Pottery Barn 2009 Annual Report Download - page 72

Note L: Related Party Transaction
On May 16, 2008, we completed two transactions relating to our corporate aircraft. First, we sold our Bombardier
Global Express airplane for approximately $46,787,000 in cash (a net after-tax cash benefit of approximately
$29,000,000) to an unrelated third party. This resulted in a gain on sale of asset of approximately $16,000,000 in
the second quarter of fiscal 2008. Second, we entered into an Aircraft Lease Agreement (the “Lease Agreement”)
with a limited liability company (the “LLC”) owned by W. Howard Lester (“Mr. Lester”), our Chief Executive
Officer and Chairman of the Board of Directors, for use of a Bombardier Global 5000 owned by the LLC. These
transactions were approved by our Board of Directors.
Under the terms of the Lease Agreement, in exchange for use of the aircraft, we will pay the LLC $375,000 for
each of the thirty-six months of the lease term through May 15, 2011. We are also responsible for all use-related
costs associated with the aircraft, including fixed costs such as crew salaries and benefits, insurance and hangar
costs, and all direct operating costs. Closing costs associated with the Lease Agreement were divided evenly
between us and the LLC, and each party paid its own attorney and advisor fees. During fiscal 2009 and fiscal
2008, we paid a total of $4,500,000 and $3,185,000 to the LLC, respectively.
In conjunction with the retirement and consulting agreement entered into between us and Mr. Lester (see
Note M) on January 25, 2010, the aircraft agreement will continue pursuant to its economic terms through May
2011. Additionally, Mr. Lester, under the agreement, has agreed to give us an option to purchase this aircraft at
the expiration of the lease term for the estimated fair market value at the time we entered into the retirement and
consulting agreement of $32,000,000.
Note M: Retirement and Consulting Agreement
On January 25, 2010, the independent members of our Board of Directors approved the company’s entry into a
Retirement and Consulting Agreement (the “Agreement”) with W. Howard Lester, our Chairman and Chief
Executive Officer. Pursuant to the terms of the Agreement, Mr. Lester will retire as Chairman and Chief
Executive Officer and as a member of the Board on the date of our 2010 annual shareholders’ meeting, or
May 26, 2010 (the “Retirement Date”). Mr. Lester will, however, provide consulting and advisory services in
order to assist with the transition to our new Chief Executive Officer. Following his retirement, Mr. Lester will
have the title of Chairman Emeritus.
In recognition of his retirement and his contributions to the company, Mr. Lester, upon his Retirement Date, will
receive accelerated vesting of his outstanding stock options (2,500 options), stock-settled stock appreciation
rights (318,750 rights) and restricted stock units (35,195 units), at which time, these awards will become fully
exercisable. The total expense associated with his retirement, primarily consisting of the fair market value of
these modified awards, is expected to be approximately $4,600,000, which will be expensed principally in the
first quarter of fiscal 2010.
Pursuant to the terms of the Agreement, Mr. Lester will provide consulting and advisory services from his
Retirement Date through December 2012. During the consulting period, Mr. Lester will, at our request, advise
and assist on such matters as store real estate strategy, negotiations with real estate lessors, seasonal assortments
and layouts, and outreach to shareholders. The Agreement also provides that Mr. Lester will not, among other
things, compete with the company or attempt to hire our employees. During this consulting period, Mr. Lester
will receive an annualized payment of $500,000 per year, reasonable administrative support and reimbursement
for reasonable expenses incurred in connection with his services.
Additionally, Mr. Lester will be granted units representing the right to receive 125,000 shares of our common
stock in addition to receiving cash payments representing the value of 125,000 shares of our common stock, in
each case, which will vest monthly over the consulting period. In the event we terminate the consulting
agreement as a result of Mr. Lester’s material breach of the Agreement, death, permanent disability or a change
in control transaction in which the Agreement is not assumed, any unvested portion of these stock units or cash
payments will be forfeited. The common stock award and cash award were initially measured at fair market
value, or approximately $5,000,000, and will be expensed over the consulting period through December 2012.
The unvested shares and cash awards will be re-measured at fair market value every reporting period.
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