| RETAIL VENTURES INC ITEM 1A RISK FACTORS Safe Harbor Under the Private Securities Litigation Reform Act of 1995 The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement |
| The Company desires to take advantage of the “safe harbor” provisions of the Act |
| Certain information in this Annual Report on Form 10-K, particularly information regarding future economic performance and finances, and plans, expectations and objectives of management, is forward-looking |
| The following factors, in addition to other possible factors currently not deemed material, could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements: If we are unable to retain current and attract new customers to our Value City business segment, our results of operations, cash flow, financial condition and business could be materially adversely affected |
| Our ability to execute our new management’s strategy for the Value City segment is necessary to reverse the downward sales trend we have experienced |
| This strategy includes acquiring the right mix of merchandise in our key fashion areas of women’s and men’s, acquiring in season merchandise sooner in the season in complete runs (size and color) in recognizable brands and identifying the prevailing fashion trend |
| Our advertising and marketing efforts to retain and draw new customers will need to be focused on this strategy |
| The failure to impact the customers we have and draw in new customers may further reduce profitability, which could, in turn, have a material adverse impact on our business, financial condition, cash flow and results of operations |
| We may be unable to open all the DSW and Filene’s Basement stores contemplated by our growth strategy on a timely basis, and new stores we open may not be profitable or may have an adverse impact on the profitability of existing stores, any of which could have a material adverse effect on our business, financial condition, cash flow and results of operations |
| We intend to open approximately 30 DSW stores per year in each fiscal year from 2006 through 2010, and four Filene’s Basement stores in fiscal 2006 |
| However, we may not achieve our planned expansion on a timely and profitable basis or achieve results in new locations similar to those achieved in existing locations in prior periods |
| Our ability to open and operate new DSW and Filene’s Basement stores successfully on a timely and profitable basis depends on many factors, including, among others, our ability to: • identify suitable markets and sites for new store locations; • negotiate favorable lease terms; 20 _________________________________________________________________ [85]Table of Contents • build-out or refurbish sites on a timely and effective basis; • obtain sufficient levels of inventory to meet the needs of new stores; • obtain sufficient financing and capital resources or generate sufficient cash flows from operations to fund growth; • successfully open new DSW and Filene’s Basement stores in regions of the United States in which we currently have few or no stores; • open new stores at costs not significantly greater than those anticipated; • control the costs of other capital investments associated with store openings, including, for example, those related to the expansion of distribution facilities; • hire, train and retain qualified managers and store personnel; and • 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 |
| If we fail to successfully implement our growth strategy, the opening of new stores could be delayed or prevented, could cost more than anticipated and could divert resources from other areas of our business, any of which could have a material adverse effect on our business, financial condition, cash flow and results of operations |
| As the number of our stores increases, our stores will become more concentrated in the markets we serve |
| As a result, the number of customers and financial performance of individual stores may decline and the average sales per square foot at our stores may be reduced |
| This could have a material adverse effect on our business, financial condition, cash flow and results of operations |
| We intend to open new DSW stores at an increased rate compared to historical years, and we intend to open new Filene’s Basement stores, which could strain our resources and have a material adverse effect on our business and financial performance |
| Our continued and future growth in our DSW and Filene’s Basement segments largely depends on our ability to successfully open and operate new stores on a profitable basis |
| We intend to continue to open approximately 30 new DSW stores per year in each fiscal year from fiscal 2006 through 2010, and expect to open four new Filene’s Basement Stores in fiscal 2006 |
| As of January 28, 2006, we have signed leases for an additional 16 new DSW stores to be opened in fiscal 2006 |
| During fiscal 2005, the average investment required to open a typical new DSW store and Filene’s Basement store was approximately dlra1dtta4 million and dlra4dtta0 million, respectively |
| This continued expansion could place increased demands on our financial, managerial, operational and administrative resources |
| For example, our planned expansion will require us to increase 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 |
| 21 _________________________________________________________________ [86]Table of Contents 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 material adverse effect on our competitive position, our business and financial performance |
| We do not have long-term supply agreements or exclusive arrangements with any vendors (except for greeting cards, bottled drinks and program for supplying merchandise at the register for our Value City stores) and, therefore, our success depends on maintaining good relations with our vendors in all business segments |
| Since our business is fundamentally dependent on selling brand name and designer merchandise at attractive prices, we must continue to obtain from our vendors a wide selection of this merchandise at favorable wholesale prices |
| Our growth strategy depends to a significant extent on the willingness and ability of our vendors to supply us with sufficient inventory to stock our stores |
| If we fail to continue to deepen and strengthen our relations with our existing vendors or to enhance the quality of merchandise they supply us, and if we cannot maintain or acquire new vendors of in-season brand name and designer merchandise, we may limit our ability to obtain a sufficient amount and variety of merchandise at favorable prices, which could have a negative impact on our competitive position |
| During fiscal 2005, taking into account industry consolidation, merchandise supplied to our DSW segment by three key vendors accounted for approximately 22prca of DSW’s net sales |
| The loss or reduction in the amount of merchandise made available by any one of these key vendors could have a material adverse effect on our business |
| We may be unable to anticipate and respond to fashion trends and consumer preferences in the markets in which we operate, which could materially adversely affect our business, financial condition, cash flow and results of operations |
| Our merchandising strategy is based on identifying each region’s customer base and having the proper mix of products in each store across our segments to attract its target customers |
| This requires us to anticipate and respond to numerous and fluctuating variables in fashion trends and other conditions in the markets in which our stores are situated |
| A variety of factors will affect our ability to maintain the proper mix of products in each store, including: • variations in local economic conditions, which could affect our customers’ discretionary spending; • unanticipated fashion trends; • our success in developing and maintaining vendor relationships that provide us access to in-season merchandise at attractive prices; • our success in distributing merchandise to our stores in an efficient manner; and • changes in weather patterns, which in turn affect consumer preferences |
| If we are unable to anticipate and fulfill the merchandise needs of each region, we may experience decreases in our net sales and may be forced to increase markdowns in relation to slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition, cash flow and results of operations |
| Our operations are affected by seasonal variability |
| Our operations have been historically seasonal, with a disproportionate amount of sales and a majority of net income occurring in the Fall and Christmas selling seasons for Value City and Filene’s Basement |
| DSW net sales have 22 _________________________________________________________________ [87]Table of Contents typically been higher in Spring and early Fall |
| As a result of seasonality, any factors negatively affecting us during these periods, including adverse weather, the timing and level of markdowns or unfavorable economic conditions, could have a material adverse effect on our financial condition, cash flow and results of operations for the entire year |
| Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons in addition to seasonal factors, which could result in a decline in the price of our common shares |
| Our business is sensitive to customers’ spending patterns, which in turn are subject to prevailing regional and national economic conditions and the general level of economic activity |
| Our comparable store sales and quarterly results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future |
| In addition to seasonal fluctuations, including weather patterns, a variety of other factors affect our comparable store sales and quarterly financial performance, including: • changes in our merchandising strategy; • timing and concentration of new store openings and related pre-opening and other start-up costs; • levels of pre-opening expenses associated with new stores; • changes in our merchandise mix; • changes in and regional variations in demographic and population characteristics; • timing of promotional events; • actions by our competitors; and • general United States economic conditions and, in particular, the retail sales environment |
| Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results to be expected for any other quarter, and comparable store sales for any particular future period may decrease |
| In the future, our financial performance may fall below the expectations of securities analysts and investors |
| In that event, the price of our common shares would likely decline |
| We have debt which could have consequences if we were unable to repay the balances or interest due |
| We have debt on our balance sheet which could have consequences if we were unable to repay the balances or interest due |
| For example, it could: • limit our flexibility in planning for, or reacting to, changes in our industry in which we operate; • place us at a competitive disadvantage compared to our competitors that have less debt; • limit our ability to seek and borrow additional funds; and • expose us to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates |
| 23 _________________________________________________________________ [88]Table of Contents Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future |
| This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| We cannot provide assurance that our business will generate sufficient cash flow from operating activities or that future borrowings will be available to us under our credit facility in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs |
| We may need to refinance all or a portion of our indebtedness, on or before maturity |
| We cannot assure that we would be able to refinance any of our indebtedness on commercially reasonable terms or at all |
| A breach of any of these significant lines could result in a default |
| Upon the occurrence of an event of default, the lenders could elect to declare the applicable outstanding indebtedness due immediately and payable and terminate all commitments to extend further credit |
| We cannot be sure that our lenders would waive a default or that we could pay the indebtedness in full if it were accelerated |
| VCDS’s and DSW’s secured revolving credit facilities could limit operational flexibility |
| dlra275 Million Secured Revolving Credit Facility – The VCDS Revolving Loan VCDS has entered into a dlra275 million secured revolving credit facility with a term expiring the earlier of July 2009 or the date 91 days prior to the maturity date of the Non-Convertible Loan which is in June 2009 |
| Under this facility, RVI and certain of its wholly-owned subsidiaries are named as co-borrowers and/or co-guarantors |
| This facility is subject to a borrowing base restriction and provides for borrowings at variable interest rates based on the London Interbank Offered Rate, or LIBOR, the prime rate and the Federal Funds effective rate, plus a margin |
| VCDS’s obligations under our secured revolving credit facility are secured by a lien on substantially all our personal property |
| In addition, the secured revolving credit facility contains usual and customary restrictive covenants relating to our management and the operation of our business |
| These covenants, among other things, restrict VCDS’s ability to grant liens on its assets, incur additional indebtedness, open or close stores, pay cash dividends, enter into transactions with affiliates and merge or consolidate with another entity |
| In addition, if at any time VCDS utilizes over 90prca of its borrowing capacity under the facility, VCDS would be in default as set forth in the facility documents |
| These covenants could restrict VCDS’s operational flexibility, and any failure to comply with these covenants or VCDS’s payment obligations would limit VCDS’s ability to borrow under the secured revolving credit facility and, in certain circumstances, may allow the lenders thereunder to require repayment |
| dlra150 Million Secured Revolving Credit Facility – The DSW Revolving Loan DSW has entered into a dlra150 million secured revolving credit facility with a term expiring July 2010 |
| Under this facility, DSW and DSW’s subsidiary, DSW Shoe Warehouse, Inc, or DSWSW, are named as co-borrowers |
| This facility is subject to a borrowing base restriction and provides for borrowings at variable interest rates based on the London Interbank Offered Rate, or LIBOR, the prime rate and the Federal Funds effective rate, plus a margin |
| DSW’s obligations under our secured revolving credit facility are secured by a lien on substantially all our personal property and a pledge of DSW’s shares of DSWSW In addition, the secured revolving credit facility contains usual and customary restrictive covenants relating to our management and the operation of our business |
| These covenants, among other things, restrict DSW’s ability to grant liens on DSW’s assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem DSW’s stock, enter into transactions with affiliates and merge or consolidate with another entity |
| In addition, if at any time DSW utilizes over 90prca of DSW’s borrowing capacity under the facility, DSW must comply with a fixed charge coverage ratio test set forth in the facility documents |
| These covenants could restrict DSW’s operational flexibility, and any failure to comply with these covenants or DSW’s payment obligations would limit DSW’s ability to borrow under the secured revolving credit facility and, in certain circumstances, may allow the lenders thereunder to require repayment |
| 24 _________________________________________________________________ [89]Table of Contents Our stock price may fluctuate significantly, which could negatively affect the trading of our common shares |
| The market price of our common shares has fluctuated significantly in the past and may likely continue to fluctuate in the future, which could negatively affect the trading of our common shares |
| Various factors and events have caused this fluctuation and are likely to cause the fluctuations to continue |
| These factors include, among others: • developments related to DSW and fluctuations in the market price of DSW shares; • quarterly variations in actual or anticipated operating results; • changes by securities analysts in estimates regarding Retail Ventures; • conditions in the retail industry; • the condition of the stock market; and • general economic conditions |
| Our failure to retain our existing senior management team and to continue to attract qualified new personnel could materially adversely affect our business |
| Our business requires disciplined execution at all levels of our organization to ensure that we continually have sufficient inventories of assorted brand name merchandise at below traditional retail prices |
| This execution requires an experienced and talented management team |
| If we were to lose the benefit of the experience, efforts and abilities of any of our key executive and buying personnel, our business could be materially adversely affected |
| We have entered into employment agreements with certain of these officers |
| Furthermore, our ability to manage our retail expansion will require us to continue to train, motivate and manage our employees and to attract, motivate and retain additional qualified managerial and merchandising personnel |
| Competition for these personnel is intense, and we may not be successful in attracting, assimilating and retaining the personnel required to grow and operate profitably |
| We may be unable to compete favorably in our highly competitive markets |
| The off-price retail, department store and retail footwear markets are highly competitive with few barriers to entry |
| We compete against a diverse group of retailers, both small and large, including locally owned, regional and national department stores, specialty retailers, discount chains and off-price retailers |
| Some of our competitors are larger and have substantially greater resources than we do |
| Our success depends on our ability to remain competitive with respect to style, price, brand availability and customer service |
| The performance of our competitors, as well as a change in their pricing policies, marketing activities and other business strategies, could have a material adverse effect on our business, financial condition, cash flow, results of operations and our market share |
| SSC and/or its affiliates may compete directly against us |
| Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to SSC and us in the area of employee recruiting and retention |
| Any competition could intensify if SSC acquired a business that carried an assortment of shoes or merchandise in these stores similar to those found in our stores, targeted customers similar to ours or adopted a similar business model or strategy for its shoe businesses |
| Given that RVI and DSW are not wholly-owned, SSC may be inclined to direct relevant corporate opportunities to its other affiliates rather than us |
| 25 _________________________________________________________________ [90]Table of Contents SSC is under no obligation to communicate or offer any corporate opportunity to us |
| In addition, SSC has the right to engage in similar activities as us, do business with our suppliers and customers and employ or otherwise engage any of our officers or employees |
| SSC and its affiliates engage in a variety of businesses, including, but not limited to, business and inventory liquidations, real estate management and real estate acquisitions |
| A decline in general economic conditions, or the outbreak or escalation of war or terrorist acts, could lead to reduced consumer demand for our merchandise |
| Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates, income tax rates and policies, consumer confidence and consumer perception of economic conditions |
| In addition, consumer purchasing patterns may be influenced by consumers’ disposable income |
| A general slowdown in the US economy or an uncertain economic outlook could adversely affect consumer spending habits |
| Consumer confidence is also affected by the domestic and international political situation |
| The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the United States, could lead to a decrease in spending by consumers |
| In the event of an economic slowdown, we could experience lower net sales than expected on a quarterly or annual basis and be forced to delay or slow our retail expansion plans |
| We rely on foreign sources for our merchandise, and our business is therefore subject to risks associated with international trade |
| We purchase merchandise from domestic and foreign vendors |
| In addition, many of our domestic vendors import a large portion of their merchandise from abroad |
| For this reason, we face risks inherent in purchasing from foreign suppliers, such as: • economic and political instability in countries where these suppliers are located; • international hostilities or acts of war or terrorism affecting the United States or foreign countries from which our merchandise is sourced; • increases in shipping costs; • transportation delays and interruptions, including as a result of increased inspections of import shipments by domestic authorities; • work stoppages; • adverse fluctuations in currency exchange rates; • laws of the United States affecting the importation of goods, including duties, tariffs and quotas and other non-tariff barriers; • expropriation or nationalization; • changes in local government administration and governmental policies; • changes in import duties or quotas; 26 _________________________________________________________________ [91]Table of Contents • compliance with trade and foreign tax laws; and • local business practices, including compliance with local laws and with domestic and international labor standards |
| We require our vendors to operate in compliance with applicable laws and regulations and our internal requirements |
| The violation of labor or other laws by one of our vendors could have a material adverse effect on our business |
| DSW and Filene’s Basement each rely on a single distribution center |
| The loss or disruption of either of these centralized distribution centers could have a material adverse effect on our business and operations |
| Most of DSW’s 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 DSW stores |
| Inventory for Filene’s Basement stores is processed and shipped from a single distribution facility in Auburn, Massachusetts |
| Our operating results depend on the orderly operation of our receiving and distribution process, which in turn depends on third-party vendors’ adherence to shipping schedules and our effective management of our distribution facilities |
| We may not anticipate all the changing demands that our expanding operations in these two segments will impose on our receiving and distribution systems, and events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems, may result in delays in the delivery of merchandise to our stores |
| While we maintain business interruption and property insurance, in the event a distribution center were to be shut down for any reason or if we were to incur higher costs and longer lead times in connection with a disruption at a distribution center, our insurance may not be sufficient, and insurance proceeds may not be timely paid to us |
| We will require strong cash flows from our operations to support capital expansion, operations and debt repayment |
| In order to fully implement our new strategy for our Value City segment, as well as implementing our expansion strategy for both the Filene’s Basement and DSW segments, we will require strong cash flows from operations to support our capital expansion requirements, our general operating activities and to fund debt repayment and the availability of financing sources |
| Our inability to generate sufficient cash flows to support these activities or the lack of availability of financing in adequate amounts and on appropriate terms could adversely affect our financial performance or our earnings per share growth |
| If we fail to execute our opportunistic buying and inventory management well, our business could be materially adversely affected |
| We purchase some of the inventory for our Value City and Filene’s Basement stores opportunistically with our buyers purchasing close to need |
| To drive traffic to the stores and to increase same store sales, the treasure hunt nature of the off-price buying experience requires continued replenishment of fresh high quality, attractively priced merchandise |
| While the practice of opportunistic buying enables our buyers to buy at the right time and price, in the quantities we need and into market trends, it places considerable discretion in our buyers |
| This discretion subjects us to risks that our buyers will miscalculate on the timing, quantity and nature of inventory flowing to the stores |
| We rely on our distribution infrastructure to support delivering goods to our stores on time |
| We must effectively and timely distribute inventory to stores, maintain an appropriate mix and level of inventory and effectively manage pricing and markdowns |
| Failure to acquire and manage our inventory well and to operate our distribution infrastructure effectively, can materially adversely affect our performance and our relationship with our customers |
| 27 _________________________________________________________________ [92]Table of Contents If we do not attract and retain quality sales, distribution center and other associates in sufficient numbers as well as experienced buying and management personnel, our performance could be materially adversely affected |
| Our performance is dependent on attracting and retaining a large and growing number of quality associates |
| Many of these associates are in entry level or part-time positions with historically high rates of turnover |
| Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics |
| In the event of increasing wage rates, if we do not increase our wages competitively, our customer service could suffer because of a declining quality of our workforce, or our earnings would decrease if we increase our wage rates |
| Further, our off-price model limits the market for experienced buying and management personnel and requires us to do significant internal training and development |
| Changes that adversely impact our ability to attract and retain quality associates could materially adversely affect our performance |
| If we are unable to operate information systems and implement new technologies effectively, our business could be materially disrupted or our sales or profitability could be reduced |
| The efficient operation of our business is dependent on our information systems, including our ability to operate them effectively and successfully to implement new technologies, systems, controls and adequate disaster recovery systems |
| The failure of our information systems to perform as designed or our failure to implement and operate them effectively could materially disrupt our business or subject us to liability and thereby harm our profitability |
| We face security risks related to our electronic processing and transmission of confidential customer information |
| This security breach could materially adversely affect our reputation and business and subject us to liability |
| We rely on commercially available encryption software and on other technologies to provide security for processing and transmission of confidential customer information, such as credit card numbers |
| Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments, including improper acts by third parties, could result in a compromise or breach of 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 may subject us to significant liabilities and reporting obligations |
| A party who is able to circumvent our security measures could misappropriate our information, cause interruptions in our operations, damage our reputation and customers’ willingness to shop in our stores and subject us to possible liability |
| We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches |
| As previously reported, on March 8, 2005, RVI announced that it had learned of the theft of credit card and other purchase information from a portion of DSW customers |
| On April 18, 2005, RVI issued the findings from its investigation into the theft |
| The theft covered transaction information involving approximately 1dtta4 million credit cards and data from transactions involving approximately 96cmam000 checks |
| The Company contacted and continues to cooperate with law enforcement and other authorities with regard to this matter |
| DSW is involved in several legal proceedings arising out of this incident, which seek unspecified monetary damages, credit monitoring and other relief |
| After consultation with counsel, DSW believes that the damages arising out of these legal proceedings will not exceed the reserves the Company has currently recorded |
| In connection with this matter, DSW entered into a consent order with the Federal Trade Commission (“FTC”), which has jurisdiction over consumer protection matters |
| The FTC published the final order on March 14, 2006, and copies of the complaint and consent order are available from the FTC’s Web site at http://www |
| gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, NW, Washington, DC 20580 |
| 28 _________________________________________________________________ [93]Table of Contents DSW has not admitted any wrongdoing or that the facts alleged in the FTC’s proposed unfairness complaint are true |
| DSW has agreed, however, to maintain a comprehensive information security program and to undergo a biannual assessment of such program by an independent third party |
| There can be no assurance that there will not be additional proceedings or claims brought against DSW in the future |
| DSW has contested and will continue to vigorously contest the claims made against it and will continue to explore its defenses and possible claims against others |
| DSW estimates that the potential exposure for losses related to this theft including exposure under currently pending proceedings, ranges from approximately dlra6dtta5 million to approximately dlra9dtta5 million |
| Because of many factors, including the early development of information regarding the theft and recoverability under insurance policies, there is no amount in the estimated range that represents a better estimate than any other amount in the range |
| Therefore, in accordance with Financial Accounting Standard Nodtta 5, Accounting for Contingencies, DSW has accrued a charge to operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above |
| As the situation develops and more information becomes available, the amount of the reserve may increase or decrease accordingly |
| As of January 28, 2006, the balance of the associated accrual for potential exposure was dlra4dtta8 million Although difficult to quantify, since the announcement of the theft, DSW has not discerned any material negative effect on sales trends it believes is attributable to the theft |
| However, this may not be indicative of the long-term developments regarding this matter |
| We continue to be dependent on DSW to provide us with key services for our business |
| From 1998 until the completion of its IPO, DSW was operated as a wholly-owned subsidiary of Value City or Retail Ventures, and provided key services required for the operation of Retail Ventures’ business |
| In connection with the DSW IPO, we entered into agreements with DSW related to the separation of our business operations from DSW including, among others, a master separation agreement and a shared services agreement |
| Under the terms of the shared services agreement, which when signed became effective as of January 30, 2005, DSW provides several of our subsidiaries with key services relating to planning and allocation support, distribution services and outbound transportation management, site research, lease negotiation, store design and construction management |
| 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 DSW to provide these services for us under the shared services agreement to facilitate the efficient operation of our business |
| Once the transition periods specified in the shared services agreement have expired and are not renewed, or if DSW does not or is unable to perform its obligations under the shared services agreement, we will be required to provide these services ourselves or to obtain substitute arrangements with third parties |
| We may be unable to provide these services because of financial or other constraints or be unable to timely implement substitute arrangements on terms that are favorable to us, or at all, which would have a material adverse effect on our business, financial condition, cash flow and results of operations |
| We are controlled indirectly by Schottenstein Stores Corporation, whose interests may differ from our other shareholders |
| As of January 28, 2006, SSC owned approximately 48dtta2prca of the outstanding shares and beneficially owns 59dtta0prca (assumes issuance of (i) 8cmam333cmam333 RVI Common Shares issuable upon the exercise of convertible warrants, (ii) 1cmam388cmam752 RVI Common Shares issuable upon the exercise of term loan warrants, and, (iii) 685cmam417 RVI Common Shares issuable pursuant to the term loan warrants of the outstanding shares of Retail Ventures |
| Schottenstein Stores Corporation, a privately held corporation, is controlled by Jay L Schottenstein, the Chairman of our Board of Directors, and members of his immediate family |
| Given its 29 _________________________________________________________________ [94]Table of Contents ownership interests, SSC will be able to control or substantially influence the outcome of all matters submitted to our shareholders for approval, including, the election of directors, mergers or other business combinations, and acquisitions or dispositions of assets |
| The interests of SSC may differ from or be opposed to the interests of our other shareholders, and its control may have the effect of delaying or preventing a change in control that may be favored by other shareholders |
| Some of our directors and officers also serve as directors or officers of DSW, and may have conflicts of interest because they may own DSW stock or options to purchase DSW stock, or they may receive cash-based or equity-based awards based on the performance of DSW Some of our directors and officers also serve as directors or officers of DSW and may own DSW stock or options to purchase DSW stock, or they may be entitled to participate in the DSW incentive plans |
| Jay L Schottenstein is our Chairman of the Board of Directors and Chairman of the Board of Directors of DSW; Heywood Wilansky is our Chief Executive Officer and a director of DSW; Harvey L Sonnenberg is a director of Retail Ventures and of DSW; Julia A Davis is Executive Vice President, General Counsel and Assistant Secretary of Retail Ventures, and previously served as Executive Vice President, General Counsel and Secretary of DSW until April 10, 2006; Steven E Miller is Senior Vice President and Controller of both Retail Ventures and DSW; and James A McGrady is our Executive Vice President, Chief Financial Officer, Treasurer and Secretary and is a Vice President of DSW DSW’s incentive plans provide cash-based and equity-based compensation to employees based on DSW’s performance |
| These employment arrangements and ownership interests or cash-based or equity-based awards could create, or appear to create, potential conflicts of interest when directors or officers who own DSW stock or stock options or who participate in the DSW incentive plans are faced with decisions that could have different implications for DSW than they do for us |
| These potential conflicts of interest may not be resolved in our favor |