Pottery Barn 2011 Annual Report Download - page 50

2010, we had no borrowings under the credit facility, and no amounts were outstanding as of January 29, 2012 or
January 30, 2011. Additionally, as of January 29, 2012, $9,420,000 in issued but undrawn standby letters of
credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities
associated with workers’ compensation and other insurance programs.
Letter of Credit Facilities
We have three unsecured letter of credit reimbursement facilities for a total of $90,000,000, each of which
matures on August 31, 2012. The letter of credit facilities contain covenants and provide for events of default that
are consistent with our unsecured revolving line of credit. Interest on unreimbursed amounts under the letter of
credit facilities accrues at the lender’s prime rate (or if greater, the average rate on overnight federal funds plus
one-half of one percent) plus 2.0%. As of January 29, 2012, an aggregate of $23,544,000 was outstanding under
the letter of credit facilities, which represent only a future commitment to fund inventory purchases to which we
had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is
January 28, 2013.
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 the estate of
W. Howard Lester (“Mr. Lester”), our former Chairman of the Board and Chief Executive Officer, and the estate
of James A. McMahan (“Mr. McMahan”), a former Director Emeritus and significant stockholder. 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. The terms of the lease automatically renewed until the bonds that financed the
construction of the facility were fully repaid in December 2010, at which time we continued to rent the facility on
a month-to-month basis. In October 2011, we entered into an agreement with Partnership 1 to lease the facilities
through April 2013. During fiscal 2011, we made rental payments associated with the lease of $618,000. We
made annual rental payments in fiscal 2010 and 2009 of $618,000, plus interest on the bonds.
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 the estate of Mr. Lester, the estate of Mr. 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. The term of the lease automatically renews on an
annual basis until the bonds that financed the construction of the facility are fully repaid in August 2015. As of
January 29, 2012, $6,924,000 was outstanding under the Partnership 2 bonds. We made annual rental payments
of approximately $2,516,000, $2,567,000 and $2,582,000 plus applicable taxes, insurance and maintenance
expenses in fiscal 2011, fiscal 2010 and fiscal 2009, respectively.
As of January 29, 2012, Partnership 2 qualifies as a variable interest entity and is consolidated by us due to its
related party relationship and our obligation to renew the lease until the bonds are fully repaid. As such, as of
January 29, 2012, our consolidated balance sheet includes $11,975,000 in assets (primarily buildings),
$6,924,000 in debt and $5,051,000 in other long-term liabilities related to the consolidation of the Partnership 2
distribution facility.
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 recent economic environment, however, we cannot be certain of the effect inflation (or
deflation) may have on the 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
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