Restoration Hardware 2015 Annual Report Download - page 53

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In accounting for the debt issuance costs related to the issuance of the 2020 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 2020 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 2020 Notes were comprised of discounts upon original issuance of $3.8 million and third party
offering costs of $2.3 million. Discounts were recorded as a contra-liability and are presented net against the convertible senior notes
due 2020 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 non-current assets on the consolidated balance sheets.
2020 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015,
we entered into convertible note hedge transactions whereby we have the option to purchase a total of approximately 5.1 million
shares of our common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions
was $68.3 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase a total of
approximately 5.1 million shares of our common stock at a price of $189.00 per share. We received $30.4 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 earnings dilution from the conversion of the 2020 Notes until our common stock is above approximately $189.00 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.
We recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and
recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and
deferred tax asset are recorded in non-current deferred tax assets on the consolidated balance sheets.
0.00% Convertible Senior Notes due 2019
In June 2014, we issued $350 million aggregate principal amount of 0.00% convertible senior notes due 2019 (the “2019
Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between us and U.S. Bank National
Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by us or converted. The 2019
Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the
event of our failure to perform certain of our obligations under the indenture governing the 2019 Notes. The 2019 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 us or any of our subsidiaries. Certain events are also considered “events of default” under
the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the
2019 Notes.
The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019
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,” we will, in certain circumstances, increase the conversion rate
by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental
change.
Prior to March 15, 2019, the 2019 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 2019 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. As of January 30, 2016, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of
January 30, 2016. 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 2019 Notes at any time, regardless of the foregoing
circumstances. Upon conversion, the 2019 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.