Pottery Barn 2004 Annual Report Download - page 58

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The aggregate minimum annual rental payments under noncancelable operating leases (excluding the Memphis-
based distribution facilities) in effect at January 30, 2005 were as follows:
Dollars in thousands
Minimum Lease
Commitments1
Fiscal 2005 $ 164,993
Fiscal 2006 165,143
Fiscal 2007 162,284
Fiscal 2008 156,124
Fiscal 2009 147,396
Thereafter 725,694
Total $1,521,634
1Projected payments include only those amounts that are fixed and determinable as of the reporting date.
Note F: Consolidation of 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 W. Howard
Lester, Chairman of the Board of Directors and a significant shareholder, and James A. McMahan, a Director
Emeritus and a significant shareholder. 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.
Partnership 1 financed the construction of this distribution facility through the sale of a total of $9,200,000 of
industrial development bonds in 1983 and 1985. Annual principal payments and monthly interest payments are
required through maturity in December 2010. The Partnership 1 industrial development bonds are collateralized
by the distribution facility and the individual partners guarantee the bond repayments. As of January 30, 2005,
$2,341,000 was outstanding under the Partnership 1 industrial development bonds.
The operating lease for this distribution facility requires us to pay annual rent of $618,000 plus interest on the
bonds calculated at a variable rate determined monthly (2.3% in January 2005), applicable taxes, insurance and
maintenance expenses. Although the current term of the lease expires in August 2005, we are obligated to renew
the operating lease until these bonds are fully repaid.
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 W. Howard Lester, James A. 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.
Partnership 2 financed the construction of this distribution facility and related addition through the sale of a total
of $24,000,000 of industrial development bonds in 1990 and 1994. Quarterly interest and annual principal
payments are required through maturity in August 2015. The Partnership 2 industrial development bonds are
collateralized by the distribution facility and require us to maintain certain financial covenants. As of January 30,
2005, $14,659,000 was outstanding under the Partnership 2 industrial development bonds.
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 FASB 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.
51
Form 10-K