Restoration Hardware 2014 Annual Report Download - page 98

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.
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. In fiscal 2014, the Company recorded $0.5 million related to the amortization of
debt issuance costs.
The Notes consist of the following components as of January 31, 2015 (in thousands):
Liability component
Principal $350,000
Less: Debt discount (62,513)
Net carrying amount $287,487
Equity component (1) $ 70,482
(1) Included in additional paid-in capital on the consolidated balance sheets.
The Company recorded interest expense of $8.0 million for the amortization of the debt discount related to
the Notes in fiscal 2014.
Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 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 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 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible
note hedge transactions. Both 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
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