Pottery Barn 2004 Annual Report Download - page 106

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The operating lease for this distribution facility requires us to pay annual rent of approximately $2,600,000, plus
applicable taxes, insurance and maintenance expenses. This operating lease has a term of 15 years expiring in
August 2006, with three optional five-year renewal periods. We are, however, obligated to renew the lease until
the bonds are fully repaid.
As of February 1, 2004, the Company adopted Financial Accounting Standards Board Interpretation No.
(“FIN”) 46R, which requires existing unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties involved. The two partnerships
described above qualify as variable interest entities under FIN 46R due to their related party relationship and our
obligation to renew the leases until the bonds are fully repaid. Accordingly, the two related party variable interest
entity partnerships from which we lease our Memphis-based distribution facilities were consolidated by us as of
February 1, 2004. As of January 30, 2005, the consolidation had resulted in increases to our consolidated balance
sheet of $18,882,000 in assets (primarily buildings), $17,000,000 in long-term debt, and $1,882,000 in other
long-term liabilities. Consolidation of these partnerships did not have an impact on our net income. However, the
interest expense associated with the partnerships’ long-term debt, shown as occupancy expense in fiscal 2003, is
now recorded as interest expense. In fiscal 2004, this interest expense approximated $1,525,000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and holders of
more than 10% of our common stock to file reports regarding their ownership and changes in ownership of our
stock with the SEC. Based on their filings with the SEC and information provided to us by them, we believe that
during fiscal 2004, our directors, officers and more than 10% shareholders complied with all Section 16(a) filing
requirements.
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