Restoration Hardware 2015 Annual Report Download - page 86

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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 “2019
Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between the Company and U.S. Bank
National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by the Company 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 the failure of the Company to perform certain of its 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 the Company or any of its 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,” the Company 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 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 2019 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. 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 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.
The Company 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 the Company 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, the Company 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 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 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, the Company 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.