Pottery Barn 2006 Annual Report Download - page 26

expenditures or to fund our operations. Our Board of Directors may, at its discretion, decrease the intended level
of dividends or entirely discontinue the payment of dividends at any time. The stock repurchase program does
not have an expiration date and may be limited or terminated at any time. Our ability to pay dividends and
repurchase shares will depend on our ability to generate cash flows from operations in the future. This ability
may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any
failure to pay dividends or repurchase shares after we have announced our intention to do so may negatively
impact our reputation and investor confidence in us and negatively impact our stock price. In addition, we may
be subject to lawsuits regarding the use of our cash for dividends or share repurchases.
We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of
the Sarbanes-Oxley Act of 2002.
We have evaluated and tested our internal controls in order to allow management to report on, and our registered
independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-
Oxley Act of 2002. We have incurred, and expect to continue to incur, significant expenses and a diversion of
management’s time to meet the requirements of Section 404. If we are not able to continue to meet the
requirements of Section 404 in a timely manner or with adequate compliance, we would be required to disclose
material weaknesses if they develop or are uncovered and we may be subject to sanctions or investigation by
regulatory authorities, such as the Securities and Exchange Commission or the New York Stock Exchange. Any
such action could negatively impact the perception of us in the financial market and our business. In addition, our
internal controls may not prevent or detect all errors and fraud. A control system, no matter how well designed
and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of
the control system will be met.
Changes to accounting rules or regulations may adversely affect our results of operations.
Changes to existing accounting rules or regulations may impact our future results of operations. For example, on
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 123R, “Share Based Payment,” which requires us to measure compensation
costs for all stock-based compensation at fair value and record compensation expense equal to that value over the
requisite service period. Share-based compensation resulted in a negative impact of approximately $0.14 on our
fiscal 2006 diluted earnings per share. A change in accounting rules or regulations may even affect our reporting
of transactions completed before the change is effective. Other new accounting rules or regulations and varying
interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future
changes to accounting rules or regulations or the questioning of current accounting practices may adversely
affect our results of operations.
Changes to estimates related to our property and equipment, or operating results that are lower than our current
estimates at certain store locations, may cause us to incur impairment charges.
We make certain estimates and projections in connection with impairment analyses for certain of our store
locations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
We review for impairment all stores for which current cash flows from operations are either negative or nominal,
or the construction costs are significantly in excess of the amount originally expected. An impairment charge is
required when the carrying value of the asset exceeds the undiscounted future cash flows over the life of the
lease. These calculations require us to make a number of estimates and projections of future results, often up to
20 years into the future. If these estimates or projections change or prove incorrect, we may be, and have been,
required to record impairment charges on certain of these store locations. If these impairment charges are
significant, our results of operations would be adversely affected.
We must properly account for our unredeemed gift certificates and merchandise credits.
We maintain a liability for unredeemed gift certificates and merchandise credits until the earlier of redemption,
escheatment or four years. After four years, the remaining unredeemed gift certificate or merchandise credit
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