Restoration Hardware 2014 Annual Report Download - page 112

under build-to-suit lease transactions is recognized as interest expense within the consolidated statements of
operations.
In addition to the above, non-cash rent expense recognized within the consolidated statements of operations
was $2.9 million, $3.9 million and $5.3 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively, which
represents the straight-line impact and amortization of tenant allowances under operating leases and land rent
expense recorded for build-to-suit lease transactions prior to cash payments occurring under the leases.
Commitments
The Company had no material off balance sheet commitments as of January 31, 2015.
Contingencies
The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of its business.
These disputes are increasing in number as the business expands and the Company grows larger. Litigation is
inherently unpredictable. As a result, the outcome of matters in which the Company is involved could result in
unexpected expenses and liability that could adversely affect the Company’s operations. In addition, any claims
against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require
significant amounts of management time and result in the diversion of significant operational resources.
The Company reviews the need for any loss contingency reserves and establishes reserves when, in the
opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can
be reasonably estimated. Generally, in view of the inherent difficulty of predicting the outcome of those matters,
particularly in cases in which claimants seek substantial or indeterminate damages, it is not possible to determine
whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability
until the case is close to resolution, in which case no reserve is established until that time. As of January 31,
2015, the Company has recorded a liability for the estimated loss related to these disputes. There is a possibility
that additional losses may be incurred in excess of the amounts that the Company has accrued. However, the
Company believes that the ultimate resolution of these current matters will not have a material adverse effect on
its consolidated financial statements.
In fiscal 2014, material developments occurred in an ongoing legal proceeding involving the Company. On
October 21, 2008, Mike Hernandez, individually and on behalf of others similarly situated, filed a class action in the
Superior Court of the State of California for the County of San Diego against Restoration Hardware, Inc. alleging
principally that the Company violated California’s Song-Beverly Credit Card Act of 1971 by requesting and recording
ZIP codes from customers paying with credit cards. On May 23, 2014, in response to a directive from the Court, the
parties filed a joint statement as to the parties’ agreed-upon claims process for the class members as well as to other
matters related to this proceeding. On September 5, 2014, the Court granted plaintiffs’ motion for attorneys’ fees, costs,
and awards, and awarded $9.5 million in fees and costs to plaintiffs’ attorneys. The Court entered judgment on
September 29, 2014 and, on November 21, 2014, a class member filed a notice of appeal from the judgment. As a
result of the appeal, the judgment was stayed until January 10, 2015. The appeal remains pending but the judgment is
enforceable. As a result of these developments, during fiscal 2014, the Company recorded a $9.5 million charge related
to this matter that was subsequently decreased to approximately $8 million. The decrease of approximately $1.5
million was based on a revision of estimated class member response. On March 16, 2015, the Company, through the
third party claims administrator, began mailing the class action award to class members.
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