amended, borrowings under the Convertible Loan bears interest at 10%
per annum. At our option, interest may be PIK during the first two years, and
thereafter, at our option, up to 50% of the interest due may be PIK until
maturity. PIK interest accrued with respect to the convertible loan is added to
the outstanding principal balance, on a quarterly basis, and is payable in cash
upon the maturity of the debt. The Convertible Loan is guaranteed by all
principal subsidiaries and is secured by a lien on assets junior to liens
granted in favor of the Revolving Credit Facility and Term Loans. The
Convertible Loan is not prepayable until June 11, 2007, and has a maturity date
of June 10, 2009. The agent has the right to designate two observers to our
Board of Directors for so long as the agent is the beneficial owner of at least
50% of the advances initially made by it and has the right to designate two
individuals to our Board of Directors for so long as the agent is the beneficial
owner of at least 50% of the conversion shares issued or issuable upon
conversion of the advances initially made by it.
The Convertible Loan is convertible at the option of the holders into shares of
our common stock at an initial conversion price of $4.50. The conversion price
is subject to adjustment upon the occurrence of specified events.
Achievement of expected cash flows from operations and compliance with the
restrictive covenants of our credit agreements (as discussed in the Notes to
Consolidated Financial Statements that are included in our 2003 Annual Report
Form 10-K filed with the Securities and Exchange Commission) are dependent upon
a number of factors, including the attainment of sales, gross profit, expense
levels, vendor relations, and flow of merchandise that are consistent with our
financial projections. Future limitations of credit availability by factor
organizations and/or vendors will restrict our ability to obtain merchandise and
services and may impair operating results. We believe that cash generated by
operations, along with the available proceeds from our credit
-22-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
agreements and other sources of financing will be sufficient to meet our
obligations for working capital, capital expenditures, and debt service.
However, there is no assurance that we will be able to meet our projections.
Further, there is no assurance that extended financing will be available in the
future if we fail to meet our projections or on terms acceptable to us.
Contractual Obligations and Off-Balance Sheet Arrangements
We have made no material changes to our contractual obligations outside the
ordinary course of business.
ADOPTION OF ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
certain entities considered to be variable interest entities (VIEs). An entity
is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital is
insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of the
VIE's expected losses or residual returns if they occur. FIN 46 provides certain
exceptions to these rules, relating to qualifying special purpose entities
(QSPE's) subject to the requirements of SFAS No. 140. Upon its original
issuance, FIN 46 required that VIEs created after January 31, 2003 would be
consolidated immediately, while VIEs created prior to February 1, 2003 were to
be consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation of VIEs
created prior to February 1, 2003 to December 31, 2003 for calendar year-end
companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to clarify
some of the provisions of the original interpretation and to exempt certain
entities from its requirements. FIN 46R provides special effective date
provisions to enterprises that fully or partially applied to FIN 46 prior to the
issuance of the revised interpretation. In particular, entities that have
already adopted FIN 46 are not required to adopt FIN 46R until the quarterly
reporting period ended May 1, 2004. Adoption of the required sections of FIN 46,
as modified and interpreted, including the provisions of FIN 46R, did not have
any effect on the Company's consolidated financial statements or disclosures.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor; however, there can be no assurance that the business
will not be affected by inflation in the future.
-23-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, which may
adversely affect our financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. We do
not use financial instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under our
Revolving Credit Facility. At May 1, 2004, direct borrowings aggregated $140.0
million and an additional $13.9 million of letters of credit were outstanding
against the facility. The Revolving Credit Facility permits debt commitments up
to $350.0 million, matures on June 11, 2005 and generally bears interest at a
floating rate of LIBOR plus 2.0% to 2.75% based on the average excess
availability during the previous quarter.
A hypothetical 100 basis point increase in interest rates, net of taxes, would
have an approximate $0.4 million impact to our financial position, liquidity and
results of operation.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision, and with the participation, of its
management, including its Chief Executive Officer and Chief Financial Officer,
performed an evaluation of the Company's disclosure controls and procedures, as
contemplated by Securities Exchange Act Rule 13a-15. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded, as
of the end of the period covered by this report, that such disclosures and
procedures were effective.
No change was made in the Company's internal control over financial reporting
during the Company's most recent fiscal quarter that has materially affected, or
is reasonable likely to affect, the Company's internal control over financial
reporting.
-24-
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Not applicable
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES. Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not
applicable
Item 5. OTHER INFORMATION. Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Part A Index to Exhibits on page 27.
Part B Reports on Form 8-K.
A current report on Form 8-K, dated May 6, 2004, was filed
with the Securities and Exchange Commission on May 6, 2004
(Items 7 and 12).
A current report on Form 8-K, dated June 7, 2004, was filed
with the Securities and Exchange Commission on June 7, 2004
(Items 7 and 12).
-25-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RETAIL VENTURES, INC.
(Registrant)
------------
Date: June 7, 2004 By: /s/ James A. McGrady
----------------------------------------
James A. McGrady,
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary of Retail Ventures, Inc.
-26-
INDEX TO EXHIBITS
Exhibit Number Description Page No.
31.1 Rule 13a-14(a)/15d-14(a) 28
Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) 30
Certification of Chief Financial Officer
32.1 Section 1350 Certification of 32
Chief Executive Officer
32.2 Section 1350 Certification of
Chief Financial Officer 33
-27-