DSW 2011 Annual Report Download - page 31

Table of Contents
charge to earnings in the quarter that termination is completed.
$143.75 Million Premium Income Exchangeable Securities
SM
(“PIES”) .
On August 10, 2006, RVI announced the pricing of its 6.625%
Mandatorily Exchangeable Notes due September 15, 2011, or PIES, in the aggregate principal amount of $125.0 million. The closing of the transaction
took place on August 16, 2006. On September 15, 2006, RVI closed on the exercise by the sole underwriter of its entire option to purchase an
additional aggregate principal amount of $18.75 million of PIES. The $143.75 million PIES bore a coupon at an annual rate of 6.625% of the principal
amount, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on December 15, 2006 and
ending on September 15, 2011. The PIES were mandatorily exchangeable, on the maturity date, into DSW Class A Common Shares, which were
issuable upon exchange of DSW Class B Common Shares, beneficially owned by RVI prior to the Merger, and after the Merger beneficially owned by
a subsidiary of DSW, and retired in the third quarter of fiscal 2011. On the maturity date, each holder of the PIES received a number of DSW Class A
Common Shares per $50.00 principal amount of PIES equal to the “exchange ratio”
described in the RVI prospectus filed with the SEC on August 11,
2006.
During fiscal 2011, 2010 and 2009, DSW, and prior to the Merger, RVI, recorded a non-cash charge of $41.7 million , $34.4 million , and
$49.7
million
, respectively, related to the change in the fair value of the conversion feature of the PIES. The fair value of the conversion feature was
reclassified to equity at the settlement date. As of January 29, 2011, the fair value liability recorded for the conversion feature of the PIES was $6.4
million.
On September 15, 2011, DSW issued 3,826,855 of its Class A Common shares, without par value, to the holders of the PIES. On the maturity date,
each holder of the PIES received a number of DSW Class A Common Shares per $50.00 principal amount of PIES equal to the “exchange ratio”
described in the RVI prospectus filed with the SEC on August 11, 2006. The exchange ratio was 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 equaled or exceeded $34.95, the exchange ratio
would have been 1.4306 shares; (ii) if the applicable market value of DSW Class A Common Shares was less than $34.95 but greater than $27.41, the
exchange ratio would have been between 1.4306 and 1.8242 shares; and (iii) if the applicable market value of DSW Class A Common Shares was less
than or equal to $27.41, the exchange ratio would have been 1.8242 shares, subject to adjustment as provided in the PIES. A subsidiary of DSW
assumed, as of the effective time of the Merger, by supplemental indenture and supplemental agreement, all of RVI’
s obligations with respect to the
PIES. The applicable market value exceeded $34.95, thus the exchange ratio was 1.4306 shares, resulting in the settlement of the PIES with 3.8 million
DSW Class A Common Shares. In connection with this settlement, DSW reclassified $48.0 million from the conversion feature of short-
term debt and
$133.8 million from current maturities of long-term debt to paid in capital during the third quarter of fiscal 2011.
The embedded exchange feature of the PIES was accounted for as a derivative, which was recorded at fair value with changes in fair value in the
statement of operations. Accordingly, the accounting for the embedded derivative addressed 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 was amortized into interest expense over the term of the PIES.
Warrants.
DSW, and prior to the Merger, RVI, has outstanding warrants to purchase up to 753,185 DSW Common Shares to certain Schottenstein
Affiliates at an exercise price of $10.35 per share. The warrants are subject to certain anti-
dilution provisions and are exercisable at any time on or
prior to June 11, 2012. DSW has granted registration rights with respect to the shares issuable upon exercise of the warrants.
On March 14, 2012, DSW issued 411,963 of its Class B Common Shares, without par value, to the Schottenstein Affiliates in connection with the
exercise of its outstanding warrant that was originally issued on July 5, 2005. The common shares were issued at an exercise price of $10.35 per share,
for an aggregate cash purchase price of $4.3 million, and DSW paid accrued dividends of $0.8 million related to the Company's special dividend
issued on September 30, 2011. In connection with this issuance, no underwriters were utilized and no commissions were paid. Following this exercise,
there are remaining warrants held by other Schottenstein Affiliates to acquire 341,222 Class A or Class B Common Shares.
During fiscal 2011, DSW recorded a non-cash charge of $12.3 million
related to the change in the fair value of the warrants, of which the portion
held by related parties was a non-cash charge of $11.1 million . For fiscal 2010, the Company recorded a non-cash charge of $14.6 million
for the
change in fair value of warrants, of which the portion held by related parties was a non-cash charge of $13.0 million
. For fiscal 2009, the Company
recorded a non-cash charge of $16.8 million for the change in fair value of warrants, of which the portion held by related parties was a non-
cash charge
of $6.9 million .
On April 28, 2011, RVI issued 221,037 common shares (which represent 96,151 DSW Common Shares factoring in the exchange ratio of 0.435
subsequent to the Merger), without par value, to Millennium Partners, L.P. (“Millennium”) in connection with
26