Pottery Barn 2005 Annual Report Download - page 123

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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 29,
2006, $13,809,000 was outstanding under the Partnership 2 industrial development bonds.
During fiscal 2005, we made annual rental payments of approximately $2,600,000, plus applicable taxes,
insurance and maintenance expenses. This operating lease has an original term of 15 years expiring in August
2006, with three optional five-year renewal periods. We are, however, obligated to renew the operating lease on
an annual basis until these bonds are fully repaid.
As of February 1, 2004, the company adopted 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 29, 2006, the consolidation
resulted in increases to our consolidated balance sheet of $18,250,000 in assets (primarily buildings),
$15,696,000 in debt, and $2,554,000 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’ debt, shown
as occupancy expense in fiscal 2003, is now recorded as interest expense. In fiscal 2005 and fiscal 2004, this
interest expense approximated $1,462,000 and $1,525,000, respectively.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, 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. We believe that during fiscal 2005, our directors, officers and more than
10% shareholders complied with all Section 16(a) filing requirements based on their filings with the SEC and
information provided to us by them.
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