Pottery Barn 2007 Annual Report Download - page 139

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2008), applicable taxes, insurance and maintenance expenses. Although the current term of the lease expires in
August 2008, 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 February 3,
2008, $11,893,000 was outstanding under the Partnership 2 industrial development bonds.
We made annual rental payments of approximately $2,591,000, $2,585,000 and $2,600,000 plus applicable taxes,
insurance and maintenance expenses in fiscal 2007, fiscal 2006 and fiscal 2005, respectively. Although the
current term of the lease expires in August 2008, 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 Financial Accounting Standards
Board Interpretation No. 46R, “Consolidation of Variable Interest Entities,” due to their related party relationship
to us 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 February 3, 2008, our consolidated balance sheet includes $16,995,000 in assets
(primarily buildings), $12,822,000 in debt and $4,173,000 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 2007, 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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