Restoration Hardware 2012 Annual Report Download - page 161

NOTE 14—RELATED PARTY TRANSACTIONS
Resignation of Co-Chief Executive Officer and Formation of Hierarchy
The Company’s former Chairman and Co-Chief Executive Officer, Gary Friedman, resigned from these
positions and as a director of the Company effective as of October 20, 2012. In connection with such resignation,
Mr. Friedman and the Company entered into an advisory services agreement that provides for Mr. Friedman to
advise the Company in his role as the Creator and Curator with respect to product development, merchandising
and other creative matters. The agreement has a five-year term and is renewable for an additional five-year
period. In addition, in connection with the Company’s initial public offering, Home Holdings has agreed to invest
$5 million, consisting of $2.5 million in an initial tranche and up to $2.5 million in one or more additional
tranches, directly or indirectly, in Hierarchy, LLC (“Hierarchy”), a newly formed entity in which Mr. Friedman
has a controlling interest. If requested by Home Holdings and agreed to by the Company, the Company may
make these subsequent investments. The Company will have the right to acquire all or a portion of Home
Holdings’ interest in Hierarchy between the second and third anniversaries of the Company’s initial public
offering, at the greater of the then fair market value and the price paid by Home Holdings. As of February 2,
2013, the initial investment tranche of $2.5 million had not been funded by Home Holdings.
In addition, Home Holdings has assigned to the Company its right of first offer and co-sale right over the sale
by Mr. Friedman of his interests in Hierarchy, its right of first offer over the sale of Hierarchy or any of its lines of
business and its preemptive rights on issuances of additional interests in Hierarchy. The agreements among
Hierarchy, Home Holdings, Mr. Friedman and the Company contemplate that the Company will enter into an
agreement to provide Hierarchy with back office, logistics, supply chain and administrative support, with pricing
determined based on the fair market value of such services. Unless otherwise agreed by Home Holdings, for two
years from the date of the Hierarchy operating agreement, Hierarchy’s line of business will be limited to apparel
and apparel related businesses. In addition, Hierarchy will be permanently prohibited from entering into lines of
business in which the Company is engaged and certain lines of business in which the Company may become
engaged (other than luggage, which Hierarchy may enter into after such two year period). Mr. Friedman is also a
significant stockholder in the Company and will continue to advise the Board of Directors in an observer capacity,
with the honorary title of Chairman Emeritus.
Management Agreement
Pursuant to the Amended and Restated Management Services Agreement with certain affiliates of Catterton,
Tower Three and Glenhill, such affiliated entities were to provide services to the Company for general
management, consulting services and other strategic planning functions. The amount of the annual management
fee payable to Catterton, Tower Three and Glenhill under the Amended and Restated Management Services
Agreement was equal to 1.5% of Catterton’s and Tower Three’s invested capital in Home Holdings and 1% of
Glenhill’s invested capital in Home Holdings.
The Amended and Restated Management Services Agreement provided that the term of the agreement ends
upon the consummation of an initial public offering, and that additional fees would be payable upon termination
in connection with an initial public offering. The Company paid additional fees upon such termination in
connection with its initial public offering to Catterton, Tower Three and Glenhill in the amount of $3.3 million,
$3.1 million and $0.6 million, respectively.
In addition to the initial public offering termination fees, the Company recorded management fees of $3.9
million in selling, general and administrative expenses in fiscal 2012 and such management fees were paid by the
Company as of February 2, 2013.
The Company recorded management fees of $9.9 million in selling, general and administrative expenses in
fiscal 2011, of which $6.0 million was paid directly by Home Holdings and reflected as a capital contribution
from Home Holdings through additional paid-in capital. The remaining $3.9 million was paid by the Company as
of January 28, 2012.
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Form 10-K