Restoration Hardware 2014 Annual Report Download - page 97

NOTE 9—CONVERTIBLE SENIOR NOTES
0.00% Convertible Senior Notes due 2019
On June 18, 2014, the Company issued $350 million principal amount of 0.00% convertible senior notes due
2019 (the “Notes”) in a private offering. The Notes are governed by the terms of an indenture between the
Company and U.S. Bank National Association, as the Trustee. The Notes will mature on June 15, 2019, unless
earlier purchased by the Company or converted. The Notes will not bear interest, except that the Notes will be
subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform
certain of its obligations under the indenture governing the Notes. The Notes are unsecured obligations and do
not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness
or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also
considered “events of default” under the Notes, which may result in the acceleration of the maturity of the Notes,
as described in the indenture governing the Notes.
The initial conversion rate applicable to the Notes is 8.6143 shares of common stock per $1,000 principal
amount of Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The
conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be
adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole
fundamental change,” the Company 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 the Company’s 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 the Company’s 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 the Company’s election, in cash, shares of the Company’s common
stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a
notice of its election of settlement method prior to the final conversion period it will be deemed to have elected
combination settlement with the specified dollar amount of $1,000.
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, the
Company 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 excess of the principal amount of the liability component over its carrying amount
(“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 accounting for the debt issuance costs related to the issuance of the Notes, the Company allocated the
total amount incurred to the liability and equity components based on their relative values. Debt issuance costs
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