Restoration Hardware 2014 Annual Report Download - page 36

requires that the board of directors of a listed company be comprised of a majority of independent directors. Our
board of directors subsequently appointed a new independent director effective January 22, 2015 and we have
regained compliance with Section 303A.01 of the NYSE Listed Company Manual.
Risks Relating to Our Convertible Notes Financing
We expect that our common stock may experience increased trading volatility in connection with our
Convertible Notes Financing.
In June 2014, we issued 0.00% convertible senior notes due 2019 (the “Notes”) and entered into convertible
note hedge transactions with certain counterparties (the “Bond Hedge”) and warrant transactions (the “Warrants”
and together with the Notes and the Bond Hedge, the “Convertible Notes Financing”) with the same
counterparties (the “hedge counterparties”).
We have been advised that, in connection with establishing their initial hedge positions with respect to the
Bond Hedge and Warrants, the hedge counterparties and/or their affiliates would likely purchase shares of the
Company’s common stock or enter into various derivative transactions with respect to the Company’s common
stock concurrently with, or shortly after, the pricing of the Notes, including with certain investors in the Notes.
These hedging activities could increase (or reduce the size of any decrease in) the market price of the Company’s
common stock or the Notes.
In addition, we expect that many investors in, including future purchasers of, the Notes may employ, or seek
to employ, a convertible arbitrage strategy with respect to the Notes. Investors would typically implement such a
strategy by selling short the common stock underlying the Notes and dynamically adjusting their short position
while continuing to hold the Notes. Investors may also implement this type of strategy by entering into swaps on
our common stock in lieu of or in addition to short selling the common stock.
Further, investors in the Notes may periodically modify their arbitrage strategies with respect to the Notes or
modify their hedge positions with respect to the Notes from time to time. The hedge counterparties and/or their
respective affiliates also may periodically modify their hedge positions from time to time (and are likely to do so
during the conversion period relating to any conversion of the Notes or following any repurchase of Notes by us
on any fundamental repurchase date or otherwise). Such modifications may be implemented by entering into or
unwinding various derivatives with respect to our common stock, and/or by purchasing or selling shares of our
common stock or other securities of the Company in secondary market transactions and/or open market
transactions. The effect, if any, of these transactions and activities on the market price of our common stock or
the trading price of the Notes (which could affect a noteholder’s ability to convert the Notes or the amount and
value of the consideration received upon conversion of the Notes) will depend in part on market conditions and
cannot be ascertained at this time. Any of these activities, however, could adversely affect the market price of our
common stock.
It is not possible to predict the effect that these hedging or arbitrage strategies adopted by holders of the
Notes or counterparties to the Bond Hedge and Warrants will have on the market price of our common stock. For
example, the SEC and other regulatory and self-regulatory authorities have implemented various rules and taken
certain actions, and may in the future adopt additional rules and take other actions, that may impact those
engaging in short selling activity involving equity securities (including our common stock). Such rules and
actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority,
Inc. of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of
securities for certain periods following specific market declines, and the implementation of certain regulatory
reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any changes in
government regulations or other factors that affect the manner in which third parties can engage in hedging
strategies, including entering into short sales or swaps on our common stock, could adversely affect the trading
price and the liquidity of the Notes and/or our common stock.
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