Pottery Barn 2006 Annual Report Download - page 74

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 28, 2007, we estimate the
remaining minimum charge to be approximately $14,491,000. 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. As of January 28, 2007, this termination fee does not exceed $6,000,000. We
recognized expense relating to this agreement of approximately $14,000,000, $12,000,000 and $3,000,000 during
fiscal 2006, fiscal 2005 and fiscal 2004, respectively.
We are involved in 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, West Elm and
Williams-Sonoma Home). The five retail merchandising concepts are operating segments, which have been
aggregated into one reportable segment, retail. The direct-to-customer segment has six merchandising concepts
(Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home) and sells
similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids,
Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites
(williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com). All
of our Hold Everything retail stores were closed during late 2005 and the first quarter of fiscal 2006. The final
phase of our operational shutdown was completed in the second quarter of fiscal 2006, with our final Hold
Everything catalog mailed in May 2006 and our Hold Everything website ceasing operations in June 2006.
Management’s expectation is that the overall economics of each of our major concepts within each reportable
segment will be similar over time.
These reportable segments are strategic business units that offer similar home-centered products. They are
managed separately because the business units utilize two distinct distribution and marketing strategies. It is not
practicable for us to report revenue by product group.
We use earnings before unallocated corporate overhead, interest and taxes to evaluate segment profitability.
Unallocated costs before income taxes include corporate employee-related costs, occupancy expense (including
depreciation expense), third-party service costs and administrative costs, primarily in our corporate systems,
corporate facilities and other administrative departments. Unallocated assets include corporate cash and cash
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