NOTE 13—STOCK-BASED COMPENSATION

The Company estimates the value of equity grants based upon an option-pricing model and recognizes this estimated value as compensation expense over the vesting periods. The Company recognizes expense associated with performance-based awards when it becomes probable that the performance condition will be met. Once it becomes probable that a participant will vest, the Company recognizes compensation expense equal to the number of shares which have vested multiplied by the fair value of the related shares measured at the grant date.

Stock-based compensation expense is included in selling, general and administrative expenses on the consolidated statements of operations. The Company recorded stock-based compensation expense of $67.6 million, $116.2 million and $1.6 million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. No stock-based compensation cost has been capitalized in the accompanying consolidated financial statements. Stock-based compensation expense by equity award plan and by equity award type is discussed below.

2012 Stock Option Plan and 2012 Stock Incentive Plan

In connection with the Reorganization, the Board of Directors adopted the Restoration Hardware 2012 Stock Option Plan (the “Option Plan”), pursuant to which 6,829,041 fully vested options were granted in connection with the Reorganization to certain of the Company’s employees and advisors, including Mr. Friedman and Mr. Alberini. The options granted under this plan were fully vested upon the completion of the initial public offering and are subject to resale restrictions whereby the holder may not sell the shares for a period of 20 years after the initial public offering, except as follows: (i) with respect to 875,389 of these shares with an exercise price of $29.00 per share, such resale restrictions lapse over time in accordance with the dates set forth in the applicable award agreement, and (ii) with respect to 5,953,652 shares with an exercise price of $46.50 per share, such resale restrictions lapse on dates after the initial public offering on which the 10-day average closing price per share of the Company’s common stock reaches specified levels ranging from $50.75 to $111.25 for at least 10 consecutive trading days. Aside from these options granted in connection with the Reorganization, no other awards will be granted under the Option Plan.

In connection with the Reorganization, the Board of Directors adopted the Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for the grant of incentive stock options to the Company’s employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to the Company’s employees, directors and consultants and the Company’s parent and subsidiary corporations’ employees, directors and consultants. In connection with the Reorganization, the Board of Directors granted options to purchase 1,264,036 shares of the Company’s common stock to employees of the Company under the Stock Incentive Plan, which options were fully vested upon the completion of the initial public offering, with a weighted-average exercise price equal to $26.50 per share.

In addition, in connection with the Reorganization, the Board of Directors granted an aggregate of 40,623 restricted stock awards to certain of the Company’s directors under the Stock Incentive Plan. Such restricted stock awards vested in full on January 31, 2013.

In connection with the grants under the Option Plan and the Stock Incentive Plan, the Company recorded a non-cash compensation charge at the Reorganization in fiscal 2012 of $52.0 million related to these awards.

On July 2, 2013, in connection with Mr. Friedman’s reappointment as Chairman and Co-Chief Executive Officer, the Company granted a stock option to Mr. Friedman under the 2012 Stock Incentive Plan to purchase 1,000,000 shares of its common stock, with an exercise price of $75.43, which is equal to the closing price of the Company’s common stock on the date of grant. This option is fully vested as of the date of grant but any shares issued upon exercise of the option will be subject to selling restrictions which are scheduled to lapse in three equal installments on the third, fourth and fifth anniversaries of the grant date. The fully vested option resulted in a one-time non-cash stock-based compensation charge of $33.7 million in fiscal 2013.

Upon adoption, there were a total of 11,900,671 shares issuable under the Option Plan and Stock Incentive Plan. On February 4, 2013, an additional 759,353 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Option Plan and Stock Incentive Plan as of February 1, 2014 to 12,660,024. Awards under the plans reduce the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Stock Incentive Plan increase the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Option Plan are immediately retired and are no longer available for future issuance. The number of shares available for future issuance under the Stock Incentive Plan as of February 1, 2014 was 2,857,157. There are no more shares available for issuance under the Option Plan. Shares issued as a result of award exercises under the Option Plan and Stock Incentive Plan will be funded with the issuance of new shares.

On February 3, 2014, an additional 782,495 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision.

2012 Stock Option Plan and 2012 Stock Incentive Plan – Stock Options

A summary of stock option activity under the Option Plan and the Stock Incentive Plan for fiscal 2013 is as follows:


	Options			Weighted-Average Exercise Price
Outstanding—February 2, 2013		8,159,577		$	41.41
Granted		1,417,500			70.32
Exercised		(317,771	)		27.26
Forfeited		(95,675	)		35.75
Retired		(16,325	)		29.00

Outstanding—February 1, 2014		9,147,306		$	46.46

The fair value of stock options issued during fiscal 2013 and 2012 was estimated on the date of grant using the following assumptions:


	Fiscal 2013			Fiscal 2012
Expected volatility		39.7	%		35.4	%
Expected life (years)		6.7			5.3
Risk-free interest rate		1.9	%		1.6	%
Dividend yield		—			—

A summary of additional information about stock options is as follows:


	Fiscal 2013		Fiscal 2012
Weighted-average fair value per share of stock options granted	$	30.49	$	6.34
Aggregate intrinsic value of stock options exercised (in thousands)	$	11,623	$	—
Fair value of stock options vested (in thousands)	$	33,871	$	51,063

Information about stock options outstanding, vested or expected to vest, and exercisable as of February 1, 2014 is as follows:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Options		Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
$24.00 - $29.00		1,736,279		8.50	$	27.51		1,736,279	$	27.51
$32.35 - $39.00		141,875		8.75		33.89		5,000		32.46
$46.50 - $46.50		5,953,652		4.54		46.50		5,953,652		46.50
$58.96 - $69.64		265,500		9.41		61.54		—		—
$74.03 - $76.80		1,050,000		9.41		75.46		1,000,000		75.43

Total		9,147,306		6.06	$	46.46		8,694,931	$	46.03

Vested or expected to vest as of February 1, 2014		9,113,138		6.05	$	46.43

The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of February 1, 2014 was $114.9 million, $114.7 million, and $111.8 million, respectively. Stock options exercisable as of February 1, 2014 had a weighted-average remaining contractual life of 8.82 years.

The Company recorded stock-based compensation expense for stock options of $1.3 million and $0.1 million in fiscal 2013 and fiscal 2012 (subsequent to expense incurred at the time of the Reorganization), respectively. As of February 1, 2014, the total unrecognized compensation expense related to unvested options was $7.7 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.88 years.

2012 Stock Incentive Plan – Restricted Stock Awards

The Company grants restricted stock awards, which include restricted stock and restricted stock units, to its employees and members of its Board of Directors. A summary of restricted stock award activity under the Stock Incentive Plan for fiscal 2013 is as follows:


	Options			Weighted-Average Grant Date Fair Value		Intrinsic Value
Outstanding—February 2, 2013		—		$	—
Granted		316,580			65.37
Released		(13,333	)		57.01
Cancelled		(13,500	)		73.92

Outstanding—February 1, 2014		289,747		$	65.36	$	16,440,000

A summary of additional information about restricted stock awards is as follows:


	Fiscal 2013		Fiscal 2012
Weighted-average fair value per share of awards granted	$	65.37	$	24.00
Grant date fair value of awards released (in thousands)	$	760	$	975

The Company recorded stock-based compensation expense for restricted stock awards of $2.7 million in fiscal 2013. As of February 1, 2014, the total unrecognized compensation expense related to unvested restricted stock awards was $14.5 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.64 years.

2012 Equity Replacement Plan

In connection with the Reorganization, the Board of Directors adopted the Restoration Hardware 2012 Equity Replacement Plan (the “Replacement Plan”), and outstanding units under the Team Resto Ownership Plan were replaced with vested and unvested shares of common stock under the Replacement Plan, in some cases subject to selling restrictions.

A portion of the shares issued under the Replacement Plan, which are fully vested, are subject to resale restrictions whereby the holder may not sell the shares until the earlier of 20 years after the initial public offering, or with respect to 818,209 of these shares, such resale restrictions will lapse over time in accordance with the dates set forth in the applicable award agreement.

The Company recorded a non-cash compensation charge at the Reorganization in fiscal 2012 of $39.1 million related to the awards granted under the Replacement Plan.

A portion of the shares issued under the Replacement Plan are unvested restricted shares issued to Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units granted under the Team Resto Ownership Plan. With respect to the 1,331,548 shares received by Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units, such shares began to vest during the period following the initial public offering when the price of the Company’s common stock reached a 10-day average closing price per share of $31.00 for at least 10 consecutive trading days, and such shares fully vested when the price of the Company’s common stock reached a 10-day average closing price per share of $46.50 for at least 10 consecutive trading days. In addition, with respect to the 512,580 shares received by Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units, such shares began to vest during the period following the initial public offering when the 10-day average closing price of the Company’s common stock exceeded the initial public offering price of $24.00 per share for at least 10 consecutive trading days, and such shares fully vested when the 10-day average closing price of the Company’s common stock reached a price per share of $31.00 for at least 10 consecutive trading days.

In connection with Mr. Friedman’s resignation and new role as the Creator and Curator in fiscal 2012 and prior to his reappointment as Chairman and Co-Chief Executive Officer in fiscal 2013, 1,185,511 shares of unvested stock he received in replacement of certain performance-based units were marked to market every period until the required vesting criteria were met in accordance with ASC 718.

During fiscal 2012, all 512,580 shares received by Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units met the performance objective of $31.00 per share for at least 10 consecutive trading days. The Company recorded a non-cash compensation charge of $12.5 million related to these awards in fiscal 2012. During fiscal 2012, 442,932 shares of the 1,331,548 shares received by Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units had vested in accordance with the performance objective as described above. The Company recorded a non-cash compensation charge of $10.6 million related to these awards in fiscal 2012.

During fiscal 2013, 888,616 shares of the 1,331,548 shares received by Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units vested in accordance with the performance objectives described above. The Company recorded a non-cash compensation charge of $29.9 million related to these awards in fiscal 2013. As all shares received by Mr. Friedman and Mr. Alberini in replacement of certain of their performance-based units had vested as of February 1, 2014, no additional compensation expense will be recorded in future periods related to these awards.

Aside from the awards described above, no other awards will be granted under the Replacement Plan.

Team Resto Ownership Plan

Home Holdings established the Team Resto Ownership Plan in fiscal 2009. Awards under the Team Resto Ownership Plan were granted by the Home Holdings and were made up of the following:

•

Time-based units—time-based units vested in annual installments, generally over a five-year graded vesting period.

•

Performance-based units—performance-based units vested based on a return on equity investment to the Company’s investors between either two times and three times such investment or three times and five times such investment.

All stock-based compensation expense associated with the grants of units by Home Holdings to the Company’s directors, executive officers and employees was recorded by the Company. The Company recorded stock-based compensation expense for time-based units of $1.1 million and $1.6 million in fiscal 2012 and fiscal 2011, respectively. In connection with its initial public offering, the Company recorded $0.8 million related to the vested performance-based units in fiscal 2012.

On November 7, 2012, the Company completed its initial public offering and at the time of the initial public offering, outstanding units under the Team Resto Ownership Plan, were replaced with common stock of the Company.