Pottery Barn 2008 Annual Report Download - page 72

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options that may be issued to 10% shareholders, which have a maximum term of five years. The exercise price of
these option awards is not less than 100% of the closing price of our stock on the date prior to the grant date or
not less than 110% of such closing price for an incentive stock option granted to a 10% shareholder. Option
awards granted to employees generally vest over four to five years. Stock awards granted to employees generally
vest over a period of three to five years for service based awards, and four to five years for performance based
awards. Certain option and stock awards contain vesting acceleration clauses in the event of a merger or similar
corporate event. Option and stock awards granted to non-employee Board members generally vest in
approximately one year. Non-employee Board members automatically receive stock awards on the date of their
initial election to the Board and annually thereafter on the date of the annual meeting of shareholders (as long as
they continue to serve as a non-employee Board member). Shares issued as a result of option award exercises
will be funded with the issuance of new shares.
We account for stock-based compensation arrangements in accordance with SFAS No. 123R, “Share-Based
Payment,” which requires us to measure and record compensation expense in our consolidated financial
statements for all employee stock-based awards using a fair value method.
Total Stock-Based Compensation Expense
During fiscal 2008, fiscal 2007 and fiscal 2006, we recognized total stock-based compensation expense, as a
component of selling, general and administrative expenses, of $12,131,000 (which includes the $11,023,000
reversal of compensation expense related to performance-based stock awards), $26,812,000, and $26,759,000,
respectively. As of February 1, 2009, there was a remaining unamortized expense balance of $50,145,000 (net of
estimated forfeitures), which we expect to be recognized on a straight-line basis over an average remaining
service period of approximately three years.
Fiscal 2008 stock-compensation expense was impacted by the reversal of approximately $11,023,000 of expense
previously recognized relating to previously issued stock awards that would have vested based on the
achievement of certain performance criteria. We had recognized compensation expense related to these awards as
we believed that it was probable that the performance criteria would be achieved. During the third quarter of
fiscal 2008, due to the decline in our operating performance, we concluded that it was no longer probable that
these criteria would be achieved and therefore reversed approximately $11,023,000 of compensation expense
previously recognized.
Subsequently, our Board of Directors decided to remove or modify the performance conditions but retain the
service provisions of the awards. As a result, these awards are now considered probable of vesting. Accordingly,
we measured the fair value of all such awards as of the date of the modification and will recognize the fair value
over the remaining service period of the awards.
Compensation expense is recorded for the following awards:
•Stock Options – Compensation expense related to the remaining unvested portion of all stock options
granted prior to the adoption of SFAS No. 123R is based on the grant date fair value (using the market
value of our stock on the date prior to the grant date), estimated in accordance with the provisions of
SFAS No. 123, as amended by SFAS No. 148. Compensation expense related to all stock options
granted subsequent to the SFAS No. 123R adoption date is based on the grant date fair value estimated
in accordance with the provisions of SFAS No. 123R.
•Stock-Settled Stock Appreciation Rights – Compensation expense is based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123R.
•Restricted Stock Units – For performance-based restricted stock units, compensation expense is based
on the grant date fair value (or modification date fair values, if applicable) and the probability that the
performance metrics will be achieved. For non-performance-based restricted stock units, compensation
expense is based on the grant date fair value.
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