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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 July 31, 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
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
incorporation or organization) No.)
3241 Westerville Road, Columbus, Ohio 43224
- ------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(614) 471-4722
----------------------------------------------
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 [X] NO [ ]
The number of outstanding Common Shares, without par value, as of August 31,
2004 was 34,076,155.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at July 31, 2004
and January 31, 2004........................................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended July 31, 2004 and August 2, 2003.................... 4
Condensed Consolidated Statements of Shareholders' Equity
for the six months ended July 31, 2004 and August 2, 2003...................... 5
Condensed Consolidated Statements of Cash Flows
for the six months ended July 31, 2004 and August 2, 2003...................... 6
Notes to Condensed Consolidated Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 27
Item 4. Controls and Procedures............................................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 28
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities........................................................... 28
Item 3. Defaults Upon Senior Securities.................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders................................ 28
Item 5. Other Information.................................................................. 28
Item 6. Exhibits and Reports on Form 8-K................................................... 28
Signature............................................................................................ 30
Index to Exhibits.................................................................................... 31
-2-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
July 31, January 31,
2004 2004
--------- ----------
ASSETS
Cash and equivalents $ 2,728 $ 14,226
Accounts receivable, net 13,066 8,969
Receivables from related parties 991 137
Inventories 517,547 420,338
Prepaid expenses and other assets 24,766 10,651
Deferred income taxes 47,794 44,933
--------- ---------
Total current assets 606,892 499,254
--------- ---------
Property and equipment, net 258,731 251,818
Goodwill 37,619 37,619
Tradenames and other intangibles, net 45,554 43,638
Other assets 32,113 31,616
--------- ---------
Total assets $ 980,909 $ 863,945
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 196,612 $ 147,771
Accounts payable to related parties 3,170 3,335
Accrued expenses 113,249 112,550
Current maturities of long-term obligations 613 741
--------- ---------
Total current liabilities 313,644 264,397
--------- ---------
Long-term obligations, net of current maturities
Non-related 215,436 154,724
Related parties 173,228 172,216
Other noncurrent liabilities 61,640 55,841
Commitments and contingencies
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 34,083,706 and
33,990,707 shares, respectively 143,395 143,077
Warrants 6,074 6,074
Retained earnings 73,934 74,321
Deferred compensation expense, net (372) (635)
Treasury shares, at cost, 7,551 shares (59) (59)
Accumulated other comprehensive loss (6,011) (6,011)
--------- ---------
Total shareholders' equity 216,961 216,767
--------- ---------
Total liabilities and shareholders' equity $ 980,909 $ 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 Six months ended
--------------------------- ---------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---- ---- ---- ----
Net sales, excluding sales of
licensed departments $ 631,654 $ 604,594 $ 1,277,954 $ 1,193,126
Cost of sales (372,088) (368,228) (758,955) (740,040)
----------- ----------- ----------- -----------
Gross profit 259,566 236,366 518,999 453,086
Selling, general and administrative
expenses (249,261) (234,885) (503,465) (464,919)
License fees and other income 1,566 1,291 3,123 2,792
----------- ----------- ----------- -----------
Operating profit (loss) 11,871 2,772 18,657 (9,041)
Interest expense, net
Non-related (3,078) (2,102) (5,858) (6,337)
Related parties (6,836) (6,957) (13,451) (13,312)
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,957 (6,287) (652) (28,690)
(Provision) benefit for income taxes (797) 2,639 265 11,869
----------- ----------- ----------- -----------
Net income (loss) $ 1,160 $ (3,648) $ (387) $ (16,821)
=========== =========== =========== ===========
Basic and diluted income (loss) per share:
Basic $ 0.03 $ (0.11) $ (0.01) $ (0.50)
Diluted $ 0.03 $ (0.11) $ (0.01) $ (0.50)
----------- ----------- ----------- -----------
Shares used in per share calculations:
Basic 33,903 33,720 33,882 33,716
Diluted 37,094 33,720 33,882 33,716
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, FEBRUARY 1, 2003 33,913 8 $143,183 $6,074 $78,767 $(981) $(59) $(5,820) $221,164
Net loss (16,821) (16,821)
Exercise of stock options 7
Amortization of deferred
compensation expense 193 193
Net unrealized gain on
derivative instruments,
net of taxes of $413 620 620
------ - -------- ------ ------- ----- ---- ------- --------
BALANCE, AUGUST 2, 2003 33,920 8 $143,183 $6,074 $61,946 $(788) $(59) $(5,200) $205,156
====== = ======== ====== ======= ===== ==== ======= ========
BALANCE, JANUARY 31, 2004 33,991 8 $143,077 $6,074 $74,321 $(635) $(59) $(6,011) $216,767
Net loss (387) (387)
Exercise of stock options 109 422 422
Forfeiture of
restricted shares (16) (104) 104
Amortization of deferred
compensation expense 159 159
------ - -------- ------ ------- ----- ---- ------- --------
BALANCE, JULY 31, 2004 34,084 8 $143,395 $6,074 $73,934 $(372) $(59) $(6,011) $216,961
====== = ======== ====== ======= ===== ==== ======= ========
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)
Six months ended
-----------------------
July 31, August 2,
2004 2003
-------- ---------
Cash flows from operating activities:
Net loss $ (387) $(16,821)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of debt discount and issuance costs 3,158 3,009
Amortization of deferred compensation 159 193
Depreciation and amortization 25,619 25,796
Deferred income taxes and other noncurrent liabilities (5,327) (7,862)
Loss on disposal of assets 726 279
Change in working capital, assets and liabilities:
Receivables (4,951) 2,724
Inventories (97,209) (87,369)
Prepaid expenses and other assets (13,771) 6,189
Accounts payable 48,676 42,303
Accrued expenses 300 (23,362)
-------- --------
Net cash used in operating activities (43,007) (54,921)
-------- --------
Cash flows from investing activities:
Capital expenditures (30,800) (23,504)
Proceeds from sale of assets 62 13
Tradename acquisition (4,037)
Proceeds from lease incentives 5,716 3,684
-------- --------
Net cash used in investing activities (29,059) (19,807)
-------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations
and other debt (416) (411)
Net increase in revolving credit facility 61,000 96,000
Debt issuance costs (438)
Proceeds from exercise of stock options 422
-------- --------
Net cash provided by financing activities 60,568 95,589
-------- --------
Net (decrease) increase in cash and equivalents (11,498) 20,861
Cash and equivalents, beginning of period 14,226 11,059
-------- --------
Cash and equivalents, end of period $ 2,728 $ 31,920
======== ========
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 July 31, 2004, there
are a total of 116 Value City Department Stores located principally in the
Midwestern, Eastern and Southern states, 158 DSW stores located throughout
the United States and 24 Filene's Basement stores located primarily in
major metropolitan areas. DSW also supplies, under supply arrangements, to
197 locations for other non-related retailers in the United States.
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 158 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 unrelated third parties'
shoe departments. The results of substantially all supply agreements are
included with the DSW segment.
FILENE'S BASEMENT. We operate 24 Filene's Basement stores with 18 of the
total stores located in the Boston, New York City and Washington, D.C.
metropolitan areas. 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 unaudited interim financial statements should be read in
conjunction with the 2003 Annual Report on Form 10-K.
In the opinion of management, the unaudited interim financial statements
reflect all adjustments consisting of only normal recurring adjustments,
which are 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 six months ended July 31, 2004, the
"Leslie Fay" tradename for approximately $4.0 million. The anticipated
life of the amortizing asset has been initially assigned 15 years.
4. LONG-TERM OBLIGATIONS
During July, 2004 the Company extended the terms of both the $350 million
Revolving Credit Agreement and the $100 million Term Loans by one year.
The Revolving Credit Agreement and the Term Loans originally set to expire
on June 11, 2005, have been extended through June 11, 2006, under
substantially the same terms and conditions.
5. PENSION BENEFIT PLANS
The Company has three qualified defined benefit pension plans assumed at
the time of previous acquisitions. 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. Contributions 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.
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table shows the components of net periodic benefit cost for
the three and six months ended July 31, 2004 and August 2, 2003:
Three months ended Six months ended
-------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
------- ---------- ------- ---------
(in thousands)
Service cost $ 10 $ 8 $ 21 $ 17
Interest cost 351 323 701 646
Expected return on plan assets (359) (322) (718) (643)
Amortization of transition asset (10) (18) (19) (37)
Amortization of net loss 145 149 290 298
----- ----- ----- -----
Net periodic benefit cost $ 137 $ 140 $ 275 $ 281
----- ----- ----- -----
The Company had anticipated contributing approximately $1.5 million in
fiscal 2004 to meet minimum funding requirements. In April 2004, the
Company contributed approximately $1.6 million.
6. 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 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.
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$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.
7. EARNINGS PER SHARE
Basic earnings per share are based on the net income (loss) and a simple
weighted average of common shares outstanding. Diluted earnings per share
reflects the potential dilution of common shares, related to outstanding
stock options, Stock Appreciation Rights (SARS) and warrants, calculated
using the treasury stock method and convertible debt calculated using the
if-converted method. The numerator for the diluted earnings per share
calculation is the net income (loss) adjusted to remove the effect of
interest, adjusted for tax, on the convertible debt.
Three months ended Six months ended
------------------------------- ---------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
------- ---------- ------- ---------
(in thousands)
Weighted average shares outstanding 33,903 33,720 33,882 33,716
Assumed exercise of dilutive SARS 134 -- -- --
Assumed exercise of dilutive warrants 1,208 -- -- --
Assumed exercise of dilutive stock options 1,849 -- -- --
------ ------ ------ ------
Number of shares for computation of
dilutive earnings per share 37,094 33,720 33,882 33,716
------ ------ ------ ------
For the three months ended July 31, 2004 all potentially dilutive
convertible debt was anti-dilutive. For the three months ended August 2,
2003 and the six months ended July 31,
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2004 and August 2, 2003 all potentially dilutive instruments: stock
options, SARS, warrants and convertible debt, were anti-dilutive.
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 pro
vides 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 July 31, 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
The balance sheet caption accumulated other comprehensive loss of $6.0
million at July 31, 2004 and January 31, 2004, relates to the minimum
pension liability, net of income tax.
The Company's interest rate swap expired during the six months ended
August 2, 2003 and was not renewed.
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. STOCK BASED COMPENSATION
The Company has various stock-based employee compensation 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."
Three months ended Six months ended
------------------------------ ---------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
------- --------- ------- ----------
(in thousands, except per share amounts)
Net income (loss), as reported $1,160 $(3,648) $ (387) $(16,821)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax (776) (1,280) (1,427) (2,309)
------ ------- ------- --------
Pro forma net income (loss) $ 384 $(4,928) $(1,814) $(19,130)
------ ------- ------- --------
Income (loss) per share:
Basic and diluted as reported $0.03 $(0.11) $ (0.01) $ (0.50)
Basic and diluted pro forma $0.01 $(0.15) $ (0.05) $ (0.57)
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 six months ended July 31, 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 it was more likely than not 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-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities is
presented below:
Six months ended
------------------
July 31, August 2,
2004 2003
------- --------
(in thousands)
Cash paid during the period for:
Interest
Non-related parties $ 4,339 $ 8,898
Related parties 11,828 11,289
Income taxes $10,365 $ 1,558
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 profit (loss),
which is defined as income before interest expense and income taxes.
The tables below present segment income statement information for the
three and six months ended July 31, 2004 and August 1, 2003 and balance
sheet information as of July 31, 2004 and January 31, 2004.
Filene's
Value City DSW Basement Total
---------- --------- -------- -----
(in thousands)
Three months ended July 31, 2004
Net sales $317,589 $228,424 $85,641 $631,654
Operating profit (loss) (2,509) 14,990 (610) 11,871
Capital expenditures 4,954 7,659 4,169 16,782
Depreciation and amortization 6,482 5,138 1,785 13,405
Filene's
Value City DSW Basement Total
---------- --------- -------- -----
(in thousands)
Three months ended August 2, 2003
Net sales $336,522 $192,338 $75,734 $604,594
Operating profit (loss) (9,932) 11,147 1,557 2,772
Capital expenditures 9,452 2,023 1,182 12,657
Depreciation and amortization 8,503 3,053 1,443 12,999
-13-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Filene's
Value City DSW Basement Total
---------- --------- -------- -----
(in thousands)
Six months ended July 31, 2004
Net sales $656,685 $455,701 $165,568 $1,277,954
Operating profit (loss) (6,163) 28,215 (3,395) 18,657
Capital expenditures 9,068 13,217 8,515 30,800
Depreciation and amortization 13,048 9,207 3,364 25,619
As of July 31, 2004
Identifiable assets 509,269 324,443 147,197 980,909
Filene's
Value City DSW Basement Total
---------- --------- -------- -----
(in thousands)
Six months ended August 2, 2003
Net sales $679,416 $375,389 $138,321 $1,193,126
Operating (loss) profit (22,614) 13,976 (403) (9,041)
Capital expenditures 13,478 8,216 1,810 23,504
Depreciation and amortization 16,929 5,930 2,937 25,796
As of January 31, 2004
Identifiable assets 477,213 271,205 115,527 863,945
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.
-14-
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 insur-
-15-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ance 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 $37.7 million on
July 31, 2004 and $34.2 million at January 31, 2004.
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.
-16-
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 six months ended July 31, 2004 we recorded an impairment of
$0.7 million related to the Value City segment for store assets. For
the period ended August 2, 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 July 31,
2004, the actuarial assumptions of our plans have 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
-17-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
purchases. The "Reward Your Style" program is designed to promote
customer 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 six
months. We accrue the estimated costs of the anticipated redemptions
of the discount earned at the time of the initial purchase and
charge such costs to selling, general and administrative expense
based on historical experience. The estimates of the costs
associated with the loyalty program require us to make assumptions
related to customer purchase levels and redemption rates. Accrued
liability as of July 31, 2004 and January 31, 2004 was $3.7 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.
-18-
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) Six months ended(1)
------------------------- -------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
------- --------- ------- ----------
Net sales, excluding sales of
licensed departments 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of sales (58.9) (60.9) (59.4) (62.0)
----- ----- ----- -----
Gross profit 41.1 39.1 40.6 38.0
Selling, general and administrative
expenses (39.5) (38.8) (39.4) (39.0)
License fees and other income 0.2 0.2 0.3 0.2
----- ----- ----- -----
Operating profit (loss) 1.8 0.5 1.5 (0.8)
Interest expense, net (1.5) (1.5) (1.5) (1.6)
----- ----- ----- -----
Income (Loss) before income taxes 0.3 (1.0) (0.0) (2.4)
(Provision) Benefit for income taxes (0.1) 0.4 0.0 1.0
----- ----- ----- -----
Net income (loss) 0.2% (0.6)% (0.0)% (1.4)%
----- ----- ----- -----
(1) Because of the seasonal nature of our retail business cycle, the results of
operations for the 13 weeks and 26 weeks ended July 31, 2004 and August 2, 2003
(which do not include the back-to-school or Christmas holiday season) are not
necessarily indicative of such results for the fiscal year.
THREE MONTHS ENDED JULY 31, 2004 COMPARED TO THREE MONTHS ENDED AUGUST 2, 2003
Net sales increased $27.1 million, or 4.5%, from $604.6 million to $631.7
million. Comparable store sales decreased 1.7% and were by segment:
Three months ended
------------------------------
July 31, 2004 August 2, 2003
------------- --------------
Value City (5.6)% 0.6%
DSW 2.8 4.5
Filene's Basement 5.1 0.3
--- ---
Total (1.7)% 1.6%
--- ---
Value City comparable stores sales for the quarter decreased 5.6% due to a
decline in customer traffic against the comparable period partially offset by
higher average unit retail. DSW and Filene's Basement sales increased for the
same period due to increases in customer traffic and average unit retail.
Value City's segment sales decreased $18.9 million to $317.6 million, a 5.6%
comparable store sales decrease in the quarter. The decrease in comparable sales
is comprised of an increase in
-19-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
non-apparel hardlines of 0.1%, a decrease in apparel of 7.7% and a decrease of
13.9% in Jewelry. The merchandise categories of mens, ladies and childrens had
decreases of 6.4%, 9.4% and 6.0%. Shoe sales in the Value City segment were a
negative 4.7% in the quarter.
DSW segment sales were $228.4 million, an 18.8% increase in the quarter which
includes a net increase of 27 stores over the comparable period along with the
comparable store sales increase of 2.8%. The DSW operations in the segment
merchandise categories of womens and athletic areas had increases of 1.2% and
6.8% while the mens area had a decrease of 0.2%. During the quarter we had a
net increase of 43 leased shoe departments covered under various supply
agreements.
Filene's Basement sales increased 13.1% in the quarter to $85.6 million which
includes a net increase of 3 stores over the prior year's period and a
comparable store sales increase of 5.1%. Merchandise categories of mens, ladies
and childrens had comparative increases of 8.2%, 4.0% and 28.8%, respectively.
The shoe and home categories had increases of 6.9% and 17.3%, respectively.
Jewelry sales in the segment decreased 2.8%.
Total gross profit increased $23.2 million to $259.6 million. Gross profit, as a
percentage of sales, increased to 41.1% compared to 39.1% for the prior year.
The increase in our overall margin rate is attributable to higher initial
markups for all retail business operations. The Value City segment improved
average unit retail, initial retail markup and reduced markdowns to obtain the
gross margin increase. The continued improvement in comparative sales in DSW and
Filene's Basement segments reduced the need for promotional markdowns during the
period. Gross profit, as a percent of sales by segment in the second quarter,
was:
Three months ended
--------------------------------------
July 31, 2004 August 2, 2003
------------- --------------
Value City 40.9% 39.2%
DSW 43.3 41.0
Filene's Basement 35.9 33.7
---- ----
Total 41.1% 39.1%
---- ----
Selling, general and administrative expenses ("SG&A") increased $14.4 million
from $234.9 to $249.3 million. Approximately $1.4 million is associated with
the pre-opening expenses incurred during the three months ended July 31, 2004.
Total SG&A expense associated with stores opened subsequent to August 2, 2003
and through July 31, 2004 was $12.8 million and represents approximately 88.9%
of the increase in SG&A expense. As a percentage of sales SG&A was 39.5%
compared to 38.8% in the comparable quarter last year. SG&A as a percent of
sales by segment in the second quarter was:
-20-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended
----------------------------------
July 31, 2004 August 2, 2003
------------- --------------
Value City 42.0% 42.4%
DSW 36.8 35.4
Filene's Basement 37.1 32.1
---- ----
Total 39.5% 38.8%
---- ----
License fees and other income were $1.6 million and $1.3 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 $11.9 million from $2.8 million and increased as a
percentage of sales from 0.5% to 1.8%.
Net interest expense for the quarter increased $0.9 million to $9.9 million. The
increase is due primarily to an increase in our weighted average borrowing rate
and an increase of $9.3 million in average borrowings from last year to this
year.
The effective tax rate for the three months ended July 31, 2004 was 40.7% as
compared to 42.0% for the three months ended August 2, 2003.
SIX MONTHS ENDED JULY 31, 2004 COMPARED TO SIX MONTHS ENDED AUGUST 2, 2003
Net sales increased $84.8 million, or 7.1% from $1,193 million to $1,278
million. Comparable stores sales for the six-month period were negative for
Value City and positive for DSW and Filene's Basement. Comparable store sales by
segment were:
Six months ended
----------------------------------
July 31, 2004 August 2, 2003
------------- --------------
Value City (3.3)% (1.8)%
DSW 6.6 0.4
Filene's Basement 10.1 (3.8)
---- ----
Total 1.2% (1.5)%
---- ----
Value City's segment sales were $656.7 million, a 3.3% decrease in the six-month
period. Value City's non-apparel comparable sales decreased 0.3% while apparel
sales decreased 4.7%. Non-apparel sales were positively impacted by increases in
domestics and housewares up 5.9% and 0.8%, respectively. Of the three apparel
divisions mens and ladies had negative comparable sales for the six-month
period of 4.1% and 7.1% while childrens increased 0.7%. The customer traffic
decrease from the comparable six months a year ago is partially offset by
average unit retail increase.
-21-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DSW segment sales were $455.7 million, a 21.4% increase in the six-month period,
which includes a net increase of 27 DSW stores and the net increase of 43 leased
locations. During the six month period comparative store sales increased 6.6%.
DSW increases in the six month period for womens, mens and athletic were 6.4%,
1.2% and 8.1%, respectively.
Filene's Basement segment sales were $165.6 million, a 19.7% increase in the
six-month period. Merchandise categories of mens, ladies and childrens had
comparative increases of 11.5%, 7.0% and 33.3%, respectively, while other
categories of shoes and home had increases of 14.1% and 12.5%, respectively.
During the six month period comparative store sales increased 10.1%.
Gross profit increased by $65.9 million to $519.0 million, from $453.1 million,
and increased as a percentage of sales from 38.0% to 40.6%. The Value City
segment improved average unit retail, initial retail markup and reduced
markdowns to obtain the gross margin improvement. The positive sales, higher
initial markups and markdown management in DSW and Filene's Basement segments
positively impacted the gross margin for these segments in the six month period
comparison. Total gross profit increased 14.5%. Gross profit, as a percent of
sales by segment in the six-month period, was:
Six months ended
--------------------------------------
July 31, 2004 August 2, 2003
-------------- --------------
Value City 39.9% 37.9%
DSW 43.4 39.9
Filene's Basement 35.7 33.3
---- ----
Total 40.6% 38.0%
---- ----
Selling, general and administrative expenses ("SG&A") increased $38.6 million,
from $464.9 million to $503.5 million, and increased as a percentage of sales
from 39.0% to 39.4%. This increase includes $19.4 million attributable to new
stores and leased shoe departments in operation at DSW and $ 5.0 million
attributable to new stores in the Filene's Basement division. The increase in
SG&A as a percentage of sales is due in part to additional marketing efforts to
promote sales and create brand awareness. SG&A as a percent of sales by segment
in the six-month period was:
Six months ended
---------------------------------
July 31, 2004 August 2, 2003
-------------- --------------
Value City 41.2% 41.5%
DSW 37.3 36.2
Filene's Basement 38.2 34.1
---- ----
Total 39.4% 39.0%
---- ----
License fees and other operating income increased $0.3 million, from $2.8
million to $3.1 million, and increased as a percentage of sales to 0.3%. 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.
-22-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating profit (loss) increased to a profit of $18.7 million from a loss of
$9.0 million and improved as a percentage of sales from a loss of 0.8% to a
profit of 1.5%. The operating profit increase is attributable to the increased
margin partially offset by increased expenses.
Net interest expense for the six-month period decreased $0.3 million to $19.3
million. The decrease is due primarily to a decrease in our weighted average
borrowing rate offset by an increase of $21.5 million in average borrowings from
last year to this year.
The effective tax rate for the six months ended July 31, 2004 is 40.6% versus
41.4% for the six months ended August 2, 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 $293.2 million and $270.5 million at July 31, 2004 and
August 2, 2003, respectively. Current ratios at those dates were 1.9 and 1.8,
respectively. Net cash used in operations was $43.0 million in year-to-date
fiscal 2004 as compared to $54.9 million in year-to-date fiscal 2003.
Net cash used for capital expenditures was $30.8 million and $23.5 million for
the six months ended July 31, 2004 and August 2, 2003, respectively. During the
six months ended July 31, 2004, capital expenditures included $16.7 million for
new stores, $9.7 million for improvements in existing stores and $4.4 million
for information technology equipment upgrades and new systems. In addition to
the capital expenditures during the six 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 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,
-23-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 was amended in the current quarter
to expire on June 11, 2006. At July 31, 2004 and January 31, 2004, $96.5 million
and $137.7 million were available under the Revolving Credit Facility,
respectively. Direct borrowings aggregated $186.0 million and $125.0 million at
July 31, 2004 and at January 31, 2004, respectively, while $32.5 million and
$23.4 million letters of credit were issued and outstanding, 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 as amended is June
11, 2006.
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 six months ended July 31, 2004 and for the year ended January 31,
2004, we elected to pay interest in cash.
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.
-24-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 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
During the current year, we have continued to enter into various construction
commitments, including capital items to be purchased for projects that were
under construction, or for which a
-25-
RETAIL VENTURES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
lease has been signed. Our obligations under these commitments aggregated
approximately $13.9 million at July 31, 2004. In addition, we signed lease
agreements for new store locations with annual rent of approximately $18.7
million and average terms of ten years. Associated with the new lease
agreements, we will receive approximately $8.1 million of tenant improvement
allowances which will offset future capital expenditures.
There are no "off-balance sheet" arrangements as of July 31, 2004 as that term
is described by the Securities and Exchange Commission.
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 July 31, 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.
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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 July 31, 2004, direct borrowings aggregated $186
million and an additional $33 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, 2006 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 on our variable rate
debt outstanding for the six months ended July 31, 2004, net of income 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.
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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.
(a) The Company held its 2004 Annual Meeting of Shareholders on June 9,
2004. Holders of 31,677,660 Common Shares of the Company were
present representing 93.7 % of the Company's 33,817,313 Common
Shares issued and outstanding and entitled to vote were at the
meeting.
(b) The following persons were elected as members of the Company's Board
of Directors to serve until the annual meeting following their
election or until their successors are duly elected and qualified.
Each person received the number of votes for or the number of votes
with authority withheld indicated below.
Name Votes For Votes Withheld
---- --------- --------------
Henry L. Aaron 31,546,151 131,509
Ari Deshe 31,333,502 344,158
Jon P. Diamond 31,338,651 339,009
Elizabeth M. Eveillard 31,265,502 412,158
Jay L. Schottenstein 31,339,059 338,601
Harvey L. Sonnenberg 31,266,101 411,559
James L. Weisman 31,270,852 406,808
Item 5. OTHER INFORMATION. Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Part A Index to Exhibits on page 31.
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).
A current report on Form 8-K, dated July 29, 2004, was
filed with the Securities and Exchange Commission on
July 29, 2004 (Items 7 and 12).
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A current report on Form 8-K, dated September 8, 2004,
was filed with the Securities and Exchange Commission on
September 8, 2004 (Items 2.02 and 9.01).
-29-
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: September 8, 2004 By: /s/ James A. McGrady
--------------------------------------
James A. McGrady,
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary of Retail
Ventures, Inc.
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INDEX TO EXHIBITS
Exhibit Number Description
10.1 Second Amendment to Loan and
Security Agreement dated July 29, 2004
10.2 Second Amendment to Financing
Agreement dated July 29, 2004
31.1 Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
32.1 Section 1350 Certification of
Chief Executive Officer
32.2 Section 1350 Certification of
Chief Financial Officer
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