Pottery Barn 2004 Annual Report Download - page 62

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In addition, we are party to a variety of contractual agreements under which we may be obligated to indemnify
the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases,
trademarks, intellectual property, financial agreements and various other agreements. Under these contracts, we
may provide certain routine indemnifications relating to representations and warranties or personal injury
matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, we
have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any
of these matters, the loss would not have a material effect on our financial condition or results of operations.
Note L: Commitments and Contingencies
On September 30, 2004, we entered into a five-year service agreement with IBM to host and manage certain
aspects of our data center information technology infrastructure. The terms of the agreement require the payment
of both fixed and variable charges over the life of the agreement. The variable charges are primarily based on
CPU hours, storage capacity and support services that are expected to fluctuate throughout the term of the
agreement.
Under the terms of the agreement, we are subject to a minimum charge over the five-year term of the agreement.
This minimum charge is based on both a fixed and variable component calculated as a percentage of the total
estimated service charges over the five-year term of the agreement. As of January 30, 2005, we estimate the
remaining minimum charge to be approximately $21,000,000. The fixed component of this minimum charge will
be paid annually not to exceed approximately $5,000,000, while the variable component will be based on usage.
The agreement can be terminated at any time for cause and after 24 months for convenience. In the event the
agreement is terminated for convenience, a graduated termination fee will be assessed based on the time period
remaining in the contract term, not to exceed $9,000,000. During fiscal 2004, we recognized expense of
approximately $3,000,000 relating to this agreement.
On September 24, 2004, a purported class action lawsuit entitled Alvarez, et al. v. Williams-Sonoma, Inc., et al.
was filed in the Superior Court of California, San Francisco County. The potential class consists of current and
former store managers and assistant store managers in California Williams-Sonoma brand stores. The lawsuit
alleges that the employees were improperly classified under California’s wage and hour and unfair business
practice laws and seeks damages, penalties under California’s wage and hour laws, restitution and attorneys’ fees
and costs. We are vigorously investigating and defending this litigation. Because the case is in the very early
stages, the financial impact to us cannot yet be predicted.
We are involved in other lawsuits, claims and proceedings incident to the ordinary course of our business. These
disputes, which are not currently material, are increasing in number as our business expands and our company
grows larger. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be
time consuming, result in costly litigation, require significant amounts of management time and result in the
diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be
predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a
material adverse effect on our consolidated financial statements taken as a whole.
Note M: Segment Reporting
We have two reportable segments, retail and direct-to-customer. The retail segment has five merchandising
concepts which sell products for the home (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Hold Everything
and West Elm). These five retail merchandising concepts are operating segments, which have been aggregated
into one reportable segment, retail. The direct-to-customer segment has seven merchandising concepts
(Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, Hold Everything, West Elm, and Williams-Sonoma
Home) and sells similar products through our eight direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery
Barn Kids, Pottery Barn Bed + Bath, PBteen, Hold Everything, West Elm and Williams-Sonoma Home) and six
e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com
and holdeverything.com). Management’s expectation is that the overall economics of each of our major concepts
within each reportable segment will be similar over time.
55
Form 10-K