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Table of Contents DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments - In accordance with ASC 815, Derivatives and Hedging
, DSW, and prior to the Merger, RVI, recognizes all derivatives
on the balance sheet at fair value. For derivatives that are not designated as hedges under ASC 815, changes in the fair values are recognized in
earnings in the period of change. There were no derivatives designated as hedges outstanding as of January 28, 2012 or January 29, 2011
. DSW
does not hold or issue derivative financial instruments for trading purposes. DSW, and prior to the Merger, RVI, estimates the fair values of
derivatives based on the Black-Scholes pricing model using current market information.
$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. 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 Securities and Exchange Commission on August 11, 2006.
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. As of January 29, 2011, debt obligations were comprised of the face value of the PIES of $133.8 million
less
the debt discount of $1.6 million , and the conversion feature of short-term debt 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. 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. 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 exceeded or was less than the threshold appreciation
F-23
Short-term investments
Long-term investments
January 28, 2012
January 29, 2011
January 28, 2012
January 29, 2011
(in thousands)
Available-for-sale:
Bonds
$
134,322
$
93,996
Commercial paper
5,485
4,000
Total available-for-sale investments
139,807
97,996
Held-to-maturity:
Term notes and bonds
156,879
143,561
$
52,859
$
49,035
Unrealized gains (losses) included in
accumulated other comprehensive loss
11
(152
)
Equity investment – related party
1,151
952
Total investments
$
296,697
$
241,557
$
53,858
$
49,987
7.
DEBT OBLIGATIONS AND WARRANT LIABILITIES