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  • EFFECT (Jun 25, 2008)
  • Form 4 (Jun 19, 2008)
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Restoration Hardware DEFA14A 2008
Definitve Additional Materials

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

Filed by the Registrant x                            Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

¨ Definitive Proxy Statement

 

þ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

 

 

RESTORATION HARDWARE, INC.

 

(Name of Registrant as Specified In Its Charter)

 

 

  

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

 

  (1) Title of each class of securities to which transaction applies:

 

Common stock, par value $0.0001 per share, of Restoration Hardware, Inc. (“Common Stock”)

  

 
  (2) Aggregate number of securities to which transaction applies:

 

  

 
  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

  

 
  (4) Proposed maximum aggregate value of transaction:

 

  

 
  (5) Total fee paid:

 

  

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

  

 
  (2) Form, Schedule or Registration Statement No.:

 

  

 
  (3) Filing Party:

 

  

 
  (4) Date Filed:

 

  

 

 


This filing consists of information initially used on May 29, 2008 by Restoration Hardware, Inc. in connection with a presentation made to RiskMetrics Group, Inc.


RESTORATION HARDWARE, INC.
AGREEMENT AND PLAN OF MERGER
with investment funds affiliated with
Catterton Management Company, LLC


1
Forward Looking Statements
This presentation contains forward-looking statements that involve known and unknown risks. Such
forward-looking statements include, without limitation, statements concerning the timing of the closing of
the merger and statements containing words such as “likely”
or “expects”
and words of similar import or
statements of management's opinion.  There are a number of risks
and
uncertainties that could cause
actual results to differ materially from these forward-looking statements, including the following: 
(1) the Company may be unable to obtain stockholder approval required for the merger agreement;
(2) the Company may be unable to obtain regulatory approvals required for the transactions
contemplated by the merger agreement; (3) conditions to the closing of the merger agreement may not
be satisfied; (4) the transactions may involve unexpected costs,
unexpected
liabilities or unexpected
delays; (5) the Company may be adversely affected by the uncertainty relating to the pending merger or
the possibility of another transaction involving the Company, including potential difficulties in employee
retention, disruption in current plans or operations and diversion of management’s attention from ongoing
business operations; and (6) the Company may be adversely affected by other economic, business,
and/or competitive factors.  Additional factors that may affect the future results of the Company are set
forth in its filings with the Securities and Exchange Commission, including its recent filings on Forms
10-K, 10-Q and 8-K, including, but not limited to, those described in the Company's Form 10-K for the
fiscal year ended February 2, 2008, in Part I, Item 1A thereof (“Risk Factors”), Part II, Item 7 thereof
(“Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and Part II,
Item 9A thereof (“Controls and Procedures”).  Unless required by law, the Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.


2
Additional Information and Where to Find It
In connection with the proposed merger, a definitive proxy statement was filed by the
Company with the SEC on May 9, 2008.  Investors and security holders are strongly
advised to read the definitive proxy statement because it contains important information
about the merger and the parties to the merger.  Investors and security holders may
obtain a free copy of the definitive proxy statement and other documents filed by the
Company at the SEC website at http://www.sec.gov.  The definitive proxy statement
and other documents also may be obtained for free from the Company by directing
such request to Chris Newman, Chief Financial Officer and Secretary, telephone:
(415) 945-4530, or on the company’s website at http://www.restorationhardware.com.
The Company and its directors, executive officers and other members of its
management and employees may be deemed participants in the solicitation of proxies
from its stockholders in connection with the proposed merger.  Information concerning
the interests of the Company’s participants in the solicitation, which may, in some
cases,
be
different
than
those
of
stockholders
generally,
is
set
forth
in
the
Company’s
proxy statements and Annual Reports on Form 10-K, previously filed with the SEC, and
in the definitive proxy statement relating to the merger.  Each of these documents may
be
obtained
for
free
at
the
SEC
website
at
http://www.sec.gov
or
from
the
Company
by
directing such request to Chris Newman, Chief Financial Officer and Secretary,
telephone: (415) 945-4530, or on the Company’s website at
http://www.restorationhardware.com.


3
Background Leading to Merger Transaction
In determining to pursue the acquisition, the Independent Committee
focused on certainty of value to stockholders through a transaction:
Merger proposal compared against company stock price and potential value if
management successfully executed against its plan
Certainty for shareholders weighed against significant inherent risk in
management’s projections and share price pressures in the sector.
Valuation and Certainty
Company’s business operations depend upon successful execution of a number of
current initiatives related to its “tri channel”
business strategy involving stores,
catalogue and Internet sales.
Initiatives include the launch of the company’s new distribution center in Ohio as
well as the launch of new brands like Restoration Baby and Child
Company’s business results in 2007 were weaker than in 2006 in each quarter and
measured against the full fiscal year
Company Business
Outlook
and Execution Risks
Retail and home furnishings sectors have been under significant pressure as a
result
of
general
economic
trends
making
company
projections
and
industry
outlook highly uncertain, etc.
Industry Context


4
Overview
The Merger provides compelling value, particularly in
light of industry and Company trends
Significant premium to market trading benchmarks
Greater and more certain value than likely stand-alone results
The Merger Agreement resulted from a thorough and
independent review by independent Board members of
proposed transaction and alternatives
Process run by Independent Board Committee
Two “Go-Shop”
periods of 35 days each
Independent Committee actively sought alternatives
Extensive market check did not result in a superior proposal
More than 6 months since first public announcement


5
Merger Provides Compelling Value
Retail sector of economy, and specifically the home furnishings
segment, has been under substantial pressure
General economic conditions have declined in recent quarters with retail
and housing sectors particularly weak
Reduction in credit availability and slowdown in the housing sector,
including slowing housing turnover, slowing home price appreciation
and depreciation of home prices in some areas, has contributed to
reduced spending on home furnishings and home improvement projects
Weak economy, increased fuel prices and general economic uncertainty
are having a significant impact on consumers in the U.S. broadly
and
housing related segments are particularly hard hit
Company’s business is highly reliant upon housing events such as
purchases of homes and remodeling activity which in turn are affected
by weak housing prices and the credit environment


6
Merger Provides Compelling Value
Numerous companies in the retail sector have recently sought
protection from creditors under bankruptcy rules including:
Linens ‘n Things
Bombay Company
Sharper Image
Red Envelope
Lillian Vernon
Levitz Furniture
Other retailers are struggling in the context of the current economic
environment
Home furnishings sector in particular faces enormous pressure


7
Merger Provides Compelling Value
Value of continuing as a standalone entity is uncertain due to
numerous challenges including:
the Company’s strategic plan to move from a traditional retailer to a tri-
channel home furnishings business model requires significant
investments in infrastructure that may be better made in a private
investment environment
the uncertainty of the time required to complete this tri-channel strategic
business initiative may make the public market quarterly earnings focus
inconsistent with the long-term strategic business needs of the
Company
weakening of or other adverse developments in sales performance or
concerning availability of credit under the Company’s revolving credit
facility due to the borrowing base formula, covenant limitations
or other
factors could limit the overall amount of funds available to the
Company
retail market is highly competitive, and many of the Company’s
competitors have significantly greater financial, marketing and other
resources  


8
Merger Provides Compelling Value
Value of continuing as a standalone entity is uncertain
due to numerous challenges including:
a large number of changes to the corporate organization would
be necessary in order for the Company to achieve sustained
sales and earnings growth
the Company faces substantial uncertainty to implement such
changes
the time required to effectuate such changes as well as the time
needed for the Company’s share price to reflect any success of
such changes
the risk of uncertain returns to the Company’s stockholders from
the Company’s business, operations, financial condition and
prospects


9
Merger Provides Compelling Value
UBS opined to the Independent Committee that, as of
the date of their opinion, the consideration to be received
by Company stockholders who will receive all cash
merger consideration of $4.50 per share for their
holdings, was fair, from a financial point of view, to those
stockholders


10
Merger Provides Compelling Value
The price provides a significant premium to Company’s
market price at original merger agreement signing on
November 8, 2007
Premium to:
11/6/07 closing price: 73%
30-trading day period ending 11/6/07: 45.4%
60-trading day period ending 11/6/07: 40.8%
90-trading day period ending 11/6/07: 20.9% 
0%
20%
40%
60%
80%
11/6/07
closing
price
30-trading
day period
ending
11/6/07
60-trading
day period
ending
11/6/07
90-trading
day period
ending
11/6/07


11
Merger Provides Compelling Value
Trading Multiples:  Multiple of enterprise value implied by
the merger consideration to Company’s EBITDA is
significantly above mean and median multiples for
selected companies and selected transactions*
*
From UBS presentation dated January 22, 2008, attached as Exhibit 99(c)(4) to
the Schedule 13E-3 filed by Restoration Hardware on February 19, 2008
31.9
17.4
10
5.5
5.7
5.4
62.8
0
10
20
30
40
50
60
70
Last 12 Mos.
EBITDA
Est. 2007
EBITDA
Est.2008
EBITDA
Median for Precedent
Transactions
Median for Selected
Companies
RSTO


12
Merger Provides Compelling Value
Discounted Cash Flow:  Merger consideration is
significantly greater than the $2.50 to $4.00 per share
indicated by DCF analysis *
*
From UBS presentation dated January 22, 2008, attached as Exhibit 99(c)(4) to the
Schedule 13E-3 filed by Restoration Hardware on February 19, 2008
13% to 80%
premium over
DCF analysis
$4.00
$2.50
$4.50
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
Low
High
Offer


13
Merger Provides Compelling Value
Like other retailers, Company’s financial results have suffered in the
current environment
Overall environment for home furnishings sector is extremely challenging
at the present time
Quarter by quarter decline in financial performance and results of
operations during 2007, including weak 2007 holiday sales results
Company’s operating loss is increasing compared to prior year periods
10.6
(43.1)
Full Year
15.7
(9.5)
Q4
(3.7)
(15.1)
Q3
2.1
(7.4)
Q2
(3.5)
(11.2)
Q1
FY
Ended
2/3/07
FY Ended
2/2/08
Operating Income (Loss)
(dollars in millions)
Operating Income (Loss)
(dollars in millions)
-60
-40
-20
0
20
Q1
Q2
Q3
Q4
Full
Fiscal Ended 2/3/07
Fiscal Ended 2/2/08
Q1
Q2
Q3
Q4
Full


14
Merger Provides Compelling Value
Company’s downward revisions of EBITDA reflect
decreasing expectations of performance
$39
$51
$71
2010
$30
$18
$4
Provided Prior to
Amendment
$42
$27
$18
Provided Prior to Original
Merger Agreement
$53
$40
$30
Provided in July 2007
2009
2008
2007
COMPANY’S EBITDA PROJECTIONS
(Dollars in Millions)
Company's EBITDA Projections
(Dollars in Millions)
0
10
20
30
40
50
60
70
80
2007
2008
2009
2010
Provided in July 2007
Provided Prior to Original Merger Agreements
Provided Prior to Amendment


15
Merger Provides Compelling Value
Catterton has provided interim financing for the
Company
$25.0 million subordinated loan
Terms are quite favorable to the Company
Five year term
Favorable interest rate terms
Proceeds have provided Company with additional liquidity and
financial flexibility despite declining retail sector performance and
declining general economic and stock market conditions


16
Catterton Merger Terms Provide Strong
Closing Incentives –
Promotes Deal “Certainty”
Catterton has no debt financing condition in Merger
Agreement
Transaction is not subject to external debt financing
Senior banks have consented to the Catterton transaction on
terms described in the proxy statement (such consent expires on
June 30, 2008 unless transaction has occurred by then)
Catterton $25 million debt financing is an incentive to
closing –
promotes deal “certainty”
$25.0 million subordinated loan is fully funded
Loan converts into equity upon closing of merger
Provides additional capital to Company’s operations
Ranks junior to the senior bank credit facility


17
Thorough, Active and Independent Process
Merger Agreement is result of a vigorous arm’s length
process designed to maximize shareholder value
The majority of the Board is independent
Merger Agreement was negotiated by, or under the
direction of, the Independent Committee
Alignment between interest of members and stockholders at
large
Members unanimously approved the Merger Agreement
Independent Committee advised by independent
financial and legal advisors


18
Thorough, Active and Independent Process
Independent Committee conducted thorough, active and
independent process, both before and after signing of
original Merger Agreement
Independent Committee formed in August, 2007
Multiple meetings of Independent Committee and of the working
group of the Independent Committee
Independent Committee has continued to be active during the
more than 6 months from initial public announcement to date


19
Thorough, Active and Independent Process
Active market check conducted during go-shop periods
to check market interest
Merger Agreement allowed Company to solicit alternative
proposals
35 days of active solicitation allowed after execution of each of
original Merger Agreement and amendment
Negotiations with any Excluded Party could continue past expiration
of go-shop period


20
Thorough, Active and Independent Process
Independent Committee actively sought alternatives using these
two go-shop periods to solicit third party proposals
Following execution of initial Merger Agreement
22 parties were contacted
Only 3 of these parties signed confidentiality agreements
Only one party submitted proposal, providing only $0.05 per share
difference in price and subject to numerous conditions
Following execution of amended Merger Agreement
Numerous parties were contacted again
Only one party submitted proposal, providing only $0.05 per share
difference in price and subject to numerous conditions


21
Thorough, Active and Independent Process
Go-shop provided floor valuation while Independent Committee
sought better terms
Even after go-shop periods, Board is permitted to respond to
bona fide unsolicited bids
Since expiration of go-shop period, no party has made any
acquisition proposal to the Company


22
Conclusion
Merger consideration of $4.50 provides compelling
valuation and provides certainty to stockholders during
uncertain environment
Thorough, vigorous process conducted by independent
board members
Board and Management do not believe there is a viable
alternative transaction
Merger price represents a significant premium to current
market price of $3.35 per share*
Catterton merger deal must close by June 30, 2008 or is
subject to termination by terms of Merger Agreement
* Closing price on May 28, 2008.


23
Appendix:  Transaction Summary
Agreement and Plan of Merger dated as of
November 8, 2007, as amended as of January 24, 2008
Key Terms
$4.50 per share, in cash
35 day go-shop (from January 24 –
February 28, 2008)
In addition to similar go-shop period after execution of initial
Merger Agreement 
Certain shareholders (the “Participants”) have agreed to
exchange approximately 8 million shares (approximately 20.1%)
of Company stock for shares in Home Holdings, LLC
Catterton provided $25 million subordinated loan to Company
June
30,
2008
“drop
dead”
termination
date
if
deal
does
not
close
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