Restoration Hardware 2012 Annual Report Download - page 147

Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs not included in cost of goods sold.
These expenses include payroll and payroll related expenses, store expenses other than occupancy and expenses
related to many of the Company’s operations at its headquarters, including utilities, depreciation and
amortization, credit card fees and marketing expense, which primarily includes catalog production, mailing and
print advertising costs. All store pre-opening costs are included in selling, general and administrative expenses
and are expensed as incurred.
Selling, general and administrative expenses for fiscal 2012 include a $92.0 million non-cash compensation
charge related to equity grants at the time of the Reorganization, as well as a non-cash compensation charge of
$23.1 million related to the performance-based vesting of certain shares granted to the Company’s Chief
Executive Officer, Carlos Alberini, and Gary Friedman, who serves as the Company’s Creator and Curator. Costs
incurred in connection with the initial public offering, including a fee of $7.0 million to Catterton Management
Company, LLC (“Catterton”), Tower Three Partners LLC (“Tower Three”) and GJK Capital Advisors, LLC
(“Glenhill”) in accordance with the Company’s management services agreement, payments of $2.2 million to
certain former executives and bonus payments to employees of $1.3 million, were included in selling, general
and administrative expenses in fiscal 2012. In addition, legal and other professional fees of $4.8 million, incurred
in connection with the investigation conducted by the special committee of the board of directors relating to
Mr. Friedman and the Company’s subsequent remedial actions, are included in fiscal 2012 selling, general and
administrative expenses.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed as net income (loss) divided by the weighted-average number of
common shares outstanding for the period. Diluted earnings (loss) per share is computed as net income (loss)
divided by the weighted-average number of common shares outstanding for the period plus common stock
equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the
average market price of the Company’s common stock for the period, to the extent their inclusion would be
dilutive. Potential dilutive securities are excluded from the computation of diluted earnings (loss) per share if
their effect is anti-dilutive.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized
in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, the
Company generally takes into account all expected future events then known to it, other than changes in the tax
law or rates which have not yet been enacted and which are not permitted to be considered. Accordingly, the
Company may record a valuation allowance to reduce its net deferred tax assets to the amount that is more-
likely-than-not to be realized. The determination as to whether a deferred tax asset will be realized is made on a
jurisdictional basis and is based upon management’s best estimate of the recoverability of the Company’s net
deferred tax assets. Future taxable income and ongoing prudent and feasible tax planning are considered in
determining the amount of the valuation allowance, and the amount of the allowance is subject to adjustment in
the future. Specifically, in the event the Company were to determine that it is not more-likely-than-not able to
realize its net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income
in the period such determination is made. This allowance does not alter the Company’s ability to utilize the
underlying tax net operating loss and credit carryforwards in the future, the utilization of which is limited to
achieving future taxable income.
The accounting standard for uncertainty in income taxes prescribes a recognition threshold that a tax
position is required to meet before being recognized in the financial statements and provides guidance on
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Form 10-K