Restoration Hardware 2014 Annual Report Download - page 64

fundamental change,” we will, in certain circumstances, increase the conversion rate by a number of additional
shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
Prior to March 15, 2019, the Notes will be convertible only under the following circumstances: (1) during
any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not
consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately
preceding fiscal quarter, the last reported sale price of our common stock on such trading day is greater than or
equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business
day period after any ten consecutive trading day period in which, for each day of that period, the trading price per
$1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale
price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of
specified corporate transactions. On and after March 15, 2019, until the close of business on the second
scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their
Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Notes will be settled, at our
election, in cash, shares of our common stock, or a combination of cash and shares of our common stock.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to
be separately accounted for as liability and equity components of the instrument in a manner that reflects the
issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Notes, we
separated the Notes into liability and equity components. The carrying amount of the liability component was
calculated by measuring the fair value of a similar liability that does not have an associated convertible feature.
The carrying amount of the equity component, which is recognized as a debt discount, represents the difference
between the proceeds from the issuance of the Notes and the fair value of the liability component of the Notes.
The debt discount will be amortized to interest expense using an effective interest rate of 4.51% over the term of
the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity
classification. In fiscal 2014, we recorded $8.0 million of interest expense related to the amortization of the debt
discount.
In accounting for the debt issuance costs related to the issuance of the Notes, we allocated the total amount
incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to
the liability component are amortized to interest expense using the effective interest method over the term of the
Notes, and debt issuance costs attributable to the equity component are netted with the equity component in
stockholders’ equity. In fiscal 2014, we recorded $0.5 million related to the amortization of debt issuance costs.
Debt issuance costs related to the 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 assets on the
consolidated balance sheets.
Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the Notes, we entered into convertible note hedge transactions whereby
we have the option to purchase a total of approximately 3.0 million shares of our 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, we sold warrants whereby the holders of the warrants have the option to purchase a total of
approximately 3.0 million shares of our common stock at a price of $171.98 per share. We 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 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 and are
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