Restoration Hardware 2015 Annual Report Download - page 54

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We may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture
governing the notes), holders may require us to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the
principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental
change purchase date.
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 2019 Notes, we separated the 2019 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 2019 Notes and the fair value of the liability component of the
2019 Notes. The debt discount will be amortized to interest expense using an effective interest rate of 4.51% over the term of the 2019
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 2019 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 2019 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 2019 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 due 2019 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.
2019 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2019 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 2019 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 not accounted for as derivatives. 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 $27.5 million in connection with the debt discount associated with the 2019 Notes and
recorded a deferred tax asset of $28.6 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.
Revolving 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 existing credit agreement was amended and restated (the “amended and restated credit agreement”) to,
among other things, increase the existing revolving line of credit by $182.5 million and eliminate the $15.0 million term loan facility
under the existing credit agreement. Under the amended and restated credit agreement, we have the option to increase the amount of
the revolving line of credit by up to an additional $200.0 million, subject to satisfaction of certain customary conditions at the time of
such increase. As a result of the amended and restated credit agreement, unamortized deferred financing fees of $0.2 million related to
the previous facility were expensed in the fourth quarter of fiscal 2014 and $0.9 million related to the previous facility will be
amortized over the life of the new revolving line of credit, which has a maturity date of November 24, 2019.
On August 12, 2015, Restoration Hardware, Inc. and Restoration Hardware Canada, Inc. entered into a First Amendment (the
“Amendment”) to the amended and restated credit agreement. The Amendment changes the amended and restated credit agreement
definition of “Change of Control” (the occurrence of which triggers a default under the amended and restated credit agreement) so that
changes in the composition of the board of directors due to actual or threatened proxy solicitations are treated in the same way as other
changes in the composition of the board of directors.