Restoration Hardware 2014 Annual Report Download - page 37

We do not make any representation or prediction as to the direction or magnitude of any potential effect that
the transactions described above may have on the price of our common stock. In addition, we do not make any
representation that the counterparties to those transactions will engage in these transactions or activities or that
these transactions and activities, once commenced, will not be discontinued without notice; the counterparties or
their affiliates may choose to engage in, or discontinue engaging in, any of these transactions or activities with or
without notice at any time, and their decisions will be in their sole discretion and not within our control.
In addition, prior to the Convertible Notes Financing, our common stock experienced significant price and
volume fluctuations. We cannot predict whether the market price of our common stock will rise or fall. The
market price of our common stock will be influenced by a number of factors, including general market
conditions, variations in our operating results, earnings per share, cash flows, deferred revenue, other financial
and non-financial metrics and other factors described in greater detail elsewhere in this section, many of which
are beyond our control.
We are subject to risk with respect to the Bond Hedge and Warrants.
Taken together, the Bond Hedge and Warrants are expected, but not guaranteed, to reduce the potential
dilution that could occur upon delivery of shares of common stock to satisfy to the Company’s conversion
obligation under the Notes, with the intent that the Company’s stockholders would not experience dilution until
the Notes reach a conversion price of approximately $171.98 per share, the strike price of the warrant
transactions, which represents a 100% premium over the closing price of the Company’s common stock at the
time the Company entered into the Convertible Notes Financing. However, these transactions are complex, and
there can be no assurance that they will operate as planned.
For example, the hedge counterparties are financial institutions or affiliates of financial institutions, and we
will be subject to the risk that these hedge counterparties may default under the Bond Hedge. Our exposure to the
credit risk of the hedge counterparties will not be secured by any collateral. If one or more of the hedge
counterparties to one or more of our Bond Hedges becomes subject to insolvency proceedings, we will become
an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those
transactions. Our exposure will depend on many factors but, generally, the increase in our exposure will be
correlated to the increase in our stock price and in the volatility of our stock. In addition, upon a default by one of
the hedge counterparties, we may suffer adverse tax consequences and dilution with respect to our common
stock. We can provide no assurances as to the financial stability or viability of any of the hedge counterparties.
The terms of the Bond Hedge and Warrants may be subject to adjustment, modification or, in some cases,
renegotiation in the event of certain corporate and other transactions. The Bond Hedge and Warrants may not
operate as the Company had originally intended in the event that the Company is required to adjust the terms of
such instruments as a result of transactions in the future or in the event of other unanticipated developments that
may adversely affect the functioning of the Bond Hedge or Warrants.
In the event that the price of the Company’s common stock, as measured under the terms of the Warrants,
exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on the Company’s earnings per
share.
The claims of holders of the Notes are structurally subordinated to claims of creditors of our subsidiaries; our
ability to repay our debt, including the Notes, depends on the performance of our subsidiaries and their ability
to make distributions to us.
The Notes are our obligations exclusively. Our subsidiaries are separate and distinct legal entities and
substantially all of our operations is conducted through our subsidiaries. None of our subsidiaries has guaranteed
or otherwise become obligated with respect to the Notes. Our right to receive assets from one of our subsidiaries
upon its liquidation or reorganization, and the right of holders of the Notes to participate in those assets, is
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