1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 30, 1995. ------------- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ----------------------- Commission file number 2-83992 ------- WILLIAMS-SONOMA, INC. (Exact Name of Registrant as Specified in Its Charter) California 94-2203880 ------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3250 Van Ness Avenue, San Francisco, CA 94109 ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (415) 421-7900 -------------- ------------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report. Indicate by check X whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes x No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- As of September 6, 1995, 25,379,045 shares of the Registrant's Common Stock were outstanding. 1
2 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> July 30, January 29, July 31, 1995 1995 1994 ---- ---- ---- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 5,233 $ 17,481 $ 4,551 Accounts receivable 5,779 5,394 3,846 Merchandise inventories 127,644 87,949 92,431 Prepaid expenses and other assets 8,546 5,849 7,637 Prepaid catalog expenses 13,797 11,205 8,392 Deferred income taxes 259 259 2,617 -------- -------- -------- Total current assets 161,258 128,137 119,474 Deferred income taxes 4,021 4,021 2,968 Investments and other assets 6,242 6,325 2,158 Property and equipment (net) 102,872 79,395 62,173 -------- -------- -------- $274,393 $217,878 $186,773 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 39,622 $ 49,357 $ 29,842 Accrued expenses 3,067 4,407 6,069 Accrued salaries and benefits 7,108 8,138 6,157 Line of credit 75,900 -- 17,300 Current portion of long-term debt 125 141 183 Customer deposits 6,033 5,631 3,407 Other liabilities 2,911 2,628 2,807 Income taxes payable -- 8,329 1,147 -------- -------- -------- Total current liabilities 134,766 78,631 66,912 Deferred lease credits 15,656 14,250 12,814 Long-term debt 6,718 6,781 7,410 Shareholders' equity 117,253 118,216 99,637 -------- -------- -------- $274,393 $217,878 $186,773 ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements. 2
3 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended July 30, July 31, July 30, July 31, 1995 1994 1995 1994 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 127,733 $ 108,014 $ 245,893 $ 210,856 Costs and expenses: Cost of goods sold and occupancy 84,105 67,156 157,883 130,608 Selling, general and administrative 44,144 36,871 88,728 73,016 --------- --------- --------- --------- Total costs and expenses 128,249 104,027 246,611 203,624 --------- --------- --------- --------- Earnings (loss) from operations (516) 3,987 (718) 7,232 Interest expense - net 888 318 1,238 481 --------- --------- --------- --------- Earnings (loss) before income taxes (1,404) 3,669 (1,956) 6,751 Income taxes (benefit) (590) 1,545 (816) 2,839 --------- --------- --------- --------- Net earnings (loss) $ (814) $ 2,124 $ (1,140) $ 3,912 ========= ========= ========= ========= Earnings (loss) per share: Primary $ (0.03) $ .08 $ (.04) $ .15 Fully diluted $ (0.03) $ .08 $ (.04) $ .15 Average number of common shares outstanding Primary 25,359 26,109 25,348 26,084 Fully diluted * 26,112 * 26,117 </TABLE> Note: 1994 shares and per share amounts have been restated to reflect the 3-for-2 stock split in September 1994. * Incremental shares from assumed exercise of stock options are antidilutive for primary and fully diluted loss per share, and therefore not presented. See Notes to Condensed Consolidated Financial Statements. 3
4 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Twenty-six Weeks Ended July 30, July 31, 1995 1994 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings (loss) $ (1,140) $ 3,912 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 7,236 5,676 Amortization of deferred lease incentives (631) (446) Change in allowance for doubtful accounts 55 64 Change in deferred rents (120) (265) Loss on disposal of assets 466 236 Change in: Notes and accounts receivable (440) 145 Merchandise inventories (39,694) (22,092) Prepaid catalog expenses (2,592) (2,674) Prepaid expenses and other assets (7) (2,506) Accounts payable (5,608) (86) Accrued expenses and other liabilities (1,457) (796) Income taxes payable (10,351) (8,423) --------- --------- Net cash used in operating activities (54,283) (27,255) --------- --------- Cash flows from investing activities: Purchases of property and equipment (32,915) (4,875) Other investments 20 27 Proceeds from sale of property and equipment 797 1 --------- --------- Net cash used in investing activities (32,098) (4,847) --------- --------- Cash flows from financing activities: Change in cash overdrafts (4,127) 1,308 Deferred lease incentives 2,246 -- Borrowings under line of credit 105,300 54,700 Repayments under line of credit (29,400) (37,400) Proceeds from mortgage -- 7,000 Repayment of long-term debt (63) (126) Proceeds from exercise of stock options 177 414 --------- --------- Net cash provided by financing activities 74,133 25,896 --------- --------- Net decrease in cash and cash equivalents (12,248) (6,206) Cash and cash equivalents at beginning of period 17,481 10,757 --------- --------- Cash and cash equivalents at end of period $ 5,233 $ 4,551 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 4
5 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Twenty-six Weeks Ended July 30, 1995 and July 31, 1994 NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of July 30, 1995 and July 31, 1994, the condensed consolidated statements of operations for the thirteen and twenty-six week periods ended July 30, 1995 and July 31, 1994, and condensed consolidated statements of cash flows for the twenty-six week periods ending July 30, 1995 and July 31, 1994 have been prepared by Williams-Sonoma, Inc., (the Company) without audit. In the opinion of management, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position for the thirteen and twenty-six weeks then ended. These financial statements include Williams-Sonoma, Inc., and its wholly owned subsidiaries. Significant intercompany transactions and accounts have been eliminated. The balance sheet at January 29, 1995, presented herein, has been prepared from the audited balance sheet of the Company. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report to Shareholders for the fiscal year ended January 29, 1995. Certain reclassifications have been made to the prior year financial statements to conform to classifications used in the current period. The results of operations for the thirteen and twenty-six weeks ended July 30, 1995 are not necessarily indicative of the operating results of the full year. NOTE B. SUBSEQUENT EVENT On August 14, 1995 the Company borrowed $40,000,000 for ten years at 7.2% from three insurance companies. The proceeds were used to pay down current borrowings under the line of credit, a portion of which were used to expand the Company's distribution center in Memphis. 5
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following table shows the results of operations for the periods indicated as a percentage of total net sales: <TABLE> <CAPTION> Thirteen Weeks Twenty-six Weeks Ended Ended July 30, July 31, July 30, July 31, 1995 1994 1995 1994 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales Catalog 41.4% 40.7% 43.0% 41.7% Retail 58.6 56.5 57.0 55.6 California Closets 0.0 2.8 0.0 2.7 ---- --- ---- --- Total net sales 100.0 100.0 100.0 100.0 Costs and expenses Cost of goods sold and occupancy 65.8 62.2 64.2 61.9 Selling, general and administrative 34.6 34.1 36.1 34.7 ---- ---- ---- ---- Earnings (loss) from operations (.4) 3.7 (.3) 3.4 Interest expense - net .7 .3 .5 .2 ---- --- ---- --- Earnings (loss) before income taxes (1.1) 3.4 (.8) 3.2 Income taxes (benefit) (.4) 1.4 (.3) 1.3 ---- --- ---- --- Net earnings (loss) (.7)% 2.0% (.5)% 1.9% ===== ==== ===== ==== </TABLE> SALES Sales in the twenty-six weeks and thirteen weeks ended July 30, 1995 increased 16.6% and 18.3%, respectively over the same periods of the prior year. Catalog sales increased 20.5% in the twenty-six weeks ended July 30, 1995 and grew 20.2% in the second quarter. Pottery Barn sales for the twenty-six weeks ended July 30, 1995 increased 42.2% over the similar period of the prior year and accounted for 70.7% of the increase in catalog sales during this period. Retail sales in the twenty-six weeks and thirteen weeks ended July 30, 1995 increased 19.4% and 22.7%, respectively over the same periods of the prior year. Comparable store sales for the 26 weeks and the thirteen weeks ended July 30, 1995, increased 2.6% and 2.9%, respectively. Williams-Sonoma and Pottery Barn reported positive single digit comparable store sales in the twenty-six and thirteen weeks ended July 30,1995. COST OF GOODS SOLD AND OCCUPANCY Total cost of goods sold and occupancy expense for the twenty-six weeks and thirteen weeks ended July 30, 1995 increased 2.3 and 3.6 percentage points, respectively, over the same periods of the prior year. Cost of goods sold for the twenty-six and thirteen weeks ended July 30, 1995 increased 1.5 and 2.6 percentage points, respectively, over the same periods of the prior year principally due to higher retail clearance markdowns during the thirteen weeks ended July 30, 1995. 6
7 SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for the twenty-six weeks ended July 30, 1995 increased 1.4 percentage points from 34.7% to 36.1% of sales. The increase is principally due to higher employment and advertising expense. Selling, general and administrative expenses in the thirteen weeks ended July 30, 1995 increased .5 percentage points over the prior year. INTEREST EXPENSE Interest expense in the twenty-six weeks and thirteen weeks ended July 30,1995 increased $757,000 and $570,000, respectively, from 1994 due to higher bank line borrowings used to support the distribution center expansion and new stores. INCOME TAXES The Company's effective tax rate for the twenty-six weeks and thirteen weeks ended July 30,1995 was 42.0% and 41.7%, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities in the twenty-six weeks ended July 30,1995 was $54,283,000 an increase of $27,028,000 over the comparable period in 1994. The increase in cash used is due primarily to a $5,052,000 decline in net earnings and a $17,602,000 increase in merchandise inventories. The increase in merchandise levels over the prior year is principally due to planned sales increases and new and remodeled stores. Capital expenditures in the first twenty-six weeks of fiscal 1995 were $32,915,000, an increase of $28,040,000 over the same period last year. New stores that opened in fiscal 1995 accounted for $9,932,000 and new stores under construction accounted for $9,831,000. The balance is attributable to the distribution center expansion, information systems and other corporate expenditures. Net borrowings under the line of credit have increased to $75,900,000 at July 30, 1995, from $17,300,000 at July 31, 1994, due to capital and inventory expenditures. On August 14, 1995 the Company borrowed $40,000,000 for ten years at 7.2% from three insurance companies. The proceeds were used to pay down current borrowings under the line of credit, a portion of which were used to expand the Company's distribution center in Memphis. SEASONALITY The Company's business is subject to substantial seasonal variations in demand. Historically, a significant portion of the Company's sales and net income have been realized during the period from October through December, and levels of net sales and net income have generally been significantly lower during the period from February through July. The Company believes this is the general pattern associated with the mail order and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and mail order processing and distribution areas, and incurs significant fixed catalog production and mailing costs. 7
8 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES FORM 10-Q PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There are no material pending legal proceedings against the Company. The Company is, however, involved in routine litigation arising in the ordinary course of its business, and, while the results of the proceedings cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a materially adverse effect on the Company's consolidated financial position or results of operations. 8
9 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <CAPTION> Exhibit Number Exhibit Description ------ ------------------- <S> <C> 10. Material Contracts 10.1 1983 Incentive Stock Option Plan and Form of Agreement (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, as filed with the Commission on May 25, 1983) 10.1A 1976 Stock Option Plan and Form of Agreement as amended (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993, as filed with the Commission on May 3, 1993) 10.1B 1993 Stock Option Plan approved by the Shareholders at the 1993 Annual Meeting (incorporated by reference to Exhibit 10.22 to the Company's Report on Form 10-Q for the period ended May 2, 1993 as filed with the Commission on June 16, 1993) 10.2 Warehouse - distribution facility lease dated July 1, 1983 between the Lester-McMahan Partnership as lessor and the Company as lessee (incorporated by reference to Exhibit 10.28 to the Company's Report on Form 10-Q for the period ended September 30, 1983, as filed with the Commission on October 14, 1983) 10.2A The Amendment, dated December 1, 1985, to the lease for the distribution center, dated July 1, 1983 between the Company as lessee and the Lester McMahan Partnership as lessor (incorporated by reference to Exhibit 10.48 to the Company's Report on Form 10-K for the fiscal year ended February 3, 1985, as filed with the Commission on April 26, 1985) 10.2B The Sublease, dated as of August 1, 1990, by and between Hewson-Memphis Partners and the Company (incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the period ended October 28, 1990, as filed with the Commission on December 12, 1990) 10.2C Second Amendment to Lease between the Company and The Lester-McMahan Partnership, dated December 1, 1993 (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) </TABLE> 9
10 <TABLE> <S> <C> 10.2D Second Amendment to Sublease between the Company and Hewson-Memphis Partners, dated September 1, 1994 (incorporated by reference to Exhibit 10.38 to the Company's Report on Form 10-Q for the period ended October 30, 1994 as filed with the Commission on December 13, 1994) 10.3 The lease for the Company's Corporate Offices at 100 North Point Street, San Francisco, California dated January 13, 1986, between the Company as lessee and Northpoint Investors as lessor (incorporated by reference to Exhibit 10.49 to the Company's Report on Form 10-K for the year ended February 3, 1985, as filed with the Commission on April 26, 1985) 10.4 Joint Venture Agreement and Trade Name and Trade Mark Licensing Agreement, dated May 3, 1988 between the Company and Tokyu Department Store Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the period ended July 31, 1988, as filed with the Commission on September 15, 1988) 10.4A Stock Purchase Agreement dated as of May 15, 1989, by and between the Company and Tokyu Department Store Co., Ltd. (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-2 filed with the Commission on June 28, 1990 as amended by amendment Number 1 on Form S-2 filed with the Commission on July 17, 1990) 10.5 Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan effective as of February 1, 1989 (incorporated by reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed February 22, 1990) 10.5A Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan Trust Agreement, dated September 20, 1989 (incorporated by reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed February 22, 1990) 10.5B Amendment Number One to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated April 27, 1990 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991, as amended by a Form 8 Amendment to Form 10-K, filed with the Commission on July 26, 1991) 10.5C Amendment Number Two to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated December 12, 1990 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991, as amended by a Form 8 Amendment to Form 10-K, filed with the Commission on July 26, 1991) </TABLE> 10
11 <TABLE> <S> <C> 10.5D Amendment Number Three to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated March 10, 1992 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 as filed with the Commission on May 3, 1993) 10.5E Amendment Number Four to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated June 9, 1993 (incorporated by reference to Exhibit 10.24 to the Company's Report on Form 10-Q for the period ended May 2, 1993 as filed with the Commission on June 16, 1993) 10.5F Williams-Sonoma, Inc. Executive Deferral Plan, dated July 1, 1995. 10.5G Williams-Sonoma, Inc. Deferred Compensation Plan, dated July 1, 1995. 10.6 Indemnity Agreement by the Company in favor of Bank of America, NT & SA, dated December 1, 1993 (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.6A Standing Loan Agreement and Deed of Trust between the Company and Bank of America, NT & SA, dated March 9, 1994 (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.6B Master Agreement between the Company and Bank of America, NT & SA, dated March 30, 1994 (incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.6C Amended and Restated Credit Agreement between the Company and Bank of America, NT & SA, dated October 13, 1994 (incorporated by reference to Exhibit 10.27 to the Company's Report on Form 10-Q for the period ended October 30, 1994 as filed with the Commission on December 13, 1994) 10.6D Second Amendment to Credit Agreement, dated July 11, 1995. 10.6E Third Amendment to Credit Agreement, dated August 8, 1995. 10.6F Continuing Guaranty from Pottery Barn East Inc. to Bank of America NT&SA, dated August 7, 1995. </TABLE> 11
12 <TABLE> <S> <C> 10.6G Continuing Guaranty from Hold Everything, Inc. to Bank of America NT&SA, dated August 7, 1995. 10.6H Continuing Guaranty from Williams-Sonoma Stores, Inc. to Bank of America NT&SA, dated August 7, 1995. 10.6I Continuing Guaranty from Chambers Catalog Company, Inc. to Bank of America NT&SA, dated August 7, 1995. 10.6J Continuing Guaranty from Gardener's Eden, Inc. to Bank of America NT&SA, dated August 7, 1995. 10.7 Purchase and Sale Agreement between the Company and Bancroft-Whitney, a division of Thomson Legal Publishing, Inc., dated December 14, 1993 (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.8 Stock Purchase agreement between the Company and Bill Levine, dated August 12, 1994. (incorporated by reference to Exhibit 10.36 to Company's Report on Form 10-Q for period ended July 31, 1994 as filed with the Commission on September 13, 1994) 10.9 Note Agreement for $40,000,000 7.2% Senior Notes, dated August 1, 1995. 10.9A Guaranty Agreement for $40,000,000 Senior Notes, dated August 1, 1995. 10.9B Intercreditor Agreement for $40,000,000 Senior Notes, dated August 1, 1995. 11 Statement re computation of per share earnings. 27 Financial Data Schedule </TABLE> (b) There have been no reports on Form 8-K filed during the quarter for which this report on Form 10-Q is being filed. 12
13 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. WILLIAMS-SONOMA, INC. By: /s/Russell Solt --------------- Russell Solt Senior Vice President Principal Financial Officer Principal Accounting Officer Dated: September 12, 1995 13
14 EXHIBIT INDEX <TABLE> <S> <C> Ex. 10.5F Williams-Sonoma, Inc. Executive Deferral Plan Ex. 10.5G Williams-Sonoma, Inc. Deferred Compensation Plan Ex. 10.6D Second Amendment to Credit Agreement Ex. 10.6E Third Amendment to Credit Agreement Ex. 10.6F Continuing Guaranty from the Pottery Barn East, Inc. to Bank of America NT & SA Ex. 10.6G Continuing Guaranty from the Hold Everything, Inc. to Bank of America NT & SA Ex. 10.6H Continuing Guaranty from the Williams-Sonoma Stores, Inc. to Bank of America NT & SA Ex. 10.6I Continuing Guaranty from The Chambers Catalog Company, Inc. to Bank of America NT & SA Ex. 10.6J Continuing Guaranty from Gardener's Eden, Inc. to Bank of America NT & SA Ex. 10.9 Note Agreement for $40,000,000 7.2% Senior Notes Ex. 10.9A Guaranty Agreement for $40,000,000 Senior Notes Ex. 10.9B Intercreditor Agreement for $40,000,000 Senior Notes Ex. 11 Statement Re Computation of Per Share Earnings Ex. 27 Financial Data Schedule </TABLE>