Pottery Barn 2009 Annual Report Download - page 48

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 January 31, 2010,
$175,000 was outstanding under the Partnership 1 industrial development bonds.
We made annual rental payments in fiscal 2009, fiscal 2008 and fiscal 2007 of approximately $618,000, plus
interest on the bonds calculated at a variable rate determined monthly (approximately 1.8% as of January 31,
2010), applicable taxes, insurance and maintenance expenses. The term of the lease automatically renews on an
annual basis until the bonds are fully repaid in December 2010, at which time, we intend to enter into a new
short-term lease agreement on this facility.
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 31,
2010, $9,625,000 was outstanding under the Partnership 2 industrial development bonds.
We made annual rental payments of approximately $2,582,000, $2,577,000 and $2,591,000 plus applicable taxes,
insurance and maintenance expenses in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. The term of the
lease automatically renews on an annual basis until these bonds are fully repaid in August 2015.
The two partnerships described above qualify as 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 January 31, 2010, our consolidated balance sheet includes $15,765,000 in assets
(primarily buildings), $9,800,000 in debt and $5,965,000 in other long-term liabilities related to these leases.
IMPACT OF INFLATION
The impact of inflation (or deflation) on our results of operations for the past three fiscal years has not been
significant. In light of the current economic environment, however, we cannot be certain of the effect inflation
(or deflation) may have on our results of our operations in the future.
CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an
ongoing basis and are based on historical experience and various other factors that we believe to be reasonable
under the circumstances. Actual results could differ from these estimates.
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