Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DSW INC.
(Exact name of registrant as specified in its charter)
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Ohio
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5661
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31-0746639
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(State or Other jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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4150 East
5
th
Avenue
Columbus, Ohio 43219
(614) 237-7100
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrants Principal Executive
Offices)
Julia A. Davis
General Counsel
3241 Westerville Road
Columbus, Ohio 43224
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
Copies to:
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Robert M. Chilstrom
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
(212) 735-3000
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Steven J. Slutzky
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
(212) 909-6000
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effective date of
this registration statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box.
o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of earlier effective registration statement for
the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
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If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box.
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of
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Proposed Maximum
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Amount of
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Securities to be Registered
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Offering Price(1)(2)
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Registration Fee
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Class A Common Shares, without par value
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$185,000,000
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$21,775
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(1)
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Includes shares subject to underwriters option to purchase
additional shares.
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(2)
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Estimated solely for purposes of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of
1933.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities, and we are not soliciting offers to buy these
securities, in any state or jurisdiction where the offer or sale
is not permitted.
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Subject to completion, dated
March 14, 2005.
PROSPECTUS
Shares
Class A Common Shares
This is our initial public offering of Class A Common
Shares. We are
offering shares.
No public market currently exists for our shares.
We have two classes of authorized Common Shares, Class A
Common Shares, which are offered hereby, and Class B Common
Shares, all of which are owned by Retail Ventures, Inc., or
Retail Ventures. Holders of Class A Common Shares generally
have identical rights to holders of Class B Common Shares,
except that holders of Class A Common Shares are entitled
to one vote per share on all matters to be voted on by
shareholders, while holders of Class B Common Shares are
entitled to eight votes per share on all matters to be voted on
by shareholders, voting together with the holders of the
Class A Common Shares as a single class.
Prior to this offering, Retail Ventures owned all our capital
stock. Upon completion of this offering, without giving effect
to any exercise of the underwriters option to purchase
additional shares, Retail Ventures will own all our outstanding
Class B Common Shares, which will represent
approximately of
our outstanding Common Shares, and
approximately %
of the combined voting power of our outstanding Common Shares.
After this offering, Retail Ventures will continue to control us.
We expect to apply for listing of our Class A Common Shares
on the New York Stock Exchange under the symbol DSW.
We currently expect that the initial public offering price will
be between
$ and
$ per
share.
Investing in our Class A Common Shares involves risks.
See Risk Factors beginning on page 10.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discounts
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$
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$
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Proceeds to DSW Inc. (before expenses)
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$
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$
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We have granted the underwriters a 30-day option to purchase up
to an aggregate
of additional
Class A Common Shares from us at the public offering price
less the underwriting discount if the underwriters sell more
than Class
A Common Shares.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
Lehman Brothers Inc., on behalf of the underwriters, expects to
deliver the Class A Common Shares on or
about ,
2005.
Lehman
Brothers
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CIBC World Markets
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Johnson Rice & Company L.L.C.
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2005
TABLE OF CONTENTS
Until ,
2005 (25 days after the commencement of this offering), all
dealers effecting transactions in our Class A Common
Shares, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the
dealers obligations to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
ABOUT THIS PROSPECTUS
In making your investment decision, you should rely only on the
information contained in this prospectus. We have not, and the
underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where an offer or sale
is not permitted. You should assume that the information
appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial
condition, results of operations and prospects may have changed
since that date.
PROSPECTUS SUMMARY
This summary highlights only selected information contained
elsewhere in this prospectus. This summary does not contain all
the information you should consider before investing in our
Class A Common Shares. Before investing in our Class A
Common Shares, you should read this entire prospectus carefully,
including the Risk Factors and Forward-Looking
Statements sections and the consolidated financial
statements and notes to those consolidated financial statements
beginning on page F-1.
In this prospectus, unless the context indicates otherwise,
we, us, our and
DSW and similar terms refer to DSW Inc. and its
consolidated subsidiary, DSW Shoe Warehouse, Inc. or
DSWSW. References in this prospectus to Common
Shares include both our Class A Common Shares,
without par value, referred to as the Class A Common
Shares, and Class B Common Shares, without par value,
referred to as the Class B Common Shares. In
this prospectus, our fiscal years ended January 29, 2000,
February 3, 2001, February 2, 2002, February 1,
2003, January 31, 2004 and January 29, 2005 are
referred to as fiscal 1999, 2000, 2001, 2002, 2003 and 2004,
respectively. Our fiscal year consists of 52 or 53 weeks
and ends on the Saturday closest to January 31 in each
year. Fiscal 2000 consisted of 53 weeks, and all other
years shown consisted of 52 weeks. Our consolidated
financial results as part of Retail Ventures contained in this
prospectus may not reflect what our financial results would have
been had we been a stand-alone company during the periods
presented.
OUR BUSINESS
Overview
DSW is a leading U.S. specialty branded footwear retailer
operating 172 DSW stores in 32 states as of January 29,
2005. We offer a wide selection of brand name and designer
dress, casual and athletic footwear for women and men. Our
typical customers are brand-, quality- and style-conscious
shoppers who have a passion for footwear and accessories. Our
core focus is to create a distinctive store experience that
satisfies both the rational and emotional shopping needs of our
customers by offering them a vast, exciting selection of
in-season styles combined with the convenience and value they
desire. We believe this combination of selection, convenience
and value differentiates us from our competitors and appeals to
consumers from a broad range of socioeconomic and demographic
backgrounds.
Since its inception, DSW has evolved into a distinctive,
consumer-friendly retail concept that allows customers to
personalize their shopping experience by offering a sea of
shoes that are accessible, easy-to-shop, and fulfill a
broad range of style and fashion desires. We cater to customers
who take pleasure in the thrill of the hunt for the
perfect shoe and value the shopping experience itself as an
enjoyable pastime. Typical DSW stores are approximately
25,000 square feet, with over 85% of total square footage
used as selling space. Over 30,000 pairs of shoes in more than
2,000 styles are displayed on the selling floor of most of
our stores, compared to a significantly smaller product offering
at typical department stores. Our stores feature self-service
fixtures that allow customers to view, touch, and try on the
product without relying on salespeople to check availability.
Our locations have clear signage, and well-trained sales
associates are available to assist customers as desired. New
footwear merchandise is organized by style on the main floor,
and clearance goods are organized by size in the rear of the
store. Accessories and impulse items are featured at the front.
The store layout allows customers who do not have time for
relaxed browsing to swiftly identify the shoe styles they are
seeking and shop in a targeted, time-efficient manner.
Our goal is to further strengthen our position as a leading
specialty branded footwear retailer of choice in the United
States. For the twelve months ended October 30, 2004, we
generated $915.3 million in net sales and
$53.4 million in operating profit. During the same period,
we sold over 22.9 million pairs of shoes. Over the
four-fiscal-year period ended January 31, 2004, we have
grown our DSW store base, net sales and operating profit at
compound annual rates of 25.1%, 33.8% and 38.3%, respectively.
1
Our Competitive Strengths
We believe that our leading market position is driven by our
competitive strengths the breadth of our branded
product offerings, our distinctive and convenient store layout,
the value proposition offered to our customers and our
demonstrated ability to deliver profitable growth on a
consistent basis. Over the past few years, we have broadened our
merchandise assortment, honed our retail operating model and
continued our dedication to providing first-rate quality
products at attractive prices. We believe that we will continue
to improve our ability to leverage these competitive strengths
and to attract and retain talented managers and merchandisers.
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The Breadth of Our Product Offerings
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Our goal is to excite our customers with a sea of
shoes that fulfill a broad range of style and fashion
needs. We believe that our typical store offers the largest
selection of brand name and designer merchandise of any footwear
retailer or typical department store in the nation. We carry
primarily in-season footwear found in specialty and department
stores and branded make-ups (shoes made exclusively for a
retailer). We also offer a complementary selection of handbags,
hosiery and other accessories that appeal to our brand- and
fashion-conscious customers. Our strategy is designed to ensure
that a broad and consistent selection of merchandise is
available at all times. Our goal is to provide our customers
with the benefits of what we refer to as trip
assurance offering a wide selection of
in-season branded merchandise every day that increases our
customers likelihood of finding the right shoe at the
right price each time they visit our stores.
We continually strive to improve the quality and breadth of our
vendor relationships. Our buyers have established strong,
mutually beneficial relationships with more than 300 vendors.
Our suppliers consider us to be an attractive retail channel for
their branded offerings due to both the scale and geographic
reach of our store base and our willingness to buy merchandise
across a broad selection of styles.
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Our Distinctive and Convenient Store Layout
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Our store layout and visual merchandising techniques provide a
convenient shopping process, regardless of the type of
shoe-buying experience our customers desire on a particular trip.
Thrill of the Hunt.
We cater to the passionate shoe
enthusiast and indulge customers who love to shop. Customers
take pleasure in the thrill of the hunt as they scan
our wide product offering in search of the products that best
suit their needs. All our merchandise is displayed on the
selling floor with self-service fixtures to enable customers to
view and touch the merchandise without feeling rushed. Although
all DSW stores are designed for self-service shopping, sales
associates are available to help customers locate merchandise
and to assist as needed.
Easy Shopping Experience.
DSW also caters to shoppers who
are time-constrained and come to our stores knowing exactly what
they want. Our wide selection ensures that they are more likely
to find styles and sizes they are seeking at DSW than at other
shoe retailers. Our self-service concept empowers our customers
to shop quickly and easily because they do not have to rely on a
salesperson to check for sizes and styles. We organize most of
our stores on a single level, which allows customers to view the
entire store and product offering as they enter and move quickly
to the area where their desired styles are located. Interiors
are well-lit with informative signage, and spacious aisles allow
ease of movement throughout the store.
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The Value Proposition Offered to Our Customers
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Through our buying organization, we are able to provide our
customers with high-quality, in-season fashions at everyday
prices that we believe are competitive with the typical sale
price found at specialty retailers and department stores. We
employ a consistent pricing strategy that typically provides our
customers with the same price on our merchandise from the day it
is received until it goes into our planned clearance rotation.
We believe that customers value our pricing strategy as it
provides them with what we refer to as value
assurance knowing that no matter when our
customers shop with us, they are typically assured of receiving
our best value price on whatever merchandise they purchase.
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In order to provide additional value to shoe enthusiasts and
other regular customers, we developed a customer loyalty program
called Reward Your Style. This program offers
additional savings to frequent shoppers and encourages repeat
sales. As of January 29, 2005, over 5.5 million
members enrolled in the Reward Your Style loyalty
program had purchased merchandise in the previous two fiscal
years, up from approximately 4.5 million members as of
January 31, 2004. The program provides us with valuable
market intelligence and purchasing information regarding our
most frequent customers, and we believe that it has successfully
increased our customers shopping frequency as well. In
addition, in fiscal 2004, our Reward Your Style
customers spent an average of 19% more per purchase than
customers who are not enrolled in the program.
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Demonstrated Ability to Consistently Deliver Profitable
Growth
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We believe that the profitable growth we have achieved in the
past is attributable to our operating model and
managements focus on store-level profitability and
economic payback. Over the four-fiscal-year period ended
January 31, 2004, our net sales and operating profit have
grown at compound annual rates of 33.8% and 38.3%, respectively.
For the thirty-nine weeks ended October 30, 2004, we
generated $729.4 million of net sales and
$46.2 million of operating profit, or 6.3% of net sales. In
addition, for all our new annual store classes since 1996, we
have achieved positive operating cash flow within two years of
opening.
Growth Strategy
We plan to continue to strengthen our position as a leading
specialty branded footwear retailer by pursuing the following
three primary strategies for growth in sales and
earnings expanding our store base, driving sales
through enhanced merchandising and leveraging our operating
model.
We believe our specialty retail concept has broad national
appeal and provides substantial opportunity for new store
expansion. Over the five-fiscal-year period ended
January 29, 2005, we have rapidly expanded our store base
by opening 115 DSW stores, including 31 new stores in fiscal
2004. We plan to open approximately 30 stores in each fiscal
year from fiscal 2005 through fiscal 2009 and believe that
opening stores at this rate will not compromise our new store
economics. For stores scheduled to open in fiscal 2005, as of
January 29, 2005, we have signed leases for 23 new stores
and two store relocations.
Site selection.
In general, our evaluation of potential
new stores focuses on store size, configuration, location and
lease terms. We target high-traffic real estate locations, with
new stores sized as appropriate to fit market potential. We
intend, over time, to cluster our stores in strategic
metropolitan areas to enhance name recognition, lower average
per store advertising costs and achieve economies of scale in
management and distribution.
New store model.
We typically devote between four and six
weeks from the time we take possession of a store to prepare for
its opening. During fiscal 2004 the average investment required
to open a typical new DSW store was approximately
$1.7 million per store, of which gross inventory typically
accounted for about $880,000.
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Driving Sales Through Enhanced Merchandising
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We intend to increase the number of customer transactions and
average transaction value by continually refining our
merchandise mix and undertaking other operating initiatives. Our
merchandising group constantly monitors current fashion trends
as well as historical sales trends to identify popular styles
and styles that may become popular in the upcoming season, and
has a flexible incremental buying process that enables us to
order styles frequently throughout the year.
Expanding vendor relationships.
We have established
strong vendor relationships that allow us to gain favorable
access to high quality, brand name merchandise at attractive
prices. These favorable relationships also allow us to take
advantage of opportunistic in-season merchandise that may be
offered to us from time to
3
time. We intend to capitalize on the success of our existing
vendor relationships as well as identify and build new supply
channels, in particular to enhance our offering of high-end
designer brands.
Increasing sales within existing merchandise categories.
In order to further increase sales within our existing
womens, mens and athletic shoe categories, we aim to
increase the quality and breadth of existing vendor offerings
and to keep our product mix fresh and on target by continually
testing new fashions and actively monitoring sell-through rates
in our stores. Additionally, we employ marketing initiatives,
including broad advertising campaigns, the Reward Your
Style loyalty program and sales of gift cards to encourage
repeat visits and attract new customers.
Extending into new product categories.
While shoes are
the main focus of DSW, we believe offering a complementary
assortment of handbags, hosiery and other accessories is an
important driver of profitable sales. We will continue to
explore new, related product categories that we believe could
enhance sales of footwear.
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Leveraging Our Operating Model
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As we grow our business and fill in markets to their full
potential, we believe we will continue to improve our
profitability by leveraging our cost structure, particularly in
the areas of advertising, regional management, distribution and
overhead functions. Additionally, we intend to continue
investing in our infrastructure to improve our operating and
financial performance. Most significantly, we believe continued
investment in information systems will enhance our efficiency in
areas such as merchandise planning and allocation, inventory
management, distribution and point of sale functions, among
others.
Leased Shoe Department Businesses
As of January 29, 2005, we operated a total of 202 leased
shoe departments for three non-affiliated retailers. We operated
153 leased shoe departments for Stein Mart, Inc., or Stein Mart,
48 for Gordmans, Inc., or Gordmans, and one for Frugal
Fannies Fashion Warehouse, or Frugal Fannies. As of
January 29, 2005, we also operated 22 leased shoe
departments for Filenes Basement, Inc., or Filenes
Basement, a wholly-owned subsidiary of Retail Ventures. The
Stein Mart, Gordmans and Filenes Basement relationships
began in July 2002, June 2004 and March 2000, respectively. We
provide the merchandise and supervisory assistance in all leased
shoe department locations, and the retailers provide the sales
associates. For the three non-affiliated retailers, we also
provide display fixtures. As payment, we receive a specified
percentage of net sales. For the thirty-nine weeks ended
October 30, 2004, leased shoe department sales comprised
9.2% of our total sales.
The Transactions
On or about the date of the consummation of this offering, we
intend to complete a series of related repayment and refinancing
transactions, which include the following principal components:
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We expect to be released from our obligations under the Value
City revolving credit facility, and we expect to enter into a
new $150 million five-year secured revolving credit facility.
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We expect to be released from our obligations under the Value
City term loan and senior subordinated convertible loan
facilities.
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We will repay $165 million of intercompany indebtedness
incurred to fund a dividend to Retail Ventures.
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We refer to this series of transactions as the
Transactions. For further discussion of the
Transactions, see The Transactions. For a further
discussion of our indebtedness, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Description of Indebtedness.
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Relationship with Retail Ventures
Prior to the completion of this offering, we will enter into
agreements with Retail Ventures related to the separation of our
business operations from Retail Ventures, including, among
others, a master separation agreement and a shared services
agreement. Many aspects of our business which were fully managed
and controlled by us without Retail Ventures involvement
will continue to operate as they did prior to this offering. We
will continue to manage operations for critical functions such
as merchandise buying, planning and allocation, distribution and
store operations. Under the shared services agreement, which
when signed will be effective as of January 30, 2005, we
will provide services to several subsidiaries of Retail Ventures
relating to planning and allocation support, distribution
services and outbound transportation management, site research,
lease negotiation, store design and construction management.
Retail Ventures will provide us with services relating to import
administration, risk management, information technology, tax,
logistics and inbound transportation management, legal services,
financial services, shared benefits administration and payroll
and will maintain insurance for us and for our directors,
officers and employees. We anticipate that the initial term of
the shared services agreement will expire at the end of fiscal
2007 and will be extended automatically for additional one-year
terms unless terminated by one of the parties. We expect some of
these services to be provided for longer or shorter periods than
the initial term.
Immediately following this offering, without giving effect to
any exercise of the underwriters option to purchase
additional shares, Retail Ventures will control
approximately %
of the voting rights associated with our Common Shares and
approximately %
of the value of our Common Shares. Through its voting control,
Retail Ventures will be able to control decisions regarding any
merger, consolidation, sale of substantially all our assets or
other major corporate transactions, without the support of any
other shareholder.
Retail Ventures has advised us that its current intent is to
continue to hold all the Class B Common Shares owned by it
following this offering, except to the extent necessary to
satisfy obligations under warrants it has granted to certain of
its lenders. All the Class B Common Shares of DSW held by
Retail Ventures will continue to be subject to liens in favor of
these lenders, as well as a lien granted to Value City
Department Stores LLC. For further discussion of these warrant
agreements, see Managements Discussion and Analysis
of Financial Condition and Results of Operations The
DSW Separation, Certain Relationships and Related
Party Transactions Notes, Credit Agreements and
Guarantees and Description of Indebtedness.
Retail Ventures is not subject to any contractual obligation to
retain its controlling interest, except that Retail Ventures has
agreed not to sell or otherwise dispose of any of our Common
Shares for a period of 180 days after the date of this
prospectus without the prior written consent of Lehman Brothers
Inc. on behalf of the underwriters. See
Underwriting. As a result, there can be no assurance
concerning the period of time during which Retail Ventures will
maintain its ownership of our Common Shares following this
offering. For a further discussion of the ongoing relationships
between us and Retail Ventures, and the risks relating to our
relationship with and separation from Retail Ventures, see
Risk Factors Risks Relating to our
Business and Risks Relating to our Relationship with
and Separation From Retail Ventures and Certain
Relationships and Related Party Transactions
Relationships Between Our Company and Retail Ventures.
Our Corporate Information
We were incorporated on January 20, 1969. We opened our
first DSW store in Dublin, Ohio in July 1991. In 1998, Value
City Department Stores, Inc. purchased DSW and affiliated shoe
businesses from Schottenstein Stores Corporation, or SSC, and
Nacht Management, Inc. In December 2004, Retail Ventures
completed a corporate reorganization whereby Value City
Department Stores, Inc., a wholly-owned subsidiary of Retail
Ventures, merged with and into Value City Department Stores LLC,
or Value City, another wholly-owned subsidiary of Retail
Ventures. In turn, Value City transferred all the issued and
outstanding shares of DSW to Retail Ventures in exchange for a
promissory note. In February 2005, we changed our name from
Shonac Corporation to DSW Inc.
Our principal executive offices are located at 4150 East
5
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Avenue, Columbus, Ohio 43219. Our telephone number at that
address is (614) 237-7100. Our website address is
http://www.dswshoe.com. Information on our website is provided
for informational purposes only and should not be considered to
be part of, or incorporated by reference in, this prospectus.
5
OUR CORPORATE STRUCTURE
The following diagram sets forth our corporate structure after
giving effect to the Transactions and this offering.
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(1)
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Immediately following this offering, holders of Class A Common
Shares will own approximately % of
our outstanding Common Shares
and % of the combined voting power
of our outstanding Common Shares
(approximately % of our
outstanding Common Shares and % of
the combined voting power of our outstanding Common Shares if
the underwriters exercise their option to purchase additional
shares in full).
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(2)
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Immediately following this offering, Retail Ventures, which will
hold 100% of our Class B Common Shares, will own
approximately % of our outstanding
Common Shares and % of the
combined voting power of our outstanding Common Shares
(approximately % of our
outstanding Common Shares and % of
the combined voting power of our outstanding Common Shares if
the underwriters exercise their option to purchase additional
shares in full).
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6
THE OFFERING
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Class A Common Shares offered by us in this offering
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shares
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Common Shares outstanding after this offering:
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Class A Common Shares
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shares
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Class B Common Shares
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shares
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Total
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shares
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Use of proceeds
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We intend to use the net proceeds of this offering to repay
$165 million of intercompany indebtedness owed to Retail
Ventures and for working capital and other general corporate
purposes. The intercompany indebtedness was incurred to fund a
dividend to Retail Ventures.
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Dividend policy
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We do not anticipate paying cash dividends on our Common Shares
in the foreseeable future.
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Voting rights
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Holders of Class A Common Shares are entitled to one vote
per share on all matters to be voted on by shareholders, while
holders of Class B Common Shares are entitled to eight
votes per share on all matters to be voted on by shareholders,
voting together with the holders of the Class A Common
Shares as a single class. Immediately following completion of
this offering, Retail Ventures will own all our outstanding
Class B Common Shares.
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Proposed New York Stock Exchange symbol
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We expect to apply for listing on the New York Stock Exchange
under the symbol DSW.
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Risk factors
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See Risk Factors and other information included in
this prospectus for a discussion of factors you should consider
carefully before investing in our Class A Common Shares.
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Unless we specifically state otherwise, all information in this
prospectus:
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assumes that the underwriters do not exercise their option to
purchase additional shares. If the underwriters exercise their
option to purchase additional shares in full, immediately
following this
offering, Class A
Common Shares
and Class B
Common Shares will be outstanding, and Retail Ventures will own
approximately %
of our outstanding Common Shares and will
control %
of the combined voting power of our outstanding Common Shares;
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assumes that the initial public offering price is
$ per
share, the midpoint of the estimated offering price range shown
on the cover of this prospectus; and
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gives effect to the amendment of our articles of incorporation
prior to the consummation of this offering, pursuant to which
each outstanding common share of DSW was changed
into Class B
Common Shares of DSW.
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The number of shares that will be outstanding immediately
following this offering
excludes shares
of Class A Common Shares subject to, as
of ,
2005, employee stock options outstanding at a weighted average
exercise price of
$ per
share.
7
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION
We present below summary historical and pro forma financial
data. The following summary historical financial data
(i) as of February 1, 2003 and January 31, 2004,
and for each of fiscal years 2001, 2002 and 2003, were derived
from our audited historical consolidated financial statements
included elsewhere in this prospectus and (ii) as of
October 30, 2004 and for the thirty-nine weeks ended
November 1, 2003 and October 30, 2004, were derived
from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus. The financial data as of
February 2, 2002 were derived from our audited historical
consolidated financial statements.
The summary unaudited pro forma condensed consolidated financial
data presented below were derived by the application of pro
forma adjustments to our historical consolidated financial
statements included elsewhere in this prospectus. The
pro forma adjustments are based upon available information
and assumptions that we believe are reasonable and do not give
effect to any transactions other than those described in the
bullet points below. The unaudited pro forma condensed
consolidated financial data for the year ended January 31,
2004 and thirty-nine weeks ended October 30, 2004 assume
that each of the following items had occurred on
February 2, 2003:
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the consummation of this offering;
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the incurrence and repayment of $165 million of
intercompany indebtedness incurred to fund a dividend to Retail
Ventures and the application of net proceeds as set forth under
Use of Proceeds;
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the completion of the Transactions;
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the reallocation of shoe warehousing and distribution cost
allocated to the shoe department of Value City, using the
allocation parameters set forth in the shared services
agreement; and
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the reflection of additional operating expenses and incremental
costs associated with the operation of DSW as a separate entity.
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The unaudited pro forma condensed consolidated financial data do
not purport to (i) represent what net income actually would
have been had we been a stand-alone company during the periods
presented and had this offering occurred as of the dates
indicated or (ii) project our net income for any period.
The following data are presented for informational purposes only
and should be read in conjunction with Risk Factors,
Capitalization, Unaudited Pro Forma
Condensed Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, The
Transactions and with our audited consolidated financial
statements and notes thereto and our unaudited interim
consolidated financial statements, all included elsewhere in
this prospectus.
8
SUMMARY CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL AND OPERATING DATA
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For the Thirty-nine
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For the Fiscal Year Ended
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Weeks Ended
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2/2/02
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2/1/03
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1/31/04
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11/1/03
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10/30/04
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(Unaudited)
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(Unaudited)
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(Dollars in thousands except per share amounts, store units and square footage)
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Statement of Income Data:
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Net
sales
(1)
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$
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523,509
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$
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644,345
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$
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791,348
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$
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605,463
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$
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729,406
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Gross profit
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$
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123,396
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$
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158,756
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$
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202,927
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$
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153,615
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$
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211,979
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Operating profit
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$
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4,668
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$
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17,781
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$
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28,053
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$
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20,882
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$
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46,228
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Net income
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$
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239
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$
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8,060
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$
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14,807
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$
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10,947
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$
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26,155
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Pro forma net
income
(2)
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$
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8,814
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$
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25,058
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Balance Sheet Data:
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Total assets
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$
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232,821
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$
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295,703
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$
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291,184
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$
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375,879
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Working
capital
(3)
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$
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60,121
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$
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87,141
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$
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103,244
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$
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134,077
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Current
ratio
(4)
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1.77
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2.07
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2.39
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2.30
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Long term obligations
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$
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325
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$
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54,116
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$
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35,000
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$
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55,000
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Other Data:
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Number of DSW stores at end of period
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104
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126
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142
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137
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167
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DSW store square footage added
(5)
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684,086
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584,652
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386,734
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267,095
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702,768
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Average gross square
footage
(6)
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2,217,108
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2,912,545
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3,364,094
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3,301,872
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3,907,111
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Net sales per average gross
sq. ft.
(7)
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$
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230
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$
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214
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$
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214
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$
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167
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$
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169
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Number of leased shoe departments at end of period
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16
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113
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168
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171
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225
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Total comparable store sales
change
(8)
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0.0
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%
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0.1
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%
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5.9
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%
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4.4
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%
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4.9
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%
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(1)
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Includes net sales of leased shoe departments.
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(2)
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Gives pro forma effect to the after-tax impact of the five
adjustments presented in the bullet points above and the
footnotes to the tables entitled Unaudited Pro Forma
Condensed Consolidated Statement of Income.
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(3)
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Working capital represents current assets less current
liabilities.
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(4)
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Current ratio represents current assets divided by current
liabilities.
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(5)
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DSW square footage added represents the total amount of square
footage added during the year attributable to new store openings
for DSW stores only; it does not reflect changes in square
footage of leased shoe departments.
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(6)
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Average gross square footage represents the monthly average of
square feet for DSW stores only for each period presented.
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(7)
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Net sales per average gross square foot is the result of
dividing net sales for DSW stores only for the period by average
gross square footage. These amounts are not adjusted to reflect
the impact of opening stores in different periods during the
year.
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(8)
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Comparable DSW stores and comparable leased shoe departments are
those units that have been in operation for at least
14 months at the beginning of the fiscal year. Stores or
leased shoe departments, as the case may be, are added to the
comparable base at the beginning of the year and are dropped for
comparative purposes in the month that they are closed.
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9
RISK FACTORS
Investing in our Class A Common Shares involves a high
degree of risk. You should carefully consider the following
factors, as well as other information contained in this
prospectus, before deciding to invest in our Class A Common
Shares. If any of the following risks actually occurs, our
business, financial condition, operating results or cash flow
could suffer materially and adversely. In this case, the trading
price of our Class A Common Shares could decline, and you
could lose all or part of your investment.
Risks Relating to Our Business
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We intend to open new DSW stores at an increased rate
compared to historical years, which could strain our resources
and have a material adverse effect on our business and financial
performance.
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Our continued and future growth largely depends on our ability
to successfully open and operate new DSW stores on a profitable
basis. During fiscal 2004, fiscal 2003 and fiscal 2002, we
opened 31, 16 and 22 new DSW stores, respectively. We
intend to open approximately 30 stores per year in each fiscal
year from fiscal 2005 through fiscal 2009. For stores scheduled
to open in fiscal 2005, as of January 29, 2005, we have
signed leases for 23 new stores and two store relocations.
This continued expansion could place increased demands on our
managerial, operational and administrative resources. Our
planned expansion will require us to increase continually the
number of people we employ as well as to monitor and upgrade our
management information and other systems and our distribution
facilities. These increased demands and operating complexities
could cause us to operate our business less efficiently,
adversely affect our operations and financial performance and
slow our growth.
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We may be unable to open all the stores contemplated by
our growth strategy on a timely basis, and new stores we open
may not be profitable or may have an adverse impact on the
profitability of existing stores, either of which could have a
material adverse affect on our business, financial condition and
results of operations.
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Although we intend to open approximately 30 stores per year in
each fiscal year from fiscal 2005 through fiscal 2009, we cannot
assure you that we will achieve our planned expansion on a
timely and profitable basis or that we will be able to achieve
results similar to those achieved in existing locations in prior
periods. Our ability to open and operate new DSW stores
successfully on a timely and profitable basis depends on many
factors, including, among others, our ability to:
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identify suitable markets and sites for new store locations;
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negotiate favorable lease terms;
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build-out or refurbish sites on a timely and effective basis;
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obtain sufficient levels of inventory to meet the needs of new
stores;
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obtain sufficient financing and capital resources or generate
sufficient cash flows from operations to fund growth;
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open new stores at costs not significantly greater than those
anticipated;
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successfully open new DSW stores in regions of the United States
in which we currently have few or no stores;
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control the costs of other capital investments associated with
store openings, including, for example, those related to the
expansion of distribution facilities;
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hire, train and retain qualified managers and store personnel;
and
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successfully integrate new stores into our existing
infrastructure, operations and management and distribution
systems or adapt such infrastructure, operations and systems to
accommodate our growth.
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As a result, we may be unable to open new stores at the rates
expected or at all. If we fail to successfully implement our
growth strategy, the opening of new DSW stores could be delayed
or prevented, could cost more than anticipated and could divert
resources from other areas of our business, any of which could
have a material adverse effect on our business, financial
condition and results of operations.
To the extent that we open new DSW stores in our existing
markets, we may experience reduced net sales in existing stores
in those markets. As the number of our stores increases, our
stores will become more concentrated in the markets we serve. As
a result, the number of customers and financial performance of
individual stores may decline and the average sales per square
foot at our stores may be reduced. This could have a material
adverse effect on our business, financial condition and results
of operations.
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We rely on our good relationships with vendors to purchase
brand name and designer merchandise at favorable prices. If
these relationships were to be impaired, we may not be able to
obtain a sufficient selection of merchandise at attractive
prices, and we may not be able to respond promptly to changing
fashion trends, either of which could have a negative impact on
our competitive position, our business and financial
performance.
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We do not have long-term supply agreements or exclusive
arrangements with any vendors and, therefore, our success
depends on maintaining good relations with our vendors. Our
growth strategy depends to a significant extent on the
willingness and ability of our vendors to supply us with
sufficient inventory to stock our new stores. If we fail to
strengthen our relations with our existing vendors, to enhance
the quality of merchandise they supply us, and if we cannot
maintain or acquire new vendors of in-season brand name and
designer merchandise, our ability to obtain a sufficient amount
and variety of merchandise at favorable prices may be limited,
which could have a negative impact on our competitive position.
In addition, our inability to stock our DSW stores with
in-season merchandise at attractive prices could result in lower
net sales and decreased customer interest in our stores, which,
in turn, would adversely affect our financial performance.
During the first thirty-nine weeks of fiscal 2004, taking into
account industry consolidation, merchandise supplied by three
key vendors accounted for approximately 19% of our net sales.
The loss of or a reduction in the amount of merchandise made
available to us by any one of these key vendors could have an
adverse effect on our business.
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We may be unable to anticipate and respond to fashion
trends and consumer preferences in the markets in which we
operate, which could adversely affect our business, financial
condition and results of operations.
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Our merchandising strategy is based on identifying each
regions customer base and having the proper mix of
products in each store to attract our target customers in that
region. This requires us to anticipate and respond to numerous
and fluctuating variables in fashion trends and other conditions
in the markets in which our stores are situated. A variety of
factors will affect our ability to maintain the proper mix of
products in each store, including:
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variations in local economic conditions, which could affect our
customers discretionary spending;
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unanticipated fashion trends;
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our success in developing and maintaining vendor relationships
that provide us access to in-season merchandise at attractive
prices;
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our success in distributing merchandise to our stores in an
efficient manner; and
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changes in weather patterns, which in turn affect consumer
preferences.
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If we are unable to anticipate and fulfill the merchandise needs
of each region, we may experience decreases in our net sales and
may be forced to increase markdowns in relation to slow-moving
merchandise, either of which could have an adverse effect on our
business, financial condition and results of operations.
11
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Our comparable store sales and quarterly financial
performance may fluctuate for a variety of reasons, which could
result in a decline in the price of our Class A Common
Shares.
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Our business is sensitive to customers spending patterns,
which in turn are subject to prevailing regional and national
economic conditions and the general level of economic activity.
Our comparable store sales and quarterly results of operations
have fluctuated in the past, and we expect them to continue to
fluctuate in the future. A variety of other factors affect our
comparable store sales and quarterly financial performance,
including:
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changes in our merchandising strategy;
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timing and concentration of new DSW store openings and related
pre-opening and other start-up costs;
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levels of pre-opening expenses associated with new DSW stores;
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changes in our merchandise mix;
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changes in and regional variations in demographic and population
characteristics;
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timing of promotional events;
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seasonal fluctuations due to weather conditions;
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actions by our competitors; and
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general U.S. economic conditions and, in particular, the retail
sales environment.
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Accordingly, our results for any one fiscal quarter are not
necessarily indicative of the results to be expected for any
other quarter, and comparable store sales for any particular
future period may decrease. Our future financial performance may
fall below the expectations of securities analysts and
investors. In that event, the price of our Class A Common
Shares would likely decline. For more information on our
quarterly results of operations, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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We rely on a single distribution center. The loss or
disruption of our centralized distribution center or our failure
in the future to add additional distribution facilities could
have an adverse effect on our business and operations.
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Most of our inventory is shipped directly from suppliers to a
single centralized distribution center in Columbus, Ohio, where
the inventory is then processed, sorted and shipped to one of 11
pool locations located throughout the country and then on to our
stores. Our operating results depend on the orderly operation of
our receiving and distribution process, which in turn depends on
third-party vendors adherence to shipping schedules and
our effective management of our distribution facilities. We
cannot assure you that we have anticipated all the changing
demands that our expanding operations will impose on our
receiving and distribution system or that events beyond our
control, such as disruptions in operations due to fire or other
catastrophic events, labor disagreements or shipping problems,
will not result in delays in the delivery of merchandise to our
stores.
Although we believe that our receiving and distribution process
and infrastructure will support our anticipated growth in 2005,
we may need to increase our distribution capacity in 2006 to
accommodate our expanding retail store base. Because our ability
to expand our distribution facilities at our current site is
limited, we may need to acquire, construct or lease additional
distribution facilities in other geographic locations to
accommodate our planned expansion. We may also need to invest in
additional information technology to achieve a unified receiving
and distribution system.
Although we maintain business interruption and property
insurance, we cannot assure you that our insurance would be
sufficient, or that insurance proceeds would be timely paid to
us, in the event our distribution center were to be shut down
for any reason or if we were to incur higher costs and longer
lead times in connection with a disruption at our distribution
center.
12
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Following this offering, we will continue to be dependent
on Retail Ventures to provide us with many key services for our
business.
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Since 1998, DSW has been operated as a wholly-owned subsidiary
of Value City or Retail Ventures, and many key services required
by DSW for the operation of our business are currently provided
by Retail Ventures and its subsidiaries. Prior to the completion
of this offering, we will enter into agreements with Retail
Ventures related to the separation of our business operations
from Retail Ventures including, among others, a master
separation agreement and a shared services agreement. Under the
terms of the shared services agreement, which when signed will
be effective as of January 30, 2005, Retail Ventures will
provide us with key services relating to import administration,
risk management, information technology, tax, logistics and
inbound transportation management, legal services, financial
services, shared benefits administration and payroll and will
maintain insurance for us and for our directors, officers, and
employees. In turn, we will provide several subsidiaries of
Retail Ventures with services relating to planning and
allocation support, distribution services and outbound
transportation management, site research, lease negotiation,
store design and construction management. We anticipate that the
initial term of the shared services agreement will expire at the
end of fiscal 2007 and will be extended automatically for
additional one-year terms unless terminated by one of the
parties. We expect some of these services to be provided for
longer or shorter periods than the initial term. We believe it
is necessary for Retail Ventures to provide these services for
us under the shared services agreement to facilitate the
efficient operation of our business as we transition to becoming
an independent public company. We will, as a result, initially
be dependent on our relationship with Retail Ventures for shared
services following this offering. See Certain
Relationships and Related Party Transactions
Relationships Between Our Company and Retail
Ventures Agreements Relating to our Separation from
Retail Ventures.
Once the transition periods specified in the shared services
agreement have expired and are not renewed, or if Retail
Ventures does not or is unable to perform its obligations under
the shared services agreement, we will be required to provide
these services ourselves or to obtain substitute arrangements
with third parties. We may be unable to provide these services
because of financial or other constraints or be unable to timely
implement substitute arrangements on terms that are favorable to
us, or at all, which would have an adverse effect on our
business, financial condition and results of operations.
We have not been operated as a stand-alone company since 1998.
Following the completion of this offering, our business will no
longer have access to the borrowing capacity, cash flow, assets
and some services provided by Retail Ventures and its
subsidiaries as we did while we were wholly-owned by Retail
Ventures.
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Our failure to retain our existing senior management team
and to continue to attract qualified new personnel could
adversely affect our business.
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Our business requires disciplined execution at all levels of our
organization to ensure that we continually have sufficient
inventories of assorted brand name merchandise at below
traditional retail prices. This execution requires an
experienced and talented management team. If we were to lose the
benefit of the experience, efforts and abilities of any of our
key executive and buying personnel, our business could be
materially adversely affected. We have entered into employment
agreements with several of these officers. For more information
on our management team and their employment agreements and
severance agreements, see Management. Furthermore,
our ability to manage our retail expansion will require us to
continue to train, motivate and manage our employees and to
attract, motivate and retain additional qualified managerial and
merchandising personnel. Competition for these types of
personnel is intense, and we cannot assure you that we will be
successful in attracting, assimilating and retaining the
personnel required to grow and operate our business profitably.
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We may be unable to compete favorably in our highly
competitive market.
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The retail footwear market is highly competitive with few
barriers to entry. We compete against a diverse group of
retailers, both small and large, including locally owned shoe
stores, regional and national department
13
stores, specialty retailers and discount chains. Some of our
competitors are larger and have substantially greater resources
than we do. Our success depends on our ability to remain
competitive with respect to style, price, brand availability and
customer service. The performance of our competitors, as well as
a change in their pricing policies, marketing activities and
other business strategies, could have a material adverse effect
on our business, financial condition, results of operations and
our market share.
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A decline in general economic conditions, or the outbreak
or escalation of war or terrorist acts, could lead to reduced
consumer demand for our footwear and accessories.
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Consumer spending habits, including spending for the footwear
and related accessories that we sell, are affected by, among
other things, prevailing economic conditions, levels of
employment, salaries and wage rates, prevailing interest rates,
income tax rates and policies, consumer confidence and consumer
perception of economic conditions. In addition, consumer
purchasing patterns may be influenced by consumers
disposable income. A general slowdown in the U.S. economy or an
uncertain economic outlook could adversely affect consumer
spending habits.
Consumer confidence is also affected by the domestic and
international political situation. The outbreak or escalation of
war, or the occurrence of terrorist acts or other hostilities in
or affecting the United States, could lead to a decrease in
spending by consumers. In the event of an economic slowdown, we
could experience lower net sales than expected on a quarterly or
annual basis and be forced to delay or slow our retail expansion
plans.
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We rely on foreign sources of production for our
merchandise, and our business is therefore subject to risks
associated with international trade.
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We purchase merchandise from domestic and foreign vendors. In
addition, many of our domestic vendors import a large portion of
their merchandise from abroad, primarily from China, Brazil and
Italy. For this reason, we face risks inherent in purchasing
from foreign suppliers, such as:
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economic and political instability in countries where these
suppliers are located;
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international hostilities or acts of war or terrorism affecting
the United States or foreign countries from which our
merchandise is sourced;
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increases in shipping costs;
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transportation delays and interruptions, including as a result
of increased inspections of import shipments by domestic
authorities;
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work stoppages;
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adverse fluctuations in currency exchange rates;
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U.S. laws affecting the importation of goods, including duties,
tariffs and quotas and other non-tariff barriers;
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expropriation or nationalization;
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changes in local government administration and governmental
policies;
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changes in import duties or quotas;
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compliance with trade and foreign tax laws; and
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local business practices, including compliance with local laws
and with domestic and international labor standards.
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We require our vendors to operate in compliance with applicable
laws and regulations and our internal requirements. While our
purchasing guidelines promote ethical business practices, we do
not control our vendors or their labor and business practices.
The violation of labor or other laws by one of our vendors could
have an adverse effect on our business.
14
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Following the completion of this offering, our new secured
revolving credit facility could limit our operational
flexibility.
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In connection with the completion of this offering, we expect to
enter into a new $150 million secured revolving credit
facility with a term of five years. Under this new facility, we
expect that we and our subsidiary, DSWSW, will be named as
co-borrowers. This new facility is expected to be subject to a
borrowing base restriction and will provide for borrowings at
variable interest rates based on LIBOR, the prime rate and the
Federal Funds effective rate, plus a margin. Our obligations
under our new secured revolving credit facility will be secured
by a lien on substantially all our personal property. We will be
subject to financial covenants under the new secured revolving
credit facility. In addition, the new secured revolving credit
facility will contain usual and customary restrictive covenants
relating to our management and the operation of our business.
These non-financial covenants will restrict, among other things,
our ability to incur debt, guarantee indebtedness, put liens on
our assets, enter into transactions with affiliates and dispose
of assets. These covenants could restrict our operational
flexibility, and any failure to comply with these covenants or
our payment obligations would limit our ability to borrow under
the new secured revolving credit facility and, in certain
circumstances, may allow the lenders thereunder to require
repayment. For more information regarding the new secured
revolving credit facility, see Description of
Indebtedness.
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We will incur increased costs as a result of being a
public company.
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Prior to this offering, as a subsidiary of a publicly-held
company, we were not directly responsible for the corporate
governance and financial reporting practices and policies
required of a publicly-traded company. As a public company, we
will incur significant legal, accounting and other expenses that
we did not directly incur in the past. In addition, the
Sarbanes-Oxley Act of 2002, as well as new rules implemented by
the Securities and Exchange Commission, or the SEC, and the New
York Stock Exchange, or NYSE, require changes in corporate
governance practices of public companies. We expect these new
rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming
and costly.
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DSW has not been operated as an entity separate from Value
City and Retail Ventures since 1998, and, as a result, our
historical and pro forma financial information may not be
indicative of DSWs historical financial results or future
financial performance.
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Our consolidated financial information included in this
prospectus may not be indicative of our future financial
performance. This is because these statements do not necessarily
reflect the historical financial condition, results of
operations and cash flows of DSW as they would have been had we
been operated during the periods presented as a separate,
stand-alone entity.
Our consolidated financial information assumes that DSW, for the
periods presented, had existed as a separate legal entity, and
has been derived from the consolidated financial statements of
Retail Ventures. Some costs have been reflected in the
consolidated financial statements that are not necessarily
indicative of the costs that we would have incurred had we
operated as an independent, stand-alone entity for all periods
presented. These costs include allocated portions of Retail
Ventures corporate overhead, interest expense and income
taxes.
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We face significant security risks related to our
electronic processing and transmission of confidential customer
information. If we are unable to adequately protect such
information, our reputation and business could be adversely
affected, and we could be subject to liability.
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We rely on commercially available encryption software and other
technologies to provide security for processing and transmission
of confidential customer information, such as credit card
numbers. Advances in computer capabilities, new discoveries in
the field of cryptography, or other events or developments,
including improper acts by third parties, may result in a
compromise or breach of the security measures we use to protect
customer transaction data. Compromises of these security systems
could have a material adverse effect on our reputation and
business, and we may be subject to significant liabilities and
reporting obligations. A
15
party who is able to circumvent our security measures could
misappropriate our information, cause interruptions in our
operations, damage our reputation and customers
willingness to shop in our stores and subject us to possible
liability. We may be required to expend significant capital and
other resources to protect against these security breaches or to
alleviate problems caused by these breaches.
On March 8, 2005, we announced that we had learned of the
theft of credit card and other purchase information relating to
all customers who made purchases at 103 DSW stores during a
three-month period. We have contacted federal law enforcement
authorities, who are involved in the investigation. We are
taking steps to address the situation, including a review of our
technology systems in conjunction with a leading computer
security firm, and we are also working with credit card
companies and issuers to mitigate the situation. We cannot yet
reasonably estimate what the potential liability to us will be
in connection with these events, and we do not yet know what
effect this incident may have on our customers perceptions
of us.
Risks Relating to Our Class A Common Shares and This
Offering
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After this offering, we will continue to be controlled
directly by Retail Ventures and indirectly by SSC, whose
interests may differ from other shareholders.
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Retail Ventures will own 100% of our Class B Common Shares,
which will represent
approximately %
of our outstanding Common Shares after this offering, or
approximately %
if the underwriters exercise their option to purchase additional
shares in full. These shares collectively will
represent %
of the combined voting power of our outstanding Common Shares if
the underwriters exercise their option to purchase additional
shares in full. Although Retail Ventures is a public
corporation, approximately 49% of its common shares on a fully
diluted basis are beneficially owned by SSC, a privately held
corporation controlled by Jay L. Schottenstein, the Chairman of
the Board of Directors of DSW and Retail Ventures and the Chief
Executive Officer of DSW, and members of his immediate family.
Given their respective ownership interests, Retail Ventures and,
indirectly, SSC, will be able to control the outcome of all
matters submitted to our shareholders for approval, including:
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the election of directors;
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mergers or other business combinations; and
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acquisitions or dispositions of assets.
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The interests of Retail Ventures or SSC may differ from or be
opposed to the interests of our other shareholders, and their
control may have the effect of delaying or preventing a change
in control that may be favored by other shareholders. See
Principal Shareholders and Certain
Relationships and Related Party Transactions.
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After this offering, Retail Ventures and SSC, or their
directors and officers, may allocate corporate opportunities to
Retail Ventures and SSC or direct them to other Retail Ventures
affiliates which, prior to this offering, could have been
directed to us.
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Corporate opportunities may arise in the area of potential
competitive business activities that may be attractive to Retail
Ventures, SSC and us in the area of employee recruiting and
retention. Any competition could intensify if Value City begins
to carry an assortment of shoes in its stores similar to those
found in our stores, target customers similar to ours or adopt a
similar business model or strategy for its shoe businesses.
Given that after the consummation of this offering, Value City
will continue to be a wholly-owned subsidiary of Retail Ventures
and DSW will not be wholly-owned, Retail Ventures and SSC may be
inclined to direct relevant corporate opportunities to them
rather than us.
Retail Ventures amended and restated articles of
incorporation will provide that Retail Ventures and SSC are
under no obligation to communicate or offer any corporate
opportunity to us. In addition, Retail Ventures and SSC will
have the right to engage in similar activities as us, do
business with our suppliers and customers and, except as limited
by the master separation agreement, employ or otherwise engage
any of our officers or employees. SSC and its affiliates engage
in a variety of businesses, including, but not limited to,
16
business and inventory liquidations and real estate
acquisitions. The provisions also outline how corporate
opportunities are to be assigned in the event that our, Retail
Ventures or SSCs directors and officers learn of
corporate opportunities. These provisions are substantially
similar to those that currently apply to us through provisions
of Retail Ventures amended articles of incorporation. See
Certain Relationships and Related Party Transactions
Provisions of Our Amended Articles of Incorporation
Governing Corporate Opportunities and Related Party
Transactions.
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Some of our directors and officers may also serve as
directors or officers of Retail Ventures, and may have conflicts
of interest because they may own Retail Ventures stock or
options to purchase Retail Ventures stock, or they may receive
cash- or equity-based awards based on the performance of Retail
Ventures.
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Some of our directors and officers may also serve as directors
or officers of Retail Ventures, and may own Retail Ventures
stock or options to purchase Retail Ventures stock, or they may
be entitled to participate in the Retail Ventures Plans as
defined in Management Executive
Compensation Employee Incentive Plans. The
Retail Ventures Plans provide cash- and equity-based
compensation to employees based on Retail Ventures
performance. These employment arrangements and ownership
interests or cash- or equity-based awards could create, or
appear to create, potential conflicts of interest when directors
or officers who own Retail Ventures stock or stock options or
who participate in the Retail Ventures Plans are faced with
decisions that could have different implications for Retail
Ventures than they do for us. We cannot assure you that these
potential conflicts of interest will be resolved in our favor.
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We do not expect to pay dividends in the foreseeable
future.
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We anticipate that future earnings will be used principally to
finance our retail expansion. Thus, we do not intend to pay cash
dividends on our Common Shares in the foreseeable future.
Provisions in our new secured revolving credit facility may also
restrict us from declaring dividends. Our board of directors
will have sole discretion to determine the dividend amount, if
any, to be paid. Our board of directors will consider a number
of factors, including applicable provisions of Ohio corporate
law, our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable
contractual restrictions and any other factors our board may
deem relevant. For further description of our dividend policy,
see Dividend Policy.
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If our existing shareholders or holders of rights to
purchase our Common Shares sell the shares they own, or if
Retail Ventures distributes its Common Shares to its
shareholders, it could adversely affect the price of our
Class A Common Shares.
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The market price of our Class A Common Shares could decline
as a result of market sales by our existing shareholders,
including Retail Ventures, or a distribution of our Common
Shares to Retail Ventures shareholders after this offering
or the perception that such sales or distributions will occur.
These sales or distributions also might make it difficult for us
to sell equity securities in the future at a time and at a price
that we deem appropriate. We cannot predict the size of future
sales of our Common Shares or the impact that such sales may
have on the shares purchased or acquired by investors in this
offering.
Upon completion of this offering, there will
be Class
A Common Shares of DSW outstanding which will be freely
transferable without restriction or further registration under
the Securities Act of 1933, as amended, or the Securities Act.
The
remaining Common
Shares outstanding will be restricted securities within the
meaning of Rule 144 under the Securities Act but will be
eligible for resale subject to applicable volume, manner of
sale, holding period and other limitations of Rule 144.
Following consummation of this offering, SSC, Cerberus Partners
L.P., or Cerberus, and Back Bay Capital Funding LLC, or Back
Bay, will have the right to acquire Class A Common Shares
of DSW from Retail Ventures pursuant to warrant agreements they
will enter into with Retail Ventures. For further discussion of
these warrant agreements, see Managements Discussion
and Analysis of Financial Condition and Results of
Operations The DSW Separation, Certain
Relationships and Related Party Transac-
17
tions Notes Credit Agreements and Guarantees
and Description of Indebtedness. We, Retail
Ventures, SSC, Cerberus, and Back Bay, as well as our officers
and directors, have agreed to a lock-up, meaning
that neither we nor they will sell any Common Shares without the
prior consent of Lehman Brothers Inc. on behalf of the
underwriters for 180 days following the date of this
prospectus. Upon the expiration of this lock-up period, all
these Common Shares will be eligible for future sale, subject to
the applicable volume, manner of sale, holding period and other
limitations of Rule 144. In addition, Retail Ventures, SSC,
Cerberus, and Back Bay have the right to require that we
register their shares for resale. See Shares Eligible for
Future Sale and Certain Relationships and Related
Party Transactions for a discussion of Common Shares that
may be sold into the public market in the future.
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There currently exists no market for our Class A
Common Shares. We cannot assure you that an active trading
market will develop for our Class A Common Shares. If our
share price fluctuates after this offering, you could lose all
or a significant part of your investment.
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Prior to this offering, no public market existed for our
Class A Common Shares. An active and liquid market for the
Class A Common Shares may not develop following the
completion of this offering, or, if developed, may not be
maintained. If an active public market does not develop or is
not maintained, you may have difficulty selling your
Class A Common Shares. The initial public offering price of
our Class A Common Shares was arrived at by negotiations
between us, Retail Ventures and the underwriters for this
offering and may not be indicative of the price at which the
Class A Common Shares will trade following the completion
of this offering.
The market price of our Class A Common Shares may also be
influenced by many other factors, some of which are beyond our
control, including, among other things:
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actual or anticipated variations in comparable store sales or
quarterly operating results;
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changes in financial estimates by research analysts;
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actual or anticipated changes in the U.S. economy or the
retailing environment;
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terrorist acts or wars;
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changes in the market volatility of other shoe or retail
companies;
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, divestitures, joint
ventures or other strategic initiatives; and
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actual or anticipated sales or distributions of Common Shares by
Retail Ventures, SSC, Cerberus, or Back Bay, as well as our
officers and directors, whether in the market, in subsequent
public offerings or in a distribution to shareholders.
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As a result of this volatility, you may not be able to resell
your Class A Common Shares at or above the initial public
offering price. In addition, the stock market in general has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of companies like DSW. These broad market and
industry factors may materially reduce the market price of the
Class A Common Shares, regardless of our operating
performance.
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Investors purchasing Class A Common Shares in this
offering will incur substantial and
immediate dilution.
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The assumed initial public offering price of our Class A
Common Shares is substantially higher than the net tangible book
value per outstanding share of our Common Shares. Purchasers of
our Class A Common Shares in this offering will incur
immediate and substantial dilution of
$ per
share in the net tangible book value of our Common Shares from
the assumed initial public offering price of
$ per
share, which is the midpoint of the estimated range set forth on
the cover of this prospectus. If the underwriters exercise their
option to purchase additional shares in full, there will be
dilution of
$ per
share in the net tangible book value of our Common Shares,
assuming the same public offering price. This means that if we
were to
18
be liquidated immediately after this offering, there might be no
assets available for distribution to you after satisfaction of
all our obligations to creditors. For further description of the
effects of dilution in the net tangible bank value of our Common
Shares, see Dilution.
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Our amended articles of incorporation, amended and
restated code of regulations and Ohio state law contain
provisions that may have the effect of delaying or preventing a
change in control of DSW. This could adversely affect the value
of your shares.
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Our amended articles of incorporation authorizes our board of
directors to issue up
to preferred
shares and to determine the powers, preferences, privileges,
rights, including voting rights, qualifications, limitations and
restrictions on those shares, without any further vote or action
by the shareholders. The rights of the holders of our
Class A Common Shares will be subject to, and may be
adversely affected by, the rights of the holders of any
preferred shares that may be issued in the future. The issuance
of preferred shares could have the effect of delaying, deterring
or preventing a change in control and could adversely affect the
voting power of your shares.
In addition, provisions of our amended articles of
incorporation, amended and restated code of regulations and Ohio
law, together or separately, could discourage potential
acquisition proposals, delay or prevent a change in control and
limit the price that certain investors might be willing to pay
in the future for our Common Shares. Among other things, these
provisions establish a staggered board, require a supermajority
vote to remove directors, and establish certain advance notice
procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at
shareholders meetings. For further description of these
provisions of amended articles of incorporation, amended and
restated code of regulations and Ohio law, see Description
of Capital Stock Anti-Takeover Effects of Certain
Provisions of our Amended Articles of Incorporation, our Amended
and Restated Code of Regulations and Ohio Law.
Risks Relating to our Relationship with and Separation From
Retail Ventures
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The new agreements we are entering into with Retail
Ventures in connection with this offering could restrict our
operations and adversely affect our
financial condition.
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Upon the consummation of this offering, we and Retail Ventures
will have entered into a number of agreements governing our
separation from and our future relationship with Retail
Ventures, including a master separation agreement and a shared
services agreement, in the context of our relationship to Retail
Ventures as a wholly-owned subsidiary. Accordingly, the terms
and provisions of these agreements may be less favorable to us
than terms and provisions we could have obtained in arms
length negotiations with unaffiliated third parties.
We and Retail Ventures intend to enter into a tax separation
agreement that will become effective upon consummation of this
offering. The tax separation agreement will govern the
respective rights, responsibilities, and obligations of Retail
Ventures and us with respect to tax liabilities and benefits,
tax attributes, tax contests and other matters regarding taxes
and related tax returns. Although Retail Ventures does not
intend or plan to undertake a spin-off of our stock to Retail
Ventures stockholders, we and Retail Ventures have agreed to set
forth our respective rights, responsibilities and obligations
with respect to any possible spin-off in the tax separation
agreement. If Retail Ventures were to decide to pursue a
possible spin-off, we have agreed to cooperate with Retail
Ventures and to take any and all actions reasonably requested by
Retail Ventures in connection with such a transaction. We have
also agreed not to knowingly take or fail to take any actions
that could reasonably be expected to preclude Retail
Ventures ability to undertake a tax-free spin-off. In
addition, we generally would be responsible for any taxes
resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of DSW and Retail Ventures at the time of such
spin-off) of such taxes to the extent such taxes are not
otherwise attributable to DSW or Retail
19
Ventures. Our agreements in connection with such tax matters
last indefinitely. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Separation Agreements and
Certain Relationships and Related Party
Transactions Relationships Between Our Company and
Retail Ventures.
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We may be prevented from issuing stock to raise capital,
to effectuate acquisitions or to provide equity incentives to
members of our management and
board of directors.
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Beneficial ownership of at least 80% of the total voting power
and 80% of each class of nonvoting capital stock is required in
order for Retail Ventures to effect a tax-free spin-off of DSW
or certain other tax-free transactions. Although as of the date
of this prospectus Retail Ventures does not intend or plan to
undertake a spin-off of our stock to Retail Ventures
shareholders, under the terms of our tax separation agreement,
we have agreed that for so long as Retail Ventures continues to
own greater than 50% of the voting control of our outstanding
stock, we will not knowingly take or fail to take any action
that could reasonably be expected to preclude Retail
Ventures ability to undertake a tax-free spin-off. This
may prevent us from issuing additional equity securities to
raise capital, to effectuate acquisitions or to provide
management or director equity incentives. See Certain
Relationships and Related Party Transactions
Relationships Between Our Company and Retail Ventures.
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Our prior and continuing relationship with Retail Ventures
exposes us to risks attributable to Retail
Ventures businesses.
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Retail Ventures is obligated to indemnify us for losses that a
party may seek to impose upon us or our affiliates for
liabilities relating to the Retail Ventures business that are
incurred through a breach of the master separation agreement or
any ancillary agreement by Retail Ventures or its non-DSW
affiliates, if such losses are attributable to Retail Ventures
in connection with this offering or are not expressly assumed by
us under the master separation agreement. Immediately following
this offering, any claims made against us that are properly
attributable to Retail Ventures or Value City in accordance with
these arrangements would require us to exercise our rights under
the master separation agreement to obtain payment from Retail
Ventures. We are exposed to the risk that, in these
circumstances, Retail Ventures cannot, or will not, make the
required payment. If this were to occur, our business and
financial performance could be adversely affected. See
Certain Relationships and Related Party Transactions.
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Possible future sales of Class A Common Shares by
Retail Ventures, SSC, Cerberus and Back Bay could adversely
affect prevailing market prices for the
Class A Common Shares.
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After completion of this offering, the Class B Common
Shares held by Retail Ventures will continue to be subject to
liens in favor of SSC, Cerberus and Value City. However, Retail
Ventures may sell any and all of the Common Shares held by it
upon the consent of these lenders, subject to applicable
securities laws and the restrictions set forth below. For a
discussion of these liens, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations The DSW Separation and
Description of Indebtedness. In addition, SSC,
Cerberus and Back Bay will have the right to acquire from Retail
Ventures Class A Common Shares of DSW after the
consummation of this offering. Sales or distribution by Retail
Ventures, SSC, Cerberus and Back Bay of a substantial number of
Class A Common Shares in the public market or to their
respective shareholders, or the perception that such SSC,
Cerberus and Back Bay sales or distributions could occur, could
adversely affect prevailing market prices for the Class A
Common Shares. See Certain Relationships and Related Party
Transactions Relationships Between our Company and
Retail Ventures Agreements Relating to our
Separation from Retail Ventures Exchange
Agreement.
Retail Ventures has advised us that its current intent is to
continue to hold all the Common Shares owned by it following
this offering, except to the extent necessary to satisfy
obligations under warrants it has granted to SSC, Cerberus, and
Back Bay. See Managements Discussion and Analysis of
Financial Condition and Results of Operations The
DSW Separation, Certain Relationships and Related
Party Transactions Notes Credit Agreements and
Guarantees and Description of Indebtedness.
However, Retail Ventures is not subject to any contractual
obligation to retain its controlling interest, except that Retail
20
Ventures has agreed not to sell or otherwise dispose of any
Common Shares of DSW that Retail Ventures holds for a period of
180 days after the date of this prospectus without the
prior written consent of Lehman Brothers Inc. on behalf of the
underwriters. See Underwriting. As of the date of
this prospectus, Retail Ventures has outstanding indebtedness
under its term loan facility, revolving credit facility and
convertible loan facility, and may incur additional indebtedness
in the future. If Retail Ventures were to require additional
funds to service or refinance its indebtedness or to fund its
operations in the future and could not obtain capital from
alternative sources, it could seek to sell some or all of the
Common Shares of DSW that it holds in order to obtain such funds.
Similarly, SSC, Cerberus and Back Bay are not subject to any
contractual obligation to retain Class A Common Shares they
may acquire from Retail Ventures, except that they, too, have
agreed not to sell or otherwise dispose of any of our Common
Shares for a period of 180 days after the date of this
prospectus without the prior written consent of Lehman Brothers,
Inc. As a result, there can be no assurance concerning the
period of time during which Retail Ventures, SSC, Cerberus and
Back Bay will maintain their respective beneficial ownership of
Common Shares following this offering. Retail Ventures, SSC,
Cerberus and Back Bay will have registration rights respect to
their respective Common Shares following this offering which
would facilitate any future disposition. See Certain
Relationships and Related Party Transactions
Relationships Between Our Company and Retail Ventures and
Shares Available for Future Sale.
21
FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Business and elsewhere in this prospectus may
contain forward-looking statements which reflect our current
views with respect to, among other things, future events and
financial performance. You can identify these forward-looking
statements by the use of forward-looking words such as
outlook, believes, expects,
potential, continues, may,
will, should, seeks,
approximately, predicts,
intends, plans, estimates,
anticipates or the negative version of those words
or other comparable words. Any forward-looking statements
contained in this prospectus are based upon our historical
performance and on current plans, estimates and expectations.
The inclusion of this forward-looking information should not be
regarded as a representation by us, the underwriters or any
other person that the future plans, estimates or expectations
contemplated by us will be achieved. Such forward-looking
statements are subject to various risks and uncertainties.
Accordingly, there are or will be important factors that could
cause our actual results to differ materially from those
indicated in these statements. We believe that these factors
include but are not limited to those described under Risk
Factors. These factors should not be construed as
exhaustive and should be read in conjunction with the other
cautionary statements that are included in this prospectus. We
do not undertake any obligation to publicly update or review any
forward-looking statement, whether as a result of new
information, future developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we may
have projected. Any forward-looking statements you read in this
prospectus reflect our current views with respect to future
events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of
operations, financial condition, growth strategy and liquidity.
You should specifically consider the factors identified in this
prospectus that could cause actual results to differ before
making an investment decision.
22
USE OF PROCEEDS
We estimate that the net proceeds from our sale of
the Class A
Common Shares we are offering will be
$ million,
assuming an initial public offering price of
$ per
share (the midpoint of the range set forth on the cover page of
the prospectus), and after deducting estimated underwriting
discounts and offering expenses. If the underwriters exercise
their option to purchase additional shares in full, we estimated
that the net proceeds will be
$ ,
after deducting estimated underwriting discounts and offering
expenses.
We intend to use the net proceeds:
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to repay $165 million of intercompany indebtedness owed to
Retail Ventures; and
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for working capital and other general corporate purposes.
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The intercompany indebtedness was incurred to fund a
$165 million dividend to Retail Ventures. The indebtedness
is evidenced by a note which is scheduled to mature in March
2020 and bears interest at a rate equal to London Interbank
Offered Rate, or LIBOR, plus 850 basis points per year.
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DIVIDEND POLICY
We do not anticipate paying cash dividends on our Common Shares
in the foreseeable future. Management anticipates that all our
earnings and other cash resources, if any, will be retained by
us for investment in our business. The payment of dividends is
subject to the discretion of our board of directors and will
depend on our results of operations, financial position and
capital requirements, general business conditions, restrictions
imposed by financing arrangements, legal restrictions on the
payment of dividends and other factors the board of directors
deems relevant. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources and
Description of Indebtedness Our New Secured
Revolving Credit Facility.
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CAPITALIZATION
The following table sets forth our capitalization as of
October 30, 2004:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to give effect to the incurrence and
repayment of $165 million of intercompany indebtedness
incurred to fund a dividend to Retail Ventures, and the
amendment of our articles of incorporation pursuant to which
each outstanding common share of DSW was changed into
Class B Common Shares of DSW; and
|
|
|
|
on a pro forma as adjusted for this offering basis to give
further effect to (i) our issuance and sale
of Class A
Common Shares in this offering at an assumed public offering
price of
$ per
share, the midpoint of the range of the initial public offering
price set forth on the cover page of this prospectus,
(ii) the deduction of estimated underwriting discounts and
offering expenses payable by us, (iii) the repayment of
$165 million of intercompany indebtedness incurred to fund
a dividend to Retail Ventures and the application of the net
proceeds of this offering, as described under Use of
Proceeds and (iv) expected borrowings under our new
secured revolving credit facility.
|
This table contains unaudited information and should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
consolidated financial statements and the accompanying notes
that appear elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 30, 2004
|
|
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
|
|
Adjusted for
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
this Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Cash
|
|
$
|
11,217
|
|
|
$
|
11,217
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Ventures revolving credit facility
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
|
|
|
|
|
New DSW revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany indebtedness
|
|
|
|
|
|
|
165,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
55,000
|
|
|
$
|
220,000
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, no par value, 500 shares authorized,
410.09 shares outstanding actual; no shares authorized or
outstanding, pro forma or pro forma as adjusted to give effect
to this offering
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
Class A Common Shares, no par
value, shares
authorized; no shares outstanding, historical and pro
forma; shares
outstanding, pro forma as adjusted to give effect to this
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Shares, no par
value, shares
authorized; no shares outstanding,
historical; shares
outstanding, pro forma and pro forma as adjusted to give effect
to this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares, no par
value, shares
authorized, no shares outstanding actual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
101,442
|
|
|
|
101,442
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
68,584
|
|
|
|
(96,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
170,026
|
|
|
$
|
5,026
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
225,026
|
|
|
$
|
225,026
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents $165 million of intercompany indebtedness
incurred to fund a dividend to Retail Ventures.
|
25
DILUTION
If you invest in our Class A Common Shares, your interest
will be diluted to the extent of the difference between the
initial public offering price per share of our Class A
Common Shares and the net tangible book value per share of our
Common Shares after this offering.
Net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the number of
Common Shares then outstanding. Our net tangible book value as
of ,
2005 was approximately
$ million,
or approximately
$ per
share based
on Common
Shares outstanding as of such date. After giving effect to our
sale of Class A Common Shares in this offering at the
initial public offering price of
$ per
share (the midpoint of the price range set forth on the cover
page of this prospectus), and after deducting estimated
underwriting discounts and estimated offering expenses, our pro
forma net tangible book value as
of ,
2005 would have been
$ ,
or
$ per
share of Common Share (assuming no exercise of the
underwriters option to purchase additional shares). This
represents an immediate increase in the pro forma net tangible
book value of
$ per
share to Retail Ventures and an immediate and substantial
dilution of
$ per
share to new investors purchasing Class A Common Shares in
this offering. The following table illustrates this dilution per
share:
|
|
|
|
|
Assumed initial public offering price per share
|
|
$
|
|
|
Pro forma net tangible book value per share as
of ,
2005
|
|
$
|
|
|
Decrease in pro forma net tangible book value per share
attributable to this offering
|
|
$
|
|
|
Pro forma net tangible book value per share after giving effect
to this offering
|
|
$
|
|
|
Dilution per share to new investors
|
|
$
|
|
|
The foregoing discussion and tables assume no exercise of stock
options outstanding immediately following this offering. As
of ,
2005, there were options outstanding to purchase a total
of Class A
Common Shares of DSW at a weighted average exercise price of
$ per
share. To the extent that any of these options are exercised
there may be further dilution to new investors.
The following table sets forth, as
of ,
2005, on the pro forma basis as described above, the difference
between the number of Common Shares purchased from us, the total
price and average price per share paid by our existing
shareholder, Retail Ventures, and by the new investors in this
offering at an assumed initial public offering price
of per
share (the midpoint of the price range set forth on the cover
page of this prospectus) and after deducting the estimated
underwriting discounts and estimated offering expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Ventures
|
|
|
0
|
|
|
|
0
|
%
|
|
$
|
0
|
|
|
|
0
|
%
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
If the underwriters option to purchase additional shares
is exercised in full, the following will occur:
|
|
|
|
|
the number of Common Shares held by Retail Ventures will
decrease to
approximately %
of the total number of Common Shares outstanding; and
|
|
|
|
the number of Common Shares held by new investors will be
increased
to shares,
or
approximately %
of the total number of our Common Shares outstanding after this
offering.
|
26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated financial data
presented below were derived by the application of pro forma
adjustments to our historical consolidated financial statements
included elsewhere in this prospectus. The pro forma adjustments
are based upon available information and assumptions that we
believe are reasonable and do not give effect to any
transactions other than those described below.
The unaudited pro forma condensed consolidated statements of
income for the year ended January 31, 2004 and thirty-nine
weeks ended October 30, 2004 assume that each of the
following items described in the bullet points below had
occurred on February 2, 2003, and the unaudited pro forma
condensed consolidated balance sheet as of October 30, 2004
assumes that each of the following items had occurred on
October 30, 2004:
|
|
|
|
|
the consummation of this offering;
|
|
|
|
the incurrence and repayment of $165 million of
intercompany indebtedness incurred to fund a dividend to Retail
Ventures and the application of net proceeds as set forth under
Use of Proceeds;
|
|
|
|
the completion of the Transactions;
|
|
|
|
the reallocation of shoe warehousing and distribution cost
allocated to the shoe department of Value City, using the
allocation parameters set forth in the services agreement; and
|
|
|
|
the reflection of additional operating expenses and incremental
costs associated with the operation of DSW as a separate entity.
|
The unaudited pro forma condensed consolidated financial
statements do not purport to (i) represent what our
financial position and results of operations actually would have
been had we been a stand-alone company during the periods
presented and had this offering occurred as of the dates
indicated and (ii) project our financial performance for
any period. The following data are presented for informational
purposes only and should be read in conjunction with Risk
Factors, Capitalization, Selected
Consolidated Financial and Operating Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, The
Transactions and with our audited consolidated financial
statements and the notes thereto and our unaudited interim
consolidated financial statements and the notes thereto, all
included elsewhere in this prospectus.
27
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
INCOME
For the Thirty-Nine Weeks Ended October 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net sales
|
|
$
|
729,406
|
|
|
$
|
|
|
|
$
|
729,406
|
|
Cost of sales
|
|
|
517,427
|
|
|
|
(2,352
|
)
(1)
|
|
|
515,075
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
211,979
|
|
|
|
2,352
|
|
|
|
214,331
|
|
Operating expenses
|
|
|
165,751
|
|
|
|
4,186
|
(2)
|
|
|
169,937
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
46,228
|
|
|
|
(1,834
|
)
|
|
|
44,394
|
|
Interest expense
|
|
|
2,460
|
|
|
|
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
43,768
|
|
|
|
(1,834
|
)
|
|
|
41,934
|
|
Income taxes
|
|
|
17,613
|
|
|
|
(737
|
)
(3)
|
|
|
16,876
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,155
|
|
|
$
|
(1,097
|
)
|
|
$
|
25,058
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma as adjusted basic net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing unaudited pro forma as adjusted basic
net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma as adjusted diluted net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing unaudited pro forma as adjusted diluted
net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects the reallocation of shoe warehousing and distribution
costs allocated to the leased shoe departments of Value City,
using the allocation parameters set forth in the shared services
agreement.
|
|
(2)
|
Reflects additional estimated operating expenses, including the
reallocation of corporate department charges between Retail
Ventures and DSW, the cost of services to be provided under the
shared services agreement from Retail Ventures to DSW (net of
income to be earned from services provided by DSW to Retail
Ventures) and incremental costs associated with the operation of
DSW as a separate entity.
|
|
(3)
|
The effective tax rate applied to the pro forma adjustments is
40.2%, the tax rate that was in effect for the thirty-nine weeks
ended October 30, 2004.
|
|
(4)
|
During the thirty-nine weeks ended October 30, 2004, DSW
operated as a wholly-owned subsidiary of Retail Ventures and,
accordingly, did not have publicly traded shares outstanding.
Unaudited pro forma as adjusted basic and diluted net income per
share is computed by dividing unaudited pro forma as adjusted
net income by the number of common shares. We assume there will
be Common Shares outstanding after this offering.
|
28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
INCOME
For the Fiscal Year Ended January 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share amounts)
|
|
Net sales
|
|
$
|
791,348
|
|
|
$
|
|
|
|
$
|
791,348
|
|
Cost of sales
|
|
|
588,421
|
|
|
|
(2,355
|
)
(1)
|
|
|
586,066
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
202,927
|
|
|
|
2,355
|
|
|
|
205,282
|
|
Operating expenses
|
|
|
174,874
|
|
|
|
12,600
|
(2)
|
|
|
187,474
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
28,053
|
|
|
|
(10,245
|
)
|
|
|
17,808
|
|
Interest expense
|
|
|
2,739
|
|
|
|
|
|
|
|
2,739
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
25,314
|
|
|
|
(10,245
|
)
|
|
|
15,069
|
|
Income taxes
|
|
|
10,507
|
|
|
|
(4,252
|
)
(3)
|
|
|
6,255
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,807
|
|
|
$
|
(5,993
|
)
|
|
$
|
8,814
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma as adjusted basic net income per share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing unaudited pro forma as adjusted basic
net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma as adjusted diluted net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing unaudited pro forma as adjusted diluted
net income per
share
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects the reallocation of shoe warehousing and distribution
costs allocated to the leased shoe departments of Value City,
using the allocation parameters set forth in the shared services
agreement.
|
|
(2)
|
Reflects additional estimated operating expenses, including the
reallocation of corporate department charges between Retail
Ventures and DSW, the cost of services to be provided under the
shared services agreement from Retail Ventures to DSW (net of
income to be earned from services provided by DSW to Retail
Ventures) and incremental costs associated with the operation of
DSW as a separate entity.
|
|
(3)
|
The effective tax rate applied to the pro forma adjustments is
41.5%, the tax rate that was in effect for the fiscal year ended
January 31, 2004.
|
|
(4)
|
During the fiscal year ended January 31, 2004, DSW operated
as a wholly-owned subsidiary of Retail Ventures and,
accordingly, did not have publicly traded shares outstanding.
Unaudited pro forma as adjusted basic and diluted net income per
share is computed by dividing unaudited pro forma as adjusted
net income by the number of common shares. We assume there will
be Common
Shares outstanding after this offering.
|
29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of October 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
|
|
|
|
Pro Forma As
|
|
|
|
|
Adjusted for the
|
|
|
|
|
|
Capital
|
|
|
Adjusted for
|
|
|
|
|
Offering and for
|
|
|
|
|
|
Structure
|
|
|
Capital Structure
|
|
|
Offering
|
|
|
Capital Structure
|
|
|
|
Actual
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Adjustments
(3)
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Current assets
|
|
$
|
237,393
|
|
|
|
|
|
|
$
|
237,393
|
|
|
|
|
|
|
|
|
|
Advances to affiliates
|
|
|
14,061
|
|
|
|
|
|
|
|
14,061
|
|
|
|
|
|
|
|
|
|
Property & equipment net
|
|
|
85,245
|
|
|
|
|
|
|
|
85,245
|
|
|
|
|
|
|
|
|
|
Goodwill, trademarks & other
|
|
|
39,180
|
|
|
|
|
|
|
|
39,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
375,879
|
|
|
|
|
|
|
$
|
375,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
103,316
|
|
|
|
|
|
|
$
|
103,316
|
|
|
|
|
|
|
|
|
|
Long term obligations
|
|
|
55,000
|
(1)
|
|
|
165,000
|
(2)
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
Other non current liabilities
|
|
|
47,537
|
|
|
|
|
|
|
|
47,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
|
170,026
|
|
|
|
(165,000
|
)
(2)
|
|
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & shareholders equity
|
|
$
|
375,879
|
|
|
|
|
|
|
$
|
375,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents borrowings on the existing revolving credit facility
of Value City, which are attributable to DSW.
|
|
(2)
|
Represents the issuance of $165 million of intercompany
indebtedness incurred to fund a dividend to Retail Ventures.
|
|
(3)
|
Represents the issuance of
$ million
of Class A
Common Shares at an assumed initial offering price of
$ per share (the
midpoint of the price range set forth on the cover page of this
prospectus), the payment of estimated fees and expenses assumed
to be
$ million,
and the application of the net proceeds as set forth under
Use of Proceeds.
|
30
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We present below summary historical financial data. The
following summary historical financial data (i) as of
February 1, 2003 and January 31, 2004, and for each of
fiscal 2001, 2002 and 2003, were derived from our audited
historical consolidated financial statements included elsewhere
in this prospectus, (ii) as of January 29, 2000,
February 3, 2001, and February 2, 2002, and for each
of fiscal 1999 and 2000 were derived from our unaudited
consolidated financial statements for these periods and
(iii) as of October 30, 2004, and for the period ended
November 1, 2003 and October 30, 2004 were derived
from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Thirty-nine
|
|
|
|
For the Fiscal Year Ended
|
|
|
Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
1/29/00
|
|
|
2/3/01
(1)
|
|
|
2/2/02
|
|
|
2/1/03
|
|
|
1/31/04
|
|
|
11/1/03
|
|
|
10/30/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands except per share amounts, store units and square footage)
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
(2)
|
|
$
|
246,595
|
|
|
$
|
421,548
|
|
|
$
|
523,509
|
|
|
$
|
644,345
|
|
|
$
|
791,348
|
|
|
$
|
605,463
|
|
|
$
|
729,406
|
|
|
Gross profit
|
|
$
|
63,651
|
|
|
$
|
103,675
|
|
|
$
|
123,396
|
|
|
$
|
158,756
|
|
|
$
|
202,927
|
|
|
$
|
153,615
|
|
|
$
|
211,979
|
|
|
Operating profit
|
|
$
|
7,660
|
|
|
$
|
9,955
|
|
|
$
|
4,668
|
|
|
$
|
17,781
|
|
|
$
|
28,053
|
|
|
$
|
20,882
|
|
|
$
|
46,228
|
|
|
Net income
|
|
$
|
3,359
|
|
|
$
|
5,242
|
|
|
$
|
239
|
|
|
$
|
8,060
|
|
|
$
|
14,807
|
|
|
$
|
10,947
|
|
|
$
|
26,155
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
175,226
|
|
|
$
|
230,660
|
|
|
$
|
232,821
|
|
|
$
|
295,703
|
|
|
$
|
291,184
|
|
|
|
|
|
|
$
|
375,879
|
|
|
Working
capital
(3)
|
|
$
|
41,168
|
|
|
$
|
2,687
|
|
|
$
|
60,121
|
|
|
$
|
87,141
|
|
|
$
|
103,244
|
|
|
|
|
|
|
$
|
134,077
|
|
|
Current
ratio
(4)
|
|
|
1.73
|
|
|
|
1.03
|
|
|
|
1.77
|
|
|
|
2.07
|
|
|
|
2.39
|
|
|
|
|
|
|
|
2.30
|
|
|
Long term obligations
|
|
$
|
707
|
|
|
$
|
513
|
|
|
$
|
325
|
|
|
$
|
54,116
|
|
|
$
|
35,000
|
|
|
|
|
|
|
$
|
55,000
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of DSW stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
44
|
|
|
|
58
|
|
|
|
78
|
|
|
|
104
|
|
|
|
126
|
|
|
|
126
|
|
|
|
142
|
|
|
|
|
New stores
|
|
|
14
|
|
|
|
20
|
|
|
|
26
|
|
|
|
22
|
|
|
|
16
|
|
|
|
11
|
|
|
|
26
|
|
|
|
|
Closed stores
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
58
|
|
|
|
78
|
|
|
|
104
|
|
|
|
126
|
|
|
|
142
|
|
|
|
137
|
|
|
|
167
|
|
|
|
Comparable DSW stores (units)
|
|
|
38
|
|
|
|
44
|
|
|
|
54
|
|
|
|
74
|
|
|
|
102
|
|
|
|
102
|
|
|
|
124
|
|
|
|
DSW store square footage
added
(5)
|
|
|
343,963
|
|
|
|
544,999
|
|
|
|
684,086
|
|
|
|
584,652
|
|
|
|
386,734
|
|
|
|
267,095
|
|
|
|
702,768
|
|
|
|
|
Average gross square
footage
(6)
|
|
|
1,093,977
|
|
|
|
1,536,307
|
|
|
|
2,217,108
|
|
|
|
2,912,545
|
|
|
|
3,364,094
|
|
|
|
3,301,872
|
|
|
|
3,907,111
|
|
|
|
|
Net sales per average gross sq. ft.
(7)
|
|
$
|
225
|
|
|
$
|
267
|
|
|
$
|
230
|
|
|
$
|
214
|
|
|
$
|
214
|
|
|
$
|
167
|
|
|
$
|
169
|
|
|
Number of leased shoe departments at end of period
|
|
|
0
|
|
|
|
16
|
|
|
|
16
|
|
|
|
113
|
|
|
|
168
|
|
|
|
171
|
|
|
|
225
|
|
|
|
Affiliated leased shoe departments
|
|
|
0
|
|
|
|
16
|
|
|
|
16
|
|
|
|
16
|
|
|
|
17
|
|
|
|
17
|
|
|
|
21
|
|
|
|
Non-affiliated leased shoe departments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
97
|
|
|
|
151
|
|
|
|
154
|
|
|
|
204
|
|
|
Total comparable store sales change
(8)
|
|
|
19.5
|
%
|
|
|
19.1
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
5.9
|
%
|
|
|
4.4
|
%
|
|
|
4.9
|
%
|
|
|
(1)
|
Fiscal 2000 includes 53 weeks; all other years contain
52 weeks.
|
|
(2)
|
Includes net sales of leased shoe departments.
|
|
(3)
|
Working capital represents current assets less current
liabilities.
|
|
(4)
|
Current ratio represents current assets divided by current
liabilities.
|
|
(5)
|
DSW square footage added represents the total amount of square
footage added during the year attributable to new store openings
for DSW stores only; it does not reflect changes in square
footage of leased shoe departments.
|
|
(6)
|
Average gross square footage represents the monthly average of
square feet for DSW stores only for each period presented.
|
31
|
|
(7)
|
Net sales per average gross square foot is the result of
dividing net sales for DSW stores only for the period by average
gross square foot. These amounts are not adjusted to reflect the
impact of opening stores in different periods during the year.
|
|
(8)
|
Comparable DSW stores and comparable leased shoe departments are
those units that have been in operation for at least
14 months at the beginning of the fiscal year. Stores or
leased shoe departments, as the case may be, are added to the
comparable base at the beginning of the year and are dropped for
comparative purposes in the month that they are closed.
|
32
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This managements discussion and analysis of financial
condition and results of operations contains forward-looking
statements that involve risks and uncertainties. Please see
Forward-Looking Statements for a discussion of the
uncertainties, risks and assumptions associated with these
statements. You should read the following discussion in
conjunction with our historical consolidated financial
statements and the notes thereto, our unaudited pro forma
financial statements and the notes to our unaudited pro forma
financial statements appearing elsewhere in this prospectus,
including Prospectus Summary Summary
Consolidated Financial Information,
Capitalization, Unaudited Pro Forma
Consolidated Financial Data and Selected
Consolidated Financial and Operating Data. The results of
operations for the periods reflected herein are not necessarily
indicative of results that may be expected for future periods,
and our actual results may differ materially from those
discussed in the forward-looking statements as a result of
various factors, including but not limited to those listed under
Risk Factors and included elsewhere in this
prospectus.
Overview
DSW is a leading U.S. specialty branded footwear retailer
operating 172 DSW stores in 32 states as of January 29,
2005, with net sales of approximately $791.3 million in
fiscal 2003. We offer in our DSW stores a combination of
selection, convenience and value that we believe differentiates
us from our competitors such as mall-based department stores,
national chains and independent shoe retailers and appeals to
consumers from a broad range of socioeconomic and demographic
backgrounds. In addition to operating DSW stores, as of
January 29, 2005, we operated a total of 202 leased shoe
departments for three non-affiliated retailers and 22 leased
shoe departments for Filenes Basement, a wholly-owned
subsidiary of Retail Ventures. We plan to further strengthen our
position as a leading specialty branded footwear retailer by
pursuing three primary strategies for growth
expanding our store base, driving sales through enhanced
merchandising and continuing to improve profitability.
The first DSW store was opened in July 1991, and in 1998, the
DSW business was acquired by Value City, which subsequently
became a wholly-owned subsidiary of Retail Ventures. In December
2004, Retail Ventures completed a corporate reorganization
whereby Value City Department Stores, Inc., a wholly-owned
subsidiary of Retail Ventures, merged with and into Value City,
another wholly-owned subsidiary of Retail Ventures. In turn,
Value City transferred all the issued and outstanding shares of
DSW to Retail Ventures in exchange for a promissory note. We
have operated as a division of Retail Ventures, and our assets,
liabilities and operating results have been included in Value
Citys or Retail Ventures financial statements, since
the time of our acquisition and the formation of Retail
Ventures, respectively. In connection with the sale of
Class A Common Shares offered pursuant to this prospectus,
DSW will become a publicly-traded company and will operate its
business as a stand-alone entity. For more information regarding
the separation of the DSW business from Retail Ventures, please
see Separation Agreements and
Certain Relationships and Related Party
Transactions Relationships Between Our Company and
Retail Ventures.
Our consolidated financial statements, which are discussed
below, reflect the historical position, results of operations
and cash flows of the DSW business, which has been transferred
to us from Retail Ventures or other affiliates pursuant to the
reorganization. They assume that DSW, for the periods presented,
had existed as a separate legal entity. Our consolidated
financial statements reflect the accounting policies adopted by
Retail Ventures in the preparation of its financial statements.
Some costs have been reflected in the consolidated financial
statements that are not necessarily indicative of the costs that
DSW would have incurred had it operated as an independent,
stand-alone entity for all periods presented. These costs
include allocated portions of Retail Ventures corporate
overhead, interest expense and income taxes.
Sources of Revenue
DSW generates revenues by purchasing primarily in-season shoes
and accessories directly from vendors for sale to customers in
DSW stores and leased shoe departments. We have operated the
leased shoe
33
departments in Stein Mart stores since July 2002 and in Gordmans
stores since June 2004. Filenes Basement leased shoe
department operations are included in our financial statements
beginning in April 2000.
Expansion Strategy
We opened 31 new stores in fiscal 2004 and plan to open
approximately 30 stores in each fiscal year from fiscal 2005
through fiscal 2009. For stores scheduled to open in fiscal
2005, as of January 29, 2005, we have signed leases for 23
new stores and two store relocations. We anticipate that cash
from operations, together with borrowings under our new secured
revolving credit facility, will be adequate to fund operating
expenses, working capital, capital expenditures and our planned
retail expansion. However, there can be no assurance as to the
future availability of external financing or internally
generated funds required to execute our store base expansion
strategy as planned. For more information regarding our plans
for funding our operations and expansion, see
Liquidity and Capital Resources.
Key Financial and
Non-Financial Measures
In evaluating DSWs results of operations, our management
refers to a number of key financial and non-financial measures
relating to the performance of our business. Among our key
financial results are net sales, operating profit and net
income. Non-financial measures that we use in evaluating our
performance include number of DSW stores and leased shoe
departments, net sales per average gross square foot for DSW
stores, and change in comparable stores sales.
The following describes certain line items set forth in our
consolidated statement of income:
Net Sales.
We record net sales exclusive of sales tax and
net of returns. For comparison purposes, we define stores or
leased shoe departments as comparable or non-comparable. A
stores or leased shoe departments sales are included
in comparable sales if the store or leased shoe department has
been in operation at least 14 months at the beginning of
the fiscal year. Stores and leased shoe departments are excluded
from the comparison in the month that they close. Stores that
are remodeled or relocated are excluded from the comparison if
they are closed for more than two fiscal months or are relocated
out of their market area.
Cost of Sales.
Our cost of sales includes the cost of
merchandise, distribution and warehousing, store occupancy,
permanent and point of sale reductions, markdowns and shrinkage
provision. After the consummation of this offering, our cost of
sales will also reflect the impact of shared services.
Operating Expenses.
Operating expenses include expenses
related to store selling, store management and store payroll
costs, advertising, leased shoe department operations, store
depreciation and amortization, pre-opening advertising and other
pre-opening costs (which are expensed as incurred), corporate
expenses for buying services, information services, marketing,
insurance, legal, finance and other corporate related
departments and benefits for associates and related payroll
taxes. After the consummation of this offering, our operating
expenses will also reflect the cost of shared services and the
cost of operating as a public company. Corporate level expenses
are primarily attributable to our corporate offices in Columbus,
Ohio.
Fiscal Year;
Seasonality
We follow a 52/53-week fiscal year that ends on the Saturday
nearest to January 31 in each year. Fiscal 2004, 2003, 2002
and 2001 each consisted of 52 weeks.
Our business, measured in terms of net sales, is subject to
seasonal trends. Our net sales, measured on a comparable stores
basis, have typically been higher in spring and early fall, when
our customers interest in new seasonal styles increases.
In addition, when measured in terms of operating profit, our
business has historically experienced lower levels of
profitability in the fourth quarter of our fiscal year, due
primarily to moderately lower sales in the fourth quarter.
Unlike many other retailers, we have not historically
experienced a large increase in net sales during our fourth
quarter associated with the winter holiday season.
34
Separation Agreements
We will enter into several agreements with Retail Ventures in
connection with the separation of the DSW business from the
Retail Ventures group.
Master Separation Agreement.
The separation agreement
will become effective upon the consummation of this offering.
The master separation agreement contains key provisions relating
to the separation of our business from Retail Ventures. The
master separation agreement will require us to exchange
information with Retail Ventures, follow certain accounting
practices and resolve disputes with Retail Ventures in a
particular manner. We also will agree to maintain the
confidentiality of certain information and preserve available
legal privileges. The separation agreement also will contain
provisions relating to the allocation of the costs of our
initial public offering, indemnification, non-solicitation of
employees and employee benefit matters.
Under the master separation agreement, we have agreed to effect
up to one demand registration per calendar year under applicable
federal and state securities laws of our Common Shares, whether
Class A or Class B, held by Retail Ventures, if
requested by Retail Ventures. We have also granted Retail
Ventures the right to include its Common Shares of DSW in an
unlimited number of other registrations of such shares initiated
by us or on behalf of our other shareholders.
Shared Services Agreement.
Many aspects of our business,
which were fully managed and controlled by us without Retail
Ventures involvement, will continue to operate as they did
prior to this offering. We will continue to manage operations
for critical functions such as merchandise buying, planning and
allocation, distribution and store operations. Under the shared
services agreement, which when signed will become effective as
of January 30, 2005, we will provide services to several
subsidiaries of Retail Ventures relating to planning and
allocation support, distribution services and outbound
transportation management, site research, lease negotiation,
store design and construction management. Retail Ventures will
provide us with services relating to import administration, risk
management, information technology, tax, logistics and inbound
transportation management, legal services, financial services,
shared benefits administration and payroll and will maintain
insurance for us and for our directors, officers, and employees.
We anticipate that the initial term of the shared services
agreement will expire at the end of fiscal 2007 and will be
extended automatically for additional one-year terms unless
terminated by one of the parties. We expect some of these
services to be provided for longer or shorter periods than the
initial term.
Tax Separation Agreement.
We have historically been
included in Retail Ventures consolidated group, or the
Consolidated Group, for U.S. federal income tax purposes as
well as in certain consolidated, combined or unitary groups
which include Retail Ventures and/or certain of its
subsidiaries, or a Combined Group, for state and local income
tax purposes. We intend to enter into a tax separation agreement
with Retail Ventures that will become effective upon
consummation of this offering. Pursuant to the tax separation
agreement, we and Retail Ventures generally will make payments
to each other such that, with respect to tax returns for any
taxable period in which we or any of our subsidiaries are
included in the Consolidated Group or any Combined Group, the
amount of taxes to be paid by us will be determined, subject to
certain adjustments, as if we and each of our subsidiaries
included in the Consolidated Group or Combined Group filed our
own consolidated, combined or unitary tax return. Retail
Ventures will prepare pro forma tax returns for us with respect
to any tax return filed with respect to the Consolidated Group
or any Combined Group in order to determine the amount of tax
separation payments under the tax separation agreement. We will
have the right, under certain circumstances, to review and
comment on such pro forma tax returns. We will be responsible
for any taxes with respect to tax returns that include only us
and our subsidiaries.
Retail Ventures will be exclusively responsible for preparing
and filing any tax return with respect to the Consolidated Group
or any Combined Group. We generally will be responsible for
preparing and filing any tax returns that include only us and
our subsidiaries. Retail Ventures has agreed to undertake to
provide these services with respect to our separate tax returns.
For the tax services to be provided to us by Retail Ventures, we
will pay Retail Ventures a monthly fee equal to 50% of all costs
associated with the maintenance and operation of Retail
Ventures tax department (including all overhead expenses).
In addition, we will reimburse Retail Ventures for 50% of any
third party fees and expenses generally incurred by Retail
Ventures tax
35
department and 100% of any third party fees and expenses
incurred by Retail Ventures tax department solely in
connection with the performance of the tax services to be
provided to us.
Retail Ventures will be primarily responsible for controlling
and contesting any audit or other tax proceeding with respect to
the Consolidated Group or any Combined Group; provided, however,
that, except in cases involving taxes relating to a spin-off, we
will have the right to control decisions to resolve, settle or
otherwise agree to any deficiency, claim or adjustment with
respect to any item for which we are solely liable under the tax
separation agreement. Pursuant to the tax separation agreement,
we will have the right to control and contest any audit or tax
proceeding that relates to any tax returns that include only us
and our subsidiaries. We and Retail Ventures will have joint
control over decisions to resolve, settle or otherwise agree to
any deficiency, claim or adjustment for which we and Retail
Ventures could be jointly liable, except in cases involving
taxes relating to a spin-off. Disputes arising between the
parties relating to matters covered by the tax separation
agreement are subject to resolution through specific dispute
resolution provisions.
We have been included in the Consolidated Group for periods in
which Retail Ventures owned at least 80% of the total voting
power and value of the our outstanding stock. It is not expected
that we will be included in the Consolidated Group following the
offering. Each member of a consolidated group for
U.S. federal income tax purposes is jointly and severally
liable for the U.S. federal income tax liability of each
other member of the consolidated group. Similarly, in some
jurisdictions, each member of a consolidated, combined or
unitary group for state, local or foreign income tax purposes is
jointly and severally liable for the state, local or foreign
income tax liability of each other member of the consolidated,
combined or unitary group. Accordingly, although the tax
separation agreement allocates tax liabilities between us and
Retail Ventures, for any period in which we were included in the
Consolidated Group or a Combined Group, we could be liable in
the event that any income tax liability was incurred, but not
discharged, by any other member of the Consolidated Group or a
Combined Group.
As of the date of this prospectus Retail Ventures does not
intend or plan to undertake a spin-off of our stock to Retail
Ventures stockholders. Nevertheless, we and Retail Ventures have
agreed to set forth our respective rights, responsibilities and
obligations with respective to any possible spin-off in the tax
separation agreement. If Retail Ventures were to decide to
pursue a possible spin-off, we have agreed to cooperate with
Retail Ventures and to take any and all actions reasonably
requested by Retail Ventures in connection with such a
transaction. We have also agreed not to knowingly take or fail
to take any actions that could reasonably be expected to
preclude Retail Ventures ability to undertake a tax-free
spin-off. In addition, we generally would be responsible for any
taxes resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of us and Retail Ventures at the time of such
spin-off) of such taxes to the extent such taxes are not
otherwise attributable to us or Retail Ventures. Our agreements
in connection with such spin-off matters last indefinitely. In
addition, present and future majority-owned affiliates of DSW or
Retail Ventures will be bound by our agreements, unless Retail
Ventures or we, as applicable, consent to grant a release of an
affiliate (such consent cannot be unreasonably withheld,
conditioned or delayed), which may limit our ability to sell or
otherwise dispose of such affiliates. Additionally, a minority
interest participant(s) in a future joint venture, if any, would
need to evaluate the effect of the tax separation agreement on
such joint venture, and such evaluation may negatively affect
their decision whether to participate in such a joint venture.
Furthermore, the tax separation agreement may negatively affect
our ability to acquire a majority interest in a joint venture.
Critical Accounting Policies
and Estimates.
As discussed in Note 1 to our consolidated financial
statements included elsewhere in this prospectus, the
preparation of our consolidated financial statements in
conformity with generally accepted accounting principles, or
GAAP, 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
36
statements and reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, we evaluate our
estimates and judgments, including, but not limited to, those
related to inventory valuation, depreciation, amortization,
recoverability of long-lived assets (including intangible
assets), estimates for self insurance reserves for health and
welfare, workers compensation and casualty insurance,
income taxes, contingencies, litigation and revenue recognition.
We base these estimates and judgments on our historical
experience and other factors we believe to be relevant, 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 our financial statements.
We believe the following represent the most significant
accounting policies, critical estimates and assumptions, among
others, used in the preparation of our consolidated financial
statements:
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Revenue Recognition.
Revenues from merchandise sales are
recognized at the point of sale and are net of returns and
exclude sales tax. Revenue from gift cards is deferred and the
revenue is recognized upon redemption of the gift cards.
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Cost of Sales and Merchandise Inventories.
Merchandise
inventories are stated at the lower of cost, determined using
the first-in, first-out basis, or market, using the retail
inventory method. The retail inventory method is widely used in
the retail industry due to its practicality. Under the retail
inventory method, the valuation of inventories at cost and the
resulting gross profit 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 $11.5 million
and $11.4 million at the end of fiscal 2003 and 2002,
respectively.
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Inherent in the calculation of inventories are certain
significant management judgments and estimates, including
setting the original merchandise retail value or mark-on,
markups of initial prices established, reductions in prices due
to customers perception of value (known as markdowns), and
estimates of losses between physical inventory counts, or
shrinkage, which, combined with the averaging process within the
retail inventory method, can significantly impact the ending
inventory valuation at cost and the resulting gross profit.
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We include in the cost of sales expenses associated with
warehousing, distribution and store occupancy. Warehousing costs
are comprised of labor, benefits and other labor-related costs
associated with the operations of the warehouse, which are
primarily payroll-related taxes and benefits. The non-labor
costs include rent, insurance, utilities and maintenance and
other operating costs that are passed to us from the landlord.
Distribution costs include the transportation of merchandise to
the warehouse and from the warehouse to our stores. Store
occupancy costs include rent, utilities, repairs, maintenance
and janitorial costs and other costs associated with licenses
and occupancy-related taxes, which are primarily real estate
taxes passed to us by our landlords.
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Asset Impairment and Long-lived Assets.
We must
periodically evaluate the carrying amount of our long-lived
assets, primarily property and equipment, and finite life
intangible assets when events and circumstances warrant such a
review to ascertain if any assets have been impaired. The
carrying amount of a long-lived asset is considered impaired
when the carrying value of the asset exceeds the expected future
cash flows (undiscounted and without interest) from the asset.
Our reviews are
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37
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conducted down at the lowest identifiable level, which include a
store. The impairment loss recognized is the excess of the
carrying value, based on discounted future cash flows, of the
asset over its fair value. Should an impairment loss be
realized, it will be included in operating expenses. The amount
of impairment losses recorded during fiscal 2003, 2002 and 2001
were immaterial to the financial statements. We believe at this
time that the 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.
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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 the total cost of claims for health and
welfare, workers compensation and casualty insurance exceed
those anticipated, reserves recorded may not be sufficient, and,
to the extent actual results vary from assumptions, earnings
would be impacted.
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Customer Loyalty Program.
We maintain a customer loyalty
program for our DSW stores in which customers receive a future
discount on qualifying purchases. The Reward Your
Style program is designed to promote customer awareness
and loyalty and provide us with the ability to communicate with
our customers and enhance our understanding of their spending
trends. Upon reaching the target spending 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 operating 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. The accrued liability as of
January 31, 2004, and February 1, 2003 was
$3.0 million and $2.0 million, respectively. To the
extent assumptions of purchases and redemption rates vary from
actual results, earnings would be impacted.
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Income Taxes.
We are required to determine the aggregate
amount of income tax expense to accrue and the amount which will
be currently payable based upon tax statutes of each
jurisdiction we do business in. In making these estimates, we
adjust income based on a determination of generally accepted
accounting principles for items that are treated differently by
the applicable taxing authorities. Deferred tax assets and
liabilities, as a result of these differences, are reflected on
our balance sheet for temporary differences that will reverse in
subsequent years. A valuation allowance is established against
deferred tax assets when it is more likely than not that some or
all of the deferred tax assets will not be realized. If our
management had made these determinations on a different basis,
our tax expense, assets and liabilities could be different.
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38
Results of Operations
As of October 30, 2004, we operated 167 DSW stores and
leased shoe departments in 155 Stein Mart locations,
48 Gordmans locations, 21 Filenes Basement
locations and one Frugal Fannies location. We manage our
operations as one segment. The following table represents
selected components of our historical consolidated results of
operations, expressed as percentages of net sales:
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For the Thirty-Nine Weeks
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For the Fiscal Year Ended
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Ended
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February 2,
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February 1,
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January 31,
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November 1,
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October 30,
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2002
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2003
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2004
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2003
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2004
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(52 Weeks)
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(52 Weeks)
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(52 Weeks)
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(39 Weeks)
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(39 Weeks)
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Net sales, including sales from leased departments
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100.0
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%
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100.0
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%
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100.0
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%
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|
100.0
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%
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100.0
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%
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Cost of sales
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(76.4
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)
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|
(75.4
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)
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|
(74.4
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)
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|
(74.6
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)
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(70.9
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)
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Gross profit
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23.6
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24.6
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25.6
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25.4
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29.1
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|
Operating expenses
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|
(22.7
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)
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|
(21.9
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)
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|
(22.1
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)
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|
(21.9
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)
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|
(22.8
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)
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Operating profit
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0.9
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|
2.7
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|
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|
3.5
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|
3.5
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|
6.3
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|
Interest expense, net
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|
(0.8
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)
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|
|
(0.6
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)
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
|
|
(0.3
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes
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|
|
0.1
|
|
|
|
2.1
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|
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|
3.2
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|
|
|
3.1
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|
|
|
6.0
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|
Provision for income taxes
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|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
|
|
(1.3
|
)
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|
|
(1.3
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)
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|
|
(2.4
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)
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|
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|
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|
|
|
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|
Net income
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|
|
0.0
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%
|
|
|
1.2
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%
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|
|
1.9
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%
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|
|
1.8
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
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|
|
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Thirty-Nine Weeks Ended October 30, 2004 Compared to the
Thirty-Nine Weeks Ended November 1, 2003
Net Sales.
Net sales for the thirty-nine weeks ended
October 30, 2004 increased by 20.5% to $729.4 million
from $605.5 million for the comparable period in fiscal
2003. This increase includes a net increase of 30 DSW stores, 50
non-affiliated leased shoe departments and four Filenes
Basement leased shoe departments over the comparable prior year
period. In June 2004, we entered into a lease arrangement with
Gordmans, a non-affiliated third party, to operate its leased
shoe departments. Our comparable store and leased shoe
department sales in the first thirty-nine weeks of fiscal 2004
improved 4.9% compared to the previous year.
Net sales for DSW stores in the thirty-nine weeks ended
October 30, 2004, compared to the comparable thirty-nine
week period of fiscal 2003, increased in womens 3.6%,
mens 0.1%, athletic 9.7%, and accessories 14.4%. The
increase in womens was driven by improvements in the
moderate and better dress categories. The increase in athletic
was primarily driven by the fashion category in both mens
and womens. The increase in accessories was driven by both
the handbag and gift item categories. Leased shoe department
sales comprised 9.2% of net sales in the thirty-nine weeks ended
October 30, 2004, compared to 8.9% in the comparable period
in fiscal 2003.
Gross Profit.
Gross profit for the thirty-nine weeks
ended October 30, 2004 increased $58.4 million to
$212.0 million from $153.6 million in the comparable
thirty-nine weeks in fiscal 2003. Gross profit increased as a
percentage of net sales to 29.1% in the thirty-nine weeks ended
October 30, 2004 from 25.4% in the comparable thirty-nine
week period of fiscal 2003. The gross profit increase is
primarily attributable to higher initial markups on merchandise
purchases, evidenced by an increase in average unit retail
prices and a reduction in markdowns resulting from a strong
spring selling season, and a decrease in warehouse expense as a
percentage of net sales to 2.2% in the thirty-nine weeks ended
October 30, 2004 from 2.5% for the comparable period of
fiscal 2003. Store occupancy costs decreased from 12.4% of sales
in the comparable thirty-nine week period of fiscal 2003 to
12.1% of sales in the comparable thirty-nine weeks of fiscal
2004.
Operating Expenses.
Operating expenses for the
thirty-nine weeks ended October 30, 2004 increased
$33.1 million from the comparable period of fiscal 2003 to
$165.8 million, which represented 22.8% of sales.
39
The thirty-nine week period of fiscal 2004 includes
$8.8 million in pre-opening costs compared to
$2.6 million in the comparable period of the prior fiscal
year. Pre-opening costs are expensed as incurred and, therefore,
do not necessarily reflect expenses for the stores opened in a
given fiscal period. Included in operating expenses is the
related operating cost associated with operating the leased shoe
departments, excluding occupancy.
Operating Profit.
Operating profit for the thirty-nine
weeks ended October 30, 2004 was $46.2 million
compared to $20.9 million in the comparable thirty-nine
weeks of fiscal 2003. Operating profit was 6.3% and 3.5% of net
sales in the comparable thirty-nine week periods in fiscal 2004
and 2003, respectively. Operating profit in the period was
positively affected by the inclusion of operations for the full
thirty-nine week period for the stores and leased shoe
departments opened in the previous fiscal year.
Interest Expense.
Interest expense, net of interest
income, increased $0.3 million to $2.5 million for the
thirty-nine weeks ended October 30, 2004 from
$2.2 million for the comparable period of fiscal 2003 due
primarily to higher outstanding debt, partially offset by lower
weighted average borrowing rates. Interest expense includes the
amortization of debt discount of $0.4 million in each of
the thirty-nine week periods.
Income Taxes.
Our effective tax rate for the thirty-nine
weeks ended October 30, 2004 was 40.2%, compared to 41.5%
for the comparable thirty-nine weeks of fiscal 2003. The
reduction was the result of the reduced impact of permanent
differences on taxable income.
Fiscal Year Ended January 31, 2004 (Fiscal 2003)
Compared To Fiscal Year Ended February 1, 2003 (Fiscal
2002)
Net Sales.
Net sales for the fifty-two weeks ended
January 31, 2004 increased by 22.8% to $791.3 million
from $644.3 million in the fifty-two week period of fiscal
2002. This increase includes a net increase of 16 DSW stores, 54
non-affiliated leased shoe departments and one Filenes
Basement leased shoe department in fiscal 2003. Our comparable
store sales in fiscal 2003 improved 5.9% compared to the
previous fiscal year.
Net sales for DSW stores increased in fiscal 2003 compared to
fiscal 2002 in womens 7.3%, mens 4.5%, athletic 1.5%
and accessories 3.2%. The increase in womens was primarily
attributable to strong year-long comparative store performance
in the womens better category and strong seasonal boot
performance in the fourth quarter of fiscal 2003. The increase
in mens was primarily driven by increases in the casual
and fashion dress shoe categories. In athletic, the increase was
primarily attributable to an increase in the mens athletic
category. The increase in accessories was primarily driven by an
increase in the gift category. Leased shoe department sales
comprised 8.9% of net sales in fiscal 2003, compared to 3.5% in
fiscal 2002.
Gross Profit.
Gross profit increased $44.1 million
from $158.8 million in fiscal 2002 to $202.9 million
in fiscal 2003, and increased as a percentage of net sales from
24.6% to 25.6% for the same period. Our gross profit increase is
primarily attributable to higher initial markups on merchandise
purchases, evidenced by the increase in average unit retail
prices and a decrease in warehouse expense as a percentage of
sales from 2.7% in fiscal 2002 to 2.5% in fiscal 2003. These
components were offset by increases in store occupancy from
12.1% of sales in fiscal 2002 to 12.8% of net sales in fiscal
2003. The increase in store occupancy is the result of higher
rents on newer stores.
Operating Expenses.
For fiscal 2003, operating expenses
increased $33.9 million from fiscal 2002 levels to
$174.9 million, which represented 22.1% of net sales.
Fiscal 2003 includes $5.1 million in pre-opening costs
compared to $2.9 million in the prior fiscal year.
Pre-opening costs are expensed as incurred and therefore do not
necessarily reflect expenses for the stores opened in a given
fiscal year. Included in operating expenses is the related
operating cost associated with operating the leased shoe
departments, excluding occupancy.
Operating Profit.
Operating profit was $28.1 million
in fiscal 2003 compared to $17.8 million in fiscal 2002. As
a percentage of net sales, operating profit was 3.5% and 2.7% in
fiscal 2003 and 2002, respectively. Operating profit was
positively affected by the full year of operations for the
stores and leased operations opened in the previous year.
40
Interest Expense.
Interest expense, net of interest
income, decreased $1.2 million from $3.9 million in
fiscal 2002 to $2.7 million in fiscal 2003 due primarily to
the write-off in fiscal 2002 of unamortized debt issuance costs
and a decrease in the average weighted borrowing rate offset in
part by an increase in average weighted borrowings. Interest
expense includes the amortization of debt issuance costs of
$0.5 million in each of fiscal 2003 and fiscal 2002.
Income Taxes.
Our effective tax rate for fiscal 2003 was
41.5%, versus 42.0% for fiscal 2002. The decrease in the
effective tax rate was primarily due to the decrease in
non-deductible expenses for tax purposes.
Fiscal Year Ended February 1, 2003 (Fiscal 2002)
Compared To Fiscal Year Ended February 2, 2002 (Fiscal
2001)
Net Sales.
Net sales for the fifty-two weeks ended
February 1, 2003 increased by 23.1% to $644.3 million
from $523.5 million in the fifty-two week period of fiscal
2001. This increase includes a net increase of 22 DSW
stores and 97 non-affiliated leased shoe departments in
fiscal 2002. Our comparable store and leased shoe department
sales in fiscal 2002 increased 0.1% compared to the previous
fiscal year.
Net sales for DSW stores increased in fiscal 2002 compared to
fiscal 2001 in athletic 8.8% and accessories 7.4% but decreased
in womens 2.4% and mens 0.3%. The decrease in
womens was primarily attributable to a decrease in the
womens casual category. The decrease in mens was
attributable to a drop in our seasonal business, offset by
increases in the casual and dress shoes categories. The increase
in athletic is primarily attributable to the expansion of the
assortment beyond our core product offering by adding a fashion
category for both men and women. Accessories growth was
primarily driven by expansion of the gift category, specifically
personal care products. Leased shoe department sales comprised
3.5% of net sales in fiscal 2002 compared to 2.7% in fiscal 2001.
Gross Profit.
Gross profit increased $35.4 million
from $123.4 million in fiscal 2001 to $158.8 million
in fiscal 2002, and increased as a percentage of net sales from
23.6% to 24.6% for the same periods. Our gross profit increase
was primarily attributable to higher initial markups on
merchandise purchases, evidenced by the increase in average unit
retail prices and a decrease in warehousing expense from 3.1% in
fiscal 2001 to 2.7% in fiscal 2002. These components were offset
by an increase in store occupancy expense as a percentage of net
sales from 11.6% to 12.1% of net sales. The increase in store
occupancy is the result of increased rents in newer stores.
Operating Expenses.
For fiscal 2002, operating expenses
increased $22.3 million from fiscal 2001 levels to
$141.0 million, which represented 21.9% of net sales.
Fiscal 2002 includes $2.9 million in pre-opening costs
compared to $4.3 million in the prior fiscal year.
Pre-opening costs are expensed as incurred and therefore do not
necessarily reflect expenses for the stores opened in a given
fiscal year.
Operating Profit.
Operating profit was $17.8 million
in fiscal 2002 compared to an operating profit of
$4.7 million in fiscal 2001. As a percentage of net sales,
operating profit was 2.7% and 0.9% in fiscal 2002 and 2001,
respectively.
Interest Expense.
Interest expense, net of interest
income, increased $0.3 million from $3.6 million in
fiscal 2001 to $3.9 million in fiscal 2002 due primarily to
the write off of unamortized debt issuance costs, which was
partially offset by a decrease in the average weighted borrowing
rate. Interest expense includes the amortization of debt
issuance costs of $0.5 million in fiscal 2002.
Income Taxes.
Our effective tax rate for fiscal 2002 was
42.0% versus 76.7% for fiscal 2001. There was a decrease in the
effective tax rate primarily due to the increase in income
relative to the permanent differences that remained
substantially unchanged from the prior year.
41
Quarterly Results
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Quarterly Operations Data
|
The following tables set forth unaudited quarterly condensed
consolidated statements of operations data, expressed in
thousands of dollars. This quarterly information is unaudited,
but has been prepared on the same basis as the annual
consolidated financial statements included elsewhere in this
prospectus and, in the opinion of our management, reflects all
adjustments necessary for a fair representation of the
information for the periods presented. This quarterly condensed
statement of income data should be read in conjunction with our
audited consolidated financial statements and the related notes
included elsewhere in this prospectus. Operation results for any
quarter are not necessarily indicative of results for any future
period or for the full fiscal year.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
FY2002
|
|
|
FY2003
|
|
|
FY2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/4/02
|
|
|
8/3/02
|
|
|
11/2/02
|
|
|
2/1/03
|
|
|
5/3/03
|
|
|
8/2/03
|
|
|
11/1/03
|
|
|
1/31/04
|
|
|
5/1/04
|
|
|
7/31/04
|
|
|
10/30/04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
159,680
|
|
|
$
|
163,073
|
|
|
$
|
174,597
|
|
|
$
|
146,995
|
|
|
$
|
186,715
|
|
|
$
|
197,327
|
|
|
$
|
221,421
|
|
|
$
|
185,885
|
|
|
$
|
232,559
|
|
|
$
|
234,403
|
|
|
$
|
262,444
|
|
Cost of sales
|
|
|
119,096
|
|
|
|
121,040
|
|
|
|
129,443
|
|
|
|
116,010
|
|
|
|
144,718
|
|
|
|
145,607
|
|
|
|
161,523
|
|
|
|
136,573
|
|
|
|
164,972
|
|
|
|
167,464
|
|
|
|
184,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,584
|
|
|
|
42,033
|
|
|
|
45,154
|
|
|
|
30,985
|
|
|
|
41,997
|
|
|
|
51,720
|
|
|
|
59,898
|
|
|
|
49,312
|
|
|
|
67,587
|
|
|
|
66,939
|
|
|
|
77,453
|
|
Operating expenses
|
|
|
33,590
|
|
|
|
34,502
|
|
|
|
41,410
|
|
|
|
31,473
|
|
|
|
42,363
|
|
|
|
42,904
|
|
|
|
47,466
|
|
|
|
42,141
|
|
|
|
53,782
|
|
|
|
51,305
|
|
|
|
60,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
6,994
|
|
|
|
7,531
|
|
|
|
3,744
|
|
|
|
(488
|
)
|
|
|
(366
|
)
|
|
|
8,816
|
|
|
|
12,432
|
|
|
|
7,171
|
|
|
|
13,805
|
|
|
|
15,634
|
|
|
|
16,789
|
|
Interest expense
|
|
|
1,175
|
|
|
|
1,405
|
|
|
|
678
|
|
|
|
616
|
|
|
|
924
|
|
|
|
627
|
|
|
|
634
|
|
|
|
554
|
|
|
|
726
|
|
|
|
745
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
5,819
|
|
|
|
6,126
|
|
|
|
3,066
|
|
|
|
(1,104
|
)
|
|
|
(1,290
|
)
|
|
|
8,189
|
|
|
|
11,798
|
|
|
|
6,617
|
|
|
|
13,079
|
|
|
|
14,889
|
|
|
|
15,800
|
|
Income tax (provision) benefit
|
|
|
(2,446
|
)
|
|
|
(2,575
|
)
|
|
|
(1,290
|
)
|
|
|
464
|
|
|
|
535
|
|
|
|
(3,395
|
)
|
|
|
(4,890
|
)
|
|
|
(2,757
|
)
|
|
|
(5,263
|
)
|
|
|
(5,992
|
)
|
|
|
(6,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,373
|
|
|
$
|
3,551
|
|
|
$
|
1,776
|
|
|
$
|
(640
|
)
|
|
$
|
(755
|
)
|
|
$
|
4,794
|
|
|
$
|
6,908
|
|
|
$
|
3,860
|
|
|
$
|
7,816
|
|
|
$
|
8,897
|
|
|
$
|
9,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales change
|
|
|
1.6
|
%
|
|
|
(1.8%
|
)
|
|
|
1.8
|
%
|
|
|
(1.5%
|
)
|
|
|
(3.5%
|
)
|
|
|
4.8
|
%
|
|
|
12.0
|
%
|
|
|
11.6
|
%
|
|
|
11.4
|
%
|
|
|
3.2
|
%
|
|
|
0.9
|
%
|
Liquidity and Capital Resources
Our primary ongoing cash requirements are for seasonal and new
store inventory purchases, capital expenditures in connection
with our expansion, the remodeling of existing stores and
infrastructure growth. We have historically funded our
expenditures with cash flows from operations and borrowings
under the Retail Ventures credit facilities to which we have
been a party, as described below. Our working capital and
inventory levels typically build seasonally. We believe that we
will be able to continue to fund our operating requirements and
the expansion of our business pursuant to our growth strategy in
the future with cash flows from operations and borrowings under
the new DSW secured revolving credit facility we are entering
into in connection with the separation of the DSW business from
Retail Ventures, although we can give no assurance in this
regard.
On or about the date of the consummation of this offering,
Retail Ventures expects to amend or terminate the existing
credit facilities and other debt obligations of Value City and
its other affiliates, including certain facilities under which
DSW has rights and obligations as a co-borrower and
co-guarantor. For further description of these facilities and
our new secured revolving credit facility, see Description
of Indebtedness.
42
The Value City Revolving Credit Facility.
Until the
amendment or replacement of this revolving credit agreement, we
will continue to be a co-borrower under a Loan and Security
Agreement, as amended, entered into with National City Business
Credit, Inc., or National City, as administrative agent, and the
other parties named therein, originally entered into in June
2002. We, Value City and other Retail Ventures affiliates are
currently named as co-borrowers, and Retail Ventures is a
co-guarantor. The maturity date of the facility is June 11,
2006. This revolving credit agreement allows DSW and the other
Retail Ventures affiliates named as co-borrowers to draw on a
$425 million revolving credit facility, subject to applicable
borrowing base restrictions. All the capital stock of DSW and
DSWSW is pledged to National City, as administrative agent, in
favor of the revolving credit facility lenders. We, Retail
Ventures and the other co-borrowers and guarantors named therein
are jointly and severally liable for all liabilities incurred
under the agreement. We have reflected our direct obligations
under this revolving credit facility as they relate to
borrowings secured by our assets in our historical financial
statements included elsewhere in this prospectus. For additional
information regarding this revolving credit facility, see
Financing Activities.
Under the Value City revolving credit facility, the borrowing
base formula applicable to DSW has been based on the value of
our inventory and receivables. Primary security for this
revolving credit facility is provided in part by a first
priority lien on all of the inventory and accounts receivable of
DSW and the other co-borrowers thereunder, as well as certain
intercompany notes and payment intangibles. Subject to the
provisions of an intercreditor agreement, this revolving credit
facility also has the substantial equivalent of a second
priority perfected security interest in all the first priority
collateral securing the Value City aggregate $100 million
term loans and the Value City $75 million convertible loan,
including all of the capital stock of DSW and DSWSW. We are a
co-borrower under this revolving credit facility, and will
remain obligated thereunder until the amendment or replacement
of this revolving credit agreement described below. Interest on
borrowings under this revolving credit facility is calculated at
the banks base rate plus 0.0% to 0.5%, or at the
Eurodollar rate plus 2.00% to 2.75%, depending upon the level of
average excess availability that DSW and the other co-borrowers
maintain. At October 30, 2004 and January 31, 2004,
$103.1 million and $120.0 million were available,
respectively, under this revolving credit facility. Direct
borrowings by us aggregated $55.0 million and
$35.0 million as of October 30, 2004 and
January 31, 2004, respectively, while $9.4 million and
$11.4 million letters of credit were issued and outstanding
as of October 30, 2004 and January 31, 2004,
respectively.
On or about the date of the consummation of this offering,
Retail Ventures and its affiliates will amend or replace the
revolving credit agreement, and we will be released from our
obligations thereunder. In addition, National City will release
its liens on the shares of our capital stock held by Retail
Ventures and the capital stock of DSWSW held by us.
Simultaneously, DSW expects to enter into a new
$150 million secured revolving credit facility with a term
of five years. Under this facility, we expect that we and our
subsidiary, DSW Shoe Warehouse, Inc., will be named as
co-borrowers. This new DSW facility is expected to have
borrowing base restrictions and will provide for borrowings at
variable interest rates based on LIBOR, the prime rate and the
Federal Funds effective rate, plus a margin. Our obligations
under our new secured revolving credit facility will be secured
by a lien on substantially all of our and our subsidiarys
personal property. We will be subject to financial covenants
under this new secured revolving credit facility. In addition,
our new secured revolving credit facility will contain usual and
customary restrictive covenants relating to our management and
the operation of our business. These non-financial covenants
will restrict, among other things, our ability to incur debt,
guarantee indebtedness, grant liens on our assets, enter into
transactions with affiliates and dispose of assets.
The Value City Term Loan Facility.
Until the amendment of
this term loan agreement, we will continue to be a co-borrower
under a Financing Agreement, as amended, among Cerberus, as
agent, and other parties named therein, originally entered into
in June 2002. Under the terms of this term loan agreement,
Cerberus and SSC each provided to us, Value City and other
Retail Ventures affiliates a separate $50 million
three-year term loan. Retail Ventures is named as a
co-guarantor. In July 2004, the maturity date of these loans was
extended until June 11, 2006. In connection with these
loans, Retail Ventures issued to each of Cerberus and SSC
warrants to purchase 1,477,396 common shares of Retail
Ventures at a purchase price of $4.50 per share, subject to
adjustment. In September 2002, Back Bay bought from each of
Cerberus and SSC a
43
$3.0 million interest in each of their term loans and
received a corresponding portion of the warrants to purchase
Retail Ventures stock from each of Cerberus and SSC. All the
capital stock of DSW and DSWSW is pledged to Cerberus, as agent,
in favor of SSC, Cerberus and Back Bay. As a co-borrower, we are
jointly and severally liable for the performance and payment of
obligations under this financing agreement; however, this
indebtedness has not been reflected in our historical financial
statements included elsewhere in this prospectus as it is
recorded on the books of Retail Ventures.
On or about the date of the consummation of this offering, we
expect to be released from our obligations as a co-borrower
pursuant to the amendment of this term loan agreement. We have
been advised by Retail Ventures that they expect to repay all
the term loan indebtedness on or about the date of the
consummation of this offering. In connection with the amendment
of this term loan agreement, Retail Ventures has agreed to amend
the outstanding warrants to provide SSC, Cerberus and Back Bay
the right, from time to time, either to (i) acquire Retail
Ventures common shares at the then current conversion price
(subject to the existing antidilution provisions) or
(ii) acquire from Retail Ventures Class A Common
Shares of DSW at the price of shares sold to the public in this
offering (subject to antidilution provisions similar to those in
the existing warrants). Prior to the consummation of this
offering, we will enter into an exchange agreement with Retail
Ventures whereby, upon the request of Retail Ventures, we will
be required to exchange some or all of the Class B Common
Shares held by Retail Ventures for Class A Common Shares.
See Certain Relationships and Related Party
Transactions Relationships Between our Company and
Retail Ventures Agreements Relating to our
Separation from Retail Ventures Exchange
Agreement.
The Value City Senior Subordinated Convertible Loan
Facility.
Until the amendment of this convertible loan
agreement, we will continue to be a co-guarantor under an
Amended and Restated Senior Subordinated Convertible Loan
Agreement, as amended, entered into with Cerberus, as agent and
lender, SSC, as lender, and the other parties named therein,
originally entered into in June 2002. Under this agreement, SSC
initially provided a $75 million loan, now held equally by
SSC and Cerberus, to Value City, as borrower, which is
convertible at the option of the lenders into common shares of
Retail Ventures at an initial conversion price of $4.50 per
share. All the capital stock of DSW and DSWSW is pledged to
Cerberus, as agent, in favor of Cerberus and SSC. Retail
Ventures is a co-guarantor under this convertible loan
agreement, and the maturity date of this convertible loan is
June 10, 2009. This indebtedness has not been reflected in
our historical financial statements included elsewhere in this
prospectus as it is recorded on the books of Retail Ventures.
This indebtedness originated as a $75 million loan made to
Value City by an institutional lender in March 2000, which was
assigned to SSC in December 2000.
On or about the date of the consummation of this offering, we
expect to be released from our obligations as a co-guarantor
pursuant to the amendment of this agreement. The
$75 million convertible loan will be converted into a
$75 million non-convertible loan, and the capital stock of
DSW held by Retail Ventures will continue to secure the amended
loan facility. In addition, in connection with the amendment of
this convertible loan agreement, Retail Ventures has agreed to
issue to SSC and Cerberus convertible warrants which will be
exercisable from time to time until the later of June 11,
2007 and the repayment in full of Value Citys obligations
under the amended loan agreement.
Under the convertible warrants, SSC and Cerberus will have, from
time to time, the right either to (i) acquire Retail
Ventures common shares at the conversion price referred to in
the convertible loan (subject to existing antidilution
provisions) or (ii) acquire from Retail Ventures
Class A Common Shares of DSW at a strike price equal to the
price of the shares to the public in this offering (subject to
antidilution provisions similar to those in the existing
warrants). SSC and Cerberus may acquire an aggregate number of
Class A Common Shares of DSW from Retail Ventures which, at
the price of shares sold in this offering, have a value equal to
the outstanding principal amount of the amended loan facility.
Prior to the consummation of this offering, we will enter into
an exchange agreement with Retail Ventures whereby, upon the
request of Retail Ventures, we will be required to exchange some
or all of the Class B Common Shares held by Retail Ventures
for Class A Common Shares. See Certain Relationships
and Related Party Transactions Relationships Between
our Company and Retail Ventures Agreements Relating
to our Separation from Retail Ventures Exchange
Agreement.
44
Cross-Corporate Guarantees.
We have entered into
cross-corporate guarantees with various financing institutions
pursuant to which we, Retail Ventures, Filenes Basement
and Value City, jointly and severally, guarantee payment
obligations owed to these entities under factoring arrangements
they have entered into with vendors who may provide merchandise
to some or all of Retail Ventures subsidiaries. We may be
released from any prospective liability under the guarantees at
any time. Upon release, our potential liability would be limited
to the then outstanding amount under the canceled guarantee. We
will terminate these cross-corporate guarantees on or about the
date of the consummation of this offering. The outstanding
balance at that time, which we expect to be approximately
$ ,
will decrease to zero over a period of approximately
90 days as payments are made in the ordinary course of
business.
Value City Intercompany Note
. The capital stock of DSW
held by Retail Ventures will continue to secure the
$240 million Value City intercompany note made payable by
Retail Ventures to Value City, which was executed and delivered
on January 1, 2005 in connection with the transfer of all
the capital stock of DSW and Filenes Basement by Value
City to Retail Ventures on that date. The lien granted to Value
City on the DSW capital stock held by Retail Ventures will be
released upon written notice that warrants held by Cerberus, SSC
and Back Bay are to be exercised in exchange for DSW capital
stock held by Retail Ventures and to be delivered by Retail
Ventures upon the exercise of such warrants.
In the thirty-nine weeks ended October 30, 2004, our net
cash provided by operations was approximately $4.0 million,
compared to approximately $11.7 million for the thirty-nine
weeks ended November 1, 2003. Net working capital increased
$32.7 million to $134.1 million at October 30,
2004 from $101.4 million at November 1, 2003 primarily
due to increased investing with respect to current year new
stores and new leased locations. Current assets divided by
current liabilities at those dates were 2.3 and 2.3,
respectively.
The net cash used by operations during the thirty-nine weeks
ended October 30, 2004 reflects several causes, primarily
the increase in inventory of $48.4 million, offset by the
increase in accounts payable of $20.0 million and the
increase of accrued expenses of $8.7 million. The cash
usage was funded from operations and borrowings under the Retail
Ventures revolving credit facility.
Net cash provided by operating activities totaled
$45.1 million in fiscal 2003 while operating activities
used $30.8 million in fiscal 2002. The net cash change
reflects several causes, primarily the increase in inventory of
$8.9 million, the decrease in accounts payable of
$9.0 million and the decrease in advances to affiliates of
$20.6 million, which were funded from operations.
Net cash used in operating activities totaled $30.8 million
in fiscal 2002 while operating activities provided
$25.8 million in fiscal 2001. The net cash change reflects
several causes, primarily the increase in inventory of
$24.5 million and the increase in advances to affiliates of
$33.0 million, which were funded from operations and
borrowings under the Retail Ventures revolving credit facility.
We operate all our stores, warehouses and corporate office space
from leased facilities. Lease obligations are accounted for
either as operating leases or as capital leases. We disclose in
the notes to the financial statements included elsewhere in this
prospectus the minimum payments due under operating or capital
leases.
In the thirty-nine weeks ended October 30, 2004, our cash
used in investing activities amounted to $19.8 million
compared to $11.3 million for the corresponding period of
fiscal 2003. In the thirty-nine weeks ended October 30,
2004, and in fiscal 2001 through fiscal 2003, our cash used in
investing activities consisted of capital expenditures. Cash
used for capital expenditures was $22.3 million,
$23.1 million and $27.3 million for fiscal 2003,
fiscal 2002 and fiscal 2001, respectively. Capital expenditures
were related primarily to new stores.
Our future capital expenditures will depend primarily on the
number of new stores we open, the number of existing stores we
remodel and the timing of these expenditures. In fiscal 2004, we
opened 31 additional stores. As of October 30, 2004,
we had opened 26 of these 31 stores. We plan to open
approximately
45
30 stores per year in the four years from fiscal 2005
through fiscal 2009. During fiscal 2004, the average investment
required to open a typical new DSW store was approximately
$1.7 million. Of this amount, gross inventory typically
accounted for $880,000, fixtures and leasehold improvements
typically accounted for $600,000 (prior to tenant allowances)
and pre-opening advertising and other pre-opening expenses
typically accounted for $250,000.
In the thirty-nine weeks ended October 30, 2004, our net
cash provided by financing activities was $19.9 million
compared to $4.8 million for the corresponding period in
fiscal 2003. The primary source of financing funds is the Retail
Ventures revolving credit facility.
Net cash used by financing activities was $19.2 million in
fiscal 2003 and was primarily attributable to the net decrease
in borrowing under the Value City revolving credit facility of
$19.0 million. Net cash provided by financing activities in
fiscal 2002 was $52.4 million. The primary source of
financing funds was the net increase in the Value City revolving
credit facility of $54.0 million, which was partially
offset by debt issuance costs of $1.4 million. Net cash
used in financing activities was $0.2 million in fiscal
2001 and was related to the reduction of capital lease
obligations. For a discussion of the terms of the Value City
revolving credit facility and the expected $150 million
secured revolving credit facility of DSW, see
The DSW Separation.
Contractual and Operating Lease Obligations
We have the following minimum commitments under contractual
obligations, as defined by the SEC. A purchase
obligation is defined as an agreement to purchase goods or
services that is enforceable and legally binding on us and that
specifies all significant terms, including: fixed or minimum
quantities to be purchased, fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Other
long-term liabilities are defined as long-term liabilities that
are reflected on our balance sheet in accordance with GAAP.
Based on this definition, the tables below include only those
contracts which include fixed or minimum obligations. It does
not include normal purchases, which are made in the ordinary
course of business.
The following table provides aggregated information about
contractual obligations and other long-term liabilities as of
January 31, 2004:
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
No
|
|
|
|
|
|
Less than
|
|
|
|
|
More than
|
|
|
Expiration
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Long-term
debt
(1)
|
|
$
|
35,000
|
|
|
|
|
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
689,138
|
|
|
|
68,767
|
|
|
|
144,245
|
|
|
$
|
136,781
|
|
|
$
|
339,345
|
|
|
|
|
|
Construction
commitments
(2)
|
|
|
3,821
|
|
|
|
3,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations
(3)
|
|
|
5,750
|
|
|
|
5,553
|
|
|
|
155
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
733,709
|
|
|
$
|
78,141
|
|
|
$
|
179,400
|
|
|
$
|
136,823
|
|
|
$
|
339,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On or about the date of this offering, we expect to be released
from our obligations under the Retail Ventures revolving credit
facility, the Retail Ventures term loan facility and the Retail
Venture senior subordinated convertible loan facility.
Simultaneously, we expect to enter into a new $150 secured
revolving credit facility.
|
|
(2)
|
Construction commitments include capital items to be purchased
for projects that were under construction, or for which a lease
had been signed, as of January 31, 2004.
|
|
(3)
|
Many of our purchase commitments are cancelable by us without
payment or penalty, and we have excluded such commitments, along
with all associate employment and intercompany commitments.
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46
We had outstanding letters of credit that totaled approximately
$11.4 million at January 31, 2004 and
$9.4 million at October 30, 2004. If certain
conditions are met under these arrangements, we would be
required to satisfy the obligations in cash. Due to the nature
of these arrangements and based on historical experience, we do
not expect to make any significant payment outside of terms set
forth in these arrangements.
As of October 30, 2004, we have entered into various
construction commitments, including capital items to be
purchased for projects that were under construction, or for
which a lease has been signed. Our obligations under these
commitments aggregated to approximately $0.2 million at
October 30, 2004. In addition, we have signed lease
agreements for new store locations with annual rent of
approximately $12.0 million. In connection with the new
lease agreements, we will receive approximately
$9.0 million of tenant allowances, which will reimburse us
for expenditures at these locations.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board, or
FASB, issued a revision of Interpretation No. 46,
Consolidation of Variable Interest Entities, or
FIN 46R, which requires the consolidation of certain
entities considered to be variable interest entities, or VIEs.
An entity is considered to be a VIE when it has equity investors
who do not have a controlling financial interest, or its capital
is insufficient to permit it to finance its activities without
additional subordinated financial support. Adoption of the
required sections of FIN 46R, did not have any effect on
our consolidated financial statements or disclosures because we
have no variable interest entities. For additional information
about recent accounting pronouncements, see Note 1 to our
consolidated financial statements included elsewhere in this
prospectus.
In December 2004, the FASB issued SFAS No. 123
(revised 2004) or SFAS No. 123R,
Share-Based Payment. This statement revised
SFAS No. 123, Accounting for Stock-Based
Compensation, and requires companies to expense the value
of employee stock options and similar awards. The effective date
of this standard is interim and annual periods beginning after
June 15, 2005.
Historically we, as a wholly-owned subsidiary of a publicly
traded company, have not had to account for stock-based employee
compensation plans. Our parent, a public traded company, did
account for stock-based compensation costs as options were
exercised.
Upon the adoption of SFAS No. 123R, we will be
required to expense stock options over the vesting period in our
statement of income. In addition, we will need to recognize
expense, when stock options are issued, over the remaining
vesting period associated with unvested options issued and
outstanding as of July 30, 2005. As of the date of the
prospectus, the Company does not have any options outstanding
but plans to issues options to employees under an equity plan
when it is approved.
Off-Balance Sheet Arrangements
It is not our intention to participate in transactions that
generate relationships with unconsolidated entities or financial
partnerships, such as special purpose entities or variable
interest entities, which would facilitate off-balance sheet
arrangements or other limited purposes. We have no
off-balance sheet arrangements, as that term is
described by the SEC, as of October 30, 2004.
Quantitative and Qualitative Disclosures About Market Risk
We have been exposed to market risk from changes in interest
rates, which may adversely affect our financial condition,
results of operations and cash flows. In seeking to minimize the
risks from interest rate fluctuations, we manage exposures
through our regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial
instruments. We do not use financial instruments for trading or
other speculative purposes and are not party to any leveraged
financial instruments.
We are exposed to interest rate risk primarily through our
borrowings under the Retail Ventures revolving credit facility.
At October 30, 2004, our direct borrowings under this
facility aggregated $64.4 million. Our new secured
revolving credit facility will permit debt commitments up to
$150 million, includes a letter of
47
credit facility, extends for a term of five years, and will
provide for borrowings at variable interest rates. We have
historically used interest rate swap agreements to effectively
establish long-term fixed rates on borrowings under the Retail
Ventures revolving credit facility, thus reducing a portion of
our interest rate risk. These swap agreements, which are
designated as cash flow hedges, involve the receipt of variable
rate amounts in exchange for fixed rate interest payments over
the life of the agreements. At October 30, 2004, we had no
outstanding swap agreements.
A hypothetical 100 basis point increase in the interest
rate of the debt outstanding under the Retail Ventures revolving
credit facility for the thirty-nine weeks ended October 30,
2004, net of income taxes, would have had an approximate
$0.2 million impact on our results of operation for such
period.
Inflation
Our results of our 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 our 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.
48
BUSINESS
Company Overview
DSW is a leading U.S. specialty branded footwear retailer
operating 172 shoe stores in 32 states as of January 29,
2005. We offer a wide selection of brand name and designer
dress, casual and athletic footwear for women and men. Our
typical customers are brand-, quality- and style-conscious
shoppers who have a passion for footwear and accessories. Our
core focus is to create a distinctive store experience that
satisfies both the rational and emotional shopping needs of our
customers by offering them a vast, exciting selection of
in-season styles combined with the convenience and value they
desire. We believe this combination of selection, convenience
and value differentiates us from our competitors and appeals to
consumers from a broad range of socioeconomic and demographic
backgrounds.
Since its inception, DSW has evolved into a distinctive,
consumer-friendly retail concept that allows customers to
personalize their shopping experience by offering a sea of
shoes that are accessible, easy-to-shop, and fulfill a
broad range of style and fashion desires. We cater to customers
who take pleasure in the thrill of the hunt for the
perfect shoe and value the shopping experience itself as an
enjoyable pastime. Typical DSW stores are approximately 25,000
square feet, with over 85% of total square footage used as
selling space. Over 30,000 pairs of shoes in more than 2,000
styles are displayed on the selling floor of most of our stores,
compared to a significantly smaller product offering at typical
department stores. Our stores feature self-service fixtures that
allow customers to view, touch, and try on the product without
relying on salespeople to check availability. Our locations have
clear signage, and well-trained sales associates are available
to assist customers as desired. New footwear merchandise is
organized by style on the main floor, and clearance goods are
organized by size in the rear of the store. Accessories and
impulse items are featured at the front. The store layout allows
customers who do not have time for relaxed browsing to swiftly
identify the shoe styles they are seeking and shop in a
targeted, time-efficient manner.
Our goal is to further strengthen our position as a leading
specialty branded footwear retailer in the United States. For
the twelve months ended October 30, 2004, we generated
$915.3 million in net sales and $53.4 million in
operating profit. During the same period, we sold over
22.9 million pairs of shoes. Over the four-fiscal-year
period ended January 31, 2004, we have grown our DSW store
base, net sales and operating profit at compound annual rates of
25.1%, 33.8% and 38.3%, respectively. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our historical
consolidated financial statements and the notes thereto.
Corporate History
We were incorporated on January 20, 1969 and opened our
first DSW store in Dublin, Ohio in July 1991. In 1998, Value
City Department Stores, Inc., which subsequently became a
wholly-owned subsidiary of Retail Ventures, Inc., purchased DSW
and affiliated shoe businesses from SSC and Nacht Management,
Inc. In December 2004, Retail Ventures carried out a corporate
reorganization whereby Value City Department Stores, Inc., a
wholly-owned subsidiary of Retail Ventures, merged with and into
Value City, another wholly-owned subsidiary of Retail Ventures.
In turn, Value City transferred all the issued and outstanding
shares of DSW to Retail Ventures in exchange for a promissory
note. In February 2005, we changed our name from Shonac
Corporation to DSW Inc. Since our change in ownership in 1998,
we have accelerated our profitable expansion by investing in new
stores, merchandise development, technology and our people to
support further growth and enhance our performance.
Competitive Strengths
We believe that our leading market position is driven by our
competitive strengths the breadth of our branded
product offerings, our distinctive and convenient store layout,
the value proposition offered to our customers and our
demonstrated ability to deliver profitable growth on a
consistent basis. Over the past few years, we have broadened our
merchandise assortment, honed our retail operating model and
continued our dedication to providing first-rate quality
products at attractive prices. We believe that we will continue
to
49
improve our ability to leverage these competitive strengths and
to attract and retain talented managers and merchandisers.
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The Breadth of Our Product Offerings
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Our goal is to excite our customers with a sea of
shoes that fulfill a broad range of style and fashion
needs. We believe that our typical store offers the largest
selection of brand name and designer merchandise of any footwear
retailer or typical department store in the nation. We carry
primarily in-season footwear found in specialty and department
stores and branded make-ups (shoes made exclusively for a
retailer), with selection at each store geared toward the
particular demographics of the location. A typical DSW store
carries approximately 30,000 pairs of shoes in over
2,000 styles compared to a significantly smaller product
offering at typical department stores. We also offer a
complementary selection of handbags, hosiery and other
accessories which appeal to our brand- and fashion-conscious
customers.
Our strategy is designed to ensure that a broad and consistent
selection of merchandise is available at all times. We keep
merchandise fresh by receiving new shipments at least weekly and
by trying to ensure that new items are on the selling floor
within 24 hours of delivery. Our goal is to provide our
customers with the benefits of what we refer to as trip
assurance offering a wide selection of
in-season branded merchandise every day that increases our
customers likelihood of finding the right shoe at the
right price each time they visit our stores. The continual
turnover of new merchandise encourages customers to visit often
and see the new styles that arrive each week.
We continually strive to improve the quality and breadth of our
vendor relationships. We primarily purchase in-season
merchandise directly from more than 300 domestic and foreign
vendors. Our buyers have established strong, mutually beneficial
relationships with vendors that view DSW as a significant
distribution channel for their branded offerings. Our suppliers
consider us to be an attractive retail channel due to both the
scale and geographic reach of our store base and our willingness
to buy merchandise across a broad selection of styles. The
quality of our vendor relationships allows us to secure an
extensive assortment of in-season merchandise and distinguishes
us from other shoe retailers.
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Our Distinctive and Convenient Store Layout
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We provide our customers with the highest level of convenience
based on our belief that customers should be empowered to
control and personalize their shopping experiences. Our store
layout and visual merchandising techniques provide the most
convenient shopping process, regardless of the type of
shoe-buying experience our customers desire on a particular trip.
Thrill of the Hunt.
We cater to the passionate shoe
enthusiast and indulge customers who love to shop. Customers
take pleasure in the thrill of the hunt as they scan
our wide product offering in search of the products that best
suit their needs. All our merchandise is displayed on the
selling floor with self-service fixtures to enable customers to
view and touch the merchandise. We believe this self-service
aspect provides our customers with maximum convenience as they
are able to browse and try on the merchandise without feeling
rushed or pressured into making a decision too quickly.
Therefore, customers are able to shop at their own pace as they
savor the thrill and enjoyment of indulging their passion for
shoes. Although all DSW stores are designed for self-service
shopping, sales associates are available to help customers
locate merchandise and to assist as needed.
Easy Shopping Experience.
DSW also caters to shoppers who
are time-constrained and come to our stores knowing exactly what
they want. Our wide selection ensures that they are more likely
to find styles and sizes they are seeking at DSW than at other
shoe retailers, thereby minimizing the risk of leaving
empty-handed. The stores are also creatively designed for an
efficient shopping experience. Our self-service concept empowers
our customers to shop quickly and easily because they do not
have to rely on a salesperson to check for sizes and styles.
Typical DSW stores are approximately 25,000 square feet,
with over 85% of total square footage used as selling space. We
organize most of our stores on a single level, which allows
customers to view the entire store and product offering as they
enter and move quickly to the area where their desired styles
are located. Interiors are well-lit, with informative signage,
and spacious aisles allow ease of
50
movement throughout the store. We display shoes in a logical
manner that groups together similar styles such as dress,
casual, seasonal and athletic merchandise. Clearance shoes are
grouped by size and displayed on racks in the rear of the store.
Of the 172 DSW stores open as of January 29, 2005, 145
are either freestanding or located in shopping centers, which
provide customers with direct access to parking, and the
remainder are in shopping malls or downtown locations. For added
convenience, we provide a centralized check-out, which aids
customers in quickly locating the cashier for efficient
processing.
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The Value Proposition Offered to Our Customers
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Through our buying organization, we are able to provide our
customers with high-quality, in-season fashions at prices that
we believe are competitive with the typical sale price found at
specialty retailers and department stores. We employ a
consistent pricing strategy that typically provides our
customers with the same price on our merchandise from the day it
is received until it goes into our planned clearance rotation.
Our pricing strategy differentiates us from our competitors who
usually price and promote merchandise at discounts available
only for limited time periods. We find that customers appreciate
having the power to shop for value when it is most convenient
for them, rather than waiting for a department store or
specialty retailer to have a sale event. For easy comparison by
our customers, we prominently display our price and the
corresponding vendors suggested retail price for each pair
of shoes.
Our graduated, self-liquidating clearance process automatically
moves shoes to large clearance racks located in the rear of the
store when only a few pairs remain. Because this system also
applies to our fastest-moving merchandise, some of our shoppers
benefit from steep price reductions on our most popular items.
We have also successfully tested extreme clearance,
a system that is productive in high-traffic locations and
incorporates greater price reductions on clearance merchandise.
This system provides more floor space for new merchandise at a
faster rate.
We believe that customers value our pricing strategy as it
provides them with what we refer to as value
assurance knowing that no matter when our
customers shop with us, they are typically assured of receiving
our best value price on whatever merchandise they purchase. We
believe our everyday value prices are competitive with the
typical sale price found at most of our competitors. We use the
tagline The Shoes of the Moment. The Deal of a
Lifetime. to convey this combination of selection and
value to our customers. During fiscal 2004, the average ticket
price for a pair of shoes (including clearance stock) in a DSW
store was $39.
In order to provide additional value to shoe enthusiasts and
other regular customers, we developed a customer loyalty program
called Reward Your Style. This program offers
additional savings to frequent shoppers and encourages repeat
sales. We target market to Reward Your Style members
throughout the year. We classify these members by frequency and
use direct mail and on-line communication to stimulate further
sales and traffic. As of January 29, 2005, over
5.5 million members enrolled in the Reward Your
Style loyalty program had purchased merchandise in the
previous two fiscal years, up from approximately
4.5 million members as of January 31, 2004. In fiscal
2004, approximately 60.1% of DSW store net sales were generated
by shoppers in the loyalty program, and these shoppers spent an
average of 19% more per purchase than customers who were not
enrolled.
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Demonstrated Ability to Consistently Deliver Profitable
Growth
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Since 1998, we have focused our operating model on selection,
convenience and value. We believe that the profitable growth we
have achieved in the past is attributable to our operating model
and managements focus on store-level profitability and
economic payback.
Over the four fiscal years ended January 31, 2004, our net
sales and operating profit have grown at compound annual growth
rates of 33.8% and 38.3%, respectively. For the thirty-nine
weeks ended October 30, 2004, we generated
$729.4 million of net sales and $46.2 million of
operating profit, or 6.3% of net sales. In addition, for all our
annual new store classes since 1996, we have achieved positive
operating cash flow within two years of opening. We intend to
continue to focus on net sales, operating profit and cash flow
per annual new store class as we pursue our growth strategy.
51
Growth Strategy
We plan to continue to strengthen our position as a leading
specialty branded footwear retailer by pursuing the following
three primary strategies for growth in sales and
profitability expanding our store base, driving
sales through enhanced merchandising and leveraging our
operating model. For additional information regarding our growth
strategy, see Managements Discussion and Analysis of
Financial Condition and Results of Operation
Overview Expansion Strategy.
We believe our specialty retail concept has broad national
appeal and provides substantial opportunity for new store
expansion. Over the five-fiscal-year period ended
January 29, 2005, we have rapidly expanded our store base
by opening 115 DSW stores, including 31 new stores in fiscal
2004. We plan to open approximately 30 stores in each fiscal
year from fiscal 2005 through fiscal 2009 and believe that
opening stores at this rate will not compromise our new store
economics. For stores scheduled to open in fiscal 2005, as of
January 29, 2005, we have signed leases for 23 new stores
and two store relocations. We plan to open stores both in
markets in which we currently operate and in new markets.
Based on an internal planning model created in fiscal 2003, we
believe that we have the long-term potential to operate over 400
stores in the United States, including the 172 stores existing
as of January 29, 2005. Our internal supportable store
analysis model is used to evaluate potential new DSW store
growth opportunities in both existing and new markets based on
demographic characteristics, current penetration levels,
market-specific real estate assessments and a variety of
subjective adjustments. We may not prepare our internal model on
the same basis, or using similar assumptions, as may be used by
other participants in the retail industry or other third
parties, and the projections of our model may therefore not be
comparable to projections of the models of such other parties.
We periodically evaluate and revise our model based on a number
of factors, including our financial condition, general economic
conditions in the United States, customer demographics, the
penetration of zip codes proximate to existing stores, the
competitive environment and the publics awareness of our
brand. Because of these numerous variables, our supportable
store projections are subject to change, and the total number of
potential stores is periodically revised as a result of these
changes. No assurance can be given as to whether or when we will
achieve the market penetration targets generated by our model.
Site selection.
In general, our evaluation of potential
new stores focuses on store size, configuration, location and
lease terms. We target high-traffic real estate locations, with
new stores sized as appropriate to fit market potential. An
ideal DSW store is either freestanding on the peripheral road of
a mall, in a power strip center, in a shopping center or in a
high traffic urban shopping zone. We target not only locations
with high traffic and visibility, but also locations near other
large format, category leading retailers, such as Bed Bath &
Beyond, Barnes & Noble and Staples, and we insist on
favorable lease terms. We intend, over time, to cluster our
stores in strategic metropolitan areas to enhance name
recognition, lower average per store advertising costs and
achieve economies of scale in management and distribution.
New store model.
After we approve a site, we negotiate
lease terms and begin planning the store layout and design. We
typically devote between four and six weeks from the time we
take possession of a store to prepare for its opening. During
fiscal 2004 the average investment required to open a new DSW
store was approximately $1.7 million per store. Of this
amount, in fiscal 2004, gross inventory typically accounted for
approximately $880,000, fixtures and leasehold improvements
typically accounted for approximately $600,000 (prior to tenant
allowances) and pre-opening advertising and other pre-opening
expenses typically accounted for approximately $250,000. All our
stores are leased or subleased.
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Driving Sales Through Enhanced Merchandising
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We intend to increase the number of customer transactions and
average transaction value by continually refining our
merchandise mix. Our merchandising group constantly monitors
current fashion trends as well as historical sales trends to
identify popular styles and styles that may become popular in
the upcoming season. We track store performance and sales trends
on a weekly basis and have a flexible incremental buying process
52
that enables us to order styles frequently throughout each
season, in contrast to department stores, which typically make
one large purchase at the beginning of the season.
Expanding vendor relationships.
We have established
strong vendor relationships that allow us to gain favorable
access to high quality, brand name merchandise at attractive
prices. These favorable relationships also allow us to take
advantage of opportunistic in-season merchandise that may be
offered to us from time to time. We intend to capitalize on the
success of our existing vendor relationships as well as identify
and develop new supply sources, in particular to enhance our
offering of high-end designer brands.
Increasing sales within existing merchandise categories.
In order to further increase sales within our existing
womens, mens and athletic shoe categories, we aim to
increase the quality and breadth of existing vendor offerings
and to keep our product mix fresh and on target by continually
testing new fashions and actively monitoring sell-through rates
in our stores. Additionally, we employ marketing initiatives,
including broad advertising campaigns, the Reward Your
Style loyalty program and sales of gift cards to encourage
repeat visits and attract new customers.
Extending into new product categories.
While shoes are
the main focus of DSW, we believe offering a complementary
assortment of handbags, hosiery and other accessories is an
important driver of profitable sales. We will continue to
explore new, related product categories that we believe could
enhance sales of footwear.
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Leveraging Our Operating Model
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As we grow our business and fill in markets to their full
potential, we believe we will continue to improve our
profitability by leveraging our cost structure, particularly in
the areas of advertising, regional management, distribution and
overhead functions. Additionally, we intend to continue
investing in our infrastructure to improve our operating and
financial performance. Most significantly, we believe continued
investment in information systems will enhance our efficiency in
areas such as merchandise planning and allocation, inventory
management, distribution and point of sale functions, among
others.
Retail Store Base
As of January 29, 2005, we operated 172 DSW stores in
32 states in the United States. The map below shows the
states in which our DSW stores are located as of
January 29, 2005:
53
Merchandising
DSW stores offer a wide selection of high quality, in-season and
fashion-oriented footwear, handbags and accessories with
everyday prices that we believe are competitive with the typical
sale price found at specialty retailers and department stores.
Our merchandising group continually monitors current fashion
trends, as well as historical sales trends, to identify popular
styles and those that may become popular in the upcoming season.
We believe that our stores offer the largest selection of brand
name and designer merchandise of any footwear retailer or
typical department store in the nation. We primarily carry
in-season footwear found in specialty and department stores and
branded make-ups (shoes made exclusively for a retailer), with
selection at each store geared towards the particular
demographics of the location. A typical DSW store carries over
2,000 shoe styles, compared to a significantly smaller product
offering at typical department stores. Our goal is to offer a
wide selection of on-trend branded merchandise that greatly
increases our customers likelihood of finding the right
shoe at the right price in one trip.
We believe our wide selection of merchandise from
moderate-priced brands to higher-end designer goods contributes
to a distinctive shopping experience for our customers.
Particularly, our growing selection of high-end brands
differentiates us from price-oriented retailers and builds
strong customer loyalty. We purchase in-season designer and
branded merchandise both on a planned and opportunistic basis.
In the main portion of each of our stores, the shoes are
organized by style in order to highlight the breadth of our
merchandise assortment. However, when only a few pairs of a
style remain, we place those shoes on a clearance rack organized
by size in the rear of the store and reduce their prices
periodically. Our clearance approach has been successful in
creating additional excitement and traffic in the store and in
moving the remaining merchandise quickly. It also creates
available floor space for incoming new styles and a wider
selection of shoes.
We separate our DSW merchandise into four total
categories womens dress and casual footwear;
mens dress and casual footwear; athletic footwear; and
accessories. While shoes are the main focus of DSW, we also
offer a complementary assortment of handbags, hosiery and other
accessories. The following table sets forth the approximate
percentage of our sales attributable to each DSW merchandise
category in fiscal 2004:
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Category
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Percent of Net Sales
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Womens
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62%
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Mens
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18%
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Athletic
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14%
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Accessories and Other
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6%
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Buying, Planning and Allocation
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As of January 29, 2005, our merchandising group consists of
a President Chief Merchandising Officer, or President CMO, two
Vice President General Merchandising Managers, a Vice President
Planning and Allocation, a corporate merchandise manager, two
divisional merchandise managers, and three senior buyers. For
each major product category, there is a buyer, an assistant
buyer and a merchandiser, whose responsibility is allocation. We
begin the buying process for our DSW stores in February for the
following fall merchandise and in June for the following spring
merchandise. Once our buyers determine the styles and
merchandise mix for an upcoming season, they focus on purchasing
the required quantities at the lowest cost and the highest
quality available, as well as within the most advantageous flow
or timetable.
Our planning and allocation group serves as strategic partner
to, and exercises financial control over, the buying team. Each
buyers purchasing plan is reviewed on a seasonal and
yearly basis by the President Chief Merchandising Officer and
Vice President Planning and Allocation. Quarterly updates based
on seasonal
54
trends are incorporated into the buying plan. We believe this
organizational scheme helps maximize our buying opportunities
while maintaining appropriate organizational and financial
control. Since October 2003, all functional areas within
planning and allocation have been supported by a software
package that integrates financial analysis into the planning and
allocation process. While this software is already yielding
positive results, we believe that continued use of this software
will yield additional improvements in our planning and
allocation functions.
Merchandise planning at the category level, for pre-season
planning and in-season adjustments, is developed through strong
relationships with our buying organization. Channel planning at
the store level tailors the assortment of merchandise by store
based on each stores customer demographics and balances
the merchandise mix by factoring in volume and space management
objectives. Allocation management, which directs the flow of
merchandise from our distribution center to the individual
stores, allows us to quickly respond and adjust assortments
based on trend, store and style specific sales patterns. Our
allocation decisions are based not only on quantity and
assortment, but also include consideration of price, vendor,
color and other style characteristics. We believe that this
approach to planning and allocation allows us to optimize our
ability to deliver the right merchandise to the right store at
the right time, thereby increasing sales and reducing the need
for markdowns.
We believe we have good relationships with our vendors. We
purchase merchandise directly from more than 300 domestic and
foreign vendors as of January 29, 2005. Our vendors include
suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. Most of DSWs
domestic vendors import a large portion of their merchandise
from abroad. We have implemented quality control programs under
which our DSW buyers and store managers inspect incoming
merchandise for fit, color and material, as well as for overall
quality of manufacturing. We do not generally experience
material difficulties with merchandise manufactured overseas. As
the number of DSW locations increases and our sales volumes
grow, we believe there will continue to be adequate sources
available to acquire a sufficient supply of quality goods in a
timely manner and on satisfactory economic terms. After giving
effect to consolidation among our vendors, during the first
thirty-nine weeks of fiscal 2004, merchandise supplied by three
key vendors accounted for approximately 19% of our net sales.
We believe that many vendors view us as a significant
distribution channel for their branded offerings and appreciate
our uncomplicated purchasing program. Our vendor relationships
result in greater access to high quality, in-season merchandise
at attractive prices.
Marketing and Advertising
Our marketing strategy for DSW focuses on communicating the
selection, convenience and value offered by DSW through the use
of the slogan The Shoes of the Moment. The Deal of a
Lifetime. We utilize television, radio and print media
advertising as well as in-store promotions. In fiscal 2004, we
spent $39.7 million, or 4.1% of our net sales on
advertising, excluding costs to promote each new store opening,
which are included in pre-opening expenses.
In early 1998, we introduced the Reward Your Style
customer loyalty program at DSW. The Reward Your
Style program seeks to motivate members to shop at DSW by
offering them a $25 reward certificate for every $250 they
spend. In addition to customer rewards, the program regularly
communicates with customers through direct mail, e-mail and the
DSW website. Messages include fashion updates, new arrivals and
other shopping information. As of January 29, 2005, over
5.5 million members enrolled in the Reward Your
Style program had purchased merchandise in the previous
two fiscal years and, in fiscal 2004, 60.1% of DSW store net
sales were generated by shoppers in the loyalty program. We
believe that this program has successfully increased the
shopping frequency and average transaction size of our customers.
55
While the program develops customer loyalty, it also provides us
with valuable market intelligence and purchasing information
regarding our most frequent customers. We carefully analyze the
members transaction activity and use this information to
directly advertise, to encourage repeat shopping and to
communicate with our targeted customers. By understanding the
characteristics of our best DSW customers, we are able to
identify other existing customers in lower spending groups with
similar profiles and target communications and advertisements to
increase the attractiveness of our offerings to them, resulting
in increases in their spending level.
We implemented a gift card program in November 2003. We use this
program to generate additional sales by reaching new customers
and increasing awareness of the DSW concept. During the November
and December holiday season of 2004, we sold approximately
96,000 gift cards with an aggregate value of approximately
$4.5 million.
Staffing and Operations
At DSW, store associates receive training to maximize the
customer shopping experience in our self-service environment.
Training components consist of customer service, maintaining
neat, clean and orderly store conditions for ease of shopping,
efficient checkout process and friendly service. We also
maintain a store management training program to develop the
skills of management personnel and to provide an ongoing talent
pool for future store expansion. We prefer to fill store
management and field supervisor positions through internal
promotions.
As of January 29, 2005, our stores are organized into the
West, Central and East geographic regions, composed of 13, 7 and
12 districts, respectively. Each region is supported by a
Regional Vice President or Director, who supervise senior
district, district and area managers headquartered in the
respective region, district or area. The Regional Vice
Presidents and Directors spend the majority of their time in
their stores to ensure adherence to merchandising, operational
and personnel standards. The typical staff for a DSW store
consists of a store manager and two assistant managers who
supervise 15 to 25 full-and part-time hourly associates. Each
store manager reports directly to one of 32 district or area
managers, each of whom in turn reports to one of three Regional
Vice Presidents or Regional Directors, who in turn report to the
Senior Vice President of Store Operations. Our DSW store
managers are responsible on a day-to-day basis for customer
relations, personnel hiring and scheduling, and all other
operational matters arising in the stores. Our store managers
are an important source of information concerning local market
conditions, trends and customer preferences. We provide
compensation bonuses to our store managers which are largely
based on store profitability and inventory control.
Distribution
DSWs distribution center is located in an approximately
707,000 square foot facility in Columbus, Ohio. The design
of the distribution center facilitates the prompt delivery of
priority purchases and fast-selling footwear to stores so we can
take full advantage of each selling season. This distribution
center facility uses a warehouse management system, upgraded in
2003, and material handling equipment, including conveyor
systems, to separate and collate shipments to our stores. We use
a cross dock conveyor system which enhances the movement of
merchandise through the distribution facility using vendor
advance shipment notifications, or ASNs. Although we believe
that our receiving and distribution process and infrastructure
will support our anticipated growth in 2005, we may need to
increase our distribution capacity in 2006 to accommodate our
expanding retail store base.
Management Information and Control Systems
We believe a high level of automation is essential to
maintaining and improving our competitive position and executing
our expansion strategy. We rely upon computer systems to provide
information for all areas of our business, including merchandise
planning and allocation, inventory control, distribution,
warehouse
56
operations, financial planning, store billing, point of sale and
automated payroll and accounting. We focus on leveraging our
technology infrastructure and systems whenever appropriate to
simplify our processes and increase our efficiency. Most of our
technical infrastructure for stores, corporate headquarters and
distribution center has been replaced or upgraded in the last
two years.
In order to promote our continued growth, we have undertaken
several major initiatives to build upon the merchandise
management system and warehouse management systems that support
DSW. An electronic data interchange, or EDI, project is underway
to utilize product UPC barcodes and electronic exchange of
purchase orders, advance shipment notifications and invoices
with our top vendors. As of January 29, 2005, approximately
70% of our footwear product is processed using UPC bar codes,
which has reduced processing costs and improved flow of goods
through the distribution center to the stores. EDI purchase
orders and ASNs were piloted with key vendors in early 2004.
They accounted for approximately 20% of the volume of our
shipments as of the end of fiscal 2004, and we expect they will
be approximately 50% by the end of fiscal 2005. This will speed
the flow of goods from the vendor to DSW stores, as well as
reduce the amount of inventory needed in our warehouse.
Additionally, new merchandise planning and merchandise
allocation systems were implemented in 2003 to improve inventory
productivity and store assortments and reduce supply chain cycle
time.
We utilize point of sale, or POS, registers with full scanning
capabilities to increase speed and accuracy at customer
checkouts and facilitate inventory restocking. In 2003, a new,
completely wireless POS system was implemented in all DSW
stores, resulting in more efficient customer checkouts and back
office operations. This enables us to complete new store
openings more efficiently and simply. In addition, in October
2004, we launched an application that provides us with the
ability to look up a customers Reward Your
Style number at POS registers. We anticipate that in
fiscal 2005, the POS system will be further upgraded with debit
card terminals and signature capture. We also expect to
continually enhance system security.
Program administration, operations and analysis for the
Reward Your Style program was brought in-house on
February 1, 2005. Prior to this time, these functions were
contracted out to a third party. We use enterprise data
warehouse and customer relationship management software to
manage the program. We expect this will allow us to support,
expand and integrate Reward Your Style with the POS
system to improve the customer experience while reducing costs.
Effective as of the date of consummation of this offering,
information technology support will be provided to us as a
shared service under the shared services agreement by Retail
Ventures information technology department for a period
that ends at the end of fiscal 2007 and will extend
automatically unless terminated by one of the parties.
Industry Overview and Competition
According to the NPD Fashionworld consumer panel, or NPD
Fashionworld, for the twelve months ended October 2004, the
total U.S. footwear market generated sales of
$38.7 billion. Womens footwear accounted for
$18.8 billion in sales, representing 48.5% of the market,
while mens footwear generated $14.8 billion,
representing 38.3% of the total market. According to NPD
Fashionworld, for the twelve months ended October 2004, DSW
captured 2.8% of the total womens market, including 4.5%
of the dress and 3.6% of the dress casual categories. In both
categories, DSW ranked fourth in the industry and third and
second, respectively, among branded shoe retailers. In
mens, DSW has achieved a 1.4% share of the overall market,
including a 3.1% share in dress casual. In the mens
category, DSW is ranked fifth overall, and third among branded
shoe retailers.
Based on our unique retail format and the high quality,
in-season selection of our shoe merchandise, we believe that DSW
provides a distinct shoe-shopping destination for our customers.
We view our primary competitors to be department stores.
According to NPD Fashionworld, for the twelve months ended
October 2004, department stores represented 12.3% of the
footwear market based on dollar volume, decreasing from 12.6%
for the same period a year ago. DSW also competes with
mall-based company stores, national chains, independent shoe
retailers, single-brand specialty retailers and brand-oriented
discounters.
57
We believe that customers prefer our wide selection of on-trend
merchandise compared to product offerings of typical traditional
department stores, mall-based company stores, national chains,
single-brand specialty retailers and independent shoe retailers
because those retailers generally offer a more limited selection
at higher average prices and in a less convenient format than we
do. In addition, we also believe that we will successfully
compete against competitors who have attempted to duplicate our
format because they typically offer assortments with fewer
recognizable brands and more styles from prior seasons.
Although our prices are value-oriented, our core customer is not
the low-price shoe buyer. Therefore, we do not view
non-brand-oriented discount retailers as our prime competitors.
These non-brand-oriented discount retailers may offer footwear
at lower price points; however, they generally offer lower
quality, private label shoes. In contrast, we serve customers
that are typically brand-, quality- and style-conscious
shoppers. As such, we believe they prefer our value offerings to
those of the non-brand oriented discount stores. In addition, we
believe we will increase our market share as discount shoppers
realize that they can buy higher quality brands and more
fashionable shoes in our stores clearance sections for
prices only slightly higher than what they are willing to spend
at a discount store.
Leased Shoe Department Businesses
We have operated leased shoe departments for Filenes
Basement, a wholly-owned subsidiary of Retail Ventures, since
its acquisition by Retail Ventures in March 2000. Effective as
of January 30, 2005, we updated and reaffirmed our
contractual arrangement with Filenes Basement. Under the
new agreement, we own the merchandise and provide supervisory
assistance in all covered locations and receive a percentage of
net sales as payment. Filenes Basement provides the
fixtures and sales associates. As of January 29, 2005, we
operated leased shoe departments in 22 Filenes
Basement locations.
We also operate leased shoe departments for three non-affiliated
retailers. We entered into supply agreements to merchandise the
shoe departments in Stein Mart and Gordmans stores as of July
2002 and June 2004, respectively. We own the merchandise and
fixtures and provide supervisory assistance in these covered
locations, and we receive a percentage of net sales as payment.
Stein Mart and Gordmans provide the sales associates. As of
January 29, 2005, we supplied merchandise to 153 Stein
Mart stores and 48 Gordmans stores. As of January 29, 2005,
we also supplied merchandise to a single Frugal Fannies
store in Westwood, Massachusetts.
Intellectual Property
We have registered a number of trademarks and service marks in
the United States and internationally, including DSW®, DSW
Shoe Warehouse® and Reward Your Style®.
We believe that our trademarks and service marks, especially
those related to the DSW concept, have significant value and are
important to building our name recognition. We aggressively
protect our fixture designs, our packaging and store design
elements and our marketing slogans and graphics. To protect our
brand identity, we have also protected the DSW trademark in
several foreign countries.
Properties
All DSW stores, our principal executive office and all our
distribution, warehouse and office facilities are leased or
subleased. As of January 29, 2005, we leased or subleased
15 DSW stores and our main warehouse facility from entities
affiliated with SSC. The remaining DSW stores are leased from
unrelated entities. Most of the DSW store leases provide for a
minimum annual rent plus a percentage of gross sales over
specified breakpoints. Most of our leases are for a fixed term
with three to five four- or five-year renewal terms exercisable
at our option.
Our warehouse and distribution facility, located in an
approximately 707,000 square foot facility in Columbus,
Ohio, is adequate for our current needs. The lease expires in
December 2016 and has three renewal options with terms of five
years each. We believe that this facility, with some
modifications and additional equipment on an as-needed basis,
will be adequate for our foreseeable demands in 2005; however,
58
we may need to increase our distribution capacity in 2006 to
accommodate our expanding retail store base. Because our ability
to expand our warehouse facilities at our current site is
limited, we may need to acquire and construct additional
facilities in other geographic locations to accommodate our
planned expansion. Our principal executive office is also
located on the site of our main warehouse and distribution
facility in Columbus, Ohio.
Associates
As of January 29, 2005, we employed approximately 4,600
associates. None of our associates is covered by any collective
bargaining agreement.
We offer competitive wages, comprehensive medical and dental
insurance, vision care, company-paid and supplemental life
insurance programs, associate-paid long-term and short-term
disability insurance and a 401(k) plan to our full-time
associates and some of our part-time associates.
We have not experienced any work stoppages, and we consider our
relations with our associates to be good.
Legal Proceedings
We are involved in various legal proceedings that are incidental
to the conduct of our business, including, but not limited to
employment discrimination claims. In the opinion of management,
the amount of any liability with respect to these proceedings,
either individually or in the aggregate, will not be material.
As of the date of this prospectus, we are defending against a
claim in the State of California alleging improper
classification of managerial employees. This claim was brought
as a class action in which one of our former California
assistant store managers has alleged violations of the
California Labor Code and the Business and Professions Code. The
plaintiff has alleged that we improperly classify our assistant
store managers as exempt employees not entitled to overtime pay
or strictly scheduled rest and meal periods. This plaintiff is
seeking back pay for overtime allegedly not paid, rest and meal
period compensation, interest, statutory penalties, costs,
attorneys fees, and injunctions against such business
practices in the future on behalf of a purported class, which
has not yet been certified. We are vigorously defending this
action, and we do not believe that this proceeding will have a
material adverse effect on our business, financial condition or
results of operations.
On March 8, 2005, Retail Ventures announced that it had
recently learned of the theft of credit card and other purchase
information from 103 DSW stores. Federal law enforcement
officials are involved in the investigation of this incident and
we have engaged a leading computer security firm to assist us in
a review of our technology systems. While no litigation
regarding this theft is currently pending, there can be no
assurance that there will not be in the future.
59
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about our
directors and executive officers as of the consummation of this
offering, together with their positions and ages:
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Name
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Age
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Position With Us
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Jay L. Schottenstein
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Chief Executive Officer and Chairman of the Board of Directors
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Deborah L. Ferrée
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50
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President and Chief Merchandising Officer
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Peter Z. Horvath
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47
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Executive Vice President and Chief Operating Officer
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Douglas J. Probst
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40
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Senior Vice President, Chief Financial Officer and Treasurer
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Julia A. Davis
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44
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Executive Vice President, General Counsel and Secretary
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Steven E. Miller
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46
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Senior Vice President and Controller
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David J. Disque
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53
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Senior Vice President, Store Operations
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Kathleen Maurer
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44
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Vice President, Human Resources
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Timothy McDougall
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46
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Vice President, Real Estate, Store Planning and Construction
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Heywood Wilansky
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Director
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Each of our executive officers holds office until his or her
successor is elected or appointed and qualified or until his or
her resignation or removal, if earlier. Other than with respect
to Mr. James McGrady, the persons listed below will serve
as officers of DSW as of the consummation of this offering. Each
director listed below holds office until his successor is duly
elected or appointed and qualified or until his earlier death,
retirement, disqualification, resignation or removal. We expect
to replace Mr. McGrady in his capacity as director prior to
the consummation of this offering.
Jay L. Schottenstein
will serve as our Chief Executive
Officer and Chairman of the Board of Directors. He was appointed
as our Chief Executive Officer in March 2005. He has been
Chairman of the Board of Directors of Retail Ventures, American
Eagle Outfitters, Inc. and SSC since March 1992 and was Chief
Executive Officer of Retail Ventures from April 1991 to July
1997 and from July 1999 to December 2000. Mr. Schottenstein
served as Vice Chairman of SSC from 1986 until March 1992 and as
a director of SSC since 1982. He served in various executive
capacities at SSC since 1976. Mr. Schottenstein is also a
director of American Eagle Outfitters, Inc., which is a company
with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934.
Deborah L. Ferrée
will serve as our President and
Chief Merchandising Officer. Ms. Ferrée joined us in
November 1997. She has served as President and Chief
Merchandising Officer since November 2004. From March 2002 until
November 2004, she served as Executive Vice President and Chief
Merchandising Officer. Prior to that, she served as Senior Vice
President of Merchandising beginning in September 2000, and Vice
President of Merchandising beginning in October 1997. Prior to
joining us, Ms. Ferrée worked in the retail industry
for more than 30 years in various positions, including
serving as Divisional Merchandising Manager of Shoes,
Accessories and Intimate Apparel for Harris Department Store,
womens buyer for Ross Stores and Divisional Merchandise
Manager of the May Company.
Peter Z. Horvath
will serve as our Executive Vice
President and Chief Operating Officer, a position he has held
since January 2005. He has extensive retail experience, having
spent nineteen years with the Limited Brands business. He has
held numerous finance function roles within various divisions of
Limited Brands, most recently serving as Senior Vice President
of Merchandise Planning and Allocation for the entire Limited
Brands enterprise from April 2002 to August 2004. From February
1997 to April 2002, he served as Chief
60
Financial Officer for multiple apparel divisions of Limited
Brands. From 1985 to February 1997, Mr. Horvath held
various positions with Limited Brands, including Vice President
Controller of Express, Inc. and Director of Financial Reporting
for Limited Stores.
Douglas J. Probst
will serve as our Senior Vice
President, Chief Financial Officer and Treasurer beginning in
mid-March 2005. From April 1990 to February 2005, he held
various positions with TOO Inc., a company spun-off from The
Limited, Inc., including Vice President of Finance and
Controller from May 2004 to February 2005, Vice President
Finance from October 2003 to May 2004 and Vice President
Financial Analysis and Store Control from December 1999 to
October 2003. From August 1986 to March 1990, he was in the
practice of public accounting with Peat Marwick. Mr. Probst
is a certified public accountant.
Julia A. Davis
will serve as our Executive Vice
President, General Counsel and Secretary. Since January 2003,
Ms. Davis has been and will continue to be after
consummation of this offering Executive Vice President and
General Counsel of Retail Ventures as well. She has been our
Executive Vice President and General Counsel since January 2003
and was a director of DSW from December 2004 to March 2005.
Prior to joining Retail Ventures, she was a partner in the
Columbus office of Vorys, Sater, Seymour and Pease LLP for
10 years. Ms. Davis has over 17 years of
experience in private legal practice primarily representing and
advising national and regional retail companies in a variety of
employment matters.
Steven E. Miller
will serve as our Senior Vice President
and Controller. Since May 2003, he has been and will continue to
be after consummation of this offering Senior Vice President and
Controller of Retail Ventures as well. He has been Vice
President and Controller of DSW since May 2002 and held those
positions with Retail Ventures from September 2000 to May 2003.
Prior to that time, Mr. Miller served as Chief Financial
Officer of Spitzer Management, Inc. beginning in 1998. From 1993
to 1998, Mr. Miller held various positions with Big Lots,
Inc., including Director, Assistant Treasurer and Assistant
Controller. Mr. Miller is a certified public accountant.
David J. Disque
will serve as our Senior Vice President,
Store Operations. Mr. Disque joined us in November 1998 as
Vice President, DSW Store Operations and served in that capacity
until March 2004. Mr. Disque was Vice President Store
Operational Support for Value City from May 1998 to October
1998. He held several positions at Hills Department Stores from
March 1993 to April 1998, including Vice President, Merchandise
Presentation and Regional Vice President, Store Operations.
Prior to that, he spent over 21 years with Marshalls
and Federated Department Stores.
Kathleen Maurer
will serve as our Vice President, Human
Resources. From March 2004 until the consummation of this
offering, Ms. Maurer has served as Vice President, Human
Resources of Retail Ventures. Prior to that, she served as Chief
Administrative Officer and Vice President, Human Resources of
Real Living, Inc. from February 2002 to March 2004. From April
1996 to February 2002, Ms. Maurer held various positions at
TOO, Inc., a company spun off from The Limited, Inc., including
Vice President, Human Resources, Senior Vice President, Human
Resources and Executive Human Resources Consultant.
Ms. Maurer has over 22 years of human resources
experience within the retail sector, including 17 years at
The Limited, Inc and its affiliates.
Timothy McDougall
will serve as our Vice President, Real
Estate, Store Planning & Construction. From March 2004,
Mr. McDougall has served as Retail Ventures Vice
President of Real Estate, Chief Development Officer. From
November 1995 to March 2004, he was a partner in Greenwood
Realty, a retail development and consulting firm. Prior to
joining Greenwood Realty in 1995, Mr. McDougall held
various positions with the consumer products division of Gulf
and Western Industries, New York.
James A. McGrady
has served as Chief Financial Officer,
Treasurer and Secretary of Retail Ventures since July 2000. He
was our Executive Vice President, Chief Financial Officer,
Treasurer and Secretary from December 2002 to March 2005 and has
been a director of DSW since December 2002. From July 2000 to
December 2002, he served as Chief Financial Officer of Value
City Department Stores. Prior to July 2000, Mr. McGrady
served as Vice President and Treasurer of Big Lots, Inc.
beginning in 1986. From 1979 through 1986, Mr. McGrady was
in the practice of public accounting with KPMG Main Hurdman.
Prior to consummation of this offering, we expect to appoint
another individual to replace Mr. McGrady as a director.
61
Heywood Wilansky
will serve as a director of DSW. He was
appointed to the board of directors in March 2005.
Mr. Wilansky has been the President and Chief Executive
Officer of Retail Ventures since November 2004. Before joining
Retail Ventures, he served as President and Chief Executive
Officer of Filenes Basement, a subsidiary of Retail
Ventures, from February 2003 to November 2004. Mr. Wilansky
was a professor of marketing at the University of Maryland
business school from August 2002 to February 2003. From August
2000 to January 2003, he was President and Chief Executive
Officer of Strategic Management Resources, LLC. From August
1995 to July 2000, he was President and Chief Executive Officer
of Bon Ton Stores.
Board Composition
Our amended and restated code of regulations currently
authorizes seven directors to serve on the board of directors,
or board. As of March 2005, the following three individuals
serve on the board of directors: Mr. Jay Schottenstein,
Mr. James McGrady and Mr. Heywood Wilansky. We expect
to replace Mr. McGrady in his capacity as director prior to
the consummation of this offering. In addition, we expect at
least four additional individuals to be elected prior to the
consummation of this offering.
Prior to consummation of this offering, we expect to have at
least seven directors serving on our board. After all our
directors have been elected, we anticipate that our board will
determine that a majority of our directors are independent as
defined under the listing standards of the NYSE.
Committees of the Board of Directors
We will establish an audit committee, nominating and corporate
governance committee and compensation committee of our board. We
intend to comply with all applicable NYSE rules relating to
committee composition and committee charter requirements. We
will not utilize the controlled company or IPO
phase-in exemptions available to us under the NYSE rules.
The audit committee will assist the board in fulfilling its
oversight responsibility relating to our financial statements
and the financial reporting process, compliance with legal and
regulatory requirements, the qualifications and independence of
our independent public accountants, our system of internal
controls, the internal audit function, our code of ethical
conduct, retaining and, if appropriate, terminating the
independent public accountants and approving audit and non-audit
services to be performed by the independent public accountants.
We expect our board to affirmatively determine that all three
members of the audit committee are independent
directors as defined under the NYSE rules and under
Section 10A-3 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We also expect our board to
determine that one of our directors on the audit committee is an
audit committee financial expert as such term is
defined by the SEC under Item 401(h) of Regulation S-K.
The nominating and corporate governance committees
functions will include assisting the board in determining the
desired qualifications of directors, identifying potential
individuals meeting those qualification criteria, proposing to
the board a slate of nominees for election by the shareholders
and reviewing candidates nominated by shareholders. In addition,
the nominating and corporate governance committee will review
the Corporate Governance Principles, make recommendations to the
board with respect to other corporate governance principles
applicable to us, oversee the annual evaluation of the board and
management and review management and board succession plans. We
expect all three members of this committee to be
independent directors as defined under the NYSE
rules.
The compensation committees functions will include
evaluating the Chief Executive Officers performance,
setting the Chief Executive Officers annual compensation;
reviewing and approving the compensation packages of our other
executive officers; making recommendations to the board with
respect to our incentive compensation, retirement and other
benefit plans; making administrative and compensations decisions
under such plans; and recommending to the board the compensation
for non-employee board members.
62
We expect all three members serving on the compensation
committee to be independent directors as defined
under the NYSE rules, making us in full compliance with current
NYSE rules regarding compensation committee membership.
Compensation Committee Insider Participation
Compensation decisions during fiscal 2004 pertaining to our
executive officers compensation (other than for our named
executive officers) were made by the former Chief Executive
Officer of Retail Ventures, John C. Rossler, and the former
Chief Operating Officer of Retail Ventures, Edwin J.
Kozlowski. Compensation decisions regarding Deborah L.
Ferrée, Peter Z. Horvath, and Douglas J. Probst
were made by Jay L. Schottenstein as Chairman of Retail
Ventures. Mr. Schottenstein became the Chief Executive
Officer and Chairman of the Board of Directors of DSW in March
2005.
Compensation of Directors
We will pay an annual retainer to our non-employee directors
(each an independent director as defined under the
NYSE rules). The retainer will consist of $50,000 in cash and a
grant of a number of deferred stock units with a value equal to
$50,000, determined by using the fair market value of a DSW
Class A Common Share at the date of grant. These deferred
stock units will be fully vested on the date of grant, but will
not be distributable to the director until the director leaves
the board (for any reason). When the director leaves the board,
the deferred stock units owed to the director will be settled in
DSW Class A Common Shares (with cash for any fractional
shares), unless the directors award agreement provides for
a cash settlement. The deferred stock units will be settled in a
lump sum transfer, and the director may not defer settlement or
spread the settlement over a longer period of time. The deferred
stock units will be issued under the DSW 2005 Equity Plan. See
Employee Incentive Plans The DSW Plans
for a discussion of the DSW 2005 Equity Plan.
Directors will have no voting rights in respect of the deferred
stock units, but they will have the power to vote the DSW
Class A Common Shares received upon settlement of the
award. In general, directors will not have dividend rights in
the deferred stock units until settlement, but an award
agreement may provide for equivalent rights. If such equivalent
rights are granted, the director will be credited
with the same dividend that would be issued if the deferred
stock unit was a DSW Class A Common Share. The amounts
associated with the dividend equivalent rights will not be
distributed until the directors deferred stock unit award
is settled at the time that the director leaves the board. We
will be entitled to a tax deduction when the award is settled,
and the director will be taxed on the then fair market value of
the award.
All members of our board of directors will be reimbursed for
reasonable costs and expenses incurred in attending meetings of
our board of directors and its committees.
Codes of Conduct
We have adopted a code of ethics that applies to all our
directors, officers and employees, including our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, and an additional code of ethics that applies to
senior financial officers. These codes of ethics have been
designated as the Code of Conduct and the Code
of Ethics for Senior Financial Officers, respectively. We
intend to satisfy the disclosure requirement under Item 10
of Form 8-K regarding any amendment to, or waiver from, any
applicable provision (related to elements listed under
Item 406(b) of Regulation S-K) of the Code of
Conduct or the Code of Ethics for Senior Financial
Officers that applies to our directors, principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions by posting such information on our website.
Executive Compensation
The following summary compensation table sets forth information
concerning the cash and non-cash compensation for services
rendered to DSW earned during fiscal 2004 by, awarded to or paid
to our Chief
63
Executive Officer, our former Chief Executive Officer, each of
the next four most highly compensated executive officers and one
executive officer who would have been one of the four most
highly compensated but for the fact that he was no longer
serving as an executive officer at the end of fiscal 2004. We
refer to these officers as our named executive
officers in other parts of this prospectus. Even though
Mr. Probst was not employed by us during fiscal 2004, we
have included him on this table as we expect him to be one of
our most highly compensated executive officers following the
consummation of this offering and to be eligible to participate
in many of the same plans and programs as our other named
executive officers. For purposes of the summary compensation
table, we have listed the portion of each named executive
officers compensation allocable to services rendered to
DSW. This allocation is based on the net sales of the DSW
segment of the business of Retail Ventures for fiscal 2004 as
compared to the total net sales of Retail Ventures and its
subsidiaries for such year. After the consummation of this
offering, Ms. Ferrée, Mr. Horvath and
Mr. Probst will continue to be paid by us. Prior to and
after consummation of this offering, Ms. Davis will be paid
by Retail Ventures, and a portion of the related expense will be
allocated to DSW.
64
Summary Compensation Table
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Long Term Compensation
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Annual Compensation
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Awards
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Payouts
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Restricted
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Other Annual
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Stock
|
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Securities
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LTIP
|
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All Other
|
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Fiscal
|
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Salary
|
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Bonus
|
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|
Compensation
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Award(s)
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Underlying
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Payouts
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Compensation
|
|
Name and Principal Position(1)
|
|
Year
|
|
|
($)
|
|
($)(3)
|
|
|
($)(4)
|
|
|
($)
|
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|
Options
|
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|
($)(5)
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($)(6)
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|
|
|
|
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Jay L.
Schottenstein
(7)
|
|
|
2004
|
|
|
84,950
(2)
|
|
|
|
|
|
|
|
|
|
|
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Chief Executive Officer and Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deborah L.
Ferrée
(8)
|
|
|
2004
|
|
|
553,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
345,000
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|
|
|
8,037
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|
President & Chief Merchandising Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Z.
Horvath
(9)
|
|
|
2004
|
|
|
28,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Chief Operating Officer
|
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|
|
|
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|
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|
|
|
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|
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|
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|
|
|
|
|
Douglas J.
Probst
(10)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Chief Financial Officer
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. McGrady
|
|
|
2004
|
|
|
147,421
|
|
|
26,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,865
|
|
Chief Financial Officer, Treasurer and Secretary of Retail
Ventures
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julia A. Davis
|
|
|
2004
|
|
|
93,607
|
|
|
25,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,392
|
|
Executive Vice President and General Counsel of Retail Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
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John C.
Rossler
(12)
|
|
|
2004
|
|
|
255,686
|
|
|
92,746
|
|
|
|
|
|
|
|
256,329
|
|
|
|
|
|
|
|
279,979
|
|
|
|
2,484
|
|
Former Chief Executive Officer and President of Retail Ventures
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
Edwin J.
Kozlowski
(12)
|
|
|
2004
|
|
|
182,621
|
|
|
66,198
|
|
|
|
22,417
|
|
|
|
|
|
|
|
|
|
|
|
69,560
|
|
|
|
2,741
|
|
Former Executive Vice President Chief Operating Officer of
Retail Ventures
|
|
|
|
|
|
|
|
|
|
|
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|
(1)
|
In fiscal 2004, Ms. Ferrée, Mr. McGrady and
Ms. Davis were the three most highly compensated officers
who were still employed with us or Retail Ventures as of the end
of fiscal 2004. None of our other executive officers received
compensation for services rendered to DSW in an amount greater
than $100,000 in fiscal 2004.
|
|
(2)
|
Includes amounts paid in respect of fiscal 2004 to
Mr. Schottenstein as compensation for his role as Chairman
of the Board of Directors of Retail Ventures, allocable to DSW.
As of the date of his appointment as Chief Executive Officer,
Mr. Schottenstein does not have a formal written employment
agreement with DSW.
|
|
(3)
|
Includes amounts paid in respect of fiscal 2004 under the Value
City Department Stores, Inc. 2003 Incentive Plan. In connection
with the offering, we expect that our board will adopt, our
shareholders will approve, the DSW Inc. 2005 Cash Incentive
Plan. We expect that some of our named executive officers will
participate in that plan.
|
|
(4)
|
SEC rules do not require the reporting of perquisites and other
personal benefits to the extent that the aggregate amount of
such compensation is the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for each named executive
officer. For Mr. Kozlowski, includes allocated amounts of
$22,271 relating primarily to personal benefits.
|
|
(5)
|
In July 2002, the compensation committee of the board of
directors of Retail Ventures recommended and the Board of
Directors approved the establishment of a value
creation program, pursuant to which cash payments were
made to certain participants including Messrs. Rossler and
Kozlowski and Ms. Ferrée. Mr. Rossler was awarded
$805,000 in fiscal 2004, pursuant to the program, subject to a
risk of forfeiture on termination of employment, $279,979 of
which was allocable to DSW during fiscal 2004.
Mr. Kozlowski was awarded $200,000 in fiscal 2004, pursuant
to the program, subject to a risk of forfeiture on termination
|
65
|
|
|
of employment, $69,560 of which was
allocable to DSW during fiscal 2004. Ms. Ferrée was
awarded an aggregate of $690,000 pursuant to the program,
subject to a risk of forfeiture on termination of employment,
$345,000 of which was paid during fiscal 2004. All obligations
under the value creation program have been satisfied
as of February 1, 2004, upon payment of the last
installment.
|
|
|
(6)
|
The amounts shown in this column for each named executive
officer consist of contributions or other allocations to Retail
Ventures 401(k) Plan and Associate Stock Purchase Plan for
the named executive officer, as follows:
|
401(K) Plan and Associate Stock Purchase Plan
|
|
|
|
|
|
|
|
|
Name
|
|
401(K) Plan
|
|
|
Stock Purchase Plan
|
|
|
|
|
|
|
|
|
Jay L. Schottenstein
|
|
$
|
0
|
|
|
$
|
0
|
|
Deborah L. Ferrée
|
|
$
|
7,850
|
|
|
$
|
187
|
|
Peter Z. Horvath
|
|
$
|
0
|
|
|
$
|
0
|
|
Douglas J. Probst
|
|
$
|
0
|
|
|
$
|
0
|
|
James A. McGrady
|
|
$
|
2,865
|
|
|
$
|
0
|
|
Julia A. Davis
|
|
$
|
2,392
|
|
|
$
|
0
|
|
John C.
Rossler
*
|
|
$
|
2,484
|
|
|
$
|
0
|
|
Edwin J. Kozlowski
|
|
$
|
2,741
|
|
|
$
|
0
|
|
|
|
|
*
|
|
Retail Ventures paid premiums in the amount of $700 for a life
insurance policy for Mr. Rossler pursuant to which
Mr. Rossler would have received the benefit of any cash
surrender value. The policy was terminated in May 20, 2004.
|
|
(7)
|
|
Mr. Schottenstein became Chief Executive Officer and
Chairman of the Board of Directors of DSW in March 2005.
|
|
(8)
|
|
Ms. Ferrée entered into a new employment agreement
effective as of November 2004. Her new annual salary is $700,000.
|
|
(9)
|
|
Mr. Horvath joined DSW in January 2005. His annual salary
is $500,000.
|
|
(10)
|
|
Mr. Probst is expected to become Chief Financial Officer
effective March 14, 2005. His annual salary will be
$350,000.
|
|
(11)
|
|
The information in the table represents the portion of
Mr. McGradys compensation allocable to DSW. This
allocation is based on the net sales of DSW segment of the
business of Retail Ventures for 2004 as compared with the total
net sales of Retail Ventures and its subsidiaries for such year.
|
|
(12)
|
|
The employment of Messrs. Rossler and Kozlowski was
terminated by the board of directors of Retail Ventures as of
November 3, 2004. The information in the table represents
portions of their respective compensation allocable to DSW. The
portion allocable to DSW was determined as described in
footnote (11) above.
|
Aggregated Option/ SAR Exercises for Common Shares of Retail
Ventures in Last Fiscal Year and Fiscal Year-End Option/ SAR
Values
The following table sets forth information for each of the named
executive officers regarding the number of shares subject to
both exercisable and unexercisable stock options in respect of
Retail Ventures common shares, as well as the value of
unexercisable in-the-money options, as of the end of fiscal
2004, based on the
66
closing price of Retail Venture common shares on that date
($6.61 per share). No named executive officer held options
or SARs in respect of our common shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
Value of Unexercised
|
|
Named
|
|
Number of
|
|
|
|
|
Underlying Unexercised
|
|
|
In-the-Money
|
|
Executive
|
|
Shares Acquired
|
|
|
Value
|
|
|
Options/SARs At Fiscal
|
|
|
Options/SARs At Fiscal
|
|
Officers
|
|
upon Exercise
|
|
|
Realized
(1)
|
|
|
Year End
|
|
|
Year End
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/Unexercisable
|
|
|
Exercisable/Unexercisable
|
|
Jay L. Schottenstein
|
|
|
|
|
|
|
|
|
|
|
56,000/
|
|
|
|
/
|
|
Deborah L. Ferrée
|
|
|
|
|
|
|
|
|
|
|
227,600/324,400
|
|
|
|
457,440/684,060
|
|
Peter Z. Horvath
|
|
|
|
|
|
|
|
|
|
|
/
|
|
|
|
/
|
|
Douglas J. Probst
|
|
|
|
|
|
|
|
|
|
|
/
|
|
|
|
/
|
|
James A. McGrady
|
|
|
|
|
|
|
|
|
|
|
243,000/332,000
|
|
|
|
462,150/687,900
|
|
Julia A. Davis
|
|
|
|
|
|
|
|
|
|
|
8,000/32,000
|
|
|
|
39,840/159,360
|
|
John C. Rossler
|
|
|
|
|
|
|
|
|
|
|
2,445,000/
|
|
|
|
5,137,950/
|
|
Edwin J. Kozlowski
|
|
|
|
|
|
|
|
|
|
|
1,720,000/
|
|
|
|
3,629,200/
|
|
|
|
(1)
|
Represents the total gain which would be realized if all
in-the-money options held at year end were exercised, determined
by multiplying the number of shares underlying the options by
the difference in the per share option exercise price and the
per share fair market value at year end of $6.61. An option is
in-the-money if the fair market value of the underlying shares
exceeds the exercise price of the option.
|
Employee Incentive Plans
|
|
|
The Retail Ventures Incentive Plans
|
Some of our employees (including our named executive officers)
and non-employee directors have participated in or have been
eligible to participate in equity incentive plans sponsored by
Retail Ventures which provided them an opportunity to earn
incentive cash compensation and to receive equity-based
compensation related to the common shares of Retail Ventures.
These plans include the Amended and Restated Retail Ventures,
Inc. 1991 Stock Option Plan, or the Retail Ventures 1991 Option
Plan, the Retail Ventures, Inc. Amended and Restated 2000 Stock
Incentive Plan, or the Retail Ventures 2000 Stock Incentive
Plan, the Value City Department Stores, Inc. 2003 Incentive
Compensation Plan, or the Retail Ventures 2003 Incentive Plan
and the Retail Ventures, Inc. Employee Stock Purchase Plan, or
the Retail Ventures ESPP. All of these plans are collectively
referred to as the Retail Ventures Plans.
After the offering, awards previously issued under the Retail
Ventures Plans will remain outstanding and will continue to be
earned or exercisable under their terms.
All of the Retail Ventures Plans (other than the Retail Ventures
ESPP) are administered by the Retail Ventures board of
directors, or a committee comprised of independent board members
who are outside directors within the meaning of
Section 162(m) of the Code. The Retail Ventures ESPP is
administered by committee comprised of certain Retail Ventures
employees.
Subject to the terms of each plan, the administrator of each
Retail Ventures Plan decides who may participate, when awards
are granted, the number and types of awards granted and the
terms and conditions that must be met to earn the award,
including the period over which a cash award is earned and the
period over which an equity award may be earned and exercised or
settled. The plan administrator also determines the exercise
price of the stock options and stock appreciation rights granted
under any Retail Ventures Plans.
Subject to shareholder approval in certain instances, the Retail
Ventures board of directors may amend, suspend or terminate the
Retail Ventures Plans at any time, provided that no such
amendment, suspension or termination may adversely affect any
award previously granted to a participant without their consent.
Awards granted under the Retail Ventures Plans are generally not
transferable by the participant except by will or the laws of
descent and distribution, and options are exercisable, during
the lifetime of the
67
participant, only by the participant or his guardian or legal
representative, unless otherwise permitted by the plan
administrator.
With the exception of the Retail Ventures ESPP, the Retail
Ventures Plans are intended to permit the payment of
performance-based compensation within the meaning of
Section 162(m) of the Code, which generally limits the
deduction that Retail Ventures may take for compensation paid in
excess of $1,000,000 to certain of its covered
officers in any one calendar year. Under
Section 162(m) of the Code, compensation that is
qualified performance-based compensation within the
meaning of Section 162(m) of the Code, will not be subject
to this limitation if certain requirements are met. Any payments
that are intended to be deductible as qualified
performance-based compensation under Section 162(m)
of the Code must be based on one or more of the performance
measures listed in the Retail Ventures Plans as previously
approved by the shareholders of Retail Ventures and which
otherwise satisfy requirements applicable to qualified
performance-based compensation under Section 162(m)
of the Code.
|
|
|
The Retail Ventures 1991 Option Plan
|
The Retail Ventures 1991 Option Plan expired in 2001, although
some awards granted before that date remain outstanding and may
yet be exercised.
The Retail Ventures 1991 Option Plan authorizes the committee
administering the plan to grant incentive stock options (within
the meaning of Section 422 of the Code), nonstatutory stock
options and tax offset awards. A tax offset award is a cash
payment intended to reimburse an employee for a portion of the
income taxes incurred when exercising a nonstatutory stock
option or selling an incentive stock option at a time that
generates ordinary income taxes.
The Retail Ventures 1991 Plan provides that (i) all options
held by a participant who retires (i.e., terminates after
reaching age 60 or completing 30 years of service) will
become exercisable and may be exercised anytime within
30 days after retirement or, if shorter, the date the
option would expire under its terms, (ii) all options held
by a participant who terminates because of death or disability
(as defined in the Retail Ventures 1991 Option Plan) will become
exercisable and may be exercised anytime within one year after
termination because of disability or, if shorter, the date the
option would expire under its terms, and (iii) all
exercisable options held by a participant who terminates (or is
terminated) for any other reason (other than for
cause as defined in the Retail Ventures 1991 Plan)
may be exercised anytime within 30 days after termination
or, if shorter, the date the option would expire under its terms
and all options that are not exercisable at termination will be
forfeited. All options (whether or not then exercisable) held by
a participant who is terminated for cause (as
defined in the Retail Ventures 1991 Plan) are forfeited and may
not be exercised at any time.
In the event of a change in control of Retail Ventures (as
defined in the Retail Ventures 1991 Plan) all options that are
outstanding on the date of the change in control will become
exercisable for a period of 30 days ending on the date of
the change in control and will expire on the date of the change
in control if they are not exercised before that date.
|
|
|
The Retail Ventures 2000 Stock Incentive Plan
|
The Retail Ventures 2000 Stock Incentive Plan authorizes the
committee administering the plan to grant incentive stock
options (within the meaning of Section 422 of the Code),
nonstatutory stock options, stock appreciation rights,
restricted stock, performance units and performance shares.
The Retail Ventures 2000 Stock Incentive Plan provides that
(i) all options and stock appreciation rights held by a
participant who terminates employment after qualifying for
retirement under a tax-qualified retirement plan or terminates
because of death or disability (as defined in the Retail
Ventures 2000 Stock Incentive Plan), may be exercised anytime
within one year (three months in the case of incentive stock
options held by an employee who is retiring) after termination
because of retirement, death or disability or, if shorter, the
date the option would expire under its terms; and (ii) all
options and stock appreciation rights held by a participant who
terminates (or is terminated) for any other reason, may not be
exercised after
68
termination unless the committee specifically provides for a
post-termination exercise period which may not be longer than
three months. The effect of terminations of employment on
restricted stock, performance units or performance shares is
specified in individual award agreements.
In the event of a change in control of Retail Ventures (as
defined in the Retail Ventures 2000 Stock Incentive Plan)
all options that are outstanding on the date of the change in
control will become exercisable immediately. No similar plan
provision is available for other types of awards granted under
the Retail Ventures 2000 Stock Incentive Plan.
|
|
|
The Retail Ventures 2003 Incentive Plan
|
The Retail Ventures 2003 Incentive Plan is designed to provide
additional incentive cash compensation to officers of Retail
Ventures if preestablished performance criteria specified in the
plan are met. The maximum annual incentive compensation that any
covered officer may earn under the Retail Ventures 2003
Incentive Plan is $4,000,000.
A covered officer who terminates employment with Retail Ventures
and all related entities for any reason other than death or
disability before the end of a performance period will forfeit
any right to receive incentive compensation for the performance
period. However, a covered officer who terminates his or her
employment with Retail Ventures and all related entities because
of death or disability (as defined in the Retail Ventures 2003
Incentive Plan) will receive a prorated amount under the Retail
Ventures 2003 Incentive Plan, but only if applicable performance
goals are actually achieved as of the end of that performance
period. The amount paid in these circumstances is the incentive
compensation the deceased or disabled employee would have
received at the end of the performance period multiplied by a
fraction, the numerator of which is the number of days between
the beginning of the performance period and the date employment
terminated and the denominator of which is the total number of
days included in the performance period.
The Retail Ventures ESPP is a broad-based employee stock
purchase plan through which employees may purchase shares of
Retail Ventures stock if they have reached age
20
1
/
2
,
completed at least one year of employment and regularly work at
least 1,000 hours annually. To participate, each eligible
employee must agree to a weekly payroll deduction (no more than
$24.00 for hourly-rated employees and $52.00 for salary-rated
employees). Retail Ventures matches 15% of each authorized
payroll deduction. These amounts are applied to purchase Retail
Ventures stock.
Participants are always fully vested in shares purchased through
the Retail Ventures ESPP and may sell them at any time.
The DSW Incentive Plans
In connection with the offering, we expect that our board of
directors will adopt and our shareholders will approve the DSW
Inc. 2005 Equity Incentive Plan, or the DSW 2005 Equity Plan,
and the DSW Inc. 2005 Cash Incentive Compensation Plan, or the
DSW 2005 Cash Plan, to enable us to attract, retain and reward
outstanding employees and directors through cash incentives and
equity-based compensatory awards, including incentive stock
options (within the meaning of Section 422 of the Code),
non-qualified stock options, performance shares, performance
units, restricted stock, restricted stock units, stock
appreciation rights and stock units. Both of these plans are
collectively referred to as the DSW Plans.
After the offering, our officers, including those who also
simultaneously hold positions with Retail Ventures, may
participate in both the Retail Ventures Plans described above
and in the DSW Plans. Also, some Retail Ventures employees
providing services to DSW will be eligible to participate in the
DSW Plans.
The DSW Plans will be administered by the compensation committee
of our board of directors with respect to awards granted to
employees and by the entire board with respect to awards granted
to non-employee directors. The compensation committee is
comprised of at least two members who satisfy the independence
requirements of current NYSE listing standards, are
outside directors within the meaning of
69
Section 162(m) of the Code, and are non-employee
directors within the meaning of Rule 16b-3 under the
Exchange Act.
Awards granted under the DSW Plans are generally not
transferable by the participant except by will or the laws of
descent and distribution, and each award is exercisable, during
the lifetime of the participant, only by the participant or his
guardian or legal representative, unless permitted by the
committee.
The DSW Plans are intended to permit us to deliver
performance-based compensation within the meaning of
Section 162(m) of the Code, which generally limits the
deduction that we may take for compensation paid in excess of
$1,000,000 to certain of our executive officers in any one
calendar year. Under Section 162(m) of the Code,
compensation that is qualified performance-based
compensation within the meaning of Section 162(m) of
the Code, will not be subject to this limitation if certain
requirements are met. Any awards that are intended to be
deductible as qualified performance-based
compensation under Section 162(m) of the Code must be
based on one or more of the performance measures listed in the
DSW Plans and otherwise satisfies the requirements applicable to
qualified performance-based compensation under
Section 162(m) of the Code.
In the event of a change in control of DSW all awards will vest
or become exercisable and generally will be settled for cash.
However, the value of any acceleration of vesting will, if
appropriate, be reduced to avoid any golden parachute penalties
under Section 280G of the Code unless otherwise provided in
an award agreement or another written agreement (such as an
employment agreement) between DSW and an affected employee.
Generally, a change in control is defined in the DSW Plans to
include (i) a change in a majority of DSWs directors
during any 12-month period, (ii) with some exceptions
(including exceptions for acquisitions by Retail Ventures, SSC
or trusts established for members of the Schottenstein family),
the acquisition by any person (or a group of persons acting
together) of more than 30% of DSWs outstanding voting
securities, (iii) a merger or business combination
affecting DSW and after which DSW shareholders hold less than
50% of the surviving entitys voting power and (iv) a
complete dissolution or liquidation of DSW.
Our board or the compensation committee of the board may
terminate, suspend or amend the DSW Plans at any time without
shareholder approval, except to the extent necessary to satisfy
applicable law or listing requirements. However, generally no
amendment may adversely affect any rights of a participant under
an outstanding award without their consent. Unless terminated
sooner, the DSW 2005 Equity Plan will terminate automatically
ten years from the date of its implementation.
The DSW 2005 Equity Plan authorizes 4,600,000 shares of our
common shares to be issued under the plan. Of these,
4,600,000 may be issued through the exercise of incentive
stock options. The DSW 2005 Equity Plan also provides that any
shares subject to an unfulfilled award (e.g., a forfeited
option or an award settled in cash) may be subject to a
subsequent award under the plan.
The DSW 2005 Equity Plan provides that our employees may receive
incentive stock options, nonstatutory stock options, restricted
stock, restricted stock units, performance shares and
performance units and that our non-employee directors (and
directors of any of our affiliates) may receive nonstatutory
options, restricted stock or restricted stock unit awards. The
DSW 2005 Equity Plan also permits non-employee directors to
elect to receive all or a portion (in 25% increments) of their
annual cash retainer and other director fees in the form of
stock units. Each stock unit represents the right to receive the
fair market value of one of our common shares. Our non-employee
directors also will automatically receive 50% of their fees in
the form of deferred stock units which will be immediately
vested but will be settled in shares of our stock only when they
leave the board.
The maximum number of our shares underlying options that may be
issued annually to any covered executive is 500,000 and the
maximum number of whole-share grants (such as restricted stock
and performance shares) is 100,000.
The DSW 2005 Equity Plan limits participants ability to
exercise awards they hold when they terminate employment. Under
these rules (and unless the award agreement specifies
otherwise), (i) all awards held by a
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participant who retires (i.e., terminates after reaching age 65
and completing five years of service) becomes disabled (as
defined in the DSW 2005 Equity Plan) or dies will become
exercisable and may be exercised anytime within one year (three
months in the case of incentive stock options held by an
employee who is retiring) after termination because of
retirement, disability or death or, if shorter, the date the
award would expire under its terms and (ii) all exercisable
awards held by a participant whose employment terminates for any
other reason (other than for cause as defined in the
DSW 2005 Equity Plan) may be exercised anytime within
90 days after termination or, if shorter, the date the
award would expire under its terms and all awards that are not
exercisable at termination will be forfeited. All awards
(whether or not then exercisable) held by a participant who is
terminated for cause (as defined in the DSW 2005
Equity Plan) are immediately forfeited and may not be exercised
at any time.
At any time prior to a change in control of DSW, the
compensation committee is authorized to cancel any or all
outstanding stock options and other awards granted under the DSW
2005 Equity Plan. Upon cancellation, we are obligated to pay the
participants only with respect to those options and awards that
are then exercisable. With respect to outstanding stock options
that are exercisable when cancelled, we will pay the participant
the difference between the fair market value of the common
shares underlying the stock option and the exercise price of the
stock option. With respect to other awards under the DSW 2005
Equity Plan which are exercisable when cancelled, we will pay
the participant the fair market value of the common shares
subject to the award.
Based on federal income tax laws currently in effect, we believe
that we will not be entitled to a federal income tax deduction
when an incentive stock option, nonstatutory stock option,
restricted stock award, restricted stock unit award, performance
stock award, performance stock unit award or stock unit award is
granted and participants will not be required to include any
amount in federal taxable income at that time. Except in the
case of incentive stock options, we will be entitled to a
federal income deduction in the year these awards are settled or
exercised and participants will be required to recognize
ordinary federal income taxes on the same amount in the same
year. The amount of our federal income tax deduction (and the
amount simultaneously taxable to the participant) will be the
full value of the award when it is settled in the case of a
restricted stock award, restricted stock unit award, performance
stock award, performance stock unit award and stock unit award.
In the case of nonstatutory stock options, the amount of our
federal income tax deduction (and the amount simultaneously
taxable to participants) will be the difference between the
price a participant pays to exercise the nonstatutory stock
option and the fair market value of the stock acquired when the
option is exercised. Generally, upon exercise of an incentive
stock option, we would not be entitled to any federal income tax
deduction and the participant would not recognize income upon
exercise. If the participant (i) does not dispose of the
shares within two years after the date of the grant and one year
after the transfer of shares upon exercise and (ii) is an
employee of ours or of one of our subsidiaries from the date of
the grant through and until three months before the exercise
date, any gain from a subsequent sale of shares acquired through
incentive stock options would be taxed to the participant as a
long-term capital gain and we would not be entitled to a federal
income tax deduction. However, if a participant does not satisfy
the requirements of clauses (i) and (ii) above, we
will be entitled to a federal income tax deduction equal to the
difference between the price a participant paid to exercise the
incentive stock option and the fair market value of the stock
acquired when the option was exercised and the participant will
be required to recognize ordinary income in the same amount.
The DSW 2005 Cash Plan authorizes the compensation committee to
designate employees (including executive officers and employees
who are not executive officers) who may earn additional cash
compensation under the DSW 2005 Cash Plan, to identify
business-related performance goals that must be met over a
performance period specified by the compensation committee as a
condition of the payment of the incentive compensation and to
specify the amount of the cash bonus to be paid if those
performance goals are met. The performance goals that executive
officers must achieve to earn a cash bonus are derived from
criteria listed in the DSW 2005 Cash Plan. Employees who are not
executive officers also may earn a cash bonus under the DSW 2005
Cash Plan, although their performance goals may be based on
criteria not listed in the
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DSW 2005 Cash Plan. The compensation committee must establish
performance goals as soon as administratively practicable before
the beginning of the performance period but, in the case of
executive officers, no later than 90 days after the
beginning of the performance period or the expiration of 25% of
the performance period, whichever is earliest.
At the end of each performance period, the compensation
committee will ascertain whether each employee has or has not
met applicable performance goals and certify those results to
our board of directors along with a statement of the amount of
any cash bonus earned. If an employee has not met applicable
performance goals, he or she will not receive a cash bonus under
the DSW 2005 Cash Plan for that performance period. If an
employee has met applicable performance goals, DSW will pay the
stipulated cash bonus as soon as administratively practicable
but in no case later than two and one-half months after the end
of our fiscal year during which the performance period ends or
the calendar year during which the performance period ends,
whichever is latest. The maximum annual bonus that any covered
executive may earn under the DSW 2005 Cash Plan is $5,000,000.
An employee who terminates employment for any reason other than
death or disability before the end of a performance period will
forfeit any right to receive a bonus during that performance
period. However, an employee who terminates employment because
of death or disability (as defined in the DSW 2005 Cash Plan)
will receive a prorated bonus under the DSW 2005 Cash Plan but
only if applicable performance goals are actually achieved at
the end of that performance period. The amount paid in these
circumstances is the bonus the deceased or disabled employee
would have received at the end of the performance period
multiplied by a fraction, the numerator of which is the number
of days between the beginning of the performance period and the
date employment terminated and the denominator of which is the
total number of days included in the performance period.
Based on federal income tax laws currently in effect, we believe
that we will be entitled to a federal income tax deduction equal
to the full amount paid from the DSW 2005 Cash Plan in the year
it is paid and that employees receiving payments from the DSW
2005 Cash Plan will be required to recognize ordinary income in
the same year.
Benefit Plans
After the completion of this offering, we will continue to
participate in certain of the health and welfare benefit plans
that are sponsored by Retail Ventures. Such plans include a
health and medical plan, prescription drug plan, vision service
plan, optional dental plan, life insurance plans, disability
plans, and a cafeteria plan subject to Section 125 of the
Code.
Our full-time employees who attain age twenty-one may contribute
up to thirty percent of their compensation on a pre-tax basis to
a profit sharing and 401(k) plan, subject to Internal Revenue
Service limitations. Part-time employees may contribute to the
plan after attaining age twenty-one and completing one year of
service as defined in the plan. We match employee deferrals into
the plan, 100% on the first 3% of eligible compensation deferred
and 50% on the next 2% of eligible compensation deferred.
Matching begins after one year of qualified service.
Additionally, we may contribute a discretionary profit sharing
amount to the plan each year. The plan offers participants a
diverse choice of investment options and contains provisions for
loans and hardship withdrawals.
Employment Contracts, Termination of Employment and
Change-in-Control Arrangements
We have entered into an employment agreement with
Ms. Ferrée, which became effective on
November 22, 2004. The agreement provides for an indefinite
term (which terminates upon the executives death,
disability (as such term is defined in the agreement), voluntary
termination by the executive or involuntary termination by us).
Under the agreement, Ms. Ferrée will receive an annual
base salary of $700,000. Ms. Ferrée will also
participate in our bonus (cash incentive) plans with a target
bonus opportunity of 100% of base salary. The agreement also
provides for certain personal benefits for Ms. Ferrée.
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If the employment of Ms. Ferrée is involuntarily
terminated by us without cause, or if Ms. Ferrée
terminates her employment with us for good reason, as such term
is defined in her employment agreement, Ms. Ferrée
will be entitled to receive payment of her base salary through
the end of 2007 if such termination occurs prior to the end of
the 2006 or for a 12 month period beginning on the date of
termination if such termination occurs on or after
January 1, 2007; up to 18 months reimbursement for the
cost of health care continuation; a pro-rata portion of any cash
incentive bonus for the year of termination and one year of
accelerated vesting with respect to her outstanding stock
options. The agreement with Ms. Ferrée also contains
confidentiality and non-disparagement provisions effective
through the term of the agreement, a non-competition provision
effective through the longer of one year following termination
of employment or the period of any salary continuation, and a
non-solicitation provision effective through the longer of two
years following termination of employment or the period of any
salary continuation.
Mr. McGrady entered into an employment agreement with
Retail Ventures effective June 21, 2000, for an initial
term ending June 21, 2003, with automatic one-year
extensions unless either party gives 60 calendar days
notice of an intent not to extend the agreement. The agreement
provides for an annual salary of $300,000 and a bonus of at
least 40% of his base salary if board approved, predetermined,
performance measures set annually are met. The agreement also
provides for a vehicle allowance. If Mr. McGradys
employment is terminated by Retail Ventures without
cause as defined in his agreement, and other than pursuant
to Retail Ventures providing notice of its intent not to renew
the agreement, then Mr. McGrady will be entitled to receive
12 months of base salary, 12 months of reimbursement
for the cost of health care continuation and any cash incentive
bonus declared but not paid. The agreement also contains
confidentiality provisions effective through the term of the
agreement, a non-competition provision effective through the
longer of one year following termination of employment or the
period of any salary continuation, and a non-solicitation
provision effective through the longer of two years following
termination of employment or the period of any salary
continuation.
Ms. Davis entered into an employment agreement with Retail
Ventures effective as of April 29, 2004. The agreement
provides for an indefinite term (which terminates upon the
executives death, disability (as such term is defined in
her employment agreement), voluntary termination by
Ms. Davis or involuntary termination by Retail Ventures).
The agreement provides for an annual salary of $260,000 and a
cash bonus of 50% of her base salary if board approved,
predetermined performance measures set annually are met. In
addition, for each year Ms. Davis annual salary is
less than $300,000, she will receive a minimum guaranteed bonus
to raise her salary to $300,000. The agreement also provides for
a vehicle allowance and fuel card. If Ms. Daviss
employment is terminated by Retail Ventures without
cause as defined in her agreement, then Ms. Davis
will be entitled to 12 months of base salary,
12 months of reimbursement for the cost of health care
continuation, a pro-rata portion of any cash incentive bonus for
the year of termination, and one year of accelerated vesting
with respect to her outstanding stock options. The agreement
also contains confidentiality and non-disparagement provisions
effective through the term of the agreement, a non-competition
provision effective through the longer of one year following
termination of employment or the period of any salary
continuation, and a non-solicitation provision effective through
the longer of two years following termination of employment or
the period of any salary continuation.
The Company has not yet entered into employment agreements with
Messrs. Horvath and Probst. It is anticipated, however,
that these officers will enter into employment agreements prior
to the consummation of this offering, providing them with an
annual base salary of no less than $500,000 and $350,000,
respectively, and an annual bonus opportunity for 2005 of 100%
and 80%, respectively, of such base salary.
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Termination of Employment
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On November 3, 2004, the board of directors of Retail
Ventures voted to terminate John C. Rossler, President and
Chief Executive Officer of Retail Ventures, and Edwin J.
Kozlowski, President and Chief Operating Officer of Retail
Ventures, and to terminate their respective employment
agreements without cause in accordance with the
terms of the agreements.
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Mr. Rosslers employment agreement, dated effective as
of February 3, 2002, provided for an annual salary of
$700,000 with annual increases of 2.5%. Pursuant to its terms,
on termination without cause (as such term is
defined in his employment agreement), Mr. Rossler became
entitled to receive 12 months of his base salary plus
reimbursement for his cost of maintaining continuing health care
coverage for a period of up to 18 months following his
termination. Mr. Rossler has a duty to mitigate these
payments pursuant to the terms of his employment agreement. In
addition, (i) Mr. Rossler is entitled to a pro rata
incentive compensation payment based on the extent to which
performance standards are met on the last day of the year in
which he is terminated without cause; and (ii) subject to
the terms of Retail Ventures stock incentive plan and any
applicable award agreement, (a) all stock options held by
Mr. Rossler will be fully vested and exercisable,
(b) all restrictions then imposed on any restricted stock
(other than those imposed by any applicable state or federal
statute) held by Mr. Rossler will lapse and be removed and
the shares will be distributed to him, and (c) all
performance stock options held by Mr. Rossler will be fully
vested and exercisable. In consideration of the payments made
and benefits provided to Mr. Rossler upon his termination
of employment without cause, Mr. Rossler has agreed to
non-competition and non-solicitation restrictions which remain
in effect until the second anniversary of his termination of
employment and to a standard confidentiality covenant.
Mr. Kozlowskis employment agreement, dated effective
as of February 3, 2002, provided for an annual salary of
$500,000 with annual increases of 2.5%. Pursuant to its terms,
on termination without cause (as such term is
defined in his employment agreement), Mr. Kozlowski became
entitled to receive 12 months of his base salary plus
reimbursement for his cost of maintaining continuing health care
coverage for a period of up to 18 months following his
termination. Mr. Kozlowski has a duty to mitigate these
payments pursuant to the terms of his employment agreement. In
addition, (i) Mr. Kozlowski is entitled to a pro rata
incentive compensation payment based on the extent to which
performance standards are met on the last day of the year in
which he is terminated without cause; and (ii) subject to
the terms of Retail Ventures stock incentive plan and any
applicable award agreement, (a) all stock options held by
Mr. Kozlowski will be fully vested and exercisable,
(b) all restrictions then imposed on any restricted stock
(other than those imposed by any applicable state or federal
statute) held by Mr. Kozlowski will lapse and be removed
and the shares will be distributed to him, and (c) all
performance stock options held by Mr. Kozlowski will be
fully vested and exercisable. In consideration of the payments
made and benefits provided to Mr. Kozlowski upon his
termination of employment without cause, Mr. Kozlowski has
agreed to non-competition and non-solicitation restrictions
which remain in effect until the second anniversary of his
termination of employment and to a standard confidentiality
covenant.
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THE TRANSACTIONS
On or about the date of the consummation of this offering, we
intend to complete a series of related repayment and refinancing
transactions, which include the following principal components:
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We expect to be released from our obligations under the Value
City revolving credit facilities, and we expect to enter into a
new five-year secured revolving credit facility.
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We expect to be released from our obligations under the Value
City term loan and senior subordinated convertible loan
facilities.
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We expect to repay $165 million of intercompany
indebtedness incurred to fund a dividend to Retail Ventures.
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New Credit Facility
Upon the consummation of this offering, Retail Ventures will
refinance its existing credit facilities, and we expect to be
released from our obligations as a co-borrower or co-guarantor
thereunder. Simultaneously, we expect to enter into a new
$150 million secured revolving credit facility with a term
of the five years. Under this new facility, we expect that we
and our subsidiary, DSWSW, will be named as co-borrowers. This
new facility is expected to have borrowing base restrictions and
will provide for borrowings at variable interest rates based on
LIBOR, the prime rate and the Federal Funds effective rate, plus
a margin. Our obligations under our new secured revolving credit
facility will be secured by a lien on substantially all our
personal property. We will be subject to financial covenants
under our new secured revolving credit facility. In addition,
our new secured revolving credit facility will contain usual and
customary restrictive covenants relating to our management and
the operation of our business. These non-financial covenants
will restrict, among other things, our ability to incur debt,
guarantee indebtedness, put liens on our assets, enter into
transactions with affiliates and dispose of assets. See
Description of Indebtedness.
Repayment of Intercompany Debt
Prior to or concurrently with the completion of this offering,
we will repay a $165 million of intercompany indebtedness
incurred to fund a dividend to Retail Ventures. See Use of
Proceeds. Immediately following this offering, no
intercompany indebtedness will remain outstanding.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
General
Prior to this offering, we were operated as a direct
wholly-owned subsidiary of Retail Ventures. Immediately
following this offering, Retail Ventures will continue to own
approximately %
of our Common Shares and will
control %
of the combined voting power of our Common Shares. If the
underwriters option to purchase additional shares is
exercised in full, immediately following this offering, Retail
Ventures will
own %
of our Common Shares and will
control %
of the combined voting power of our Common Shares. Retail
Ventures will continue to have the power acting alone to approve
any action requiring a vote of the majority of our voting shares
and to elect all our directors.
As of January 29, 2005, SSC owned approximately 49% on a
fully diluted basis of the outstanding common shares of Retail
Ventures and had the power acting alone to approve any action
requiring a vote of the majority of the voting shares of Retail
Ventures and to elect all of Retail Ventures directors. As
of January 29, 2005, Jay Schottenstein, the Chairman of
Retail Ventures, beneficially owned approximately 78% of the
common shares of SSC as Chief Executive Officer and Chairman of
the board of directors of DSW and Chairman of the board of
directors of Retail Ventures. For fiscal 2002, fiscal 2003 and
the first thirty-nine weeks of fiscal 2004, we paid
approximately $14.9 million, $5.7 million and
$7.7 million, respectively, in total fees and expenses to
SSC. See Leases and Subleases,
Corporate Services Agreement with SSC, and
Notes, Credit Agreements and Guarantees.
In the ordinary course of business, we have entered into a
number of agreements with Retail Ventures, Value City and SSC
and their affiliates relating to our business and our
relationship with these companies, the material terms of which
are described below. We believe that each of the agreements
entered into with these entities is on terms at least as
favorable to us as could be obtained in an arms length
transaction with an unaffiliated third party. We do not expect
to enter into any additional contracts or other transactions
with Retail Ventures or any of our directors, officers or other
affiliates other than those specified below. However, in the
future, in accordance with Ohio law, any contract, action or
other transaction between or affecting us and one of our
directors or officers or between or affecting us and any entity
in which one or more of our directors or officers is a director,
trustee or officer or has a financial or personal interest, will
either be approved by the shareholders, a majority of the
disinterested members of our board or a committee of our board
that authorizes such contracts, action or other transactions or
must be fair to us as of the time our directors, a committee of
our directors or our shareholders approve the contract, action
or transaction. In addition, any transactions with directors,
officers or other affiliates will be subject to requirements of
the Sarbanes-Oxley Act and other SEC rules and regulations.
Relationships Between Our Company And Retail Ventures
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Historical Relationship With Retail Ventures
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We have been a wholly-owned subsidiary of Value City or Retail
Ventures since 1998. As a result, in the ordinary course of our
business, we have received various services provided by Value
City and Retail Ventures, including import administration, risk
management, information technology, tax, financial services,
shared benefits administration and payroll, and will maintain
insurance for us and for our directors, officers and employees
as well as other corporate services. Retail Ventures has also
provided us with the services of a number of its executives and
employees. Our historical financial statements include
allocations to us by Retail Ventures of its costs related to
these services. These cost allocations have been determined on a
basis that we and Retail Ventures consider to be reasonable
reflections of the use of services provided or the benefit
received by us. These allocations totaled $0.1 million in
fiscal 2002, $24.4 million in fiscal 2003 and
$21.6 million in the first thirty-nine weeks of fiscal 2004.
For additional information about our relationship with Retail
Ventures, see Note 2 to our consolidated financial
statements included elsewhere in this prospectus.
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Retail Ventures as our Controlling Shareholder
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Immediately prior to this offering, Retail Ventures will be our
sole shareholder. Upon completion of this offering, Retail
Ventures will continue to own
approximately %
(or
approximately %
if the underwriters exercise their option to purchase additional
shares in full) of the outstanding shares of our Common Shares.
For as long as Retail Ventures continues to control more than
50% of the combined voting power of our Common Shares, Retail
Ventures will be able to direct the election of all the members
of our board and exercise a controlling influence over our
business and affairs, including any determinations with respect
to mergers or other business combinations involving our company,
the acquisition or disposition of assets by our company, the
incurrence of indebtedness by our company, the issuance of any
additional common shares or other equity securities, and the
payment of dividends with respect to our common shares.
Similarly, Retail Ventures will have the power to determine
matters submitted to a vote of our shareholders without the
consent of our other shareholders, will have the power to
prevent a change in control of our company and will have the
power to take other actions that might be favorable to Retail
Ventures.
Retail Ventures has advised us that its current intent is to
continue to hold all the Class B Common Shares owned by it
following this offering, except to the extent necessary to
satisfy obligations under warrants it has granted to certain of
its lenders. All the Class B Common Shares of DSW held by
Retail Ventures will continue to be subject to liens in favor of
SSC, Cerberus and Value City. Retail Ventures is not subject to
any contractual obligation to retain its controlling interest,
except that Retail Ventures has agreed not to sell or otherwise
dispose of any of our Class B Common Shares for a period of
180 days after the date of this prospectus without the
prior written consent of Lehman Brothers Inc. See
Underwriting. As a result, there can be no assurance
concerning the period of time during which Retail Ventures will
maintain its ownership of Class B Common Shares owned by it
following this offering.
Beneficial ownership of at least 80% of the total voting power
and value of the outstanding Common Shares is required in order
for Retail Ventures to continue to include us in its
consolidated group for federal income tax purposes, and
beneficial ownership of at least 80% of the total voting power
and 80% of each class of nonvoting capital stock is required in
order for Retail Ventures to effect a tax-free spin-off of DSW
or certain other tax-free transactions. As of the date of this
prospectus, Retail Ventures does not intend or plan to undertake
a spin-off of DSW or another tax-free transaction involving DSW.
It is not expected that we will be included in Retail
Ventures consolidated group for U.S. federal income
tax purposes following the offering and, as a result, there can
be no assurance that our tax position will not be less favorable
than it is at present.
For a further discussion of these risks, see Risk
Factors Risks Relating to our Relationship with and
Separation from Retail Ventures.
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Agreements Between Us And Retail Ventures
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This section describes the material provisions of agreements
between us and Retail Ventures relating to this offering and our
relationship with Retail Ventures after this offering. The
description of the agreements is not complete and, with respect
to each material agreement, is qualified by reference to the
terms of the agreement, each of which will be filed as an
exhibit to the registration statement of which this prospectus
is a part. We encourage you to read the full text of these
material agreements. We have entered or will enter into these
agreements with Retail Ventures in the context of our
relationship as a wholly-owned subsidiary of Retail Ventures.
The prices and other terms of these agreements may be less
favorable to us than those we could have obtained in
arms-length negotiations with unaffiliated third parties
for similar services or under similar agreements.
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Agreements Relating to our Separation from Retail
Ventures
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In connection with this offering, Retail Ventures and we will
deliver agreements governing various interim and ongoing
relationships between us. These agreements will include:
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a master separation agreement;
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a tax separation agreement;
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a shared services agreement; and
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an exchange agreement.
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Master Separation Agreement
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The master separation agreement contains key provisions relating
to the separation of our business from Retail Ventures. The
master separation agreement will require us to exchange
information with Retail Ventures, follow certain accounting
practices and resolve disputes with Retail Ventures in a
particular manner. We also will agree to maintain the
confidentiality of certain information and preserve available
legal privileges. The separation agreement also will contain
provisions relating to the allocation of the costs of our
initial public offering, indemnification, non-solicitation of
employees and employee benefit matters.
Under the master separation agreement, we have agreed to effect
up to one demand registration per calendar year under applicable
federal and state securities laws of our Common Shares, whether
Class A or Class B, held by Retail Ventures, if
requested by Retail Ventures. We have also granted Retail
Ventures the right to include its Common Shares of DSW in an
unlimited number of other registrations of such shares initiated
by us or on behalf of our other shareholders.
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Shared Services Agreement
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Many aspects of our business, which were fully managed and
controlled by us without Retail Ventures involvement will
continue to operate as they did prior to this offering. We will
continue to manage operations for critical functions such as
merchandise buying, planning and allocation, distribution and
store operations. Under the shared services agreement, which
when signed will become effective as of January 30, 2005,
we will provide services to several subsidiaries of Retail
Ventures relating to planning and allocation support,
distribution services and outbound transportation management,
site research, lease negotiation store design and construction
management. Retail Ventures will provide us with services
relating to import administration, risk management, information
technology, tax, logistics and inbound transportation
management, legal services, financial services, shared benefits
administration and payroll and will maintain insurance for us
and for our directors, officers and employees. We anticipate
that the initial term of the shared services agreement will
expire at the end of fiscal 2007 and will be extended
automatically for additional one-year terms unless terminated by
one of the parties. We expect some of these services to be
provided for longer or shorter periods than the initial term.
Prior to and following the consummation of this offering, DSW
has had, and will continue to have, the option to use certain
administrative and marketing services provided by third party
vendors pursuant to contracts between those third party vendors
and Retail Ventures. We expect to pay Retail Ventures for these
services as expenses for these services are incurred. These
services are provided to us by virtue of our status as Retail
Ventures affiliate and are unrelated to those delineated
in the shared services agreement.
We have historically been included in Retail Ventures
consolidated group, or the Consolidated Group, for
U.S. federal income tax purposes as well as in certain
consolidated, combined or unitary groups which include Retail
Ventures and/or certain of its subsidiaries, or a Combined
Group, for state and local income tax purposes. We intend to
enter into a tax separation agreement with Retail Ventures that
will become effective upon consummation of this offering.
Pursuant to the tax separation agreement, we and Retail Ventures
generally will make payments to each other such that, with
respect to tax returns for any taxable
78
period in which we or any of our subsidiaries are included in
the Consolidated Group or any Combined Group, the amount of
taxes to be paid by us will be determined, subject to certain
adjustments, as if we and each of our subsidiaries included in
the Consolidated Group or Combined Group filed our own
consolidated, combined or unitary tax return. Retail Ventures
will prepare pro forma tax returns for us with respect to any
tax return filed with respect to the Consolidated Group or any
Combined Group in order to determine the amount of tax
separation payments under the tax separation agreement. We will
have the right, under certain circumstances, to review and
comment on such pro forma tax returns. We will be responsible
for any taxes with respect to tax returns that include only us
and our subsidiaries.
Retail Ventures will be exclusively responsible for preparing
and filing any tax return with respect to the Consolidated Group
or any Combined Group. We generally will be responsible for
preparing and filing any tax returns that include only us and
our subsidiaries. Retail Ventures has agreed to undertake to
provide these services with respect to our separate tax returns.
For the tax services to be provided to us by Retail Ventures, we
will pay Retail Ventures a monthly fee equal to 50% of all costs
associated with the maintenance and operation of Retail
Ventures tax department (including all overhead expenses).
In addition, we will reimburse Retail Ventures for 50% of any
third party fees and expenses generally incurred by Retail
Ventures tax department and 100% of any third party fees
and expenses incurred by Retail Ventures tax department
solely in connection with the performance of the tax services to
be provided to us.
Retail Ventures will be primarily responsible for controlling
and contesting any audit or other tax proceeding with respect to
the Consolidated Group or any Combined Group; provided, however,
that, except in cases involving taxes relating to a spin-off, we
will have the right to control decisions to resolve, settle or
otherwise agree to any deficiency, claim or adjustment with
respect to any item for which we are solely liable under the tax
separation agreement. Pursuant to the tax separation agreement,
we will have the right to control and contest any audit or tax
proceeding that relates to any tax returns that include only us
and our subsidiaries. We and Retail Ventures will have joint
control over decisions to resolve, settle or otherwise agree to
any deficiency, claim or adjustment for which we and Retail
Ventures could be jointly liable, except in cases involving
taxes relating to a spin-off. Disputes arising between the
parties relating to matters covered by the tax separation
agreement are subject to resolution through specific dispute
resolution provisions.
We have been included in the Consolidated Group for periods in
which Retail Ventures owned at least 80% of the total voting
power and value of the our outstanding stock. It is not expected
that we will be included in the Consolidated Group following the
offering. Each member of a consolidated group for
U.S. federal income tax purposes is jointly and severally
liable for the U.S. federal income tax liability of each
other member of the consolidated group. Similarly, in some
jurisdictions, each member of a consolidated, combined or
unitary group for state, local or foreign income tax purposed is
jointly and severally liable for the state, local or foreign
income tax liability of each other member of the consolidated,
combined or unitary group. Accordingly, although the tax
separation agreement allocates tax liabilities between us and
Retail Ventures, for any period in which we were included in the
Consolidated Group or a Combined Group, we could be liable in
the event that any income tax liability was incurred, but not
discharged, by any other member of the Consolidated Group.
As of the date of this prospectus Retail Ventures does not
intend or plan to undertake a spin-off of our stock to Retail
Ventures stockholders. Nevertheless, we and Retail Ventures have
agreed to set forth our respective rights, responsibilities and
obligations with respective to any possible spin-off in the tax
separation agreement. If Retail Ventures were to decide to
pursue a possible spin-off, we have agreed to cooperate with
Retail Ventures and to take any and all actions reasonably
requested by Retail Ventures in connection with such a
transaction. We have also agreed not to knowingly take or fail
to take any actions that could reasonably be expected to
preclude Retail Ventures ability to undertake a tax-free
spin-off. In addition, we generally would be responsible for any
taxes resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of us and Retail Ventures at the time of such
spin-off)
79
of such taxes to the extent such taxes are not otherwise
attributable to us or Retail Ventures. Our agreements in
connection with such spin-off matters last indefinitely. In
addition, present and future majority-owned affiliates of DSW or
Retail Ventures will be bound by our agreements, unless Retail
Ventures or we, as applicable, consent to grant a release of an
affiliate (such consent cannot be unreasonably withheld,
conditioned or delayed), which may limit our ability to sell or
otherwise dispose of such affiliates. Additionally, a minority
interest participant(s) in a future joint venture, if any, would
need to evaluate the effect of the tax separation agreement on
such joint venture and such evaluation may negatively affect
their decision whether to participate in such a joint venture.
Furthermore, the tax separation agreement may negatively affect
our ability to acquire a majority interest in a joint venture.
We expect to enter into an exchange agreement with Retail
Ventures which will become effective upon the consummation of
this offering. In the event that Retail Ventures desires to
exchange all or a portion of the Class B Common Shares held
by it for Class A Common Shares, we will agree to issue to
Retail Ventures an equal number of duly authorized, validly
issued, fully paid and nonassessable Class A Common Shares
in exchange for the Class B Common Shares of DSW held by
Retail Ventures. Retail Ventures may make one or more requests
for such exchange, covering all or a part of the Class B
Common Shares that it holds. In the event of any stock split,
stock dividend, recapitalization or similar transaction with
respect to the Class A Common Shares or Class B Common
Shares, we will agree to an appropriate adjustment of the
one-to-one exchange ratio as determined in good faith by the
board of directors of Retail Ventures.
Leases and Subleases
Office, warehouse and distribution facility.
We lease our
707,000 square foot corporate headquarters, warehouse and
distribution facility in Columbus, Ohio from an affiliate of
SSC, 4300 East Fifth Avenue LLC. The lease expires in
December 2016 and has three renewal options with terms of five
years each. The monthly rent is $179,533, $194,228 and $208,922
during the first, second and third five-year periods of the
initial term, respectively. The rent increases to $220,416,
$235,090 and $249,803 in the first, second and third renewal
terms, respectively. On account of this agreement, we paid to
the landlord approximately $2.6 million in fiscal 2002,
$3.1 million in fiscal 2003 and $3.1 million in the
first thirty-nine weeks of fiscal 2004. See
Business Properties.
DSW stores.
As of January 29, 2005, we leased or
subleased 15 DSW stores from affiliates of SSC. We paid SSC
or its affiliates approximately $5.3 million for fiscal
2003 and approximately $5.0 million for the first
thirty-nine weeks of fiscal 2004 on account of the leases and
subleases listed below:
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Current Annual
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Minimum Rent
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Store Location
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Landlord
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Expiration Date
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Renewal Options
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Payments(1)
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Glen Allen, Virginia
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Jubilee Richmond, LLC
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October 2015
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Three, with terms of five years each.
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$
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423,028
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Fairfax, Virginia
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Jubilee Limited Partnership
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November 2009
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Two, with terms of 10 years each.
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$
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519,100
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Clariton Boulevard (Pittsburgh, Pennsylvania)
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SSC
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December 2017
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Three, with terms of five, five and two years, respectively.
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$
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338,789
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Troy, Michigan
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Jubilee Limited Partnership
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February 2013
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Two, with terms of five years each.
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$
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512,000
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Springdale, Ohio
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Jubilee Springdale, LLC
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October 2016
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Three, with terms of five years each.
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$
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568,000
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Tampa,
Florida
(2)
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JLPK Dale Mabry, LLC
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November 2018
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Three, with terms of five years each.
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$
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314,292
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80
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Current Annual
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Minimum Rent
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Store Location
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Landlord
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Expiration Date
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Renewal Options
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Payments(1)
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Denton, Texas
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Jubilee Limited Partnership
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February 2019
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Three, with terms of five years each.
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$
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319,790
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Richmond, Virginia (Midlothian)
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JLP Richmond LLC
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April 2019
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Three, with terms of five years each.
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$
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420,000
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Merrillville, Indiana
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Jubilee Limited Partnership
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December 2017
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Three, with terms of five years each.
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$
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360,000
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Beavercreek, Ohio
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Shoppes of Beavercreek, Ltd
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September 2012
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Three, with terms of five years each.
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$
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362,745
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Chesapeake, Virginia
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JLP Chesapeake, LLC
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July 2011
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Four, with terms of five years each.
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$
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402,325
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Columbus, Ohio (Polaris)
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SSC Polaris, LLC
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October 2017
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Four, with terms of five years each.
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$
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583,800
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Cary, North Carolina
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JLP Cary, LLC
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February 2018
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Three, with terms of five years each.
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$
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424,782
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Madison, Tennessee
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JLP Madison LLC
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November 2017
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Three, with terms of five years each.
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$
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252,992
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Cincinnati, Ohio
(2)
(Eastgate)
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Eastgate Pavilion, Ltd.
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October 2019
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Three, with terms of five years each.
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$
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331,941
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Kalamazoo, Michigan
(3)
(Maple Hill Mall)
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K&S Maple Hill Mall, L.P.
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Three, with terms of five years each.
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$
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303,604
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South Bend,
Indiana
(3)
(Erskine Village)
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KSK Scottsdale Mall, L.P.
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Three, with terms of five years each.
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$
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325,000
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(1)
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For each lease, we also (a) pay percentage rent equal to 2%
annually of gross sales that exceed specified breakpoints that
increase as the minimum rent increases and (b) pay a
portion of expenses related to maintenance, real estate taxes
and insurance.
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(2)
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These properties were sold to non-affiliated third parties in
December 2004.
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(3)
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These stores are expected to open in fiscal 2005.
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Corporate Services Agreement with SSC
We receive services from SSC pursuant to a Corporate Services
Agreement between Retail Ventures and its wholly-owned
subsidiaries and SSC. The agreement set forth the costs of
shared services, including specified legal, advertising, import,
real estate and administrative services. As of January 29,
2005, the only services we receive pursuant to this agreement
pertain to real estate services and the administration of our
health insurance and benefit plans. For fiscal 2002, fiscal 2003
and the first thirty-nine weeks of fiscal 2004, our allocated
portion of the amount Retail Ventures paid SSC or its affiliates
was $0.3 million, $0.2 million and $0.2 million,
respectively, for such services. We expect to continue to
receive these services following consummation of this offering
pursuant to an amended corporate services agreement.
Until July 2004, we participated in an insurance program
maintained by SSC. While we no longer participate in the program
we continue to remain liable for liabilities incurred by us
under the program. Under the program, SSC charged Retail
Ventures amounts based, among other factors, on loss experience
and its actual payroll and related costs for administering the
program. For fiscal 2002, fiscal 2003 and the first thirty-nine
weeks of fiscal 2004, our allocated portion of the amount Retail
Ventures paid SSC was approximately $3.0 million,
$0.2 million and an immaterial amount, respectively, for
participation in the program.
Prior to and following the consummation of this offering, DSW
has had, and will continue to have, the option to use corporate
aircraft provided by a third party vendor pursuant to a contract
between the third
81
party vendor and SSC and a Retail Ventures affiliate. We expect
to pay SSC for these services as expenses for these services are
incurred. These services are made available to us by virtue of
our status as an SSC affiliate.
Agreement with Value City for Leased Shoe Departments
Until December 28, 2004, we were party to a License
Agreement with Value City which gave us the exclusive right to
supply footwear to leased shoe departments in specified Value
City stores. Under this license, we agreed to pay to Value City
a specified percentage of our annual gross sales from each of
the Value City leased shoe departments. In addition, we paid
some of Value Citys expenses, including those related to
advertising for the shoe departments and employee services for
shoe department employees.
The managers and full- and part-time associates who staffed our
departments in these Value City stores were employees of Value
City. We reimbursed Value City for the payroll taxes, benefits
and other expenses associated with those associates. We supplied
our own merchandise and store fixtures, maintained our own
insurance and were responsible for repairs and maintenance of
our fixtures, merchandise and equipment.
We paid approximately $35.3 million in total license fees
and other expenses (including payroll and benefits) to Value
City for fiscal 2002, approximately $41.6 million for
fiscal 2003 and approximately $30.7 million for the first
thirty-nine weeks of fiscal 2004. The historical and pro forma
financial data included elsewhere in this prospectus does not
give effect to transactions that have taken place pursuant to
this agreement. As part of the reorganization that took place on
December 28, 2004, this contract was terminated.
Agreements with Filenes Basement for Leased Shoe
Departments
Until January 29, 2005, we were party to an agreement with
Filenes Basement pursuant to which we had the exclusive
right to operate leased shoe departments with approximately
20,000 square feet of selling space and approximately 3,000 feet
of storage space in Filenes Basement stores. At the time
this contract was terminated, this agreement pertained only to
the two combination DSW/Filenes Basement stores. Under
this agreement, we received from Filenes Basement payments
equal to a specified percentage of our gross sales, exclusive of
sales tax, from each of these stores. We also paid the salaries,
payroll taxes, benefits and other expenses associated with the
employees utilized to coordinate and supervise the shoe
departments. We also paid certain taxes, insurance premiums and
freight costs with respect to the merchandise. We paid
approximately $2.0 million in total fees and expenses to
Filenes Basement for fiscal 2002, $2.0 million for
fiscal 2003 and $1.6 million for the first thirty-nine
weeks of fiscal 2004.
Until January 29, 2005, we were party to an agreement with
Filenes Basement pursuant to which we had the exclusive
right to operate leased shoe departments with approximately
1,000 square feet of selling space and 200 square feet of
storage space in Filenes Basement stores. At the time this
contract was terminated, we operated departments of this size in
22 Filenes Basement stores. Under this agreement, we
received from Filenes Basement payments equal to a
specified percentage of our gross sales, exclusive of sales tax,
from each Filenes Basement Store. We also paid the
salaries and payroll taxes, benefits and other expenses
associated with the employees utilized to coordinate and
supervise the shoe departments. We also paid certain taxes,
insurance premiums and freight costs with respect to the
merchandise. We paid approximately $3.1 million in total
fees and expenses to Filenes Basement for fiscal 2002,
$3.8 million for fiscal 2003 and approximately
$3.6 million for the first thirty-nine weeks of fiscal 2004.
Effective as of January 30, 2005, we updated and reaffirmed
our contractual arrangement with Filenes Basement related
to combination DSW/Filenes Basement stores. Under the new
agreement, we have the exclusive right to operate leased shoe
departments with 10,000 square feet or more of selling space in
Filenes Basement stores. We receive from Filenes
Basement payments equal to a specified percentage of our gross
sales, exclusive of sales tax, from each of these stores and a
per-store license fee for use of our name on the stores. The
employees that supervise the shoe departments are employees of
us who report directly to our supervisors. Filenes
Basement provides the fixtures and sales associates. We pay
certain taxes, insurance
82
premiums and freight costs with respect to the merchandise. As
of January 29, 2005, this agreement pertained to only two
combination DSW/Filenes Basement stores.
Effective as of January 30, 2005, we updated and reaffirmed
our contractual arrangement with Filenes Basement related
to the smaller leased shoe departments. Under the new agreement
we have the exclusive right to operate leased shoe departments
with less than 10,000 square feet of selling space in
Filenes Basement stores. We receive from Filenes
Basement payments equal to a specified percentage of our gross
sales, exclusive of sales tax, from each Filenes Basement
store. Filenes Basement provides the fixtures and sales
associates. We pay certain taxes, insurance premiums and freight
costs with respect to the merchandise. As of January 29,
2005, we operated leased shoe departments in 22 Filenes
Basement stores.
Agreement with Filenes Basement for Atrium Space at our
Union Square Store in Manhattan
Effective as of January 30, 2005, we entered into a Shared
Expenses Agreement with Filenes Basement related to the
shared atrium space connecting Filenes Basements
leased spaced at Union Square and our Union Square store leased
space, and for other expenses related to our leased space, which
are located in the same building in New York, New York. Under
that agreement, we have agreed to share with Filenes
Basement expenses related to the use and maintenance of the
atrium space and to share other expenses related to the
operation and maintenance of the Filenes Basement leased
space and our leased space.
Registration Rights Agreements
Under the Master Separation Agreement, we have agreed to effect
up to one demand registration per calendar year under applicable
federal and state securities laws of our Common Shares, whether
Class A or Class B, held by Retail Ventures, if
requested by Retail Ventures. We have also granted Retail
Ventures the right to include its Common Shares of DSW in an
unlimited number of other registrations of such shares initiated
by us or on behalf of our other shareholders.
We expect to enter into a registration rights agreement with
Cerberus, SSC and Back Bay under which we will agree to register
the Class A Common Shares held by them, if any, in certain
circumstances.
Union Square Store Guaranty of Retail Ventures
In January 2004, we entered into a Lease Agreement with 40 East
14 Realty Associates, L.L.C. for our Union Square store in
Manhattan, New York. In connection with the lease, Retail
Ventures has agreed to guarantee payment of our rent and other
expenses and charges and the performance of our other
obligations.
Notes, Credit Agreements and Guarantees
The Value City Revolving Credit Facility.
Until the
amendment or replacement of this revolving credit agreement, we
will continue to be a co-borrower under a Loan and Security
Agreement, as amended, entered into with National City, as
administrative agent, and the other parties named therein,
originally entered into in June 2002. The agreement allows us,
Value City and the other Retail Ventures affiliates co-borrowers
thereto, to draw on a $425 million revolving credit
facility, subject to applicable borrowing base restrictions. The
maturity date of the facility is June 11, 2006. We, the
other co-borrowers and the guarantors are jointly and severally
liable for the liabilities incurred under the agreement. We
expect our obligations under this agreement to be released on or
about the date of the consummation of this offering in
connection with the amendment or replacement of this revolving
credit agreement. We have reflected our direct obligations under
this revolving credit facility as they relate to borrowings
secured by our assets in our historical financial statements
included elsewhere in this prospectus. For additional
information regarding this revolving credit facility, see
Description of Indebtedness.
The Value City Term Loan Facility.
Until the amendment of
this term loan agreement, we will continue to be a co-borrower
to a Financing Agreement, as amended, among Cerberus, as agent,
and the other parties named as co-borrowers therein, originally
entered into in June 2002. Under the terms of this term loan
agreement, SSC and Cerberus each provided us, Value City and the
other Retail Ventures affiliates named as
83
co-borrowers with a separate $50 million term loan with
initial three-year terms. In July 2004, the maturity dates of
these loans were extended until June 11, 2006. In
connection with these term loans, Retail Ventures issued to each
of Cerberus and SSC warrants to purchase 1,477,396 common shares
of Retail Ventures at a purchase price of $4.50 per share,
subject to adjustment. In September 2002, Back Bay bought from
each of Cerberus and SSC a $3 million interest in each of
their term loans, and received a corresponding portion of the
warrants to purchase Retail Ventures stock from each of Cerberus
and SSC. The term loans stated rate of interest per annum
through June 11, 2004 was 14% if paid in cash and 15% if
the co-borrowers elected a paid-in-kind, or PIK, option. During
the first two years of the term loans, the co-borrowers could
elect to pay all interest in PIK. During the final two years of
the term loans, the stated rate of interest is 15.0% if paid in
cash or 15.5% if by PIK, and the PIK option is limited to 50% of
the interest due. For fiscal 2002 and fiscal 2003, the
co-borrowers elected to pay interest in cash. We expect our
obligations under this term loan agreement to be released on or
about the date of the consummation of this offering; however,
this indebtedness has not been reflected in our historical
financial statements included elsewhere in this prospectus as it
is recorded on the books of Retail Ventures. For additional
information regarding this term loan facility, see
Description of Indebtedness.
In connection with the amendment of this term loan agreement,
Retail Ventures has agreed to amend the outstanding warrants to
provide SSC, Cerberus and Back Bay the right, from time to time,
either to (i) acquire Retail Ventures common shares at the
then current conversion price (subject to the existing
antidilution) provisions or (ii) acquire from Retail
Ventures Class A Common Shares of DSW at the price of
shares sold in this offering (subject to antidilution provisions
similar to those in the existing warrants). Prior to the
consummation of this offering, we will enter into an exchange
agreement with Retail Ventures whereby, upon the request of
Retail Ventures, we will be required to exchange some or all of
the Class B Common Shares of DSW held by Retail Ventures
for Class A Common Shares. See
Relationships Between our Company and Retail
Ventures Agreements Relating to our Separation from
Retail Ventures Exchange Agreement.
The Value City Senior Subordinated Convertible Loan
Facility.
Until the amendment of this convertible loan
agreement, we will continue to be a co-guarantor under an
Amended and Restated Senior Subordinated Convertible Loan
Agreement, as amended, entered into by Value City, as borrower,
Cerberus, as agent and lender, SSC, as lender, and DSW and the
other parties named as guarantors, originally entered into in
June 2002. Under this convertible loan agreement, SSC initially
provided a $75 million term loan, now held equally by SSC
and Cerberus, to Value City, convertible at the option of the
lenders into common shares of Retail Ventures at an initial
conversion price of $4.50 per share. The maturity date of this
convertible loan is June 10, 2009. We expect our
obligations under this convertible loan agreement to be released
on or about the date of the consummation of this offering in
connection with the amendment of this convertible loan
agreement; however, this indebtedness has not been reflected in
our historical financial statements included elsewhere in this
prospectus as it is recorded on the books of Retail Ventures.
For additional information regarding this convertible loan
facility, see Description of Indebtedness.
In connection with the amendment of this convertible loan
agreement, the $75 million convertible loan will be
converted into a $75 million non-convertible loan. In
addition, Retail Ventures has agreed to issue to SSC and
Cerberus convertible warrants which will be exercisable from
time to time until the later of June 11, 2007 and the
repayment in full of Value Citys obligations under the
amended loan agreement. Under the convertible warrants, SSC and
Cerberus will have, from time to time, the right either to
(i) acquire Retail Ventures common shares at the conversion
price referred to in the convertible loan (subject to existing
antidilution provisions) or (ii) acquire from Retail
Ventures Class A Common Shares of DSW at a strike price
equal to the price of the shares to the public sold in this
offering (subject to antidilution provisions similar to those in
the existing warrants). SSC and Cerberus may acquire an
aggregate number of Class A Common Shares of DSW from
Retail Ventures which, at the price of shares sold in this
offering, have a value equal to the outstanding principal amount
of the amended loan facility. Prior to the consummation of this
offering, we will enter into an exchange agreement with Retail
Ventures whereby, upon the request of Retail Ventures, we will
be required to exchange some or all of the Class B Common
Shares held by Retail Ventures for Class A
84
Common Shares. See Relationships Between our
Company and Retail Ventures Agreements Relating to
our Separation from Retail Ventures Exchange
Agreement.
Value City Intercompany Note
. The capital stock of DSW
held by Retail Ventures will continue to secure the
$240 million Value City intercompany note made payable by
Retail Ventures to Value City, which was executed and delivered
on January 1, 2005 in connection with the transfer of all
the capital stock of DSW and Filenes Basement by Value
City to Retail Ventures on that date. The lien granted to Value
City on the DSW capital stock held by Retail Ventures will be
released upon written notice that warrants held by Cerberus, SSC
and Back Bay are to be exercised in exchange for DSW capital
stock held by Retail Ventures and to be delivered by Retail
Ventures upon the exercise of such warrants.
Cross-Corporate Guarantees.
We have entered into
cross-corporate guarantees with various financing institutions
pursuant to which we, Retail Ventures, Filenes Basement
and Value City, jointly and severally, guarantee payment
obligations owed to these entities under factoring arrangements
they have entered into with vendors who may provide merchandise
to some or all of Retail Ventures subsidiaries. We may be
released from any prospective liability under the guarantees at
any time. Upon release, our potential liability would be limited
to the then outstanding amount under the canceled guarantee. We
will terminate these cross-corporate guarantees on or about the
date of the consummation of this offering. The outstanding
balance at that time, which we expect to be approximately
$ ,
will decrease to zero over a period of approximately
90 days as payments are made in the ordinary course of
business.
Provisions of Our Amended Articles of Incorporation Governing
Corporate Opportunities and Related Party Transactions
After this offering, Retail Ventures will remain a substantial
shareholder of the corporation and SSC will remain a substantial
shareholder of Retail Ventures. Retail Ventures and SSC are
engaged in the same or similar activities or lines of business
as we are and have interests in the same areas of corporate
opportunities. Summarized below are provisions in our amended
articles of incorporation that will govern conflicts, corporate
opportunities and related party transactions. These provisions
will be substantially similar to those that currently apply to
us through provisions of Retail Ventures amended articles
of incorporation.
Conflicts/ Competition.
Retail Ventures and SSC have the
right to engage in the same businesses as we do, to do business
with our suppliers and customers and to employ any of our
officers or employees.
Corporate Opportunities.
In the event that Retail
Ventures, SSC or any director or officer of either of them who
is also one of our directors or officers learns about a
potential transaction or business opportunity which we are
financially able to undertake, which is in our line of business,
which is of practical advantage to us and in which we have an
interest or a reasonable expectancy, but which may also be
appropriate for Retail Ventures or SSC, our amended articles of
incorporation provide:
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If Retail Ventures or SSC learns about a corporate opportunity,
it does not have to tell us about it and it is not a breach of
any fiduciary duty for it to pursue such corporate opportunity
for itself or to direct it elsewhere.
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If one of our directors or officers who is also a director or
officer of Retail Ventures or SSC learns about a corporate
opportunity, he or she shall not be liable to us or to our
shareholders if Retail Ventures or SSC pursues the corporate
opportunity for itself, directs it elsewhere or does not
communicate information about the opportunity to us, if such
director or officer acts in a manner consistent with the
following policy:
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If the corporate opportunity is offered to one of our officers
who is also a director but not an officer of Retail Ventures or
SSC, the corporate opportunity belongs to us unless it was
expressly offered to the officer in writing solely in his or her
capacity as a director of Retail Ventures or SSC, in which case
it belongs to Retail Ventures or SSC, as the case may be.
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If the corporate opportunity is offered to one of our directors
who is not an officer of DSW, and who is also a director or
officer of Retail Ventures or SSC, the corporate opportunity
belongs to us
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only if it was expressly offered to the director in writing
solely in his or her capacity as our director.
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If the corporate opportunity is offered to one of our officers,
whether or not such person is also a director, who is also an
officer of Retail Ventures or SSC, it belongs to us only if it
is expressly offered to the officer in writing solely in his or
her capacity as our officer or director.
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Related Party Transactions.
We may, from time to time,
enter into contracts or otherwise transact business with Retail
Ventures, SSC, our directors, directors of Retail Ventures or
SSC or organizations in which any of such directors has a
financial interest. Such contracts and transactions are
permitted if:
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the relationship or interest is disclosed or is known to the
board of directors or the committee approving the contract or
transaction, and the board of directors or committee, in good
faith reasonably justified by the facts, authorizes the contract
or transaction by the affirmative vote of a majority of the
directors who are not interested in the contract or transaction;
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the relationship or interest is disclosed or is known to the
shareholders, and the shareholders approve the contract or
transaction by the affirmative vote of the holders of a majority
of the voting power of the corporation held by persons not
interested in the contract or transaction; or
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the contract or transaction is fair at the time it is authorized
or approved by the board of directors, a committee of the board
of directors, or the shareholders.
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Loans to Management
In June 2001, we loaned Edwin J. Kozlowski, who was then serving
as our President and Chief Operating Officer, $412,758.00. In
May 2003, Mr. Kozlowski repaid the balance of the loan.
Interest had accrued at the prime rate set from time to time by
National City Bank, Columbus, Ohio.
Mr. Kozlowski entered into an employment agreement with
Retail Ventures, effective May 1, 2001, to serve as its
Executive Vice President and Chief Operating Officer for a term
ending April 30, 2004. Under the terms of the agreement, in
July 2001, Retail Ventures loaned Mr. Kozlowski $80,000 to
cover expenses related to personal benefits. This loan was being
forgiven at the rate of 10% for each 12 consecutive month period
Mr. Kozlowski remained employed after the date the loan was
made. On November 3, 2004, the board of directors voted to
terminate Mr. Kozlowskis employment, and as of
March 11, 2005, Mr. Kozlowski has not repaid $68,329,
the balance of the loan. The largest amount of the loan
outstanding in fiscal 2004 was $72,662.
Certain Employment Arrangements
Mr. John Rossler is the former Chief Executive Officer and
President of Retail Ventures. During his tenure, his son, Ryan
Rossler, was employed as a buyer for the DSW business. During
fiscal 2004, Mr. Ryan Rossler received salary and bonus
totaling $91,942 and other employment benefits, including 401(k)
plan and associate stock purchase plan contributions by Retail
Ventures and a cafeteria health care plan. His salary and
benefits were consistent with those provided to other associates
of DSW holding comparable positions.
86
PRINCIPAL SHAREHOLDERS
Beneficial Ownership of Our Common Shares
As of the date of this prospectus, Retail Ventures owned all our
outstanding common shares. The following table sets forth
information regarding the beneficial ownership of our
Class A Common Shares and Class B Common Shares upon
completion of this offering by:
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each person or entity who is known by us to beneficially own 5%
or more of our outstanding Common Shares;
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each of our directors;
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each of our executive officers named in the Summary Compensation
Table; and
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all our directors and executive officers as a group.
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Unless otherwise indicated below, each person or entity has an
address in care of our principal executive offices at
4150 East
5
th
Avenue,
Columbus, Ohio 43219.
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Number of Shares
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Percentage of Shares
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Percentage of
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Beneficially Owned(1)
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Beneficially Owned(1)(2)
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Combined Voting
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Power of All Classes
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Name of Beneficial Owner
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Class A
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Class B
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Class A
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Class B
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of Common Shares
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Retail Ventures,
Inc.
(3)(4)
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Jay L.
Schottenstein
(5)(11)
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Deborah L.
Ferrée
(6)
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Peter Z. Horvath
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Douglas J. Probst
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James A.
McGrady
(3)(7)
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Julia A.
Davis
(3)(8)
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Heywood
Wilansky
(3)(9)
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Schottenstein Stores Corporation
(10)(11)
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Cerberus Partners
L.P.
(10)(12)
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Back Bay Capital Funding LLC
(10)(13)
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All directors and executive officers as a group (7 persons)
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(1)
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Except as otherwise set forth in the footnotes below, each
beneficial owner has the sole power to vote and dispose of all
ordinary shares held by that beneficial owner. Beneficial
ownership is determined in accordance with Rule 13d-3 of
the Exchange Act. Common shares issuable pursuant to options, to
the extent such options are exercisable within 60 days, are
treated as beneficially owned and outstanding for the purpose of
computing the percentage ownership of the person holding the
option, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
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(2)
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These numbers do not take into account any exercise of the
underwriters option to purchase additional shares.
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(3)
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Address is 3241 Westerville Road, Columbus, OH 43224.
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(4)
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Common shares of DSW held by Retail Ventures, Inc. are subject
to a lien securing Retail Ventures obligations under the
amended convertible loan provided by Cerberus and SSC to Value
City as well as a lien securing the $240 million
intercompany note made payable to Retail Ventures by Value City.
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As of the date of this prospectus, Mr. Schottenstein was
the beneficial owner of approximately 78% of the outstanding
common shares of SSC. He was also the sole beneficial owner of
144,000 Retail Venture common shares and held
52,500 Retail Ventures common shares through Glasser
Brothers Acquisition, Inc., or GBA, of which
Mr. Schottenstein was Chairman of the Board, President, a
director and a trustee or co-trustee of family trusts that own
100% of the stock of GBA. Mr. Schottenstein also held
options convertible into 56,000 Retail Ventures common
shares.
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As of the date of this prospectus, Ms. Ferrée held
options convertible into 552,000 Retail Ventures common
shares.
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(7)
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As of the date of this prospectus, Mr. McGrady was the
beneficial owner of 6,000 Retail Ventures common shares,
and held options convertible into 575,000 Retail Ventures
common shares.
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(8)
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As of the date of the prospectus, Ms. Davis held options
convertible into 40,000 Retail Ventures common shares.
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(9)
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As of the date of the prospectus, Mr. Wilansky held options
convertible into 250,000 Retail Ventures common shares.
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(10)
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Cerberus, SSC and Back Bay will have the right to acquire
Class A Common Shares of DSW from Retail Ventures after the
consummation of this offering pursuant to certain warrant
agreements. For further discussion of these warrant agreements,
see Managements Discussion and Analysis of Financial
Condition and Results of Operations The DSW
Separation, Certain Relationships and Related Party
Transactions Notes, Credit Agreements and
Guarantees and Description of Indebtedness.
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(11)
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Address is 1800 Moler Road, Columbus, OH 43207.
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(12)
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Address is 450 Park Avenue, New York, NY 10022.
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(13)
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Address is 40 Broad Street, 10th Floor, Boston, MA 02109.
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88
DESCRIPTION OF INDEBTEDNESS
Retail Ventures Existing Credit Facilities
On or about the date of the consummation of this offering,
Retail Ventures expects to amend, refinance or terminate the
existing credit facilities of Value City and its other
affiliates, including certain facilities under which DSW has
rights and obligations as a co-borrower or co-guarantor. Retail
Ventures is a co-guarantor of all of these credit facilities.
When all of these existing Value City credit facilities are
amended, refinanced or terminated and the offering has been
completed, we expect to be released from our obligations as a
co-borrower or co-guarantor under each of them. These existing
facilities include:
The Value City Revolving Credit Facility.
Until the
amendment of this revolving credit agreement, we, Value City and
other named Retail Ventures affiliates will continue to be
co-borrowers under a Loan and Security Agreement, as amended,
entered into with National City, as administrative agent, and
the other parties named therein, originally entered into in June
2002. Retail Ventures is a guarantor of this revolving credit
facility. The maturity date of this facility is June 11,
2006. This revolving credit agreement allows DSW, Value City and
the other Retail Ventures affiliates named as co-borrowers to
draw on a $425 million revolving credit facility, subject
to applicable borrowing base restrictions. All the capital stock
of DSW and DSWSW is pledged to National City, as administrative
agent, in favor of the revolving credit facility lenders. We,
Retail Ventures and the other co-borrowers and guarantors named
therein are jointly and severally liable for the liabilities
incurred under the agreement. We have reflected our direct
obligations under this revolving credit facility as they relate
to borrowings secured by our assets in our historical financial
statements included elsewhere in this prospectus.
On or about the date of the consummation of this offering,
Retail Ventures and its affiliates will amend this revolving
credit agreement, and we will be released from our obligations
thereafter. In addition, National City will release its liens on
our capital stock held by Retail Ventures and the capital stock
of DSWSW held by us.
The Value City Term Loan Facility.
Until the amendment of
this term loan agreement, we, Value City and other Retail
Ventures affiliates will continue to be co-borrowers under a
Financing Agreement, as amended, among Cerberus, as agents and
other parties named therein, originally entered into in June
2002. Under the terms of this term loan agreement, Cerberus and
SSC each provided to us, Value City and other Retail Ventures
affiliates named as the co-borrowers a separate $50 million
term loan with a three-year term. In July 2004, the maturity
dates of these term loans were extended until June 11,
2006. In connection with these term loans, Value City issued to
each of Cerberus and SSC warrants to purchase 1,477,396 common
shares of Retail Ventures at a purchase price of $4.50 per
share, subject to adjustment. In September 2002, Back Bay bought
from each of Cerberus and SSC a $3.0 million interest in
each of their term loans, and received a corresponding portion
of the warrants to purchase Retail Ventures stock from each of
Cerberus and SSC. All the capital stock of DSW and DSWSW is
pledged to Cerberus, as agent, in favor of SSC, Cerberus and
Back Bay. As a co-borrower, we are jointly and severally liable
for the performance and payment of obligations under this term
loan agreement; however, this indebtedness has not been
reflected in our historical financial statements included
elsewhere in this prospectus as it is recorded on the books of
Retail Ventures.
On or about the date of the consummation of this offering, we
expect to be released from our obligations as a co-borrower
pursuant to the amendment of this term loan agreement. We have
been advised by Retail Ventures that they expect to repay all
the term loan indebtedness on or about the date of the
consummation of this offering. In connection with the amendment
of this term loan agreement, Retail Ventures has agreed to amend
the outstanding warrants to provide SSC, Cerberus and Back Bay
the right, from time to time, either to (i) acquire Retail
Ventures common shares at the then current conversion price
(subject to the existing antidilution provisions) or
(ii) acquire from Retail Ventures Class A Common
Shares of DSW at the price of shares sold in this offering
(subject to antidilution provisions similar to those in the
existing warrants). Prior to the consummation of this offering,
we will enter into an exchange agreement with Retail Ventures
89
whereby, upon the request of Retail Ventures, we will be
required to exchange some or all of the Class B Common
Shares of DSW held by Retail Ventures for Class A Common
Shares. See Certain Relationships and Related Party
Transactions Relationships Between our Company and
Retail Ventures Agreements Relating to our
Separation from Retail Ventures Exchange
Agreement.
The Value City Senior Subordinated Convertible Loan
Facility.
Until the amendment of this convertible loan
agreement, we will continue to be a co-guarantor under an
Amended and Restated Senior Subordinated Convertible Loan
Agreement, as amended, entered into by Value City with Cerberus,
as agent and lender, SSC, as lender, and the other parties named
therein, originally entered into in June 2002. Under the
agreement, SSC initially provided a $75 million loan, now
held equally by SSC and Cerberus, to Value City, as borrower,
which is convertible at the option of the lenders into common
shares of Retail Ventures at an initial conversion price of
$4.50 per share. The maturity date of this convertible loan is
June 10, 2009. This indebtedness has not been reflected in
our historical financial statements included elsewhere in this
prospectus as it is recorded on the books of Retail Ventures.
On or about the date of the consummation of this offering, we
expect to be released from our obligations as co-guarantor
pursuant to the amendment of this convertible loan agreement.
The $75 million convertible loan will be converted into a
$75 million non-convertible loan and the capital stock of
DSW held by Retail Ventures will continue to secure the amended
loan facility. In addition, Retail Ventures has agreed to issue
to SSC and Cerberus convertible warrants which will be
exercisable from time to time until the later of June 11,
2007 and the repayment in full of Value Citys obligations
under the amended loan agreement.
Under the convertible warrants, SSC and Cerberus will have, from
time to time, the right either to (i) acquire Retail
Ventures common shares at the conversion price referred to in
the convertible loan (subject to existing antidilution
provisions) or (ii) acquire from Retail Ventures
Class A Common Shares of DSW at a strike price equal to the
price of the shares sold to the public in this offering (subject
to antidilution provisions similar to those in the existing
warrants). SSC and Cerberus may acquire an aggregate number of
Class A Common Shares of DSW from Retail Ventures which, at
the price of shares sold to the public in this offering, have a
value equal to the outstanding principal amount of the amended
loan facility. Prior to the consummation of this offering, we
will enter into an exchange agreement with Retail Ventures
whereby, upon the request of Retail Ventures, we will be
required to exchange some or all of the Class B Common
Shares from Retail Ventures for Class A Common Shares. See
Certain Relationships and Related Party
Transactions Relationships Between our Company and
Retail Ventures Agreements Relating to our
Separation from Retail Ventures Exchange
Agreement.
Cross-Corporate Guarantees.
We have entered into
cross-corporate guarantees with various financing institutions
pursuant to which we, Retail Ventures, Filenes Basement
and Value City, jointly and severally, guarantee payment
obligations owed to these entities under factoring arrangements
they have entered into with vendors who may provide merchandise
to some or all of RVIs subsidiaries. We may be released
from any prospective liability under the guarantees at any time.
Upon release, our potential liability would be limited to the
then outstanding amount under the canceled guarantee. We will
terminate these cross-corporate guarantees on or about the date
of the consummation of this offering. The outstanding balance at
that time, which we expect to be approximately
$ ,
will decrease to zero over a period of approximately
90 days as payments are made in the ordinary course of
business.
Our New Secured Revolving Credit Facility
Upon the consummation of this offering, Retail Ventures will
amend or refinance the existing Value City credit facilities,
and we expect that we will be released from our obligations as
co-borrower or co-guarantor thereunder. Simultaneously, we
expect to enter into a new $150 million secured revolving
credit facility with a term of five years. Under this new
facility, we expect that we and our subsidiary, DSWSW, will be
named as co-borrowers. This new facility is expected to have
borrowing base restrictions and will provide for borrowings at
variable interest rates based on LIBOR, the prime rate and the
Federal Funds effective rate,
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plus a margin. Our obligations under our new secured revolving
credit facility will be guaranteed by our subsidiary and secured
by a lien on substantially all our personal property. We will be
subject to financial covenants under the new secured revolving
credit facility. In addition, the new secured revolving credit
facility will contain usual and customary restrictive covenants
relating to our management and the operation of our business.
These non-financial covenants will restrict, among other things,
our ability to incur debt, guarantee indebtedness, put liens on
our assets, enter into transactions with affiliates and dispose
of assets.
91
DESCRIPTION OF CAPITAL STOCK
Our amended articles of incorporation provide that we may issue
up
to Class A
Common Shares without par
value, shares
of Class B Common Shares, without par value,
and shares
of preferred stock, without par value. Upon completion of this
offering, we will
have Class A
Common Shares outstanding
( shares
if the underwriters option to purchase additional shares
is exercised is
full), Class B
Common Shares, and no shares of preferred stock outstanding.
The following description of our capital stock does not purport
to be complete and is subject to, and is qualified by, our
amended articles of incorporation and amended and restated code
of regulations, which will be filed as exhibits to the
registration statement of which this prospectus is part.
Common Shares
Prior to the date of this prospectus, our articles of
incorporation were amended to change each outstanding common
share of DSW
into Class B
Common Shares. As of the date of this prospectus, and before
giving effect to this offering, we
had Class B
Common Shares outstanding, all of which were owned by Retail
Ventures, as our direct parent, and no Class A Common
Shares outstanding.
The holders of Class A Common Shares and Class B
Common Shares generally have identical rights except that
holders of Class A Common Shares are entitled to one vote
per share on all matters to be voted on by the shareholders,
while holders of Class B Common Shares are entitled to
eight votes per share on all matters to be voted on by the
shareholders, voting together with the holders of the
Class A Common Shares as a single class. The holders of
Common Shares are not entitled to cumulative voting rights.
Generally, all matters to be voted on by shareholders must be
approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by
all Class A Common Shares and Class B Common Shares
present in person or represented by proxy, voting together as a
single class, subject to any voting rights granted to holders of
any preferred stock.
Holders of Common Shares have no preemptive rights, and the
Common Shares are not subject to further calls or assessment by
us. There are no redemptive or sinking fund provisions
applicable to the Common Shares.
Holders of Class A Common Shares and Class B Common
Shares will share in an equal amount per share in any dividend
declared by the board of directors, subject to any preferential
rights of any outstanding preferred stock. Dividends consisting
of shares of Class A Common Shares and Class B Common
Shares may be paid only as follows: (i) Class A Common
Shares may be paid only to holders of Class A Common Shares
and Class B Common Shares may be paid only to holders of
Class B Common Shares and (ii) shares shall be paid
proportionately with respect to each outstanding Class A
Common Share and Class B Common Share.
Upon liquidation, dissolution or winding up of the affairs of
DSW, our creditors and any holders of preferred stock will be
paid before any distribution to holders of Common Shares. The
holders of Common Shares would be entitled to receive a pro rata
distribution of any excess amount. All outstanding Common Shares
are, and the Class A Common Shares offered in this offering
when issued and paid for will be, fully paid and nonassessable.
The rights, preferences and privileges of holders of Common
Shares are subject to, and may be adversely affected by, the
rights of holders of shares of any series of preferred stock
which our board of directors may designate and issue in the
future.
We expect to apply for listing of the Class A Common Shares
on the NYSE under the symbol DSW.
Preferred Shares
The board may fix by resolution the designations, preferences
and relative, participating, optional or other rights and the
qualifications, limitations or restrictions of our preferred
shares, including the number of shares in any series,
liquidation preferences, dividend rates, voting rights,
conversion rights and redemption
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provisions. Terms selected could decrease the amount of earnings
and assets available for distribution to holders of our Common
Shares or adversely affect the rights and power, including
voting rights, of the holders of our Common Shares without any
further vote or action by the shareholders. Any series of
preferred shares issued by the board could have priority over
the Common Shares in terms of dividend or liquidation rights or
both. The issuance of preferred shares, or the issuance of
rights to purchase preferred shares, could have the effect of
delaying, deferring or preventing a change of control of the
company or an unsolicited acquisition proposal or of making the
removal of management more difficult. Additionally, the issued
of preferred shares may have the effect of decreasing the market
price of our Common Shares, and may adversely affect the voting
and other rights of the holders of Common Shares. There are
currently no outstanding preferred shares. While we have no
present intention to issue any preferred shares, any issuance
could make it more difficult for a third party to acquire a
majority of our outstanding voting shares.
Provisions of Our Amended Articles of Incorporation Governing
Corporate Opportunities and Related Party Transactions
After this offering, Retail Ventures will remain a substantial
shareholder of the corporation and SSC will remain a substantial
shareholder of Retail Ventures. Retail Ventures and SSC are
engaged in the same or similar activities or lines of business
as we are and have interests in the same areas of corporate
opportunities. See Certain Relationships and Related Party
Transactions Provisions of our Amended Articles of
Incorporation Governing Corporate Opportunities and Related
Party Transactions, for descriptions of the provisions in
our amended articles of incorporation that will govern
conflicts, corporate opportunities and related party
transactions. These provisions will be substantially similar to
those that currently apply to us through provisions of Retail
Ventures amended articles of incorporation.
Anti-Takeover Effects of Certain Provisions of our Amended
Articles of Incorporation, our Amended and Restated Code of
Regulations and Ohio Law.
Provisions of our amended articles of incorporation and amended
and restated code of regulations and of the Ohio General
Corporation Law summarized below may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider in
its best interest, including those attempts that might result in
a premium over the market price for the shares held by
shareholders.
No Cumulative Voting.
Where cumulative voting is
permitted, each share is entitled to as many votes as there are
directors to be elected and each shareholder may cast all of his
or her votes for a single candidate or distribute such votes
among two or more candidates. Cumulative voting makes it easier
for a minority shareholder to elect a director. Our amended
articles of incorporation expressly deny shareholders the right
to cumulative voting.
Supermajority Vote to Remove Directors.
The
Companys code of regulations provides that the
shareholders may remove a director only by the vote of the
holders of not less than three-fourths of the voting power of
the corporation entitling them to elect directors in place of
those to be removed. This provision, when coupled with the
voting power of the Class B Common Shares held by Retail
Ventures
( %
following this offering), will preclude even a majority
shareholder from removing incumbent directors and simultaneously
gaining control of the board of directors by filling the
vacancies.
Classified Board.
The Companys code of regulations
provides for the board of directors to be divided into two
classes of directors serving staggered two-year terms. As a
result, approximately one-half of the board of directors will be
elected each year. This provision, when coupled with the vote
required to remove directors, can preclude even a majority
shareholder from gaining control of the board of directors in
one election.
Authorized But Unissued Shares.
Our authorized but
unissued Common Shares and preferred shares are available for
future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. Our amended
articles of incorporation authorize our board of
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directors to issue up
to preferred
shares and to determine the powers, preferences, privileges,
rights, including voting rights, qualifications, limitations and
restrictions on those shares, without any further vote or action
by the shareholders. The existence of authorized but unissued
Common Shares and preferred shares could have the effect of
delaying, deterring or preventing an attempt to obtain control
of DSW by means of a proxy contest, tender offer, merger or
otherwise.
Special Meeting of Shareholders.
Our amended and restated
code of regulations provides that special meeting of our
shareholders may be called only by:
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the chairman of the board, the president, or in case of the
presidents death or disability, the vice president
authorized to exercise the authority of the president;
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the directors by action at a meeting, or a majority of the
incumbent directors acting without a meeting; or
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the holders of at least 50% of all shares outstanding and
entitled to vote thereat.
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Actions by Written Consent.
Section 1701.54 of the
Ohio General Corporation Law requires that an action by written
consent of the shareholders in lieu of a meeting be unanimous,
except that under Section 1701.11 of the Ohio General
Corporation Law, the code of regulations may be amended by an
action by written consent of holders of two-thirds of the voting
power of the corporation or, if the articles of incorporation or
code of regulations otherwise provide, such greater or lesser
amount, but not less than a majority. Our code of regulations
provides that the code of regulations may be amended by an
action by written consent of holders of a majority of our total
voting power. Based on its ownership after the proposed
offering, Retail Ventures will have enough shares to amend the
code of regulations. This provision coupled with Retail
Ventures ownership may have the effect of delaying,
deferring or preventing a tender offer or takeover attempt that
a shareholder might consider in its best interest.
Advance Notice Requirements for Shareholder Proposals and
Director Nominations.
Our amended and restated code of
regulations provides that shareholders seeking to nominate
candidates for election as directors at an annual or special
meeting of shareholders must provide timely notice to us in
writing. To be timely, a shareholders notice must be
received at our principal executive offices not less than
60 days nor more than 90 days prior to the first
anniversary of the date of the previous years annual
meeting (or, if the date of the annual meeting is changed by
more than 30 days from the anniversary date of the
preceding years annual meeting, or in the case of a
special meeting, within ten days after we mail the notice of the
date of the meeting or otherwise publicly disclose the date of
the meeting.) The code of regulations also prescribes the proper
written form for a shareholders notice. These provisions
may preclude shareholders from making nominations for directors
at an annual or special meeting.
We Have Opted Out of the Ohio Control Share Acquisition
Statute.
We have opted out of the application of the Ohio
Control Share Acquisition Statute Section 1701.831 of the
Ohio Revised Code, known as the Ohio Control Share
Acquisition Statute. This statute provides that, unless a
corporations articles of incorporation or code of
regulations provide that such section does not apply, notice and
information filings, and special shareholder meeting and voting
procedures, must occur prior to any persons acquisition of
an issuers shares that would entitle the acquirer to
exercise or direct the voting power of the issuer in the
election of directors within any of the following ranges:
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one-fifth or more but less than one-third of the voting power;
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one-third or more but less than a majority of the voting power;
and
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a majority or more of the voting power.
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We Have Opted Out of the Merger Moratorium Statute.
We
have opted out of the application of Chapter 1704 of the
Ohio Revised Code, known as the Merger Moratorium
Statute. This statute prohibits certain transactions if
they involve both the issuer and either a person who became the
beneficial owner of 10% or more of the issuers shares
without the prior approval of its board of directors or anyone
affiliated or associated with such person, unless a
corporations articles of incorporation or code of
regulations provide
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that such statute does not apply. The prohibition imposed by
Chapter 1704 is absolute for at least three years and
continues indefinitely thereafter unless the transaction is
approved by the holders of at least two-thirds of the voting
power of the issuer or satisfies statutory conditions relating
to the fairness of the consideration to be received by the
shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A Common
Shares is National City Bank. The telephone number of National
City Bank is 1-800-622-6757.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our
Class A Common Shares, and we cannot predict the effect, if
any, that market sales of shares or availability of any shares
for sale will have on the market price of our Class A
Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares (including shares issued on the
exercise of options, warrants or convertible securities, if any)
or the perception that such sales could occur, could adversely
affect the market price of our Class A Common Shares and
our ability to raise additional capital through a future sale of
securities.
Upon completion of this offering, we will
have shares
of our Class A Common Shares outstanding (irrespective of
whether the underwriters exercise their over-allotment option).
We will also have
shares of our Class B Common Shares outstanding.
The (or if
the underwriters option to purchase additional shares is
exercised in full) Class A Common Shares sold in this
offering will be freely tradable without restriction or further
registration under the Securities Act unless such shares are
purchased by affiliates as that term is defined in
Rule 144 under the Securities Act. Subject to certain
contractual restrictions, holders of restricted shares will be
entitled to sell those shares in the public securities markets
if they qualify for an exemption from registration under
Rule 144 or any other applicable exemption under the
Securities Act. Subject to the lock-up agreements described
below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale as set forth below.
Lock-Up Agreements
We, each of our executive officers and directors, Retail
Ventures, SSC, Cerberus and Back Bay have agreed not to sell or
transfer any Common Shares or securities convertible into or
exercise or exchangeable for our Common Shares for a period of
180 days after the date of this prospectus without first
obtaining the written consent of Lehman Brothers Inc. on behalf
of the underwriters.
Registration Rights
Under the master separation agreement, we have agreed to effect
up to one demand registration per calendar year under applicable
federal and state securities laws of our Common Shares, whether
Class A or Class B, held by Retail Ventures, if
requested by Retail Ventures. We have also granted Retail
Ventures the right to include its Common Shares of DSW in an
unlimited number of other registrations of such shares initiated
by us or on behalf of our other shareholders.
We expect to enter into a registration rights agreement with
Cerberus, SSC and Back Bay under which we will agree to register
the Class A Common Shares held by them, if any, in certain
circumstances.
Stock Options
As of the date of this prospectus, we expect to
have shares
subject to outstanding employee stock options granted to several
of our officers. In addition, we
have Class A
Common Shares available for issuance under the DSW 2005 Equity
Plan pursuant to which we may grant stock options, stock
appreciation rights, restricted stock awards, restricted stock
units, performance share awards and annual incentive awards. We
intend to register with the SEC all Class A Common Shares
underlying the options to be granted as of the effective date of
this offering, as well as the shares reserved under our 2005
stock incentive plan.
Rule 144
In general, under Rule 144 of the Securities Act as
currently in effect, beginning 90 days after the date of
this prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities
within the meaning of Rule 144 for at least one year
(including the holding period of any prior
96
owner other than an affiliate), would be entitled to sell within
any three-month period, a number of shares that does not exceed
the greater of:
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one percent of the number of common shares then outstanding,
which will equal approximately
shares immediately after this offering; or
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the average weekly trading volume of the common shares on the
NYSE during the four calendar weeks preceding the sale.
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Sales under Rule 144 are also subject to other requirements
regarding the manner of sale, notice filing and the availability
of current public information about us. An affiliate
is a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common
control with an issuer.
Rule 144(k)
Under Rule 144(k), a person (or persons whose shares are
aggregated) who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner
other than an affiliate), is entitled to sell these shares under
Rule 144(k) without complying with the manner of sale,
public information, volume limitation or notice provisions of
Rule 144. Therefore, unless otherwise restricted,
144(k) shares may be sold immediately upon
completion of this offering.
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CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX
CONSIDERATIONS
The following is a general discussion of certain
U.S. federal income and estate tax considerations relating
to the ownership and disposition of our Class A Common
Shares by non-United States holders, as defined below, who hold
our Class A Common Shares as capital assets. This
discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended, or the Code, existing
and proposed Treasury regulations promulgated thereunder, and
administrative and judicial interpretation thereof, all as in
effect or proposed on the date hereof and all of which are
subject to change, possibly with retroactive effect or different
interpretations. This discussion does not address all the tax
considerations that may be relevant to specific holders in light
of their particular circumstances or to holders subject to
special treatment under U.S. federal income or estate tax
laws (such as financial institutions, insurance companies,
tax-exempt organizations, retirement plans, partnerships and
their partners, other pass-through entities and their members,
dealers in securities, brokers, U.S. expatriates, or
persons who have acquired our Class A Common Shares as part
of a straddle, hedge, conversion transaction or other integrated
investment). This discussion does not address the
U.S. state and local or non-U.S. tax considerations
relating to the ownership and disposition of our Class A
Common Shares.
You are urged to consult your own tax advisor
regarding the U.S. federal tax consequences of owning and
disposing of our Class A Common Shares, as well as the
applicability and effect of any state, local or foreign tax
laws.
As used in this discussion, the term non-United States
holder refers to a beneficial owner of our Class A
Common Shares that for U.S. federal income tax purposes is
not:
(i) an individual who is a citizen or resident of the
United States;
(ii) a corporation (or other entity taxable as a
corporation) created or organized in or under the laws of the
United States or any state or political subdivision thereof or
therein, including the District of Columbia;
(iii) an estate the income of which is subject to
U.S. federal income tax regardless of source thereof; or a
trust (a) with respect to which a court within the United
States. is able to exercise primary supervision over its
administration and one or more United States persons have the
authority to control all its substantial decisions, or
(b) that has in effect a valid election under applicable
U.S. Treasury Regulations to the treated as a United States
person.
An individual may, in many cases, be treated as a resident of
the United States, rather than a nonresident, among other ways,
by virtue of being present in the United States on at least
31 days in that calendar year and for an aggregate of at
least 183 days during the three-year period ending in that
calendar year (counting for such purposes all the days present
in the current year, one-third of the days present in the
immediately preceding year and one-sixth of the days present in
the second preceding year). Residents are subject to
U.S. federal income tax as if they were U.S. citizens.
If a partnership or other entity or arrangement treated as a
partnership for U.S. federal income tax purposes holds
Class A Common Shares, the tax treatment of a partner will
generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a
partnership holding Class A Common Shares, we urge you to
consult your own tax advisor.
Dividends
We or a withholding agent will have to withhold
U.S. federal withholding tax from the gross amount of any
dividends paid to a non-United States holder at a rate of 30%,
unless (i) an applicable income tax treaty reduces or
eliminates such tax, and a non-United States holder claiming the
benefit of such treaty provides to us or such agent proper
Internal Revenue Service, or IRS, documentation or (ii) the
dividends are effectively connected with a non-United States
holders conduct of a trade or business in the United
States and the non-United States holder provides to us or such
agent proper IRS documentation. In the latter case, such
non-United States holder generally will be subject to
U.S. federal income tax with respect to such dividends in
the same manner as a U.S. citizen or corporation, as
applicable, unless otherwise provided in an applicable income
tax treaty. Additionally, a non-United States holder that is a
corporation could be subject to a branch profits tax on
effectively connected dividend income at a rate of 30% (or at a
reduced rate under an
98
applicable income tax treaty). If a non-United States holder is
eligible for a reduced rate of U.S. federal withholding tax
pursuant to an income tax treaty, such non-United States holder
may obtain a refund of any excess amount withheld by filing an
appropriate claim for refund with the IRS.
Sale, Exchange or Other Disposition
Generally, a non-United States holder will not be subject to
U.S. federal income tax on gain realized upon the sale,
exchange or other disposition of our Class A Common Shares
unless (i) such non-United States holder is an individual
present in the United States for 183 days or more in the
taxable year of the sale, exchange or other disposition and
certain other conditions are met, (ii) the gain is
effectively connected with such non-United States holders
conduct of a trade or business in the United States, or where a
tax treaty provides, the gain is attributable to a
U.S. permanent establishment of such non-United States
holder, or (iii) we are or have been a U.S. real
property holding corporation for U.S. federal income
tax purposes at any time during the shorter of the five-year
period preceding such sale, exchange or other disposition or the
period that such non-United States holder held our Class A
Common Shares, or the Applicable Period.
We do not believe that we have been, are currently or are likely
to be a U.S. real property holding corporation for
U.S. federal income tax purposes. If we were to become a
U.S. real property holding corporation, so long as our
common shares are regularly traded on an established securities
market and continue to be traded, a non-United States holder
would be subject to U.S. federal income tax on any gain
from the sale, exchange or other disposition of Class A
Common Shares only if such non-United States holder actually or
constructively owned, during the Applicable Period more than 5%
of our Class A Common Shares.
Special rules may apply to non-United States holders, such as
controlled foreign corporations, passive foreign investment
companies and corporations that accumulate earnings to avoid
federal income tax, that are subject to special treatment under
the Code. These entities should consult their own tax advisors
to determine the U.S. federal, state, local and other tax
consequences that may be relevant to them.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is a
non-United States holder at the time of his or her death
generally will be included in the individuals gross estate
for U.S. federal estate tax purposes and may be subject to
U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise.
Information Reporting and Backup Withholding Tax
Information reporting may apply to payments made to a non-United
States holder on or with respect to our Class A Common
Shares. Backup withholding tax (at the then applicable rate) may
also apply to payments made to a non-United States holder on or
with respect to our Class A Common Shares, unless the
non-United States holder certifies as to it status as a
non-United States holder under penalties of perjury or otherwise
establishes an exemption, and certain other conditions are
satisfied. Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules from a
payment to a non-United States holder will be allowed as a
refund or a credit against such non-United States holders
U.S. federal income tax liability, provided that the
required information is timely furnished to the IRS.
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UNDERWRITING
Under the terms of an underwriting agreement, which will be
filed as an exhibit to the registration statement relating to
this prospectus, each of the underwriters named below, for whom
Lehman Brothers Inc. is acting as representative, have severally
agreed to purchase from us the respective number of our
Class A Common Shares opposite their names below:
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Number of
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Underwriter
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Shares
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Lehman Brothers Inc.
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CIBC World Markets Corp.
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Johnson Rice & Company L.L.C.
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Total
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The underwriting agreement provides that the underwriters
obligation to purchase our Class A Common Shares depends on
the satisfaction of the conditions contained in the underwriting
agreement, including:
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the obligation to purchase all our Class A Common Shares
offered hereby, if any of the shares are purchased;
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the representations and warranties made by us to the
underwriters are true;
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there is no material change in the financial markets; and
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we deliver customary closing documents to the underwriters.
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Commissions and Expenses
The following table summarizes the underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to
purchase additional
shares. The underwriting fee is the difference between the
initial price to the public and the amount the underwriters pay
to us for the shares.
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No Exercise
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Full Exercise
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Per share
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Total
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The representatives of the underwriters have advised us that the
underwriters propose to offer shares of our Class A Common
Shares directly to the public at the public offering price on
the cover of this prospectus and to selected dealers, who may
include the underwriters, at such offering price less a selling
concession not in excess of
$ per
share. The underwriters may allow, and the selected dealers may
re-allow, a discount from the concession not in excess of
$ per
share to other dealers. After this offering, the representatives
may change the public offering price and other offering terms.
The expenses of this offering that are payable by us are
estimated to be
$
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Option to Purchase Additional Shares
We have granted the underwriters an option after the date of the
prospectus to purchase, from time to time, in whole or in part,
up to an aggregate
of Class A
Common Shares at the public offering price less underwriting
discounts and commissions. The option may be exercised if the
underwriters sell more
than Class A
Common Shares in connection with this offering. To the extent
that this option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase its pro
rata portion of these additional shares based on the
underwriters percentage underwriting commitment in this
offering as indicated in the preceding table.
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Lock-Up Agreements
We, Retail Ventures, SSC, Cerberus, and Back Bay, and all of our
directors and executive officers have agreed that, without the
prior written consent of Lehman Brothers Inc. on behalf of the
underwriters, we and they will not, subject to some exceptions,
and limited extensions in certain circumstances, directly or
indirectly, offer, pledge, announce the intention to sell, sell,
contract to sell, sell an option or contract to purchase,
purchase any option or contract to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of any
of our Common Shares or any securities which may be converted
into or exchanged for any of our Common Shares or enter into any
swap or other agreement that transfers, in whole or in part, any
of the economic consequences of ownership of any of our Common
Shares for a period of 180 days from the date of this
prospectus other than permitted transfers.
The 180-day restricted period described in the preceding
paragraph will be extended if:
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during the last 17 days of the 180-day restricted period we
issue an earnings release or announce material news or a
material event; or
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prior to the expiration of the 180-day restricted period, we
announce that we will release earnings results during the 16-day
period beginning on the last day of the 180-day period,
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in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning on the issuance of the earnings release
or the announcement of the material news or material event.
Offering Price Determination
Prior to this offering, there has been no public market for our
Class A Common Shares. The initial public offering price
will be negotiated between the representatives and us. In
determining the initial public offering price of our
Class A Common Shares, the representatives will consider:
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the history and prospects for the industry in which we compete,
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our financial information,
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the ability of our management and our business potential and
earning prospects,
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the prevailing securities markets at the time of this offering,
and
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the recent market prices of, and the demand for, publicly traded
shares of generally comparable companies.
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Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of
1933, and to contribute to payments that the underwriters may be
required to make for these liabilities.
Stabilization, Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of our Common Shares, in
accordance with Regulation M under the Exchange Act:
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in this offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares involved in the sales made by the
underwriters in excess of the number
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of shares they are obligated to purchase is not greater than the
number of shares that they may purchase by exercising their
option to purchase additional shares. In a naked short position,
the number of shares involved is greater than the number of
shares in their option to purchase additional shares. The
underwriters may close out any short position by either
exercising their option to purchase additional shares and/or
purchasing shares in the open market. In determining the source
of shares to close out the short position, the underwriters will
consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which
they may purchase shares through their option to purchase
additional shares. A naked short position is more likely to be
created if the underwriters are concerned that there could be
downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase
in this offering.
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Syndicate covering transactions involve purchases of our Common
Shares in the open market after the distribution has been
completed in order to cover syndicate short positions.
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Common Shares
originally sold by the syndicate member are purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our Common Shares or preventing or retarding
a decline in the market price of our Common Shares. As a result,
the price of the Common Shares may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our Common Shares. In addition, neither we nor any of the
underwriters make representation that the representatives will
engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters and/or selling group members
participating in this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the particular underwriter or selling group
member, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other
allocations.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members website
and any information contained in any other website maintained by
an underwriter or selling group member is not part of the
prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by us or any underwriter or selling group member in its capacity
as underwriter or selling group member and should not be relied
upon by investors.
Listing on New York Stock Exchange
We intend to apply to have our Class A Common Shares
authorized for trading on the NYSE under the symbol
DSW. In connection with that listing, the
underwriters will undertake to sell the minimum number of Common
Shares to the minimum number of beneficial owners necessary to
meet the NYSE listing requirements.
Discretionary Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
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Stamp Taxes
If you purchase shares of our Class A Common Shares offered
in this prospectus, you may be required to pay stamp taxes and
other charges under the laws and practices of the country of
purchase, in addition to this offering price listed on the cover
page of this prospectus.
Relationships
The underwriters may in the future perform investment banking
and advisory services for us from time to time for which they
may in the future receive customary fees and expenses. The
underwriters may, from time to time, engage in transactions with
or perform services for us in the ordinary course of their
business. CIBC World Markets, one of the underwriters for this
offering, has in the past, including during 2004, performed
advisory services for Retail Ventures, in exchange for customary
fees.
Selling Restrictions
Each underwriter has represented, warranted and agreed that:
(i) it has not offered or sold and, prior to the expiry of
a period of six months from the closing date, will not offer or
sell any shares to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995;
(ii) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated any
invitation or inducement to engage in investment activity
(within the meaning of section 21 of the Financial Services
and Markets Act 2000 (FSMA)) received by it in
connection with the issue or sale of any shares in circumstances
in which section 21(1) of the FSMA does not apply to the
Issuer; and (iii) it has complied and will comply with all
applicable provisions of the FSMA with respect to anything done
by it in relation to the shares in, from or otherwise involving
the United Kingdom.
The shares may not be offered or sold, transferred or delivered,
as part of their initial distribution or at any time thereafter,
directly or indirectly, to any individual or legal entity in the
Netherlands other than to individuals or legal entities who or
which trade or invest in securities in the conduct of their
profession or trade, which includes banks, securities
intermediaries, insurance companies, pension funds, other
institutional investors and commercial enterprises which, as an
ancillary activity, regularly trade or invest in securities.
The shares may not be offered or sold by means of any document
other than to persons whose ordinary business is to buy or sell
shares or debentures, whether as principal or agent, or in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32) of
Hong Kong, and no advertisement, invitation or document relating
to the shares may be issued, whether in Hong Kong or elsewhere,
which is directed at, or the contents of which are likely to be
accessed or read by, the public in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571) of Hong Kong and any
rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation or subscription or purchase, of the
securities may not be circulated or distributed, nor may the
securities be offered or sold, or be made the subject of an
invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore other than under
circumstances in which such offer, sale or invitation does not
constitute an offer or sale, or invitation for subscription or
purchase, of the securities to the public in Singapore.
Each underwriter has acknowledged and agreed that the securities
have not been registered under the Securities and Exchange Law
of Japan and are not being offered or sold and may not be
offered or sold, directly or indirectly, in Japan or to or for
the account of any resident of Japan, except (1) pursuant
to an
103
exemption from the registration requirements of the Securities
and Exchange Law of Japan and (ii) in compliance with any
other applicable requirements of Japanese law. As part of this
offering, the underwriters may offer securities in Japan to a
list of 49 offerees in accordance with the above provisions.
LEGAL MATTERS
The validity of the Class A Common Shares offered in this
offering will be passed upon for DSW by Vorys, Sater, Seymour
and Pease LLP, Columbus, Ohio, counsel for DSW. Certain legal
matters in connection with this offering will be passed upon for
DSW by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York, Vorys, Sater, Seymour and Pease LLP, Columbus, Ohio
and Sonnenschein Nath & Rosenthal LLP, St. Louis, Missouri,
and for the underwriters by Debevoise & Plimpton LLP, New
York, New York.
EXPERTS
The financial statements included in this prospectus and the
related supplemental schedule included elsewhere in the
registration statement have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in their report appearing herein and elsewhere in the
registration statement (which report expresses an unqualified
opinion and includes an explanatory paragraph that describes the
Companys change in its method of accounting for goodwill
and other intangible assets effective February 3, 2002),
and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act with respect to the
Class A Common Shares offered by this prospectus. This
prospectus, filed as part of the registration statement, does
not contain all the information set forth in the registration
statement and its exhibits and schedules, portions of which have
been omitted as permitted by the rules and regulations of the
SEC. For further information about us and our Class A
Common Shares, we refer you to the registration statement and to
its exhibits and schedules. Statements in this prospectus about
the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to
the copy of such contract, agreement or document filed as an
exhibit to the registration statement, with each such statement
being qualified in all respects by reference to the document to
which it refers. Anyone may inspect the registration statement
and its exhibits and schedules without charge at the public
reference facilities the SEC maintains at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain copies of all
or any part of these materials from the SEC upon the payment of
certain fees prescribed by the SEC. You may obtain further
information about the operation of the SECs Public
Reference Room by calling the SEC at 1-800-SEC-0330. These
reports and other information may also be inspected without
charge at a website maintained by the SEC at http://www.sec.gov.
In addition, you may obtain information about us at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be
required to file reports, proxy statements and other information
with the SEC. You will be able to inspect and copy these
reports, proxy statements and other information at the public
reference facilities maintained by the SEC at the address noted
above. You also will be able to obtain copies of this material
from the Public Reference Room of the SEC as described above, or
inspect them without charge at the SECs website. We intend
to furnish our shareholders with annual reports containing
consolidated financial statements audited by an independent
accounting firm.
104
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
F-2
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Balance Sheets as of January 31, 2004 and
February 1, 2003
|
|
|
F-3
|
|
Consolidated Statements of Income for the years ended
January 31, 2004, February 1, 2003
and February 2, 2002
|
|
|
F-4
|
|
Consolidated Statements of Shareholders Equity for the
years ended January 31, 2004,
February 1, 2003 and February 2, 2002
|
|
|
F-5
|
|
Consolidated Statements of Cash Flows for the years ended
January 31, 2004, February 1, 2003
and February 2, 2002
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7
|
|
Schedule II-Valuation and Qualification Accounts
|
|
|
F-18
|
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
Condensed Consolidated Balance Sheets as of October 30,
2004 and January 31, 2004 (unaudited)
|
|
|
F-19
|
|
Condensed Consolidated Statements of Income for the nine months
ended October 30, 2004
and November 1, 2003 (unaudited)
|
|
|
F-20
|
|
Condensed Consolidated Statements of Shareholders Equity
for the nine months ended
October 30, 2004 and November 1, 2003 (unaudited)
|
|
|
F-21
|
|
Condensed Consolidated Statements of Cash Flows for the nine
months ended October 30, 2004
and November 1, 2003 (unaudited)
|
|
|
F-22
|
|
Notes to Condensed Consolidated Financial Statements
|
|
|
F-23
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholder
DSW Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of
DSW Inc. and subsidiary (the Company), an indirect
wholly-owned subsidiary of Retail Ventures, Inc., as of
January 31, 2004 and February 1, 2003, and the related
consolidated statements of income, shareholders equity,
and cash flows for each of the three years ended
January 31, 2004, February 1, 2003 and
February 2, 2002. Our audits also included the financial
statement schedule. These financial statements and supplemental
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of DSW
Inc. and subsidiary as of January 31, 2004 and
February 1, 2003 and the results of their operations and
their cash flows for each of the three years in the period ended
January 31, 2004, February 1, 2003 and
February 2, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such supplemental schedule, when considered in relation
to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
As discussed in the notes to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and other
Intangible Assets, effective February 3, 2002.
March 8, 2005
F-2
DSW INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2004 AND FEBRUARY 1, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(In thousands,
|
|
|
|
except share amounts)
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
7,076
|
|
|
$
|
3,481
|
|
|
Accounts receivable
|
|
|
2,264
|
|
|
|
5,229
|
|
|
Inventories
|
|
|
150,019
|
|
|
|
141,112
|
|
|
Prepaid expenses and other assets
|
|
|
8,847
|
|
|
|
6,731
|
|
|
Deferred income taxes
|
|
|
9,202
|
|
|
|
11,742
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
177,408
|
|
|
|
168,295
|
|
|
|
|
|
|
|
|
ADVANCES TO AFFILIATES
|
|
|
1,440
|
|
|
|
22,014
|
|
PROPERTY AND EQUIPMENT At cost:
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
58,729
|
|
|
|
44,958
|
|
|
Leasehold improvements
|
|
|
60,255
|
|
|
|
52,786
|
|
|
Capital leases furniture, fixtures and equipment
|
|
|
1,227
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment at cost
|
|
|
120,211
|
|
|
|
98,971
|
|
|
Less accumulated depreciation
|
|
|
(46,068
|
)
|
|
|
(32,060
|
)
|
|
|
|
|
|
|
|
|
|
|
Property and equipment net
|
|
|
74,143
|
|
|
|
66,911
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
25,899
|
|
|
|
25,899
|
|
TRADENAMES AND OTHER INTANGIBLES Net
|
|
|
7,943
|
|
|
|
8,801
|
|
DEFERRED INCOME TAXES AND OTHER ASSETS
|
|
|
4,351
|
|
|
|
3,783
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
291,184
|
|
|
$
|
295,703
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
52,237
|
|
|
$
|
61,232
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
7,215
|
|
|
|
8,804
|
|
|
|
Taxes
|
|
|
9,940
|
|
|
|
5,906
|
|
|
|
Other
|
|
|
4,634
|
|
|
|
4,985
|
|
|
Current maturities of long-term obligations
|
|
|
138
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
74,164
|
|
|
|
81,154
|
|
LONG-TERM OBLIGATIONS Net of current maturities
|
|
|
35,000
|
|
|
|
54,116
|
|
OTHER NONCURRENT LIABILITIES
|
|
|
38,149
|
|
|
|
31,369
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Common stock no par value:
|
|
|
|
|
|
|
|
|
|
|
Authorized 500 shares
|
|
|
|
|
|
|
|
|
|
|
Outstanding 410.09 shares
|
|
|
|
|
|
|
|
|
|
Paid in capital
|
|
|
101,442
|
|
|
|
101,442
|
|
|
Retained earnings
|
|
|
42,429
|
|
|
|
27,622
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
143,871
|
|
|
|
129,064
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
291,184
|
|
|
$
|
295,703
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-3
DSW INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003 AND
FEBRUARY 2, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
NET SALES
|
|
$
|
791,348
|
|
|
$
|
644,345
|
|
|
$
|
523,509
|
|
COST OF SALES
|
|
|
(588,421
|
)
|
|
|
(485,589
|
)
|
|
|
(400,113
|
)
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
202,927
|
|
|
|
158,756
|
|
|
|
123,396
|
|
OPERATING EXPENSES
|
|
|
(174,874
|
)
|
|
|
(140,975
|
)
|
|
|
(118,728
|
)
|
|
|
|
|
|
|
|
|
|
|
OPERATING PROFIT
|
|
|
28,053
|
|
|
|
17,781
|
|
|
|
4,668
|
|
INTEREST EXPENSE Net
|
|
|
(2,739
|
)
|
|
|
(3,874
|
)
|
|
|
(3,644
|
)
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
25,314
|
|
|
|
13,907
|
|
|
|
1,024
|
|
INCOME TAX PROVISION
|
|
|
(10,507
|
)
|
|
|
(5,847
|
)
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
14,807
|
|
|
$
|
8,060
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003 AND
FEBRUARY 2, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Retained
|
|
|
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
BALANCE February 3, 2001
|
|
|
410.09
|
|
|
|
101,442
|
|
|
$
|
19,323
|
|
|
$
|
120,765
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE February 2, 2002
|
|
|
410.09
|
|
|
|
101,442
|
|
|
|
19,562
|
|
|
|
121,004
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
8,060
|
|
|
|
8,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE February 1, 2003
|
|
|
410.09
|
|
|
|
101,442
|
|
|
|
27,622
|
|
|
|
129,064
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
14,807
|
|
|
|
14,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE January 31, 2004
|
|
|
410.09
|
|
|
|
101,442
|
|
|
$
|
42,429
|
|
|
$
|
143,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003 AND
FEBRUARY 2, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,807
|
|
|
$
|
8,060
|
|
|
$
|
239
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,478
|
|
|
|
12,986
|
|
|
|
11,236
|
|
|
Amortization of debt issuance costs
|
|
|
479
|
|
|
|
529
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
26
|
|
|
|
(3,715
|
)
|
|
|
(5,265
|
)
|
|
Loss on disposal of assets
|
|
|
585
|
|
|
|
40
|
|
|
|
965
|
|
|
Change in working capital, assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,965
|
|
|
|
(3,227
|
)
|
|
|
756
|
|
|
|
Inventories
|
|
|
(8,907
|
)
|
|
|
(24,475
|
)
|
|
|
(25,829
|
)
|
|
|
Prepaid expenses and other assets
|
|
|
(641
|
)
|
|
|
41
|
|
|
|
(2,718
|
)
|
|
|
Advances to/from affiliates
|
|
|
20,574
|
|
|
|
(33,020
|
)
|
|
|
55,511
|
|
|
|
Accounts payable
|
|
|
(8,995
|
)
|
|
|
1,732
|
|
|
|
(18,274
|
)
|
|
|
Proceeds from lease incentives
|
|
|
6,394
|
|
|
|
9,159
|
|
|
|
8,887
|
|
|
|
Other noncurrent liabilities
|
|
|
386
|
|
|
|
176
|
|
|
|
8,083
|
|
|
|
Accrued expenses
|
|
|
1,973
|
|
|
|
876
|
|
|
|
(7,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
45,124
|
|
|
|
(30,838
|
)
|
|
|
25,834
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(22,324
|
)
|
|
|
(23,140
|
)
|
|
|
(27,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(22,324
|
)
|
|
|
(23,140
|
)
|
|
|
(27,301
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of capital lease obligations
|
|
|
(205
|
)
|
|
|
(169
|
)
|
|
|
(174
|
)
|
|
Net (decrease) increase in revolving credit facility
|
|
|
(19,000
|
)
|
|
|
54,000
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
(1,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(19,205
|
)
|
|
|
52,394
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
|
|
|
3,595
|
|
|
|
(1,584
|
)
|
|
|
(1,641
|
)
|
CASH AND EQUIVALENTS Beginning of year
|
|
|
3,481
|
|
|
|
5,065
|
|
|
|
6,706
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS End of year
|
|
$
|
7,076
|
|
|
$
|
3,481
|
|
|
$
|
5,065
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,121
|
|
|
$
|
3,280
|
|
|
$
|
3,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
898
|
|
|
$
|
2,552
|
|
|
$
|
2,519
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-6
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003 AND
FEBRUARY 2, 2002
1. SIGNIFICANT ACCOUNTING
POLICIES
Business Operations
DSW Inc. and its
wholly-owned subsidiary are herein referred to collectively as
the Company. At January 31, 2004, the Companys common
stock was wholly-owned by Value City Department Stores, Inc.
(VCDS) which in turn was a wholly-owned subsidiary
of Retail Ventures, Inc. (RVI). RVI is listed on the
New York Stock Exchange trading under the ticker symbol
RVI. As a result of a reorganization within RVI, the
Company became a wholly-owned subsidiary of RVI on
January 1, 2005. The Company operates in a single segment
and sells better-branded footwear and accessories. As of
January 31, 2004, there were a total of 142 stores located
throughout the United States. The Company also supplies
footwear, under supply arrangements, to 17 Filenes
Basement stores and 151 locations for other non-related
retailers in the United States.
Fiscal Year
The Companys fiscal year
ends on the Saturday nearest January 31. Fiscal years 2003,
2002 and 2001 consist of 52 weeks. Unless otherwise stated,
references to years in this report relate to fiscal years rather
than calendar years.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Significant estimates are required as a part of
inventory valuation, depreciation, amortization, recoverability
of long-lived assets and establishing reserves for insurance.
Although these estimates are based on managements
knowledge of current events and actions it may undertake in the
future, actual results could differ from these estimates.
Financial Instruments
The following methods
and assumptions were used to estimate the fair value of each
class of financial instruments:
|
|
|
Cash and Equivalents
The carrying amount
approximates fair value because the original maturities are
three months or less.
|
|
|
Accounts Receivable
Accounts receivables are
classified as current assets because the average collection
period is generally less than one year. The carrying amount
approximates fair value because of the relatively short average
maturity of the instruments and no significant change in
interest rates.
|
|
|
Long-Term Debt
The carrying amount
approximates fair value as a result of the variable rate-based
borrowings.
|
Concentration of Credit Risk
Financial
instruments, which principally subject the Company to
concentration of credit risk, consist of cash and cash
equivalents. The Company invests excess cash when available
through financial institutions in over night investments. At
times, such amounts may be in excess of FDIC insurance limits.
Inventories
Merchandise inventories are
stated at the lower of cost, determined using the first-in,
first-out basis, or market using the retail inventory method.
The retail inventory method is widely used in the retail
industry due to its practicality. Under the retail inventory
method, the valuation of inventories at cost and the resulting
gross profit are calculated by applying a calculated cost to
retail ratio to the retail value of inventories. The cost of the
inventory reflected on the balance sheet is decreased by charges
to cost of sales at the time the retail value of the inventory
is lowered through the use of markdowns. Hence, earnings are
negatively impacted as the merchandise is marked down prior to
sale. Reserves to value inventory at the lower of cost or market
were $11.5 million and $11.4 million at the end of
fiscal year 2003 and 2002, respectively.
F-7
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inherent in the calculation of inventories are certain
significant management judgments and estimates, including
setting the original merchandise retail value or mark-on,
markups of initial prices established, reductions in prices due
to customers perception of value (known as markdowns), and
estimates of losses between physical inventory counts, or
shrinkage, which combined with the averaging process within the
retail inventory method, can significantly impact the ending
inventory valuation at cost and the resulting gross profit.
Vendor Allowances
Vendor allowances include
allowances, rebates and cooperative advertising funds received
from vendors. The amount of these funds is determined for each
fiscal year and the majority is based on various quantitative
contract terms. Amounts expected to be received from vendors
relating to the purchase of merchandise inventories are
recognized as a reduction of cost of goods sold as the
merchandise is sold. Amounts that represent a reimbursement of
costs incurred, such as advertising, are recorded as a reduction
to the related expense in the period that the related expense is
incurred. On an annual basis, the Company confirms earned
allowances with vendors to determine the amounts are recorded in
accordance with the terms of the contract. At January 31,
2004 and February 1, 2003, the Company had a vendor
allowance balance of less than $100,000.
Property and Equipment
Property and equipment
is stated at cost less accumulated depreciation determined by
the straight-line method over the expected useful lives of the
assets. Assets held under capital leases and related obligations
are recorded initially at the lower of fair market value or the
present value of the minimum lease payments. The straight-line
method is used to amortize such capitalized costs over the
lesser of the expected useful life of the asset or the life of
the lease. Leasehold improvements are amortized under the
straight-line method over the shorter of the initial lease term
or expected useful life. The estimated useful lives by class of
asset are:
|
|
|
|
|
Leasehold improvements
|
|
|
2 to 10 years
|
|
Furniture, fixtures and equipment
|
|
|
3 to 10 years
|
|
Asset Impairment and Long-Lived Assets
The
Company must periodically evaluate the carrying amount of its
long-lived assets, primarily property and equipment, and finite
life intangible assets when events and circumstances warrant
such a review to ascertain if any assets have been impaired. The
carrying amount of a long-lived asset is considered impaired
when the carrying value of the asset exceeds the expected future
cash flows (undiscounted and without interest) from the asset.
The Company reviews are conducted down at the lowest
identifiable level, which include a store. The impairment loss
recognized is the excess of the carrying value, based on
discounted future cash flows, of the asset over its fair value.
Should an impairment loss be realized, it will be included in
operating expenses. The amount of impairment losses recorded
during fiscal years 2003, 2002 and 2001 were immaterial to the
financial statements.
Goodwill
Goodwill represents the excess cost
over the estimated fair values of net assets including
identifiable intangible assets of businesses acquired. Goodwill
is tested for impairment at least annually. The Company, as a
result of adoption of Statement of Financial Accounting
Standards (SFAS) No. 142,
Goodwill and Other
Intangible Assets,
no longer records goodwill amortization.
The pro forma effect of ceasing amortization of goodwill under
SFAS No. 142 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Reported net income
|
|
$
|
14,807
|
|
|
$
|
8,060
|
|
|
$
|
239
|
|
Add back goodwill amortization
|
|
|
|
|
|
|
|
|
|
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
14,807
|
|
|
$
|
8,060
|
|
|
$
|
2,541
|
|
|
|
|
|
|
|
|
|
|
|
F-8
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tradenames and Other Intangible Assets
Tradenames and other intangibles assets are comprised of values
assigned to names the Company acquired and leases acquired. The
accumulated amortization for these assets is $4.9 million
and $4.1 million at January 31, 2004 and
February 1, 2003, respectively. The asset value and
accumulated amortization of intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Tradenames:
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
12,750
|
|
|
$
|
12,750
|
|
|
Accumulated amortization
|
|
|
(4,887
|
)
|
|
|
(4,038
|
)
|
|
|
|
|
|
|
|
Subtotal
|
|
|
7,863
|
|
|
|
8,712
|
|
|
Useful life
|
|
|
15
|
|
|
|
15
|
|
Favorable leases:
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
140
|
|
|
|
140
|
|
|
Accumulated amortization
|
|
|
(60
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
Subtotal
|
|
|
80
|
|
|
|
89
|
|
|
Useful life
|
|
|
14
|
|
|
|
14
|
|
Tradenames and other intangible assets, net
|
|
$
|
7,943
|
|
|
$
|
8,801
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for the current and each of the
five succeeding years is as follows:
|
|
|
|
|
Fiscal Year
|
|
(In thousands)
|
|
|
|
2003
|
|
$
|
858
|
|
2004
|
|
|
864
|
|
2005
|
|
|
864
|
|
2006
|
|
|
861
|
|
2007
|
|
|
854
|
|
2008
|
|
|
854
|
|
Aggregate amortization expense for the current and each of the
five succeeding years is as follows:
Income Taxes
Income taxes are accounted for
using the asset and liability method. Under this method,
deferred income taxes arise from temporary differences between
the tax basis of assets and liabilities and their reported
amounts in the financial statements. A valuation allowance is
established against deferred tax assets when it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
Deferred Rent
Many of the Companys
operating leases contain predetermined fixed increases of the
minimum rental rate during the initial lease term. For these
leases, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the
amount charged to expense and the rent paid as a deferred rent,
and begins amortizing such deferred rent upon the delivery of
the lease location by the lessor. The amounts included in other
noncurrent liabilities caption were $11.7 million and
$8.7 million, at January 31, 2004 and February 1,
2003, respectively.
Tenant Allowances
The Company receives cash
allowances from landlords, which are deferred and amortized on a
straight-line basis over the life of the lease as a reduction of
rent expense. These allowances are included in the caption other
noncurrent liabilities and were $26.5 million and
$20.0 million, respectively, at January 31, 2004 and
February 1, 2003.
F-9
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Sales and Revenue Recognition
Sales of
merchandise are net of returns and exclude sales tax. Revenues
from our retail operations are recognized at the latter of point
of sale or delivery of goods to the customer.
Revenue from gift cards is deferred and the revenue is
recognized upon redemption of the gift card. The Company
supplies footwear, under supply arrangements, to 17
Filenes Basement stores and 151 locations for other
non-related retailers in the United States. Sales for these
leased supply locations are included in net sales and represent
8.9%, 3.5% and 2.7% of total net sales, respectively for the
fiscal years 2003, 2002 and 2001.
Cost of Sales
Cost of sales includes expenses
associated with warehousing, distribution and store occupancy.
Warehousing costs are comprised of labor, benefits and other
labor-related costs associated with the operations of the
warehouse, which are primarily payroll-related taxes and
benefits. The non-labor costs include rent, insurance, utilities
and maintenance and other operating costs that are passed to the
Company from the landlord. Distribution costs include the
transportation of merchandise to the warehouse and from the
warehouse to the stores. Store occupancy costs include rent,
utilities, repairs, maintenance and janitorial costs and other
costs associated with licenses and occupancy-related taxes,
which are primarily real estate taxes passed to the Company by
the landlords.
Customer Loyalty Program
The Company
maintains a customer loyalty program for its DSW stores in which
customers receive a future discount on qualifying purchases. The
Reward Your Style (RYS) is designed to
promote customer awareness and loyalty plus to provide the
Company with the ability to communicate with its customers. Upon
reaching the target level, customers may redeem these discounts
on a future purchase. Generally these future discounts must be
redeemed within six months. The Company accrues the estimated
costs of the anticipated redemptions of the discount earned at
the time of the initial purchase and charges such costs to
operating expenses based on historical experience. The estimates
of the costs associated with the loyalty program require the
Company to make assumptions related to customer purchase levels
and redemption rates. The accrued liability as of
January 31, 2004 and February 1, 2003 is
$3.0 million and $2.0 million, respectively.
Pre-Opening Costs
Pre-opening costs
associated with opening or remodeling of stores are expensed as
incurred. Pre-opening costs expensed were $5.1 million,
$2.9 million and $4.3 million for fiscal 2003, 2002
and 2001, respectively.
Advertising Expense
The cost of advertising
is expensed as incurred or when the advertising first takes
place. Advertising costs were $36.4 million,
$29.8 million and $25.0 million in fiscal 2003, 2002
and 2001, respectively.
Earnings Per Share (EPS)
The
Company is a wholly-owned subsidiary of Value City Department
Stores, Inc. at January 31, 2004, and is not required to
report EPS.
Recent Accounting Pronouncements
The
Financial Accounting Standards Board (FASB)
periodically issues SFAS, some of which require implementation
by a date falling within or after the close of the fiscal year.
In June 2001, the FASB issued SFAS No. 143,
Accounting
for Asset Retirement Obligations
. SFAS No. 143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. Under this statement,
obligations that meet the definition of a liability will be
recognized consistently with the retirement of the associated
tangible long-lived assets. This statement is effective for
financial statements issued for fiscal years beginning after
June 15, 2002. The Company assessed the impact of SFAS
No. 143 and there was none.
In April 2002, the FASB issued SFAS No. 145,
Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
. SFAS
No. 145 is effective for fiscal years
F-10
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
beginning after May 15, 2002. The adoption of SFAS
No. 145 did not have a significant effect on the
Companys results of operations or its financial position.
However, for the year ended February 1, 2003, the Company
reclassified the loss on the extinguishment of debt of
approximately $0.2 million from extraordinary loss to
interest expense, in the Companys financial statement of
income.
In January 2003, the FASB issued Financial 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 VIEs expected losses or
residual returns if they occur. FIN 46 provides certain
exceptions to these rules, relating to qualifying special
purpose entities (QSPEs) 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 Companys financial
statements or disclosures.
In May 2003, the FASB issued SFAS No. 150,
Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances), many of
which were previously classified as equity. This statement is
effective for financial instruments entered into or modified
after May 31, 2003 and for pre-existing instruments as of
the beginning of the first interim period beginning after
June 15, 2003. Initial adoption of this accounting
pronouncement did not have a material impact on the
Companys financial statements.
The FASBs Emerging Issues Task Force (EITF)
Issue No. 02-16,
Accounting By A Customer (Including A
Reseller) For Cash Consideration Received From A
Vendor,
addressed the accounting treatment for vendor
allowances. The adoption of EITF Issue No. 02-16 in 2003
did not have a material impact on the Companys financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised
2004) (SFAS No. 123R),
Share-Based
Payment
. This statement revised SFAS No. 123,
Accounting for Stock-Based Compensation,
and requires
companies to expense the value of employee stock options and
similar awards. The effective date of this standard is interim
and annual periods beginning after June 15, 2005. No stock
options or similar awards have been granted by the Company as of
fiscal years 2003, 2002 and 2001. Therefore SFAS No. 123R
has no impact on the Company. However any future stock options
and similar awards would need to be value and expensed in
accordance with SFAS No. 123R.
F-11
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from VCDS and affiliates of
Schottenstein Stores Corporation (SSC), direct owner
of approximately 53.0% of RVIs common shares. The related
party transactions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Purchases of merchandise from affiliates
|
|
$
|
1,184
|
|
|
$
|
1,455
|
|
|
$
|
|
|
The Company also leases certain store and warehouse locations
owned by SSC as described in Note 3.
Accounts receivable from and payable to affiliates principally
result from commercial transactions with entities owned or
controlled by SSC or intercompany transactions with SSC.
Settlement of affiliate receivables and payables are in the form
of cash. These transactions settle normally in 30 to
60 days. Amounts receivable or payable to SSC or its
affiliates at January 31, 2004 and February 1, 2003
were immaterial.
The Company shares certain personnel, administrative and service
costs with SSC and its affiliates. The costs of providing these
services are allocated among the Company, SSC and its affiliates
without a premium. The allocated amounts are not significant.
SSC does not charge the Company for general corporate management
services. In the opinion of the Company and SSC management, the
aforementioned charges are reasonable.
Until July 2004, the Company participated in a self-insurance
program maintained by SSC. While the Company no longer
participates in the program, the Company continues to remain
liable for liabilities incurred by it under the program. Under
the program, SSC charged Retail Ventures amounts based, among
other factors, on loss experience and its actual payroll and
related costs for administering the program. The Company
expensed $0.2 million, $3.0 million and
$2.3 million in fiscal years 2003, 2002 and 2001,
respectively, for such coverage. Estimates for self-insured
programs are determined by independent actuaries based on
actuarial assumptions, which incorporate historical incurred
claims and incurred but not reported (IBNR) claims.
In the ordinary course of business the Company has received
various services provided by RVI or its subsidiaries, including
import administration, risk management, human resources,
information technology, tax, financial services, and payroll, as
well as other corporate services. RVI has also provided the
Company with the services of a number of its executives and
employees. The financial statements include allocations by RVI
of its costs related to these services. These costs allocations
have been determined on a basis that the Company and RVI
consider to be reasonable reflections of the use of services
provided or the benefit received to the Company. These
allocations totaled $24.4 million in fiscal 2003 and were
immaterial in fiscal 2002 and 2001. In addition, the Company has
entered into agreements with various subsidiaries of RVI to
supply all of their shoe inventories. The net balance of these
transactions is reflected within the balance sheets as advances
to affiliates.
See Notes 3, 4 and 6 for additional related party
disclosures.
3. LEASES
The Company leases stores and warehouses under various
arrangements with related and unrelated parties. Such leases
expire through 2019 and in most cases provide for renewal
options. Generally, the Company is required to pay real estate
taxes, maintenance, insurance and contingent rentals based on
sales in excess of specified levels.
As of January 31, 2004, the Company leased or had other
agreements with 14 store locations owned by SSC or affiliates of
SSC, and one warehouse facility for an annual minimum rent of
$6.0 million and
F-12
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
additional contingent rents based on aggregate sales in excess
of specified sales for the store locations. Under supply
agreements to Filenes Basement Stores and other
non-related retailers, the Company pays contingent rents based
on sales.
Future minimum lease payments required under the aforementioned
leases, exclusive of real estate taxes, insurance and
maintenance costs, at January 31, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated
|
|
|
Related
|
|
|
Capital
|
|
Fiscal Year
|
|
Total
|
|
|
Party
|
|
|
Party
|
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2004
|
|
$
|
68,767
|
|
|
$
|
60,881
|
|
|
$
|
7,886
|
|
|
$
|
142
|
|
2005
|
|
|
72,706
|
|
|
|
64,730
|
|
|
|
7,976
|
|
|
|
|
|
2006
|
|
|
71,539
|
|
|
|
63,468
|
|
|
|
8,071
|
|
|
|
|
|
2007
|
|
|
69,642
|
|
|
|
61,333
|
|
|
|
8,309
|
|
|
|
|
|
2008
|
|
|
67,139
|
|
|
|
58,588
|
|
|
|
8,551
|
|
|
|
|
|
Future years
|
|
|
339,345
|
|
|
|
274,317
|
|
|
|
65,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
689,138
|
|
|
$
|
583,317
|
|
|
$
|
105,821
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of rental expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Minimum rentals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties
|
|
$
|
52,326
|
|
|
$
|
47,411
|
|
|
$
|
37,217
|
|
|
Related parties
|
|
|
6,011
|
|
|
|
4,224
|
|
|
|
2,304
|
|
Contingent rentals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties
|
|
|
10,785
|
|
|
|
434
|
|
|
|
454
|
|
|
Related parties
|
|
|
5,796
|
|
|
|
4,896
|
|
|
|
4,498
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,918
|
|
|
$
|
56,965
|
|
|
$
|
44,473
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital leases are included in the balance
sheets as property, while the related obligations are included
in long-term obligations.
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Assets held under capital leases:
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,227
|
|
|
$
|
1,227
|
|
|
Accumulated depreciation and amortization
|
|
|
(1,128
|
)
|
|
|
(969
|
)
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
99
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
F-13
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Revolving credit facility
|
|
$
|
35,000
|
|
|
$
|
54,000
|
|
Capital lease obligations
|
|
|
138
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
35,138
|
|
|
|
54,343
|
|
Less current maturities
|
|
|
(138
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
$
|
35,000
|
|
|
$
|
54,116
|
|
|
|
|
|
|
|
|
Letters of credit outstanding
|
|
$
|
11,370
|
|
|
$
|
8,706
|
|
|
|
|
|
|
|
|
Availability under revolving credit facility
|
|
$
|
119,995
|
|
|
$
|
117,160
|
|
|
|
|
|
|
|
|
At January 31, 2004, the Companys direct parent,
VCDS, had an aggregate $525.0 million of financing that
consisted of three separate credit facilities (collectively, the
Credit Facilities): (i) a $350.0 million
revolving credit facility (the Revolving Loan),
(ii) two $50.0 million term loan facilities provided
equally by Cerberus Partners, L.P. and SSC (the Term
Loans), and (iii) an amended and restated
$75.0 million senior subordinated convertible term loan
facility, initially entered into by VCDS on March 15, 2000,
which is held equally by Cerberus Partners, L.P. and SSC (the
Convertible Loan). The Company is a co-borrower
under the Revolving Loan and the Term Loans, and is a guarantor
under the Convertible Loan. The Company, the other co-borrowers
and the guarantors are jointly and severally liable for
liabilities incurred under the Revolving Loan and the Term
Loans. All of the Credit Facilities are guaranteed by RVI.
The Company has reflected in the financial statements its direct
obligations under the Revolving Loan as it relates to the
borrowings thereunder secured by its assets. The Term Loans and
Convertible Loan are not reflected on the Companys
financial statements as they are recorded on consolidated
financial statements of RVI. 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 Loan, the borrowing base formula applicable
to the Company is based on the value of the Companys
inventory and accounts receivable. Primary security for the
Revolving Loan is provided in part by a first priority lien on
all of the inventory and accounts receivable of the Company and
other borrowers thereunder, as well as certain notes and payment
intangibles. Subject to the Intercreditor Agreement, the
Revolving Loan also has the substantial equivalent of a second
priority-perfected security interest in all of the first
priority collateral securing the Term Loans. Interest on
borrowings under the Revolving Loan is calculated at the
banks base rate plus 0% to 0.5%, or at the Eurodollar
offer rate plus 2.00% to 2.75%, depending upon the level of
average excess availability that the Company and the other
borrowers maintain. The interest rate on borrowings under the
Revolving Loan was 3.2% and 3.6% at January 31, 2004 and
February 1, 2003, respectively. As of January 31,
2004, the maturity date of the Revolving Loan was June 11,
2005.
At January 31, 2004, the outstanding borrowings for the
Company and VCDS and their affiliates under the Credit
Facilities were: Revolving Loan, $125 million; Term Loans,
$100 million; and Convertible Loan, $75 million.
The Company is not subject to any financial covenants; however,
the Credit Facilities contain numerous restrictive covenants
relating to the management and operation of RVI and its
subsidiaries, including the Company. These non-financial
covenants include, among other restrictions, limitations on
indebtedness, guarantees, mergers, acquisitions, fundamental
corporate changes, financial reporting requirements, budget
F-14
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approval, disposition of assets, investments, loans and
advances, liens, dividends, stock purchases, transactions with
affiliates, issuance of securities and the payments of and
modifications to debt instruments under these arrangements.
The weighted average interest rate on borrowings under the
Companys Credit Facilities during fiscal years 2003 and
2002 were 3.3% and 4.0%, respectively. There were no borrowings
in 2001. However, the Company was allocated interest expense
from Retail Ventures through June 2002. Interest expense
allocated was $2.0 million and $3.6 million in fiscal
years 2002 and 2001, respectively. The total interest expense
was $2.7 million, $3.9 million and $3.6 million
and included fees, such as commitment and line of credit fees,
of $0.6 million, $1.8 million and $2.1 million
for fiscal 2003, 2002 and 2001, respectively.
On June 11, 2002, VCDS refinanced its previous financing
arrangement. The Company recorded $0.2 million loss in
extinguishment of debt resulting from the write-off of deferred
financing costs, as their allocated portion. This write-off is
included in interest expense, net.
5. INCOME TAX PROVISION
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,711
|
|
|
$
|
7,019
|
|
|
$
|
2,953
|
|
|
State and local
|
|
|
1,770
|
|
|
|
2,543
|
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,481
|
|
|
|
9,562
|
|
|
|
6,050
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(27
|
)
|
|
|
(2,274
|
)
|
|
|
(2,428
|
)
|
|
State and local
|
|
|
53
|
|
|
|
(1,441
|
)
|
|
|
(2,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
(3,715
|
)
|
|
|
(5,265
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
10,507
|
|
|
$
|
5,847
|
|
|
$
|
785
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the expected income taxes based upon the
statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
February 2,
|
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Income tax expense at federal statutory rate
|
|
$
|
8,860
|
|
|
$
|
4,868
|
|
|
$
|
358
|
|
State and local taxes net
|
|
|
1,188
|
|
|
|
651
|
|
|
|
54
|
|
Non-deductible amortization
|
|
|
298
|
|
|
|
298
|
|
|
|
298
|
|
WOTC net
|
|
|
(131
|
)
|
|
|
(108
|
)
|
|
|
(23
|
)
|
Officer compensation
|
|
|
169
|
|
|
|
|
|
|
|
|
|
Meals, entertainment and other
|
|
|
123
|
|
|
|
138
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,507
|
|
|
$
|
5,847
|
|
|
$
|
785
|
|
|
|
|
|
|
|
|
|
|
|
F-15
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the net deferred tax asset as of
January 31, 2004 and February 1, 2003 are:
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Basis differences in inventory
|
|
$
|
3,513
|
|
|
$
|
7,738
|
|
|
State and local tax NOLs
|
|
|
5,018
|
|
|
|
5,018
|
|
|
AMT Credit Carryforward
|
|
|
1,634
|
|
|
|
1,634
|
|
|
Amortization
|
|
|
622
|
|
|
|
453
|
|
|
Accrued rent
|
|
|
4,995
|
|
|
|
3,114
|
|
|
Accrued bonus
|
|
|
726
|
|
|
|
657
|
|
|
Other
|
|
|
2,041
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
18,549
|
|
|
|
19,057
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
(1,672
|
)
|
|
|
(733
|
)
|
|
Basis differences in property and equipment
|
|
|
(526
|
)
|
|
|
(3,859
|
)
|
|
Accrued expenses
|
|
|
(773
|
)
|
|
|
|
|
|
State and local taxes
|
|
|
(3,080
|
)
|
|
|
(1,941
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,051
|
)
|
|
|
(6,533
|
)
|
|
|
|
|
|
|
|
Total net
|
|
$
|
12,498
|
|
|
$
|
12,524
|
|
|
|
|
|
|
|
|
The net deferred tax asset is recorded in the Companys
balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Current deferred tax asset
|
|
$
|
9,202
|
|
|
$
|
11,742
|
|
Non-current deferred tax asset
|
|
|
3,296
|
|
|
|
782
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
12,498
|
|
|
$
|
12,524
|
|
|
|
|
|
|
|
|
The Company joins in the filing of a consolidated federal income
tax return with RVI and its other subsidiaries. The allocation
of the RVI current consolidated federal income tax to its
subsidiaries is in accordance with Financial Accounting Standard
No. 109,
Accounting for Income Taxes
. RVI uses the
parent company down approach in allocating the
consolidated amount of current and deferred tax expense to its
subsidiaries.
6. OTHER BENEFIT PLANS
The Company participates in the SSC sponsored 401(k) Plan (the
Plan). Employees who attain age twenty-one are
eligible to defer compensation as of the first day of the month
following 60 days of employment and may contribute up to
thirty percent of their compensation to the Plan, on a pre-tax
basis, subject to IRS limitations. As of the first day of the
month following an employees completion of one year of
service as defined under the terms of the Plan, the Company
matches employee deferrals into the Plan, 100% on the first 3%
of eligible compensation deferred and 50% on the next 2% of
eligible compensation deferred. Additionally, the Company may
contribute a discretionary profit sharing amount to the Plan
each year. The Company incurred costs associated with the 401(k)
Plan of $0.9 million for fiscal years 2003 and 2002, and
$0.8 million for fiscal year 2001.
F-16
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain employees of the Company participated in the
Schottenstein Stores Corporation Deferred Compensation Plan
which is a non-qualified, pre-tax, income deferral plan. The
cost of the plan was not material to the financial statements.
Effective January 31, 2003, their participation in that
plan was terminated.
7. 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 Companys estimates and potential liability could
materially impact its results of operations.
The Company has entered into cross-corporate guarantees with
various financing institutions pursuant to which the Company,
Retail Ventures, Filenes Basement and Value City, jointly
and severally, guarantee payment obligations owed to these
entities under factoring arrangements they have entered into
with vendors who may provide merchandise to some or all of
Retail Ventures subsidiaries.
8. SUBSEQUENT EVENTS
During July 2004, RVI and VCDS extended the maturity dates of
the $350 million Revolving Loan and the $100 million
Term Loans by one year. As a result, the maturity dates of the
Revolving Loan and the Term Loans, which originally matured on
June 11, 2005, were extended to June 11, 2006, under
substantially the same terms and conditions.
During March 2005, the Company declared a dividend and issued a
intercompany note to Retail Ventures in the amount of
$165.0 million. The indebtedness is evidenced by a note
which is scheduled to mature in March 2020 and bears interest at
a rate equal to London Interbank Offered Rate, or LIBOR, plus
850 basis points per year.
F-17
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DSW Inc.
Schedule II Valuation and Qualifying
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charge to
|
|
|
Charges to
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Allowance deduction from asset to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Markdowns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/2/2002
|
|
|
4,714
|
|
|
|
2,050
|
|
|
|
2,290
|
|
|
|
|
|
|
|
9,054
|
|
|
2/1/2003
|
|
|
9,054
|
|
|
|
3,702
|
|
|
|
|
|
|
|
1,367
|
|
|
|
11,389
|
|
|
1/31/2004
|
|
|
11,389
|
|
|
|
3,729
|
|
|
|
|
|
|
|
3,614
|
|
|
|
11,505
|
|
Allowance for Sales Returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/2/2002
|
|
|
605
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
726
|
|
|
2/1/2003
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
619
|
|
|
1/31/2004
|
|
|
619
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
1,405
|
|
Store Closing Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/2/2002
|
|
|
1,545
|
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
1,117
|
|
|
2/1/2003
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
989
|
|
|
|
128
|
|
|
1/31/2004
|
|
|
128
|
|
|
|
1,249
|
|
|
|
|
|
|
|
574
|
|
|
|
803
|
|
F-18
DSW INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 30, 2004 AND JANUARY 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
January 31,
|
|
|
|
2004
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands, except
|
|
|
|
share amounts)
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
11,217
|
|
|
$
|
7,076
|
|
|
Accounts receivable
|
|
|
6,704
|
|
|
|
2,264
|
|
|
Inventories
|
|
|
198,459
|
|
|
|
150,019
|
|
|
Prepaid expenses and other assets
|
|
|
9,015
|
|
|
|
8,847
|
|
|
Deferred income taxes
|
|
|
11,998
|
|
|
|
9,202
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
237,393
|
|
|
|
177,408
|
|
|
|
|
|
|
|
|
ADVANCES TO AFFILIATES
|
|
|
14,061
|
|
|
|
1,440
|
|
PROPERTY AND EQUIPMENT At cost:
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
74,259
|
|
|
|
58,729
|
|
|
Leasehold improvements
|
|
|
67,937
|
|
|
|
60,255
|
|
|
Capital leases furniture, fixtures and equipment
|
|
|
1,227
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
Total property and equipment at cost
|
|
|
143,423
|
|
|
|
120,211
|
|
|
Less accumulated depreciation and amortization
|
|
|
(58,178
|
)
|
|
|
(46,068
|
)
|
|
|
|
|
|
|
|
Property and equipment net
|
|
|
85,245
|
|
|
|
74,143
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
25,899
|
|
|
|
25,899
|
|
TRADENAMES AND OTHER INTANGIBLES Net
|
|
|
7,295
|
|
|
|
7,943
|
|
DEFERRED INCOME TAXES AND OTHER ASSETS
|
|
|
5,986
|
|
|
|
4,351
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
375,879
|
|
|
$
|
291,184
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
72,270
|
|
|
$
|
52,237
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
6,733
|
|
|
|
7,215
|
|
|
|
Taxes
|
|
|
13,140
|
|
|
|
9,940
|
|
|
|
Other
|
|
|
11,173
|
|
|
|
4,634
|
|
|
Current maturities of long-term obligations
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
103,316
|
|
|
|
74,164
|
|
LONG-TERM OBLIGATIONS Net of current maturities
|
|
|
55,000
|
|
|
|
35,000
|
|
OTHER NONCURRENT LIABILITIES
|
|
|
47,537
|
|
|
|
38,149
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Common stock no par value:
|
|
|
|
|
|
|
|
|
|
|
Authorized 500 shares
|
|
|
|
|
|
|
|
|
|
|
Outstanding 410.09 shares
|
|
|
|
|
|
|
|
|
|
|
Paid in capital
|
|
|
101,442
|
|
|
|
101,442
|
|
|
|
Retained earnings
|
|
|
68,584
|
|
|
|
42,429
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
170,026
|
|
|
|
143,871
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
375,879
|
|
|
$
|
291,184
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
F-19
DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED OCTOBER 30, 2004 AND NOVEMBER 1,
2003
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
November 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
NET SALES
|
|
$
|
729,406
|
|
|
$
|
605,463
|
|
COST OF SALES
|
|
|
(517,427
|
)
|
|
|
(451,848
|
)
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
211,979
|
|
|
|
153,615
|
|
OPERATING EXPENSES
|
|
|
(165,751
|
)
|
|
|
(132,733
|
)
|
|
|
|
|
|
|
|
OPERATING PROFIT
|
|
|
46,228
|
|
|
|
20,882
|
|
INTEREST EXPENSE Net
|
|
|
(2,460
|
)
|
|
|
(2,185
|
)
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
43,768
|
|
|
|
18,697
|
|
INCOME TAX PROVISION
|
|
|
(17,613
|
)
|
|
|
(7,750
|
)
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
26,155
|
|
|
$
|
10,947
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-20
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
NINE MONTHS ENDED OCTOBER 30, 2004 AND NOVEMBER 1,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Retained
|
|
|
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
|
|
(Unaudited)
|
|
BALANCE February 1, 2003
|
|
|
410.09
|
|
|
|
101,442
|
|
|
$
|
27,622
|
|
|
$
|
129,064
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
10,947
|
|
|
|
10,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE November 1, 2003
|
|
|
410.09
|
|
|
|
101,442
|
|
|
|
38,569
|
|
|
|
140,011
|
|
BALANCE January 31, 2004
|
|
|
410.09
|
|
|
|
101,442
|
|
|
|
42,429
|
|
|
|
143,871
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
26,155
|
|
|
|
26,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE October 30, 2004
|
|
|
410.09
|
|
|
|
101,442
|
|
|
$
|
68,584
|
|
|
$
|
170,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-21
DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 30, 2004 AND NOVEMBER 1,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
November 1,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,155
|
|
|
$
|
10,947
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,770
|
|
|
|
6,888
|
|
|
|
Amortization of debt issuance costs
|
|
|
382
|
|
|
|
664
|
|
|
|
Deferred income taxes
|
|
|
(3,959
|
)
|
|
|
1,695
|
|
|
|
Loss on disposal of assets
|
|
|
52
|
|
|
|
269
|
|
|
|
Change in working capital, assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(4,440
|
)
|
|
|
1,626
|
|
|
|
|
Inventories
|
|
|
(48,440
|
)
|
|
|
(12,988
|
)
|
|
|
|
Prepaid expenses and other assets
|
|
|
(1,022
|
)
|
|
|
(2,243
|
)
|
|
|
|
Advances to/from affiliates
|
|
|
(12,621
|
)
|
|
|
1,749
|
|
|
|
|
Accounts payable
|
|
|
20,033
|
|
|
|
3,815
|
|
|
|
|
Proceeds from lease incentives
|
|
|
10,396
|
|
|
|
4,294
|
|
|
|
|
Other noncurrent liabilities
|
|
|
(1,008
|
)
|
|
|
(1,157
|
)
|
|
|
|
Accrued expenses
|
|
|
8,741
|
|
|
|
(3,853
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,039
|
|
|
|
11,706
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(19,760
|
)
|
|
|
(11,258
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,760
|
)
|
|
|
(11,258
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Payments of capital lease obligations
|
|
|
(138
|
)
|
|
|
(152
|
)
|
|
Net increase in revolving credit facility
|
|
|
20,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
19,862
|
|
|
|
4,848
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND EQUIVALENTS
|
|
|
4,141
|
|
|
|
5,296
|
|
CASH AND EQUIVALENTS Beginning of year
|
|
|
7,076
|
|
|
|
3,481
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS End of year
|
|
$
|
11,217
|
|
|
$
|
8,777
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,166
|
|
|
$
|
1,471
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
3,279
|
|
|
$
|
735
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-22
DSW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OPERATIONS
DSW Inc. and its wholly-owned subsidiary are herein referred to
collectively as the Company. At October 30, 2004, the
Companys common stock was wholly-owned by Value City
Department Stores, Inc. which in turn was a wholly-owned
subsidiary of Retail Ventures, Inc. (RVI). RVI is
listed on the New York Stock Exchange trading under the ticker
symbol RVI. As a result of a reorganization within
RVI, the Company became a wholly-owned subsidiary of RVI on
January 1, 2005. The Company operates in a single segment
and sells better-branded footwear and accessories. As of
October 30, 2004, there were a total of 167 stores located
throughout the United States. The Company also supplies
footwear, under supply arrangements, to 21 Filenes
Basement stores and 204 locations for other non-related
retailers in the United States.
2. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements should
be read in conjunction with the 2003 Annual Report.
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.
3. LONG-TERM OBLIGATIONS
During July, 2004 RVI and VCDS extended the maturity dates of
both the $350 million Revolving Credit Agreement and the
$100 million Term Loans by one year. As a result, the
maturity dates of the Revolving Credit Agreement and the Term
Loans which originally matured on June 11, 2005, were
extended to June 11, 2006, under substantially the same
terms and conditions.
4. 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
VIEs expected losses or residual returns if they occur.
FIN 46 provides certain exceptions to these rules, relating to
qualifying special purpose entities (QSPEs) 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 Companys consolidated
financial statements or disclosures.
F-23
DSW INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
5. 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 Companys estimates and potential liability could
materially impact its results of operations.
F-24
Shares
Class A Common Shares
PROSPECTUS
,
2005
Lehman
Brothers
CIBC World
Markets
Johnson Rice &
Company L.L.C.
(GLOBE WATERMARK)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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Item 13.
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Other Expenses of Issuance and Distribution
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The following table sets forth the estimated fees and expenses
(except for the Securities and Exchange Commission registration
fee, the National Association of Securities Dealers, Inc. filing
fee and the NYSE, Inc. listing fee) payable by the registrant in
connection with the distribution of the Class A Common
Shares:
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Securities and Exchange Commission registration fee
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$
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21,775
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National Association of Securities Dealers, Inc. filing fee
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$
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19,000
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NYSE listing fee
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*
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Printing and engraving costs
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*
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|
Legal fees and expenses
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*
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|
Accountants fees and expenses
|
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*
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Blue sky qualification fees and expenses
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*
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Transfer agent fees
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*
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Miscellaneous
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*
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Total
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$
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*
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*
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To be furnished by amendment.
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Item 14.
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Indemnification of Directors and Officers
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Ohio Revised Code
Division (E) of Section 1701.13 of the Ohio Revised
Code governs indemnification by a corporation and provides as
follows:
(E)(1) A corporation may indemnify or agree to indemnify
any person who was or is a party, or is threatened to be made a
party, to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or
investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director,
trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture,
trust or other enterprise, against expenses, including
attorneys fees, judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to
any criminal action or proceeding, if he had no reasonable cause
to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did
not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any
person who was or is a party, or is threatened to be made a
party, to any threatened, pending, or completed action or suit
by or in the right of the corporation to procure a judgment in
its favor, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director,
trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture,
trust, or other enterprise, against expenses, including
attorneys fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or
suit, if he acted in good faith and in a manner he reasonably
believed to be in or
II-1
not opposed to the best interests of the corporation, except
that no indemnification shall be made in respect of any of the
following:
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(a) Any claim, issue, or matter as to which such person is
adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless, and only to
the extent that, the court of common pleas or the court in which
such action or suit was brought determines, upon application,
that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court
of common pleas or such other court shall deem proper;
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(b) Any action or suit in which the only liability asserted
against a director is pursuant to section 1701.95 of the
Revised Code.
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(3) To the extent that a director, trustee, officer,
employee, member, manager, or agent has been successful on the
merits or otherwise in defense of any action, suit, or
proceeding referred to in division (E)(1) or (2) of this
section, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses, including attorneys
fees, actually and reasonably incurred by him in connection with
the action, suit, or proceeding.
(4) Any indemnification under division (E)(1) or
(2) of this section, unless ordered by a court, shall be
made by the corporation only as authorized in the specific case,
upon a determination that indemnification of the director,
trustee, officer, employee, member, manager, or agent is proper
in the circumstances because he has met the applicable standard
of conduct set forth in division (E)(1) or (2) of this
section. Such determination shall be made as follows:
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(a) By a majority vote of a quorum consisting of directors
of the indemnifying corporation who were not and are not parties
to or threatened with the action, suit, or proceeding referred
to in division (E)(1) or (2) of this section;
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(b) If the quorum described in division (E)(4)(a) of this
section is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by
independent legal counsel other than an attorney, or a firm
having associated with it an attorney, who has been retained by
or who has performed services for the corporation or any person
to be indemnified within the past five years;
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(c) By the shareholders;
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(d) By the court of common pleas or the court in which the
action, suit, or proceeding referred to in division (E)(1) or
(2) of this section was brought.
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Any determination made by the disinterested directors under
division (E)(4)(a) or by independent legal counsel under
division (E)(4)(b) of this section shall be promptly
communicated to the person who threatened or brought the action
or suit by or in the right of the corporation under division
(E)(2) of this section, and, within ten days after receipt of
such notification, such person shall have the right to petition
the court of common pleas or the court in which such action or
suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a directors act or
omission that is the subject of an action, suit, or proceeding
referred to in division (E)(1) or (2) of this section, the
articles or the regulations of a corporation state, by specific
reference to this division, that the provisions of this division
do not apply to the corporation and unless the only liability
asserted against a director in an action, suit, or proceeding
referred to in division (E)(1) or (2) of this section is
pursuant to section 1701.95 of the Revised Code, expenses,
including attorneys fees, incurred by a director in
defending the action, suit, or proceeding shall be paid by the
corporation as they are incurred, in advance of the final
disposition of the action, suit, or proceeding, upon receipt of
an undertaking by or on behalf of the director in which he
agrees to do both of the following:
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(i) Repay such amount if it is proved by clear and
convincing evidence in a court of competent jurisdiction that
his action or failure to act involved an act or omission
undertaken with deliberate
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II-2
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intent to cause injury to the corporation or undertaken with
reckless disregard for the best interests of the corporation;
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(ii) Reasonably cooperate with the corporation concerning
the action, suit, or proceeding.
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(b) Expenses, including attorneys fees, incurred by a
director, trustee, officer, employee, member, manager, or agent
in defending any action, suit, or proceeding referred to in
division (E)(1) or (2) of this section, may be paid by the
corporation as they are incurred, in advance of the final
disposition of the action, suit, or proceeding, as authorized by
the directors in the specific case, upon receipt of an
undertaking by or on behalf of the director, trustee, officer,
employee, member, manager, or agent to repay such amount, if it
ultimately is determined that he is not entitled to be
indemnified by the corporation.
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(6) The indemnification authorized by this section shall
not be exclusive of, and shall be in addition to, any other
rights granted to those seeking indemnification under the
articles, the regulations, any agreement, a vote of shareholders
or disinterested directors, or otherwise, both as to action in
their official capacities and as to action in another capacity
while holding their offices or positions, and shall continue as
to a person who has ceased to be a director, trustee, officer,
employee, member, manager, or agent and shall inure to the
benefit of the heirs, executors, and administrators of such a
person.
(7) A corporation may purchase and maintain insurance or
furnish similar protection, including, but not limited to, trust
funds, letters of credit, or self-insurance, on behalf of or for
any person who is or was a director, officer, employee, or agent
of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited liability company, or a
partnership, joint venture, trust, or other enterprise, against
any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or
not the corporation would have the power to indemnify him
against such liability under this section. Insurance may be
purchased from or maintained with a person in which the
corporation has a financial interest.
(8) The authority of a corporation to indemnify persons
pursuant to division (E)(1) or (2) of this section does not
limit the payment of expenses as they are incurred,
indemnification, insurance, or other protection that may be
provided pursuant to divisions (E)(5), (6), and (7) of this
section. Divisions (E)(1) and (2) of this section do not
create any obligation to repay or return payments made by the
corporation pursuant to division (E)(5), (6), or (7).
(9) As used in division (E) of this section,
corporation includes all constituent entities in a
consolidation or merger and the new or surviving corporation, so
that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entity,
or is or was serving at the request of such constituent entity
as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or
for profit, a limited liability company, or a partnership, joint
venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving
corporation as he would if he had served the new or surviving
corporation in the same capacity.
Section 5 of DSWs Code of Regulations governs
indemnification and insurance by DSW and provides as follow:
Section 5.01. Indemnification.
The
corporation shall indemnify each person who was or is a party or
is threatened to be made a party to, or is or was involved or is
threatened to be involved (as a deponent, witness or otherwise)
in, any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, arbitrative, administrative
or investigative (including, without limitation, any threatened,
pending or completed action, suit or proceeding by or in the
right of the corporation)(hereinafter a Proceeding),
by reason of the fact that such person is or was a director or
officer of the corporation or is or was serving at the request
of the corporation as a director, trustee, officer, partner,
member or manager, of another corporation, limited
II-3
liability company, partnership, joint venture, trust, employee
benefit plan or other enterprise (hereinafter an
Indemnitee), against all expenses (including,
without limitation, attorneys fees, filing fees, court
reporters fees, expert witnesses fees and transcript
costs)(hereinafter Expenses), judgments, fines,
excise taxes assessed with respect to an employee benefit plan,
penalties and amounts paid in settlement (such judgments, fines,
excise taxes, penalties and amounts paid in settlement are
hereinafter referred to as Liabilities) actually and
reasonably incurred by the Indemnitee in connection with any
Proceeding, unless and only to the extent that it is determined,
as provided in Section 5.04, that any such indemnification
should be denied or limited. Notwithstanding the foregoing,
except as to claims to enforce rights conferred on an Indemnitee
by this Article Five that may be brought, initiated or
otherwise asserted by the Indemnitee pursuant to
Section 5.07, the corporation shall not be required by this
Section 5.01 to indemnify an Indemnitee in connection with
any claim (including, without limitation, any original claim,
counterclaim, cross-claim or third-party claim) in a Proceeding,
which claim is brought, initiated or otherwise asserted by the
Indemnitee, unless the bringing, initiation or assertion of the
claim in the Proceeding by the Indemnitee was authorized or
ratified by the Board of Directors of the corporation.
Section 5.02. Court-Approved Indemnification.
Anything contained in Section 5.01 to the contrary
notwithstanding, the corporation shall not indemnify an
Indemnitee (A) in such Indemnitees capacity as a
director of the corporation in respect of any claim, issue or
matter asserted in a Proceeding by or in the right of the
corporation as to which the Indemnitee shall have been adjudged
to be liable to the corporation for an act or omission
undertaken by such Indemnitee in such capacity with deliberate
intent to cause injury to the corporation or with reckless
disregard for the best interests of the corporation, (B) in
such Indemnitees capacity other than that of director of
the corporation in respect of any claim, issue or matter
asserted in a Proceeding by or in the right of the corporation
as to which the Indemnitee shall have been adjudged to be liable
to the corporation for negligence or misconduct or (C) in
any Proceeding by or in the right of the corporation in which
the only liability is asserted pursuant to Section 1701.95
of the Ohio Revised Code against the Indemnitee, unless and only
to the extent that the court of common pleas in the county in
Ohio in which the principal office of the corporation is located
or the court in which a Proceeding is brought (each, a
Designated Court) shall determine, upon application
of either the Indemnitee or the corporation, that, despite the
adjudication or assertion of such liability, and in view of all
the circumstances of the case, the Indemnitee is fairly and
reasonably entitled to such indemnity as the Designated Court
shall deem proper. In the event of any such determination by the
Designated Court, the corporation shall timely pay any
indemnification determined by the Designated Court to be proper
as contemplated by this Section 5.02.
Section 5.03. Indemnification for Expenses When
Successful on the Merits or Otherwise.
(A) Anything contained in this Article Five to the
contrary notwithstanding, to the extent that an Indemnitee has
been successful on the merits or otherwise in defense of any
Proceeding or in defense of any claim, issue or matter asserted
therein, the Indemnitee shall be promptly indemnified by the
corporation against all Expenses actually and reasonably
incurred by Indemnitee in connection therewith.
(B) Without limiting the generality of the foregoing, an
Indemnitee claiming indemnification under Section 5.03
shall be deemed to have been successful on the merits or
otherwise in defense of any Proceeding or in defense of any
claim, issue or matter asserted therein, if such Proceeding
shall be terminated as to such Indemnitee, with or without
prejudice, without the entry of a judgment or order against the
Indemnitee, without a conviction of the Indemnitee, without the
imposition of a fine or penalty upon the Indemnitee, and without
the Indemnitees payment or agreement to pay any other
Liability (whether or not any such termination is based upon a
judicial or other determination of lack of merit of the claims
made against the Indemnitee or otherwise results in a
vindication of the Indemnitee).
Section 5.04. Determination.
(A) Any indemnification covered by Section 5.01 and
that is not precluded by Section 5.02 shall be timely paid
by the corporation unless and only to the extent that a
determination is made that such indemnification shall be denied
or limited because (i) the Indemnitee did not act in good
faith and in a manner which the Indemnitee reasonably believed
to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal Proceeding, the
Indemnitee had reasonable cause to believe that
II-4
such Indemnitees conduct was unlawful, or (ii) the
Indemnitee did not actually or reasonably incur an Expense or
Liability to be indemnified.
(B) Any indemnification covered by Section 5.03 shall
be timely paid by the corporation unless and only to the extent
that a determination is made that such indemnification shall be
denied or limited because the Indemnitee did not actually or
reasonably incur the Expense to be indemnified.
(C) Each determination required or permitted by this
Section 5.04 may be made only by a Designated Court.
Section 5.05. Presumptions.
Upon making any
request for indemnification under this Article Five, the
Indemnitee shall be presumed to be entitled to indemnification
under this Article Five, and the corporation shall have the
burden of proof in the making of any determination contrary to
such presumption by clear and convincing evidence. Without
limiting the generality of the foregoing, for purposes of this
Article Five, it shall be presumed that (A) the
Indemnitee acted in good faith and in a manner which the
Indemnitee reasonably believed to be in or not opposed to the
best interests of the corporation, (B) with respect to any
criminal Proceeding, the Indemnitee had no reasonable cause to
believe that such Indemnitees conduct was unlawful and
(C) each Liability and Expense for which indemnification is
claimed was actually and reasonably incurred by the Indemnitee.
The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut any such presumption.
Section 5.06. Advances for Expenses.
The
Expenses incurred by an Indemnitee in defending a Proceeding
shall be paid by the corporation in advance of the final
disposition of such Proceeding at the request of the Indemnitee
within thirty days after the receipt by the corporation of a
written statement or statements from the Indemnitee requesting
such advance or advances from time to time. Such statement or
statements shall reasonably evidence the Expenses incurred by
the Indemnitee in connection with the defense of the Proceeding
and shall include or be accompanied by a written undertaking by
or on behalf of such Indemnitee to repay such amount if it shall
ultimately be determined that the Indemnitee is not entitled to
be indemnified by the corporation in respect of such Expense.
Section 5.07. Right of Indemnitee to Bring
Suit.
If (A) a claim for indemnification under this
Article Five is not paid in full by the corporation within
sixty days after a written claim has been received by the
corporation or (B) a claim for advancement of Expenses
under Section 5.06 is not paid in full by the corporation
within thirty days after a written claim has been received by
the corporation, the Indemnitee may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the
claim and, if successful in whole or in part, the Indemnitee
shall be entitled to be indemnified for all the Expenses
actually and reasonably incurred by the Indemnitee in
prosecuting such claim in enforcing the Indemnitees rights
under this Article Five.
Section 5.08. Article Five Not
Exclusive.
The indemnification provided by this
Article Five shall not be exclusive of, and shall be in
addition to, any other rights to which any person seeking
indemnification may be entitled under the articles, the
regulations, any agreement, a vote of shareholders or
disinterested directors, or otherwise, both as to action in such
persons official capacity and as to action in another
capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, trustee,
partner, member or manager and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 5.09. Insurance.
The corporation may
purchase and maintain insurance, or furnish similar protection,
including but not limited to trust funds, letters of credit, or
self-insurance, for or on behalf of any person who is or was a
director, officer, employee, or agent of the corporation, or is
or was serving at the request of the corporation as a director,
trustee, officer, employee, partner, member, manager or agent of
another corporation, limited liability company, partnership,
joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such
persons status as such, whether or not the corporation
would have the obligation or the
II-5
power to indemnify such person against such liability under the
provisions of this Article Five. Insurance may be purchased from
or maintained with a person in which the corporation has a
financial interest.
Section 5.10. Venue; Jurisdiction.
(A) Any action, suit or proceeding to determine a right to
indemnification under this Article Five may be maintained
by an Indemnitee claiming such indemnification or by the
corporation only in a Designated Court. Each of the corporation
and, by claiming or accepting such indemnification, any such
Indemnitee consents to the exercise of jurisdiction by a
Designated Court in any such action, suit or proceeding.
(B) Any action, suit or proceeding to determine
(i) the obligation of an Indemnitee under this
Article Five to repay any Expenses previously advanced by
the corporation or (ii) the obligation of the corporation
under this Article Five to advance any Expenses may be
maintained by the corporation or by such Indemnitee only in a
Designated Court. Each of the corporation and, by claiming or
accepting such advancements, any such Indemnitee consents to the
exercise of jurisdiction by a Designated Court in any such
action, suit or proceeding.
The registrant has also entered into indemnification agreements
with its directors and officers.
Indemnification Agreements
DSW will enter into indemnification agreements with its
directors and executive officers. Pursuant to the
indemnification agreements, DSW will agree to indemnify an
indemnitee to the greatest extent permitted by Ohio law as set
forth above and in its code of regulations. Notwithstanding the
foregoing, an indemnitee will not be entitled to indemnification
under the indemnification agreement:
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with respect to any claim brought or made by an indemnitee in a
proceeding, unless the bringing or making of such claim has been
approved or ratified by the board of directors; provided,
however, that the foregoing does not apply to any claim brought
or made by an indemnitee to enforce a right of an indemnitee
under the indemnification agreement;
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for expenses incurred by an indemnitee with respect to any
action instituted by or in the name of DSW against the
indemnitee, if and to the extent that a court of competent
jurisdiction declares or otherwise determines in a final,
unappealable judgment that each of the material defenses
asserted by such indemnitee was made in bad faith or was
frivolous;
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for expenses and other liabilities arising from the purchase and
sale by an indemnitee of securities in violation of
Section 16(b) of the Securities Exchange Act of 1934, or
any similar state or successor statute; and
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for expenses and other liabilities if and to the extent that a
court of competent jurisdiction declares or otherwise determines
in a final, unappealable judgment that DSW is prohibited by
applicable law from making such indemnification payment or that
such indemnification payment is otherwise unlawful.
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Insurance
In addition, DSW will provide insurance coverage to its
directors and officers against certain liabilities which might
be incurred by them in such capacity. Initially, such insurance
coverage will be provided through the shared services agreement
to be entered into with Retail Ventures.
II-6
Item 16.
Exhibits and
Financial Statement Schedules
A. Exhibits
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Exhibit
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No.
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Description
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1
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.1
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Form of Underwriting Agreement.*
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3
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.1
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Amended Articles of Incorporation of the registrant.*
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3
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.2
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Amended and Restated Code of Regulations of the registrant.*
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4
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.1
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Specimen Class A Common Shares certificate.*
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4
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.2
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Registration Rights Agreement with Cerberus Partners, L.P.,
Schottenstein Stores Corporation and Back Bay Capital Funding
LLC.*
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4
|
.3
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Form of Exchange Agreement.*
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5
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.1
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Opinion of Vorys, Sater, Seymour and Pease LLP.*
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8
|
.1
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Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding certain tax matters.*
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10
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.1
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Corporate Services Agreement, dated June 12, 2002, between
Retail Ventures and SSC. Incorporated by reference to
Exhibit 10.6 to Retail Ventures Form 10-Q (file
no. 1-10767) filed June 18, 2002.
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10
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.2
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Amendment to Corporate Services Agreement, between Retail
Ventures and SSC.*
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10
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.3
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|
Lease, dated March 22, 2000, by and between East Fifth
Avenue, LLC, an affiliate of SSC, as landlord, and Shonac, as
tenant, re: warehouse facility and corporate headquarters.
Incorporated by reference to Exhibit 10.60 to Retail
Ventures Form 10-K (file no. 1-10767) filed
April 28, 2000.
|
|
10
|
.4
|
|
Employment Agreement between Deborah L. Ferrée and DSW.
|
|
10
|
.5
|
|
Employment Agreement between Peter Z. Horvath and DSW.*
|
|
10
|
.6
|
|
Employment Agreement between Douglas J. Probst and DSW.*
|
|
10
|
.7
|
|
Employment Agreement, dated June 21, 2000, between James A.
McGrady and Retail Ventures. Incorporated by reference to
Exhibit 10.46 to Retail Ventures Form 10-K (file
no. 1-10767) filed May 4, 2001.
|
|
10
|
.8
|
|
Employment Agreement, dated as of April 29, 2004, between
Julia A. Davis and Retail Ventures. Incorporated by reference to
Exhibit 10.51 to Form 10-K (File no. 1-10767)
filed April 29, 2004.
|
|
10
|
.9
|
|
Employment Agreement dated February 3, 2002 between John C.
Rossler and Retail Ventures. Incorporated by reference to
Exhibit 10 to Retail Ventures Form 10-Q (file
no. 1-10767) filed September 12, 2002.
|
|
10
|
.10
|
|
Employment Agreement, dated February 3, 2002, between Edwin
J. Kozlowski and Retail Ventures. Incorporated by reference to
Exhibit 10.43 to Retail Ventures Form 10-K (file
no. 1-10767) filed May 1, 2003.
|
|
10
|
.11
|
|
New Secured Revolving Credit Facility of DSW.*
|
|
10
|
.12
|
|
Loan and Security Agreement, dated as of June 11, 2002,
between Retail Ventures, as Borrowers, and National City
Business Credit Finance, Inc., as Administrative Agent for the
ratable benefit of the Revolving Credit Lenders. Incorporated by
reference to Exhibit 10.1 to Retail Ventures
Form 10-Q (file no. 1-10767) filed June 18, 2002.
|
|
10
|
.13
|
|
First Amendment to Loan and Security Agreement, dated as of
October 7, 2003, between Value City Department Stores,
Inc., as Agent for the Borrowers, and National City Business
Credit Finance, Inc., as Administrative Agent for the ratable
benefit of the Revolving Credit Lenders. Incorporated by
reference to Exhibit 10(a) to Retail Ventures
Form 8-K (file No. 1-10767) filed October 8, 2003.
|
|
10
|
.14
|
|
Second Amendment to Loan and Security Agreement, dated as of
July 29, 2004. Incorporated by reference to
Exhibit 10.1 to Retail Ventures Form 10-Q (file
No. 1-10767) filed September 8, 2004.
|
|
10
|
.15
|
|
Joinder and Third Amendment to Loan and Security Agreement,
dated December 29, 2004. Incorporated by reference to
Exhibit 10.1 of Retail Ventures Form 8-K (file
no. 1-10767) filed January 4, 2005.
|
|
10
|
.16
|
|
Financing Agreement, dated as of June 11, 2002, by and
among Retail Ventures, as Borrowers and Cerberus Partners, L.P.
and the Lenders from time to time party thereto. Incorporated by
reference to Exhibit 10.2 to Retail Ventures
Form 10-Q (file no. 1-10767) filed June 18, 2002.
|
II-7
|
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
|
Description
|
|
|
|
|
|
10
|
.17
|
|
First Amendment to the Financing Agreement, dated as of
October 7, 2003, by and among Value City Department Stores,
Inc., Shonac Corporation, DSW Shoe Warehouse, Inc., Gramex
Retail Stores, Inc., Filenes Basement, Inc., GB Retailers,
Inc., Value City Limited Partnership, Value City of Michigan,
Inc., J.S. Overland Delivery, Inc., Value City Department Stores
Services, Inc., Westerville Road GP, Inc. and Westerville Road
LP, Inc., Retail Ventures, Inc., Retail Ventures Jewelry, Inc.,
Retail Ventures Services, Inc., and Retail Ventures Imports,
Inc. (formerly known as VC Acquisition, Inc.) and Cerberus
Partners, L.P., as agent for the Lenders. Incorporated by
reference to Exhibit 10(b) to Retail Ventures
Form 8-K (file No. 1-10767) filed October 8, 2003.
|
|
10
|
.18
|
|
Second Amendment to Financing Agreement, dated July 29,
2004. Incorporated by reference to Exhibit 10.2 to Retail
Ventures Form 10-Q (file No. 1-10767) filed
September 8, 2003.
|
|
10
|
.19
|
|
Third Amendment to Financing Agreement, dated as of
December 29, 2004. Incorporated by reference to
Exhibit 10.2 of Retail Ventures Form 8-K (file
no. 1-10767) filed January 4, 2005.
|
|
10
|
.20
|
|
Fourth Amendment to Financing Agreement.*
|
|
10
|
.21
|
|
Amended and Restated Senior Convertible Loan Agreement, dated as
of June 11, 2002 by and among Value City Department Stores,
Inc., as Borrower, Shonac Corporation, DSW Shoe Warehouse, Inc.,
Gramex Retail Stores, Inc., VCM, Ltd., Filenes Basement,
Inc., GB Retailers, Inc., J.S. Overland Delivery, Inc., Value
City Department Stores Services, Inc., Value City Limited
Partnership, Value City of Michigan, Inc., Westerville Road GP,
Inc. and Westerville Road LP, Inc., as guarantors, the Lenders
from time to time party hereto, as Lenders, and Schottenstein
Stores Corporation, as Agent. Incorporated by reference to
Exhibit 10.3 to Retail Ventures Form 10-Q (file
no. 1-10767) filed June 18, 2002.
|
|
10
|
.22
|
|
Amendment No. 1 to Amended and Restated Senior Convertible
Loan Agreement, dated June 11, 2002 by and among Value City
Department Stores, Inc., as Borrower, Shonac Corporation, DSW
Shoe Warehouse, Inc., Gramex Retail Stores, Inc., VCM, Ltd.,
Filenes Basement, Inc., GB Retailers, Inc., J.S. Overland
Delivery, Inc., Value City Department Stores Services, Inc.,
Value City Limited Partnership, Value City of Michigan, Inc.,
Westerville Road GP, Inc. and Westerville Road LP, Inc., as
Guarantors, the Lenders from time to time party hereto, as
Lenders, and Schottenstein Stores Corporation, as Agent.
Incorporated by reference to Exhibit 10.3.1 to Retail
Ventures Form 10-Q (file no. 1-10767) filed
June 18, 2002.
|
|
10
|
.23
|
|
Amendment No. 2 to Amended and Restated Senior Convertible
Loan Agreement dated as of October 7, 2003, by and among
Value City Department Stores, Inc., Shonac Corporation, DSW Shoe
Warehouse, Inc., Gramex Retail Stores, Inc., Filenes
Basement, Inc., GB Retailers, Inc., Value City Limited
Partnership, Value City of Michigan, Inc., J.S. Overland
Delivery, Inc., Value City Department Stores Services, Inc.,
Westerville Road GP, Inc. and Westerville Road LP, Inc., Retail
Ventures, Inc., Retail Ventures Jewelry, Inc., Retail Ventures
Services, Inc., and Retail Ventures Imports, Inc. (formerly
known as VC Acquisition, Inc.) and Cerberus Partners, L.P., as
agent for the Lenders. Incorporated by reference to
Exhibit 10(c) to Retail Ventures Form 8-K (file
No. 001-10767) filed October 8, 2003.
|
|
10
|
.24
|
|
Amendment No. 3 to Amended and Restated Senior Convertible
Loan Agreement, dated as of December 29, 2004. Incorporated
by reference to Exhibit 10.3 of Retail Ventures
form 8-K (file no. 1-10767) filed January 4, 2005.
|
|
10
|
.25
|
|
Amended and Restated Registration Right Agreement, dated as of
June 11, 2002 by and among Value City Department Stores,
Inc. and Cerberus Partners, L.P. and Schottenstein Stores
Corporation. Incorporated by reference to Exhibit 10.4 to
Retail Ventures Form 10-Q (file no. 1-10767)
filed June 18, 2002.
|
|
10
|
.26
|
|
Form of Common Stock Purchase Warrants (with respect to the
stock of Retail Ventures) issued to Cerberus Partners, L.P. and
Schottenstein Stores Corporation. Incorporated by reference to
Exhibit 10.5 to Retail Ventures Form 10-Q (file
no. 1-10767) filed June 18, 2002.
|
|
10
|
.27
|
|
Amended and Restated Retail Ventures, Inc. 1991 Stock Option
Plan. Incorporated by reference to Exhibit 4(a) to
Amendment No. 1 to Form S-8 Registration Statement
(file no. 333-45852) filed October 16, 2003.
|
II-8
|
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
|
Description
|
|
|
|
|
|
10
|
.28
|
|
Retail Ventures Inc. Amended and Restated 2000 Stock Incentive
Plan. Incorporated by reference to Exhibit 4(a) to
Amendment No. 1 to Form S-8 Registration Statement
(file no. 333-100398) filed October 16, 2003.
|
|
10
|
.29
|
|
Retail Ventures, Inc. Employee Stock Purchase Plan. Incorporated
by reference to Exhibit 4(a) to Amendment No. 1 to
Form S-8 Registration Statement (file no. 33-46221)
filed October 16, 2003.
|
|
10
|
.30
|
|
Value City Department Stores, Inc.s Board of Directors
Resolutions dated as of July 6, 1992, adopting the terms of
the Value City Department Stores, Inc. 1992 Officer/Key Employee
Stock Bonus Plan. Incorporated by reference to Exhibit 4(a)
to Amendment No. 1 to Form S-8 Registration Statement
(file no. 33-50198) filed October 16, 2003 by Retail
Ventures.
|
|
10
|
.31
|
|
Value City Department Stores, Inc. 2003 Incentive Plan.*
|
|
10
|
.32
|
|
DSW Inc. 2005 Equity Incentive Plan.*
|
|
10
|
.33
|
|
DSW Inc. 2005 Cash Incentive Compensation Plan.*
|
|
10
|
.34
|
|
Form of Master Separation Agreement between Retail Ventures and
DSW.*
|
|
10
|
.35
|
|
Form of Shared Services Agreement between Retail Ventures and
DSW.*
|
|
10
|
.36
|
|
Form of Tax Separation Agreement between Retail Ventures and
DSW.*
|
|
10
|
.37
|
|
Form of Supply Agreement between Filenes Basement and DSW.*
|
|
11
|
.1
|
|
Statement regarding computation of per share earnings.*
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.
|
|
23
|
.2
|
|
Consent of Vorys, Sater, Seymour and Pease LLP (included in
Exhibit 5.1).*
|
|
24
|
.1
|
|
Powers of Attorney (included on the signature page hereto).
|
|
|
*
|
To be filed by amendment.
|
|
|
B.
|
Financial Statement Schedules
|
See Schedule II Valuation and Qualification
Accounts, included in the Consolidated Financial Statements in
Part I of this Registration Statement.
(1) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted against
the registrant by such director, officer or controlling person
in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(2) The undersigned registrant hereby undertakes that:
|
|
|
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
|
II-9
|
|
|
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and this offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
|
(3) The undersigned hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery thereof.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement on
Form S-1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Columbus, State of
Ohio, on March 14, 2005.
|
|
|
|
Title:
|
Executive Vice President, Chief Financial Officer, Treasurer and
Secretary
|
POWER OF ATTORNEY
We, the undersigned directors and officers of DSW Inc. (the
Company), and each of us, do hereby constitute and
appoint James A. McGrady and Julia A. Davis, or either of them,
our true and lawful attorneys-in-fact and agents, each with full
power of substitution, to do any and all acts and things in our
name and on our behalf in our capacities as directors and
officers of the Company and to execute any and all instruments
for us and in our names in the capacities indicated below, which
said attorneys-in-fact or agents, or any of them, may deem
necessary or advisable to enable the Company to comply with the
Securities Act of 1933, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission, in
connection with the filing of this Registration Statement on
Form S-1, including specifically but without limitation,
power and authority to sign for us or any of us in our names in
the capacities indicated below for the Company, any and all
amendments (including post-effective amendments) to such
Registration Statement and any related registration statements
filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended; and we do hereby ratify and confirm all that
said attorneys and agents, or their substitute or substitutes,
or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jay L. Schottenstein
Jay
L. Schottenstein
|
|
Chairman of the Board of Directors and Chief Executive
Officer
(Principal Executive Officer)
|
|
March 14, 2005
|
|
/s/ James A. McGrady
James
A. McGrady
|
|
Executive Vice President, Chief Financial Officer, Treasurer,
Secretary, and Director
(Principal Financial Officer and Principal Accounting Officer)
|
|
March 14, 2005
|
|
/s/ Heywood Wilansky
Heywood
Wilansky
|
|
Director
|
|
March 14, 2005
|
II-11
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.*
|
|
3
|
.1
|
|
Amended Articles of Incorporation of the registrant.*
|
|
3
|
.2
|
|
Amended and Restated Code of Regulations of the registrant.*
|
|
4
|
.1
|
|
Specimen Class A Common Shares certificate.*
|
|
4
|
.2
|
|
Registration Rights Agreement with Cerberus Partners, L.P.,
Schottenstein Stores Corporation and Back Bay Capital Funding
LLC.*
|
|
4
|
.3
|
|
Form of Exchange Agreement.*
|
|
5
|
.1
|
|
Opinion of Vorys, Sater, Seymour and Pease LLP.*
|
|
8
|
.1
|
|
Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding certain tax matters.*
|
|
10
|
.1
|
|
Corporate Services Agreement, dated June 12, 2002, between
Retail Ventures and SSC. Incorporated by reference to
Exhibit 10.6 to Retail Ventures Form 10-Q (file
no. 1-10767) filed June 18, 2002.
|
|
10
|
.2
|
|
Amendment to Corporate Services Agreement, between Retail
Ventures and SSC.*
|
|
10
|
.3
|
|
Lease, dated March 22, 2000, by and between East Fifth
Avenue, LLC, an affiliate of SSC, as landlord, and Shonac, as
tenant, re: warehouse facility and corporate headquarters.
Incorporated by reference to Exhibit 10.60 to Retail
Ventures Form 10-K (file no. 1-10767) filed
April 28, 2000.
|
|
10
|
.4
|
|
Employment Agreement between Deborah L. Ferrée and DSW.
|
|
10
|
.5
|
|
Employment Agreement between Peter Z. Horvath and DSW.*
|
|
10
|
.6
|
|
Employment Agreement between Douglas J. Probst and DSW.*
|
|
10
|
.7
|
|
Employment Agreement, dated June 21, 2000, between
James A. McGrady and Retail Ventures. Incorporated by
reference to Exhibit 10.46 to Retail Ventures
Form 10-K (file no. 1-10767) filed May 4, 2001.
|
|
10
|
.8
|
|
Employment Agreement, dated as of April 29, 2004, between
Julia A. Davis and Retail Ventures. Incorporated by
reference to Exhibit 10.51 to Form 10-K (File
no. 1-10767) filed April 29, 2004.
|
|
10
|
.9
|
|
Employment Agreement dated February 3, 2002 between
John C. Rossler and Retail Ventures. Incorporated by
reference to Exhibit 10 to Retail Ventures
Form 10-Q (file no. 1-10767) filed September 12,
2002.
|
|
10
|
.10
|
|
Employment Agreement, dated February 3, 2002, between
Edwin J. Kozlowski and Retail Ventures. Incorporated by
reference to Exhibit 10.43 to Retail Ventures
Form 10-K (file no. 1-10767) filed May 1, 2003.
|
|
10
|
.11
|
|
New Secured Revolving Credit Facility of DSW.*
|
|
10
|
.12
|
|
Loan and Security Agreement, dated as of June 11, 2002,
between Retail Ventures, as Borrowers, and National City
Business Credit Finance, Inc., as Administrative Agent for the
ratable benefit of the Revolving Credit Lenders. Incorporated by
reference to Exhibit 10.1 to Retail Ventures
Form 10-Q (file no. 1-10767) filed June 18, 2002.
|
|
10
|
.13
|
|
First Amendment to Loan and Security Agreement, dated as of
October 7, 2003, between Value City Department Stores,
Inc., as Agent for the Borrowers, and National City Business
Credit Finance, Inc., as Administrative Agent for the ratable
benefit of the Revolving Credit Lenders. Incorporated by
reference to Exhibit 10(a) to Retail Ventures
Form 8-K (file No. 1-10767) filed October 8, 2003.
|
|
10
|
.14
|
|
Second Amendment to Loan and Security Agreement, dated as of
July 29, 2004. Incorporated by reference to
Exhibit 10.1 to Retail Ventures Form 10-Q (file
No. 1-10767) filed September 8, 2004.
|
|
10
|
.15
|
|
Joinder and Third Amendment to Loan and Security Agreement,
dated December 29, 2004. Incorporated by reference to
Exhibit 10.1 of Retail Ventures Form 8-K (file
no. 1-10767) filed January 4, 2005.
|
|
10
|
.16
|
|
Financing Agreement, dated as of June 11, 2002, by and
among Retail Ventures, as Borrowers and Cerberus Partners, L.P.
and the Lenders from time to time party thereto. Incorporated by
reference to Exhibit 10.2 to Retail Ventures
Form 10-Q (file no. 1-10767) filed June 18, 2002.
|
|
|
|
|
|
Exhibit
|
|
|
|
No.
|
|
|
Description
|
|
|
|
|
|
10
|
.17
|
|
First Amendment to the Financing Agreement, dated as of
October 7, 2003, by and among Value City Department Stores,
Inc., Shonac Corporation, DSW Shoe Warehouse, Inc., Gramex
Retail Stores, Inc., Filenes Basement, Inc.,
GB Retailers, Inc., Value City Limited Partnership, Value
City of Michigan, Inc., J.S. Overland Delivery, Inc., Value
City Department Stores Services, Inc., Westerville Road GP, Inc.
and Westerville Road LP, Inc., Retail Ventures, Inc., Retail
Ventures Jewelry, Inc., Retail Ventures Services, Inc., and
Retail Ventures Imports, Inc. (formerly known as VC Acquisition,
Inc.) and Cerberus Partners, L.P., as agent for the
Lenders. Incorporated by reference to Exhibit 10(b) to
Retail Ventures Form 8-K (file No. 1-10767)
filed October 8, 2003.
|
|
10
|
.18
|
|
Second Amendment to Financing Agreement, dated July 29,
2004. Incorporated by reference to Exhibit 10.2 to Retail
Ventures Form 10-Q (file No. 1-10767) filed
September 8, 2003.
|
|
10
|
.19
|
|
Third Amendment to Financing Agreement, dated as of
December 29, 2004. Incorporated by reference to
Exhibit 10.2 of Retail Ventures Form 8-K (file
no. 1-10767) filed January 4, 2005.
|
|
10
|
.20
|
|
Fourth Amendment to Financing Agreement.
|
|
10
|
.21
|
|
Amended and Restated Senior Convertible Loan Agreement, dated as
of June 11, 2002 by and among Value City Department Stores,
Inc., as Borrower, Shonac Corporation, DSW Shoe Warehouse, Inc.,
Gramex Retail Stores, Inc., VCM, Ltd., Filenes Basement,
Inc., GB Retailers, Inc., J.S. Overland Delivery, Inc.,
Value City Department Stores Services, Inc., Value City Limited
Partnership, Value City of Michigan, Inc., Westerville Road GP,
Inc. and Westerville Road LP, Inc., as guarantors, the Lenders
from time to time party hereto, as Lenders, and Schottenstein
Stores Corporation, as Agent. Incorporated by reference to
Exhibit 10.3 to Retail Ventures Form 10-Q (file
no. 1-10767) filed June 18, 2002.
|
|
10
|
.22
|
|
Amendment No. 1 to Amended and Restated Senior Convertible
Loan Agreement, dated June 11, 2002 by and among Value City
Department Stores, Inc., as Borrower, Shonac Corporation, DSW
Shoe Warehouse, Inc., Gramex Retail Stores, Inc., VCM, Ltd.,
Filenes Basement, Inc., GB Retailers, Inc.,
J.S. Overland Delivery, Inc., Value City Department Stores
Services, Inc., Value City Limited Partnership, Value City of
Michigan, Inc., Westerville Road GP, Inc. and Westerville Road
LP, Inc., as Guarantors, the Lenders from time to time party
hereto, as Lenders, and Schottenstein Stores Corporation, as
Agent. Incorporated by reference to Exhibit 10.3.1 to
Retail Ventures Form 10-Q (file no. 1-10767)
filed June 18, 2002.
|
|
10
|
.23
|
|
Amendment No. 2 to Amended and Restated Senior Convertible
Loan Agreement dated as of October 7, 2003, by and among
Value City Department Stores, Inc., Shonac Corporation, DSW Shoe
Warehouse, Inc., Gramex Retail Stores, Inc., Filenes
Basement, Inc., GB Retailers, Inc., Value City Limited
Partnership, Value City of Michigan, Inc., J.S. Overland
Delivery, Inc., Value City Department Stores Services, Inc.,
Westerville Road GP, Inc. and Westerville Road LP, Inc., Retail
Ventures, Inc., Retail Ventures Jewelry, Inc., Retail Ventures
Services, Inc., and Retail Ventures Imports, Inc. (formerly
known as VC Acquisition, Inc.) and Cerberus Partners, L.P., as
agent for the Lenders. Incorporated by reference to
Exhibit 10(c) to Retail Ventures Form 8-K (file
No. 001-10767) filed October 8, 2003.
|
|
10
|
.24
|
|
Amendment No. 3 to Amended and Restated Senior Convertible
Loan Agreement, dated as of December 29, 2004. Incorporated
by reference to Exhibit 10.3 of Retail Ventures
form 8-K (file no. 1-10767) filed January 4, 2005.
|
|
10
|
.25
|
|
Amended and Restated Registration Right Agreement, dated as of
June 11, 2002 by and among Value City Department Stores,
Inc. and Cerberus Partners, L.P. and Schottenstein Stores
Corporation. Incorporated by reference to Exhibit 10.4 to
Retail Ventures Form 10-Q (file no. 1-10767)
filed June 18, 2002.
|
|
10
|
.26
|
|
Form of Common Stock Purchase Warrants (with respect to the
stock of Retail Ventures) issued to Cerberus Partners, L.P. and
Schottenstein Stores Corporation. Incorporated by reference to
Exhibit 10.5 to Retail Ventures Form 10-Q (file
no. 1-10767) filed June 18, 2002.
|
|
10
|
.27
|
|
Amended and Restated Retail Ventures, Inc. 1991 Stock Option
Plan. Incorporated by reference to Exhibit 4(a) to
Amendment No. 1 to Form S-8 Registration Statement
(file no. 333-45852) filed October 16, 2003.
|
|
10
|
.28
|
|
Retail Ventures Inc. Amended and Restated 2000 Stock Incentive
Plan. Incorporated by reference to Exhibit 4(a) to
Amendment No. 1 to Form S-8 Registration Statement
(file no. 333-100398) filed October 16, 2003.
|
|
10
|
.29
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|
Retail Ventures, Inc. Employee Stock Purchase Plan. Incorporated
by reference to Exhibit 4(a) to Amendment No. 1 to
Form S-8 Registration Statement (file no. 33-46221)
filed October 16, 2003.
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Exhibit
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No.
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|
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Description
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10
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.30
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|
Value City Department Stores, Inc.s Board of Directors
Resolutions dated as of July 6, 1992, adopting the terms of
the Value City Department Stores, Inc. 1992 Officer/Key Employee
Stock Bonus Plan. Incorporated by reference to Exhibit 4(a)
to Amendment No. 1 to Form S-8 Registration Statement
(file no. 33-50198) filed October 16, 2003 by Retail
Ventures.
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10
|
.31
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Value City Department Stores, Inc. 2003 Incentive Plan.*
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10
|
.32
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|
DSW Inc. 2005 Equity Incentive Plan.*
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10
|
.33
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|
DSW Inc. 2005 Cash Incentive Compensation Plan.*
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|
10
|
.34
|
|
Form of Master Separation Agreement between Retail Ventures and
DSW.*
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|
10
|
.35
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|
Form of Shared Services Agreement between Retail Ventures and
DSW.*
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|
10
|
.36
|
|
Form of Tax Separation Agreement between Retail Ventures and
DSW.*
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|
10
|
.37
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|
Form of Supply Agreement between Filenes Basement and DSW.*
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11
|
.1
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Statement regarding computation of per share earnings.*
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21
|
.1
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|
List of Subsidiaries.
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23
|
.1
|
|
Consent of Deloitte & Touche LLP.
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23
|
.2
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Consent of Vorys, Sater, Seymour and Pease LLP (included in
Exhibit 5.1).*
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24
|
.1
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|
Powers of Attorney (included on the signature page hereto).
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*
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To be filed by amendment.
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