Pottery Barn 2008 Annual Report Download - page 49

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• During fiscal 2008, we entered into lease agreements in Florida and North Carolina for storage space
associated with the additional insourcing of our furniture delivery hubs within the region and for the
purpose of a small manufacturing facility.
We are party to a variety of contractual agreements under which we may be obligated to indemnify the other
party for certain matters. These contracts primarily relate to our commercial contracts, operating leases,
trademarks, intellectual property, financial agreements and various other agreements. Under these contracts, we
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.
CONSOLIDATION OF MEMPHIS-BASED DISTRIBUTION FACILITIES
Our Memphis-based distribution facilities include an operating lease entered into in July 1983 for a distribution
facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 1”) comprised of W. Howard
Lester, our Chairman of the Board of Directors and Chief Executive Officer and James A. McMahan, a Director
Emeritus and a significant shareholder. Partnership 1 does not have operations separate from the leasing of this
distribution facility and does not have lease agreements with any unrelated third parties.
Partnership 1 financed the construction of this distribution facility through the sale of a total of $9,200,000 of
industrial development bonds in 1983 and 1985. Annual principal payments and monthly interest payments are
required through maturity in December 2010. The Partnership 1 industrial development bonds are collateralized
by the distribution facility and the individual partners guarantee the bond repayments. As of February 1, 2009,
$425,000 was outstanding under the Partnership 1 industrial development bonds.
We made annual rental payments in fiscal 2008, fiscal 2007 and fiscal 2006 of approximately $618,000, plus
interest on the bonds calculated at a variable rate determined monthly (approximately 3.0% as of February 1,
2009), applicable taxes, insurance and maintenance expenses. Although the current term of the lease expires in
August 2009, 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 1,
2009, $10,813,000 was outstanding under the Partnership 2 industrial development bonds.
We made annual rental payments of approximately $2,577,000, $2,591,000 and $2,585,000 plus applicable taxes,
insurance and maintenance expenses in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Although the
current term of the lease expires in August 2009, 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 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 1, 2009, our consolidated balance sheet includes $16,372,000 in
assets (primarily buildings), $11,238,000 in debt and $5,134,000 in other long-term liabilities.
37
Form 10-K