Pottery Barn 2011 Annual Report Download - page 156

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have in place policies in our Corporate Code of Conduct that provide that associates must not engage in any
transaction when an associate may face a real or perceived conflict of interest with the company. Our Corporate
Code of Conduct is distributed to all employees on an annual basis and made available throughout the year in our
internal document database. It is also available on our website and in print to any stockholder who requests it. In
addition, we have in place policies and procedures with respect to related person transactions that provide that
our executive officers, directors, director nominees and principal stockholders, as well as their immediate family
members and affiliates, are not permitted to enter into a related party transaction with us unless (i) the transaction
is approved or ratified by our Audit and Finance Committee or the disinterested members of our Board or (ii) the
transaction involves the service of one of our executive officers or directors or any related compensation, is
reportable under Item 402 of Regulation S-K and is approved by our Compensation Committee.
For the purposes of our related party transaction policy, “related party transaction” means any transaction in
which the amount involved exceeds $120,000 in any calendar year and in which any of our executive officers,
directors, director nominees and principal stockholders, as well as their immediate family members and affiliates,
had, has or will have a direct or indirect material interest, other than transactions available to all of our
employees.
It is our policy to approve related party transactions only when it has been determined that such transaction is in,
or is not inconsistent with, our best interests and those of our stockholders, including situations where we may
obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from
alternative sources or when the transaction is on terms comparable to those that could be obtained in arm’s length
dealings with an unrelated third party.
Memphis-Based Distribution Facilities
Our Memphis-based distribution facilities include an operating lease entered into in July 1983 for a distribution
facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 1”) comprised of the estate of
W. Howard Lester (“Mr. Lester”), our former Chairman of the Board and Chief Executive Officer, and the estate
of James A. McMahan (“Mr. McMahan”), a former Director Emeritus and significant stockholder. Partnership 1
does not have operations separate from the leasing of this distribution facility and does not have lease agreements
with any unrelated third parties. The terms of the lease automatically renewed until the bonds that financed the
construction of the facility were fully repaid in December 2010, at which time we continued to rent the facility on
a month-to-month basis. In October 2011, we entered into an agreement with Partnership 1 to lease the facilities
through April 2013. During fiscal 2011, we made rental payments associated with the lease of $618,000. We
made annual rental payments in fiscal 2010 and 2009 of $618,000, plus interest on the bonds.
Our other Memphis-based distribution facility includes an operating lease entered into in August 1990 for
another distribution facility that is adjoined to the Partnership 1 facility in Memphis, Tennessee. The lessor is a
general partnership (“Partnership 2”) comprised of the estate of Mr. Lester, the estate of Mr. McMahan and two
unrelated parties. Partnership 2 does not have operations separate from the leasing of this distribution facility and
does not have lease agreements with any unrelated third parties. The term of the lease automatically renews on an
annual basis until the bonds that financed the construction of the facility are fully repaid in August 2015. As of
January 29, 2012, $6,924,000 was outstanding under the Partnership 2 bonds. We made annual rental payments
of approximately $2,516,000, $2,567,000 and $2,582,000 plus applicable taxes, insurance and maintenance
expenses in fiscal 2011, fiscal 2010 and fiscal 2009, respectively.
As of January 29, 2012, Partnership 2 qualifies as a variable interest entity and is consolidated by us due to its
related party relationship and our obligation to renew the lease until the bonds are fully repaid. As such, as of
January 29, 2012, our consolidated balance sheet includes $11,975,000 in assets (primarily buildings),
$6,924,000 in debt and $5,051,000 in other long-term liabilities related to the consolidation of the Partnership 2
distribution facility.
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