Cash and equivalents

Restricted cash

Short-term investments, net

Accounts receivable, net

Accounts receivable from related parties

Inventories

Prepaid expenses and other current assets

Deferred income taxes

Current assets held for sale

 

 

Property and equipment, net

Goodwill

Tradenames and other intangibles, net

Conversion feature of long-term debt

Deferred income taxes

Other assets

Non-current assets held for sale

 

 

Accounts payable

Accounts payable to related parties

Accrued expenses:

Compensation

Taxes

Gift cards and merchandise credits

Guarantees from discontinued operations

Other

Warrant liability

Current maturities of long-term debt

Current liabilities held for sale

 

 

Long-term obligations

Long-term guarantees of discontinued operations

Other noncurrent liabilities

Deferred income taxes

Noncurrent liabilities held for sale

 

Commitments and contingencies

 

Shareholders’ equity:

Common shares, without par value; 160,000,000 authorized; issued and outstanding, including 7,551 treasury shares, 48,941,280 and 48,691,280, respectively

Accumulated deficit

Treasury shares, at cost, 7,551 shares

Warrants

Accumulated other comprehensive loss

Accumulated other comprehensive loss held for sale

 

Total Retail Ventures’ shareholders’ equity

Noncontrolling interests

 

 

 

Net sales

Cost of sales

 

Gross profit

Selling, general and administrative expenses

Change in fair value of derivative instruments

 

Operating (loss) profit

Interest expense

Interest income

 

Interest expense, net

Other-than-temporary impairment charge on investments

 

(Loss) income from continuing operations before income taxes

Income tax expense

 

(Loss) income from continuing operations

Loss from discontinued operations, net of tax — Value City

Income (loss) from discontinued operations, net of tax — Filene’s Basement

 

Total income (loss) from discontinued operations, net of tax

 

Net (loss) income

Less: net income attributable to the noncontrolling interests

 

Net (loss) income attributable to Retail Ventures, Inc.

 

 

Basic and diluted earnings (loss) per share:

Basic (loss) earnings per share from continuing operations attributable to Retail Ventures, Inc. common shareholders

Diluted (loss) earnings per share from continuing operations attributable to Retail Ventures, Inc. common shareholders

Basic earnings (loss) per share from discontinued operations attributable to Retail Ventures, Inc. common shareholders

Diluted earnings (loss) per share from discontinued operations attributable to Retail Ventures, Inc. common shareholders

Basic (loss) earnings per share attributable to Retail Ventures, Inc. common shareholders

Diluted (loss) earnings per share attributable to Retail Ventures, Inc. common shareholders

 

Shares used in per share calculations:

Basic

Diluted

 

Amounts attributable to Retail Ventures, Inc. common shareholders:

(Loss) income from continuing operations, net of tax

Discontinued operations, net of tax

 

Net (loss) income

 

Net income from continuing operations

Net loss from discontinued operations

Unrealized loss on available-for-sale securities, net of tax benefit of $82

 

Capital transactions of subsidiary

Stock based compensation expense, before related tax effects

Exercise of stock options

 

 

 

Net (loss) income from continuing operations (*Restated)

Net income from discontinued operations (*Restated)

Unrealized loss on available-for-sale securities

 

 

Capital transactions of subsidiary

Stock based compensation expense, before related tax effects

Exercise of stock options

Cumulative effect of adoption of new accounting pronouncement

Reclassification of warrants to liability

 

 

Net (loss) income

Less: (income) loss from discontinued operations, net of tax

(Loss) income before discontinued operations

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of debt issuance costs and discount on debt

Stock based compensation expense

Stock based compensation expense of subsidiary

Depreciation and amortization

Change in fair value of derivative instruments

Deferred income taxes and other noncurrent liabilities

Impairment charges on long-lived assets

Impairment charges on receivables from Filene’s Basement

Other-than-temporary impairment charges on investments

Other

Change in working capital, assets and liabilities:

Accounts receivable

Inventories

Prepaid expenses and other assets

Accounts payable

Proceeds from lease incentives

Accrued expenses

 

Cash paid for property and equipment

Purchases of available-for-sale investments

Maturities and sales from available-for-sale investments

Transfer of cash to restricted cash

 

Proceeds from exercise of stock options

Retail Ventures, Inc. (“Retail Ventures” or “RVI”) and its wholly-owned subsidiaries and majority-owned subsidiary are herein referred to collectively as the “Company”. Retail Ventures’ common shares are listed on the New York Stock Exchange trading under the ticker symbol “RVI”. The Company operates two segments in the United States of America (“United States”). DSW Inc. (“DSW”) is a specialty branded footwear retailer. As of May 2, 2009, DSW operated a total of 303 stores located throughout the United States and dsw.com. DSW also supplies shoes, under supply arrangements, for 365 locations for four retailers in the United States. The Corporate segment consists of all revenue and expenses that are not allocated to the other segments.

As of May 2, 2009, Retail Ventures owned Class B Common Shares of DSW representing approximately 62.9% of DSW’s outstanding common shares and approximately 93.1% of the combined voting power of such shares. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are listed on the New York Stock Exchange trading under the ticker symbol “DSW”.

On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores (“Value City”) business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an after-tax loss of $76.8 million on the transaction as of May 2, 2009. As part of the transaction, Retail Ventures, Inc. issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI common shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the change in ownership and operation of Value City Department Stores, Retail Ventures agreed to provide or arrange for the provision of certain transition services principally related to information technology, finance and human resources to Value City Department Stores for a period of one year unless otherwise extended by both parties. On October 26, 2008, Value City filed for bankruptcy protection and announced that it would close its remaining stores. The Company negotiated an agreement with Value City to continue to provide services post bankruptcy filing, including risk management, financial services, benefits administration, payroll and information technology services, in exchange for a weekly payment.

On April 21, 2009, Retail Ventures entered into and consummated the transactions contemplated by a definitive agreement dated April 21, 2009 (the “Purchase Agreement”) to dispose of Filene’s Basement, Inc. and certain related entities to FB II Acquisition Corp., a newly formed entity owned by Buxbaum Holdings, Inc. (“Buxbaum”). Retail Ventures did not realize any cash proceeds from this transaction and will pay a fee of $1.3 million to Buxbaum and has reimbursed $0.4 million of Buxbaum’s costs associated with the transaction. Retail Ventures has also agreed to indemnify Buxbaum, FB II Acquisition Corp. and their owners against certain liabilities. Retail Ventures has recognized an after-tax gain of $53.2 million on the transaction as of May 2, 2009. As a result of the disposition, Filene’s Basement is no longer a related party of Retail Ventures. On May 4, 2009, Filene’s Basement filed for bankruptcy protection.

DSW. DSW is a leading U.S. specialty branded footwear retailer operating stores in 38 states as of May 2, 2009. Its stores offer a remarkable selection of better-branded dress, casual and athletic footwear for women and men. As of May 2, 2009, DSW, pursuant to supply agreements, operated 274 leased shoe departments for Stein Mart, Inc., 65 for Gordmans, Inc., 25 for Filene’s Basement and one for Frugal Fannie’s Fashion Warehouse. Supply agreements results are included within the DSW segment. During the three months ended May 2, 2009, DSW opened five new DSW stores, ceased operations in 13 leased departments and added one new leased department.

Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not allocated to other segments through corporate allocation or shared service arrangements. The remaining results of operation are comprised of debt related expenses, income on investments and interest on intercompany notes, the latter of which is eliminated in consolidation.

Basis of Presentation — The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009, as filed with the Securities and Exchange Commission (the “SEC”) on April 30, 2009 (the “2008 Annual Report”).

In the opinion of management, the unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring adjustments, which are necessary to present fairly the condensed consolidated financial position, results of operations and cash flows for the periods presented.

Allowance for Doubtful Accounts — The Company monitors its exposure for credit losses and records related allowances for doubtful accounts. Allowances are estimated based upon specific accounts receivable balances, where a risk of default has been identified. As of May 2, 2009 and January 31, 2009, the Company’s allowance for doubtful accounts was $6.5 million and $1.2 million, respectively. The increase in the allowance is primarily related to allowances recorded related to receivables from Filene’s Basement. In addition, at May 2, 2009, there was an allowance recorded for $52.6 million to fully reserve for the notes receivable from Filene’s Basement.

Inventories — Merchandise inventories are stated at net realizable value, determined using the first-in, first-out basis, or market, using the retail inventory method. The retail method is widely used in the retail industry due to its practicality. Under the retail inventory method, the valuation of inventories at cost and the resulting gross profits 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, which are reductions in prices due to customers’ perception of value. Hence, earnings are negatively impacted as the merchandise is marked down prior to sale.

Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value or mark-on, markups of initial prices established, markdowns, and estimates of losses between physical inventory counts, or shrinkage, which combined with the averaging process within the retail method, can significantly impact the ending inventory valuation at cost and the resulting gross profit. At May 2, 2009, the reserve to value inventory at lower of cost or market was $4.7 million. At January 31, 2009, the reserve was immaterial.

Tradenames and Other Intangible Assets, net — Tradenames and other intangible assets are comprised of values assigned to names the Company acquired and leases acquired. The accumulated amortization for these assets is $9.5 million and $9.2 million at May 2, 2009 and January 31, 2009, respectively.

The asset value and accumulated amortization of intangible assets is as follows:

Not subject to amortization

Domain names

 

 

Subject to amortization

Tradenames:

Gross asset

Accumulated amortization

 

Subtotal

 

Favorable leases:

Gross asset

Accumulated amortization

 

Subtotal

 

 

Tradenames and other intangible assets, net

 

Amortization expense for the first quarter of fiscal year 2009 was $0.2 million. Amortization associated with the net carrying amount of intangible assets at May 2, 2009 is estimated to be $0.7 million for the remainder of fiscal year 2009, $0.9 million in each of fiscal years 2010 through 2012 and $0.2 million in fiscal year 2013.

Customer Loyalty Program — The Company maintains a customer loyalty program for the DSW stores and dsw.com in which program members earn reward certificates that result in discounts on future purchases. Upon reaching the target-earned threshold, the members receive reward certificates for these discounts which must be redeemed within six months. The Company accrues the anticipated redemptions of the discount earned at the time of the initial purchase. To estimate these costs, DSW is required to make assumptions related to customer purchase levels and redemption rates based on historical experience. The accrued liability as of May 2, 2009 and January 31, 2009 was $7.7 million and $7.3 million, respectively.

Noncontrolling Interests — During the three months ended May 2, 2009 and May 3, 2008, there was an immaterial impact to the net (loss) income attributed to Retail Ventures, Inc. as a result of the additional DSW common shares outstanding from DSW director stock unit grants of 1,503 and 2,347 made during each of the respective quarters.

Sales and Revenue Recognition — Revenues from merchandise sales are recognized upon customer receipt of merchandise, are net of returns and sales tax and are not recognized until collectability is reasonably assured. For dsw.com, the Company estimates a time lag for shipments to record revenue when the customer receives the goods. Net sales also include revenue from shipping and handling while the related costs are included in cost of sales.

Revenue from gift cards is deferred and recognized upon redemption of the gift card. The Company’s policy is to recognize income from breakage of gift cards when the likelihood of redemption of the gift card is remote. The Company recognized $0.2 million and $0.1 million as miscellaneous income from gift card breakage during the three months ended May 2, 2009 and May 3, 2008, respectively.

Income Taxes — Income taxes are accounted for using the asset and liability method as required by Financial Accounting Standards Board (“FASB”) Statement No. 109, Accounting for Income Taxes (“FAS 109”). Under this method, deferred income taxes arise from temporary differences between the tax bases 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.

Sale of Subsidiary Stock — Sales of stock by a subsidiary are accounted for by Retail Ventures as capital transactions.

In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (“FAS 141R”), FAS 141R establishes a framework for how an acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. FAS 141R was effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Adoption of FAS 141R during the first quarter of fiscal year 2009 did not impact the Company’s consolidated financial statements.

In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interest) and for the deconsolidation of a subsidiary. This statement shall be applied prospectively as of the beginning of the fiscal year in which this statement is initially adopted, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The statement was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The adoption of this statement during the first quarter of fiscal year 2009 resulted in enhanced disclosures regarding the minority interests of DSW as well as some presentation changes of minority interests within the balance sheets, statements of operations and statements of changes in shareholders’ equity.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (“FAS 161”). This statement establishes enhanced disclosures about the entity’s derivative and hedging activities. This statement was effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Adoption of FAS 161 has resulted in enhanced disclosure regarding the Company’s derivative instruments. See note 7 for additional information regarding Retail Ventures’ derivative instruments.

In June 2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue 07-5, Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock (“EITF No. 07-5”). This Issue was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, with early adoption prohibited. Paragraph 11(a) of Statement of Financial Accounting Standard No. 133, Accounting for Derivatives and Hedging Activities (“FAS 133”), specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No. 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the FAS 133 paragraph 11(a) scope exception. The adoption of EITF No. 07-5 resulted in the redesignation and reclassification of the VCHI Warrants from Equity to Liability within the balance sheets. In addition, the VCHI Warrants were marked to market as of the date of the adoption and will continue to be marked to market.

In November 2008, the FASB issued EITF Issue 08-8, Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary (“EITF No. 08-8”). This Issue was effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, with early adoption prohibited. EITF No. 08-8 supersedes EITF No. 00-6 and amends EITF 00-19 such that provided that the subsidiary is a substantive entity, instruments indexed to the stock of a subsidiary could be considered indexed to the entity’s own stock within the consolidated financial statements. The instruments should be evaluated using EITF No. 07-5 and other applicable guidance to determine the classification of the instrument. The adoption of EITF 08-8 during the first quarter of fiscal year 2009 did not have any impact on the consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets, (“FSP FAS 142-3”). FSP FAS 142-3 amends factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this FSP is to improve consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure its fair value. This FSP was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, with early adoption prohibited. The guidance within FSP FAS 142-3 was prospectively applied to intangible assets acquired after the effective date. The disclosure requirements of FSP FAS 142-3 was applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The adoption of FSP FAS 142-3 during the first quarter of fiscal year 2009 did not have any impact on the consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments that May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 applies to convertible debt instruments that may be settled in cash (including partial cash settlement) unless the embedded conversion option is required to be separately accounted for as a derivative under FAS 133. FSP APB 14-1 requires that the convertible debt instrument is separated into a liability-classified component and an equity-classified component in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP APB 14-1 during the first quarter of fiscal year 2009 did not have any impact on the consolidated financial statements. Additional disclosures related to the Company’s convertible debt have been included in Note 7 as a result of the adoption of FSP APB 14-1.

In June 2008, the FASB issued EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”). FSP EITF No 03-6-1 addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore need to be included in computing earnings per share under the two-class method, as described in FAS No. 128, Earnings Per Share. This FSP was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and was applied retrospectively in accordance with the FSP. The adoption of FSP EITF No. 03-6-1 during the first quarter of fiscal year 2009 did not have any impact on the consolidated financial statements.

In February 2008, the FASB (“FASB”) issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157, (“FSP 157-2”), which delayed the effective date of FASB Statement No. 157, Fair Value Measurements (“FAS 157”) for non-financial assets and liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. FAS 157, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. Refer to Note 8 for additional information regarding the Company’s fair value measurements.

In April 2009, the Financial Accounting Standards Board issued FASB Staff Position FAS 157-4, Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly (“FSP 157-4”), which the Company will adopt for the quarter ended August 1, 2009. FSP 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The FSP provides guidance for estimating fair value when the volume and level of market activity for an asset or liability have significantly decreased and determining whether a transaction was orderly. This FSP applies to all fair value measurements when appropriate. The Company does not expect that the adoption of this statement will have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”), which the Company will adopt for the quarter ended August 1, 2009. FSP 115-2 amends existing guidance for determining whether an other-than-temporary impairment of debt securities has occurred. FSP 115-2 replaces the existing requirement that an entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert (a) it does not have the intent to sell the security, and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company does not expect that the adoption of this statement will have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”), which the Company will adopt for the quarter ended August 1, 2009. FSP 107-1 requires an entity to provide the annual disclosures required by FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, in its interim consolidated financial statements. The Company does not expect that the adoption of this statement will have a significant impact on its consolidated financial statements.

As mentioned above, on January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City operations. As part of the transaction, Retail Ventures issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. Retail Ventures received no net cash proceeds from the sale and paid a fee of $500,000 to the purchaser. Retail Ventures recognized an aggregate after-tax loss related to the Value City disposition of $76.8 million as of May 2, 2009, including an increase in the loss of less than $0.1 million recognized in the three months ended May 2, 2009. The increase in the loss consisted primarily of revaluations of the liabilities due to the passage of time for the guarantees recorded by Retail Ventures. As of May 2, 2009, Retail Ventures is still providing Value City with limited transition services.

As previously discussed, on April 21, 2009, RVI disposed of its Filene’s Basement operations. RVI did not realize any cash proceeds from this transaction and will pay a fee of $1.3 million to Buxbaum and reimbursed $0.4 million of Buxbaum’s costs associated with the transaction. RVI also agreed to indemnify Buxbaum, FB II Acquisition Corp. and their owners against certain liabilities. As of May 2, 2009, RVI had recorded a liability of $34.8 million for the guarantees of Filene’s Basement commitments, including but not limited to $17.0 million of outstanding borrowings against the Filene’s Basement Revolving Loan, including letters of credit; $6.3 million of amounts due to factors for inventory purchases made prior to the disposition date; and $11.5 million under lease obligations. RVI has recognized an after-tax gain of $53.2 million on the transaction as of May 2, 2009. The $53.2 million gain on the disposition of Filene’s Basement is comprised of the write-off of the investment in Filene’s Basement partially offset by the recording of guarantees of $34.8 million, other transaction related expenses of $2.1 million and income tax expenses of $1.8 million.

On August 16, 2006, Filene’s Basement entered into a Promissory Note with Retail Ventures for $27.6 million, due August 16, 2013. In addition, on January 3, 2008, Filene’s Basement entered into a Promissory Note with Retail Ventures for $25.0 million, due February 1, 2013. The interest on each note between Filene’s Basement and Retail Ventures accrues at 13% per annum. The notes and related interest receivable have been fully reserved for as of May 2, 2009.

See note 17 for subsequent events discussions related to Filene’s Basement.

The following table presents the significant components of Filene’s Basement operating results included in discontinued operations:

Net sales

 

Loss before income taxes

Income tax (provision) benefit

Gain on sale

 

Gain (loss) from discontinued operations, net of tax — Filene’s Basement

 

The following table presents the financial classification of assets and liabilities of Filene’s Basement reflected as held for sale in the Condensed Consolidated Balance Sheets as of January 31, 2009 (in thousands):

Cash

Accounts receivable, net

Inventories

Prepaid expenses and other

 

Total current assets

 

Property and equipment, net

Tradenames and intangibles, net

Other non current assets

 

Total non current assets

 

Total assets

 

 

Accounts payable, net

Accrued expenses

Revolving credit facility

 

Total current liabilities

 

Other non current liabilities

 

Total non current liabilities

 

Total liabilities

 

As of January 31, 2009, Filene’s Basement had accumulated other comprehensive loss of $6.7 million related to the minimum pension liability.

The Company has an Amended and Restated 2000 Stock Incentive Plan (the “2000 Plan”) that provides for the issuance of equity awards covering up to 13,000,000 common shares, including stock options, stock appreciation rights and restricted stock, to management, key employees of Retail Ventures and affiliates, consultants (as defined in the plan), and non-employee directors of Retail Ventures. Options granted under the plan generally vest 20% per year on a cumulative basis and remain exercisable for a period of ten years from the date of grant.

The Company has an Amended and Restated 1991 Stock Option Plan that provided for the grant of equity awards covering up to 4,000,000 common shares. Options granted under the plan are generally exercisable 20% per year on a cumulative basis and remain exercisable for a period of ten years from the date of grant.

During the three months ended May 2, 2009 and May 3, 2008, included in income from continuing operations is stock based compensation expense of approximately $2.2 million and $1.4 million, respectively, which includes approximately $1.3 million and $1.1 million, respectively, of expenses recorded by DSW, before accounting for the noncontrolling interests.

The following tables summarize the activity of the Company’s stock options, stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) for the three months ended May 2, 2009 (in thousands):

Outstanding beginning of period

Granted

Exercised

Forfeited

 

Outstanding end of period

Exercisable end of period

The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.

 

Assumptions:

Risk-free interest rate

Expected volatility of Retail Ventures common shares

Expected option term

Expected dividend yield

The weighted-average grant date fair value of options granted in the three months ended May 2, 2009 and May 3, 2008 was $1.58 per share and $3.43 per share, respectively.

Expense of $0.7 million and $0.2 million was recorded in continuing operations during the three months ended May 2, 2009 and May 3, 2008, respectively, relating to SARs.

The Company’s continuing operations recorded a reduction of compensation expense of less than $0.1 million and compensation expense of less than $0.1 million related to the restricted stock units in the three months ended May 2, 2009 and May 3, 2008, respectively. The amount of restricted stock units accrued at both May 2, 2009 and January 31, 2009 was less than $0.1 million.

The Company issued restricted common shares to certain key employees pursuant to individual employment agreements and certain other grants from time to time, which are approved by the Board of Directors. The agreements condition the vesting of the shares generally upon continued employment with the Company with such restrictions expiring over various periods ranging from three to five years. The market value of the shares at the date of grant is charged to expense on a straight-line basis over the period that the restrictions lapse. As of January 31, 2009, the Company had 50,000 restricted common shares outstanding, which were all attributed to the discontinued operations. All 50,000 restricted shares were forfeited during the quarter ended May 2, 2009.

DSW has a 2005 Equity Incentive Plan that provides for the issuance of equity awards to purchase up to 4,600,000 common shares, including stock options and restricted stock units to management, key employees of DSW and affiliates, consultants (as defined in the plan), and directors of DSW. DSW stock options, RSUs and director stock units are not included in the number of shares used in the basic or dilutive calculation of earnings per share of Retail Ventures. During the three months ended May 2, 2009 and May 3, 2008, DSW recorded stock based compensation expense of approximately $1.3 million and $1.1 million, respectively.

The following tables summarize the activity of DSW’s stock options and RSUs for the three months ended May 2, 2009 (in thousands):

Outstanding beginning of period

Granted

Exercised

Forfeited

 

Outstanding end of period

Exercisable end of period

The weighted-average grant date fair value of each option granted in the three months ended May 2, 2009 and May 3, 2008 was $5.06 and $5.86 per share, respectively. The following table illustrates the weighted-average assumptions used in the Black-Scholes option-pricing model for options granted in each of the periods presented:

Assumptions:

Risk-free interest rate

Expected volatility of DSW common shares

Expected option term

Expected dividend yield

The total aggregate intrinsic value of nonvested restricted stock units at May 2, 2009 was $4.4 million. As of May 2, 2009, the total compensation cost related to nonvested restricted stock units not yet recognized was approximately $3.1 million with a weighted average expense recognition period remaining of 2.3 years. The weighted average exercise price for all restricted stock units is zero.

DSW issues stock units to directors who are not employees of DSW or RVI. During the three months ended May 2, 2009 and May 3, 2008, DSW granted 1,503 and 2,347 director stock units, respectively, and expensed less than $0.1 million in each respective three month period for these grants. As of May 2, 2009, 84,704 director stock units had been issued and no director stock units had been settled.

The Company determines the appropriate balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. If the Company has the intent and ability to hold the investments to maturity, investments are classified as held-to-maturity. Held-to-maturity securities are stated at amortized cost plus accrued interest. Otherwise, investments are classified as available-for-sale and stated at current market value.

Short-term investments, net at May 2, 2009 and January 31, 2009 include tax exempt, tax advantaged and taxable bonds, variable rate demand notes, tax exempt commercial paper, certificates of deposit, an auction rate security and preferred shares. DSW also participates in the Certificate of Deposit Account Registry Service^® (“CDARS”). CDARS provides FDIC insurance on deposits of up to $50.0 million. Certificates of deposit mature every 28 to 91 days. The other types of short-term investments generally have interest reset dates of every 7 days. Despite the long-term nature of the stated contractual maturities of certain short-term investments, the Company has the ability to quickly liquidate these securities. As a result, the Company has classified these securities as available for sale.

One auction rate security will undergo auction in November 2009. In the first quarter of fiscal year 2009, the Company recorded an additional temporary impairment of $0.2 million related to this security. The impairment recorded in the first quarter of fiscal 2009 is in addition to temporary impairments of $0.7 million recorded in fiscal 2008 related to this security. The Company believes the impairment is temporary as the security is a perpetual preferred security that possesses certain debt-like characteristics and the Company believes it has the ability to hold the security until it can recover in value. The temporary impairments are included in accumulated other comprehensive loss on the condensed consolidated balance sheets.

In March 2009, DSW received preferred shares as distributions-in-kind on two of its auction rate securities. For the first quarter of fiscal year 2009, DSW recorded other-than-temporary impairments of $0.4 million related to these preferred shares. The impairment recorded in the first quarter of fiscal year 2009 is in addition to other-than-temporary impairments of $1.1 million recorded in fiscal year 2008 related to these securities.

The following table discloses the major categories of the Company’s investments as of May 2, 2009 and January 31, 2009:

Available for sale:

Tax exempt, tax advantaged and taxable bonds

Variable rate demand notes

Tax exempt commercial paper

Certificates of deposit

Auction rate securities

Preferred shares

Other-than-temporary impairment

Unrealized losses included in accumulated other comprehensive loss

 

Total available for sale

 

Long term obligations of continuing operations consist of the following (in thousands):

Credit facilities:

Senior Loan Agreement — related parties

Premium Income Exchangeable Securities (“PIES”)

Discount on PIES

 

 

 

Less: current maturities

 

Total long term obligations of continuing operations

 

 

Letters of credit outstanding under DSW revolving credit facility

Availability under DSW revolving credit facility

Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the initial lease terms. For these leases, the Company recognizes the related rental expense on a straight-line basis and records the difference between the amount charged to expense and the rent paid as deferred rent and begins amortizing such deferred rent upon the delivery of the lease location by the lessor. The amounts of deferred rent included in the other non-current liabilities caption, excluding discontinued operations, were $34.2 million and $33.5 million at May 2, 2009 and January 31, 2009, respectively.

The Company receives cash allowances from landlords, which are deferred and amortized on a straight-line basis over the original terms of the lease as a reduction of rent expense. The unamortized allowances included in the other non-current liabilities caption, excluding discontinued operations, were $64.2 million and $63.7 million at May 2, 2009 and January 31, 2009, respectively.

The Company has derivative instruments, warrants and the conversion feature of convertible debt, that it has issued in conjunction with past financing activities. As of May 2, 2009 and January 31, 2009, Retail Ventures did not have any derivatives designated as hedges nor has Retail Ventures entered into derivative instruments for trading purposes. FAS 133 requires recognition of all qualifying derivative instruments as either assets or liabilities on the balance sheet at fair value. Retail Ventures utilizes the Black-Scholes pricing model to compute the fair value of its derivative instruments. The Company’s derivative instruments outstanding as of May 2, 2009, are described in detail below.

The Premium Income Exchangeable Securities^SM (“PIES”) bear a coupon at an annual rate of 6.625% of the principal amount and mature on September 15, 2011. Except to the extent RVI exercises its cash settlement option, the PIES are mandatorily exchangeable, on the maturity date, into Class A Common Shares of DSW, no par value per share, which are issuable upon exchange of DSW Class B Common Shares, no par value per share, beneficially owned by RVI. On the maturity date, each holder of the PIES will receive a number of DSW Class A Common Shares per $50.0 principal amount of PIES equal to the “exchange ratio” described in the RVI prospectus filed with the SEC on August 11, 2006, or if RVI elects, the cash equivalent thereof or a combination of cash and DSW Class A Common Shares. The exchange ratio is equal to the number of DSW Class A Common Shares determined as follows: (i) if the applicable market value of DSW Class A Common Shares equals or exceeds $34.95, the exchange ratio will be 1.4306 shares; (ii) if the applicable market value of DSW Class A Common Shares is less than $34.95 but greater than $27.41, the exchange ratio will be between 1.4306 and 1.8242 shares; and (iii) if the applicable market value of DSW Class A Common Shares is less than or equal to $27.41, the exchange ratio will be 1.8242 shares, subject to adjustment as provided in the PIES. The maximum aggregate number of DSW Class A Common Shares deliverable upon exchange of the PIES is 5,244,575 DSW Class A Common Shares subject to adjustment as provided in the PIES.

The embedded exchange feature of the PIES is accounted for as a derivative, which is recorded at fair value based upon the income approach using the Black-Scholes pricing model in accordance with FAS 157 using level 2 inputs such as current market rates and changes in fair value are reflected in the statement of operations. Accordingly, the accounting for the embedded derivative addresses the variations in the fair value of the obligation to settle the PIES when the market value exceeds or is less than the threshold appreciation price. The fair value of the conversion feature at the date of issuance of $11.7 million was equal to the amount of the discount of the PIES and is being amortized into interest expense over the term of the PIES. As of May 2, 2009, the discount on the PIES has a remaining amortization period of 2.4 years. The amount of interest expense recognized and the effective interest rate for the PIES were as follows:

Contractual interest expense

Amortization of debt discount

 

Total interest expense

 

 

Effective interest rate

During the three months ended May 2, 2009 and May 3, 2008, the Company recorded a charge of $1.3 million and a reduction of expense of $18.8 million, respectively, related to the change in fair value of the conversion feature of the PIES. As of May 2, 2009 and January 31, 2009, the fair value asset recorded for the conversion feature was $76.4 million and $77.8 million, respectively.

The fair value of the conversion feature of the PIES at May 2, 2009 and January 31, 2009 was estimated using the Black-Scholes Pricing Model with the following assumptions:

Assumptions:

Risk-free interest rate

Expected volatility of common shares

Expected option term

Expected dividend yield

On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. As part of the transaction, Retail Ventures issued warrants (“the VCHI Warrants”) to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008.

The Company adopted EITF No. 07-5 during the quarter ended May 2, 2009. The adoption of EITF No. 07-5 resulted in the redesignation and reclassification of the VCHI Warrants from Equity to Liabilities within the balance sheets. In addition, the VCHI Warrants were marked to market as of the date of the adoption and will continue to be marked to market thereafter. A charge of $0.1 million was recorded in other comprehensive income as of February 1, 2009, the date of adoption, which represented the change in fair value of the VCHI Warrants from the date of issuance to the date of adoption of EITF No. 07-5. During the three months ended May 2, 2009, the Company recorded an immaterial charge related to the change in fair value of the VCHI warrants. The value ascribed to the VCHI Warrants was estimated to be immaterial as of May 2, 2009 using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 0.1%; expected life of 0.3 years; expected volatility of 124.3% and an expected dividend yield of 0.0%.

As of May 2, 2009 and January 31, 2009, the Company had outstanding 3,683,959 Term Loan Warrants and 8,333,333 Conversion Warrants (together, the “Warrants”). For the three months ended May 2, 2009 and May 3, 2008, the Company recorded a charge of less than $0.1 million and a reduction of expenses of $18.4 million, respectively, for the change in fair value of the Term Loan Warrants and Conversion Warrants. For the three months ended May 2, 2009 and May 3, 2008, the portion of the change in the fair value of the Warrants that related to Warrants held by related parties was reductions of expenses of $0.5 million and $15.2 million, respectively. No tax benefit has been recognized in connection with these charges. These derivative instruments do not qualify for hedge accounting under FAS 133 therefore; changes in the fair values are recognized in earnings in the period of change. As the Warrants may be exercised for either common shares of RVI or common shares of DSW owned by RVI, the settlement of the Warrants will not result in a cash outlay by the Company. The Term Loan Warrants expire on June 11, 2012 while the Conversion Warrants expired on June 10, 2009.

In accordance with FAS 133 and FAS 157, Retail Ventures estimates the fair values of derivatives based on the income approach using the Black-Scholes pricing model using level 2 inputs such as current market rates and records all derivatives on the balance sheet at fair value. The fair value of the Warrants was $6.3 million at both May 2, 2009 and January 31, 2009. The fair value of the portion of the Warrants held by related parties at May 2, 2009 and January 31, 2009 was $3.4 million and $3.9 million, respectively.

The values ascribed to the Warrants were estimated as of May 2, 2009 and January 31, 2009 using the Black-Scholes Pricing Model with the following assumptions:

Assumptions:

Risk-free interest rate

Expected volatility of common shares

Expected option term

Expected dividend yield

The fair values and balance sheet locations of the Company’s derivative assets (liabilities) are as follows (in thousands):

Warrants

Conversion feature of long-term debt

 

Total

 

The effect of derivative instruments on the Company’s condensed consolidated statements of operations is as follows (in thousands):

Warrants

Conversion feature of long-term debt

 

(Expense) income related to the change in fair value of derivative instruments

 

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The intent of this standard is to ensure consistency and comparability in fair value measurements and enhanced disclosures regarding the measurements. This statement is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. For non-financial assets and liabilities measured at fair value on a non-recurring basis, FAS 157 is effective for fiscal years beginning after November 15, 2008.

Although the adoption of this standard as of February 3, 2008 for financial assets and liabilities and as of February 1, 2009 for non-financial assets and liabilities measured on a nonrecurring basis had no impact on RVI’s financial position or results of operations, it does result in additional disclosures regarding fair value measurements. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Therefore, fair value is a market-based measurement based on assumptions of the market participants. As a basis for these assumptions, FAS 157 establishes the following three level fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that are publicly accessible. Active markets have frequent transactions with enough volume to provide ongoing pricing information.

Level 2 inputs are other than level 1 inputs that are directly or indirectly observable. These can include unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical assets or liabilities in inactive markets, or other observable inputs.

Level 3 inputs are unobservable inputs.

Financial assets and liabilities measured at fair value on a recurring basis as of May 2, 2009 consisted of the following:

Assets:

Cash and equivalents

Restricted cash

Short-term investments

Conversion feature of long-term debt

 

 

 

 

Liabilities:

Warrant liabilities

 

 

 

Cash and equivalents and restricted cash primarily represent cash deposits and investments in money market funds held with financial institutions, as well as credit card receivables that settle in less than three days. The Company’s investments in preferred shares are valued using level 1 inputs of quoted prices in active markets. The Company’s investment in an auction rate security is recorded at fair value under FAS 157 using an income approach valuation model that uses level 3 inputs such as the financial condition of the issuers of the underlying securities, expectations regarding the next successful auction, risks in the auction rate securities market and other various assumptions. The Company’s other types of investments are valued using a market based approach using level 2 inputs such as prices of similar assets in active markets.

See Note 6 for fair value disclosures regarding investments and Note 7 for fair value disclosure regarding financial instruments and debt.

The activity related to level 3 investments for the three months ended May 2, 2009 is summarized below:

Carrying value as of January 31, 2009

Transfer out of Level 3

Unrealized losses included in accumulated other comprehensive loss

 

Carrying value as of May 2, 2009

 

When the Company received distributions-in-kind on the underlying preferred shares of its two auction rate securities, the investments were transferred out of Level 3 to Level 1 as the preferred shares can be valued using quoted prices in active markets.

Non-financial assets and liabilities measured at fair value on a nonrecurring basis as of May 2, 2009 consisted of the following:

Assets:

Long-lived assets to be held and used

 

 

 

Long-lived assets held and used with a carrying amount of $0.8 million were written down to their fair value of $0.4 million, resulting in an impairment charge of $0.4 million, which was included in earnings for the three months ended May 2, 2009. The impairment charges were recorded within the DSW segment.

The Company periodically evaluates the carrying amount of its long-lived assets, primarily property and equipment, and finite life intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset is considered impaired when the carrying value of the asset exceeds the expected future cash flows from the asset. The 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 of the asset over its fair value, based on discounted cash flow analysis using a discount rate determined by management.

The Company was not required to make any contributions during the first quarter of fiscal 2009 to meet minimum funding requirements under the Filene’s Basement defined benefit pension plan (“the Pension Plan”). Prior to fiscal 2009, the liability associated with the Filene’s Basement Pension Plan was included within noncurrent liabilities held for sale. The following table shows the components of net periodic cost of the Pension Plan (in thousands):

Interest cost

Expected return on plan assets

Amortization of transition asset

Amortization of net loss

 

Net periodic cost

 

Basic earnings (loss) per share are based on the net income (loss) and a simple weighted average of common shares outstanding. Diluted earnings (loss) per share reflects the potential dilution of common shares, related to outstanding stock options, SARs and Warrants, calculated using the treasury stock method. The numerator for the diluted earnings (loss) per share calculation is the net income (loss). The denominator is the weighted average number of shares outstanding.

The following table shows the composition of the number of shares used for the computations of dilutive earnings per share (in thousands):

Weighted average shares outstanding

Assumed exercise of dilutive SARs

Assumed exercise of dilutive stock options

Assumed exercise of dilutive Term Loan Warrants

Assumed exercise of dilutive Conversion Warrants

 

Number of shares for computations of dilutive earnings per share

 

The amount of securities outstanding at May 2, 2009 and May 3, 2008 that were not included in the computation of dilutive earnings per share because the equity unit’s exercise price was greater than the average market price of the common shares for the period and, therefore, the effect would be anti-dilutive, was as follows (in thousands):

SARs

Stock options

VCHI Warrants

Term Loan Warrants

Conversion Warrants

 

Total of all potentially dilutive instruments

 

The balance sheet caption “Accumulated Other Comprehensive Loss” was $7.5 million and $0.7 million at May 2, 2009 and January 31, 2009, respectively. At May 2, 2009, $6.7 million of the Accumulated Other Comprehensive Loss related to the Pension Plan and $0.8 million related to the unrealized loss on available-for-sale securities, net of income tax. At January 31, 2009, the Accumulated Other Comprehensive Loss primarily related to the unrealized loss on available-for-sale securities, net of income tax. For the three months ended May 2, 2009 the comprehensive loss was $30.6 million. For the three months ended May 3, 2008 the comprehensive income was $32.8 million.

Effective February 4, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. The Company has determined that there is a probability that future taxable income may not be sufficient to fully utilize deferred tax assets. The valuation allowance as of May 2, 2009 and January 31, 2009 was $53.5 million and $50.7 million, respectively. Based on available data, the Company believes it is more likely than not that the remaining deferred tax assets will be realized.

The tax rate of 1.3% for the three month period ended May 2, 2009 reflects the impact of the change in fair value of warrants, included in book income but not tax income and an increase in valuation allowance of $2.8 million on federal and state deferred tax assets.

The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for the fiscal years prior to 2000. The Company is currently under audit by the IRS for 2005, and there are several state audits and appeals ongoing for fiscal years from 2000 through 2006. The Company estimates the range of possible changes that may result from the examinations to be insignificant at this time.

Consistent with its historical financial reporting, the Company has elected to classify interest expense related to income tax liabilities, when applicable, as part of the interest expense in its condensed consolidated statement of income rather than income tax expense. The Company will continue to classify income tax penalties as part of operating expenses in its condensed consolidated statements of income. $1.1 million was accrued for the payment of interest and penalties at both May 2, 2009 and January 31, 2009.