Restoration Hardware 2015 Annual Report Download - page 87

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Debt issuance costs related to the 2019 Notes were comprised of discounts and commissions payable to the initial purchasers of
$4.4 million and third party offering costs of $1.0 million. Discounts and commissions payable to the initial purchasers attributable to
the liability component were recorded as a contra-liability and are presented net against the convertible senior notes balance on the
consolidated balance sheets. Third party offering costs attributable to the liability component were recorded as an asset and are
presented in other non-current assets on the consolidated balance sheets. The Company recorded $0.8 million and $0.5 million related
to the amortization of debt issuance costs in fiscal 2015 and fiscal 2014, respectively, related to the 2019 Notes.
The carrying values of the 2019 Notes are as follows (in thousands):
January 30, January 31,
2016 2015
Liability component ...................................................................
Principal ............................................................................... $ 350,000 $ 350,000
Less: Debt discount .............................................................. (49,289) (62,513 )
Net carrying amount........................................................ $ 300,711 $ 287,487
Equity component
(
1
)
.................................................................. $ 70,482 $ 70,482
(1) Included in additional paid-in capital on the consolidated balance sheets.
The Company recorded interest expense of $13.2 million and $8.0 million for the amortization of the debt discount related to the
2019 Notes in fiscal 2015 and fiscal 2014, respectively.
Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2019 Notes, the Company entered into convertible note hedge transactions whereby the
Company has the option to purchase a total of approximately 3.0 million shares of its common stock at a price of approximately
$116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, the Company sold warrants
whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of the Company’s common
stock at a price of $171.98 per share. The Company received $40.4 million in cash proceeds from the sale of these warrants. Taken
together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the
conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As
these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are
not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the
convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the consolidated balance
sheets.
The Company recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019
Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax
liability and deferred tax assets are included in non-current deferred tax assets on the consolidated balance sheets.
NOTE 10—LINE OF CREDIT
In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered
into a credit agreement (the “prior credit agreement”) with Bank of America, N.A., as administrative agent, and certain other lenders.
On November 24, 2014, the Company amended its existing revolving line of credit by entering into an amended and restated credit
agreement with the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent. The amended and
restated credit agreement increased the existing revolving line of credit by $182.5 million, while eliminating the $15.0 million term
loan facility under the existing revolving line of credit. Under the amended and restated credit agreement, the Company has the option
to increase the amount of the revolving line of credit by up to an additional $200.0 million, subject to satisfaction of certain customary
conditions at the time of such increase. As a result of the amended and restated credit agreement, unamortized deferred financing fees
of $0.2 million related to the previous facility were expensed in fiscal 2014 and $0.9 million related to the previous facility will be
amortized over the life of the new revolving line of credit, which has a maturity date of November 24, 2019.
On August 12, 2015, Restoration Hardware, Inc. and Restoration Hardware Canada, Inc. entered into a First Amendment (the
“Amendment”) to the amended and restated credit agreement. The Amendment changes the amended and restated credit agreement
definition of “Change of Control” (the occurrence of which triggers a default under the amended and restated credit agreement) so that
changes in the composition of the board of directors due to actual or threatened proxy solicitations are treated in the same way as other
changes in the composition of the board of directors.