Pottery Barn 2006 Annual Report Download - page 129

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During fiscal 2006, we made annual rental payments of approximately $618,000, plus interest on the bonds
calculated at a variable rate determined monthly (4.0% in January 2007), applicable taxes, insurance and
maintenance expenses. Although the current term of the lease expires in August 2007, we are obligated to renew
the operating lease on an annual basis 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 28,
2007, $12,893,000 was outstanding under the Partnership 2 industrial development bonds.
During fiscal 2006, we made annual rental payments of approximately $2,585,000, plus applicable taxes,
insurance and maintenance expenses. Although the current term of the lease expires in August 2007, we are
obligated to renew the operating lease on an annual basis until these bonds are fully repaid.
The two partnerships described above qualify as variable interest entities under FIN 46R, “Consolidation of
Variable Interest Entities,” 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 are consolidated by us. As of January 28, 2007, the consolidation
resulted in increases to our consolidated balance sheet of $17,620,000 in assets (primarily buildings),
$14,312,000 in debt, and $3,308,000 in other long-term liabilities. Consolidation of these partnerships does not
have an impact on our net income.
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 2006, 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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