1 UNITED STATES 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 August 1, 1999. [ ] 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 000-12704 WILLIAMS-SONOMA, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) California 94-2203880 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (I.R.S. Employer of 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 [ ] As of September 8, 1999, 56,011,388 shares of the Registrant's Common Stock were outstanding.
2 WILLIAMS-SONOMA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 1, 1999 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE ---- <S> <C> Item 1. Financial Statements (2) Condensed Consolidated Balance Sheets August 1, 1999, January 31, 1999, and August 2, 1998 Condensed Consolidated Statements of Operations Thirteen weeks ended August 1, 1999 and August 2, 1998 Twenty-six weeks ended August 1, 1999 and August 2, 1998 Condensed Consolidated Statements of Cash Flows Twenty-six weeks ended August 1, 1999 and August 2, 1998 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (7) Item 3. Quantitative and Qualitative Disclosure about Market Risk (10) PART II. OTHER INFORMATION Item 1. Legal Proceedings (12) Item 4. Submission of Matters to a Vote of Security Holders (12) Item 6. Exhibits and Reports on Form 8-K (13) </TABLE> 1
3 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> August 1, January 31, August 2, 1999 1999 1998 --------- ----------- --------- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 6,219 $107,308 $ 37,896 Accounts receivable (net) 25,321 20,082 18,408 Merchandise inventories 234,358 173,160 152,247 Prepaid expenses and other assets 10,989 8,985 9,333 Prepaid catalog expenses 12,859 13,154 12,485 Deferred income taxes 4,077 4,077 3,680 -------- -------- -------- Total current assets 293,823 326,766 234,049 Property and equipment (net) 276,734 243,119 213,742 Investments and other assets (net) 7,636 6,360 5,823 -------- -------- -------- Total assets $578,193 $576,245 $453,614 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 72,417 $ 70,964 $ 44,697 Accrued expenses 22,134 24,003 24,028 Line of credit 8,000 -- -- Customer deposits 27,603 26,659 19,171 Income taxes payable 1,075 19,529 153 Current portion of long-term debt 6,368 6,368 125 Other liabilities 6,426 6,377 5,516 -------- -------- -------- Total current liabilities 144,023 153,900 93,690 Deferred lease credits 76,811 72,327 62,641 Deferred tax liability 3,339 3,339 2,439 Long-term debt and other liabilities 45,315 44,649 50,587 Commitments and contingencies -- -- -- Shareholders' equity Common stock 106,191 109,708 100,841 Retained earnings 202,514 192,322 143,416 -------- -------- -------- Total shareholders' equity 308,705 302,030 244,257 Total liabilities and shareholders' equity $578,193 $576,245 $453,614 ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements. 2
4 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 ------------------------- ------------------------- August 1, August 2, August 1, August 2, 1999 1998 1999 1998 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $264,000 $215,262 $522,676 $421,472 Costs and expenses: Cost of goods sold and occupancy 166,078 135,248 325,972 263,171 Selling, general and administrative 89,848 73,336 183,183 147,695 -------- -------- -------- -------- Total costs and expenses 255,926 208,584 509,155 410,866 -------- -------- -------- -------- Earnings from operations 8,074 6,678 13,521 10,606 Gain on sale of assets 4,000 -- 4,000 -- Interest expense (net) 638 163 675 452 -------- -------- -------- -------- Earnings before income taxes 11,436 6,515 16,846 10,154 Income taxes 4,518 2,671 6,654 4,163 -------- -------- -------- -------- Net earnings $ 6,918 $ 3,844 $ 10,192 $ 5,991 ======== ======== ======== ======== Earnings per share: Basic $ 0.12 $ 0.07 $ 0.18 $ 0.11 Diluted $ 0.12 $ 0.07 $ 0.17 $ 0.11 Average number of common shares outstanding: Basic 55,671 55,484 55,725 53,587 Diluted 58,294 57,852 58,402 55,947 </TABLE> See Notes to Condensed Consolidated Financial Statements. 3
5 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended --------------------------- August 1, August 2, 1999 1998 --------- --------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 10,192 $ 5,991 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 19,448 15,571 Net gain on sale/disposal of assets (2,850) -- Amortization of deferred lease incentives (3,953) (2,959) Other 112 151 Change in: Accounts receivable (5,238) (3,170) Merchandise inventories (63,870) (19,796) Prepaid catalog expenses (1,334) 1,111 Prepaid expenses and other assets (2,005) (1,342) Accounts payable 1,453 (13,799) Accrued expenses and other liabilities (1,810) (10,092) Deferred lease incentives 8,437 9,442 Income taxes payable (18,454) (17,063) --------- --------- Net cash used in operating activities (59,872) (35,955) --------- --------- Cash flows from investing activities: Purchases of property and equipment (54,273) (31,233) Proceeds from landlord for store closure -- 2,117 Net proceeds from the sale of Gardeners Eden 9,101 -- Other (102) -- --------- --------- Net cash used in investing activities (45,274) (29,116) --------- --------- Cash flows from financing activities: Borrowings under line of credit 11,750 -- Repayments under line of credit (3,750) -- Repayment of long-term obligations (427) (311) Proceeds from exercise of stock options 1,222 6,064 Repurchase of common stock (4,738) -- --------- --------- Net cash provided by financing activities 4,057 5,753 --------- --------- Net decrease in cash and cash equivalents (101,089) (59,318) Cash and cash equivalents at beginning of period 107,308 97,214 --------- --------- Cash and cash equivalents at end of period $ 6,219 $ 37,896 ========= ========= Non-cash financing activity: Conversion of convertible notes to equity $ 39,004 </TABLE> See Notes to Condensed Financial Statements 4
6 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Thirteen and Twenty-six Weeks Ended August 1, 1999 and August 2, 1998 (Unaudited) NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of August 1, 1999 and August 2, 1998, the condensed consolidated statements of operations for the thirteen and twenty-six week periods ended August 1, 1999 and August 2, 1998 and the condensed consolidated statements of cash flows for the twenty-six week periods ended August 1, 1999 and August 2, 1998 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 at the balance sheet dates and the results of operations 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 31, 1999, presented herein, has been derived from the audited balance sheet of the Company included in the Company's Form 10-K for the fiscal year ended January 31, 1999. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed 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 31, 1999. Certain reclassifications have been made to the prior period financial statements to conform to classifications used in the current period. The results of operations for the thirteen and twenty-six weeks ended August 1, 1999 are not necessarily indicative of the operating results of the full year. NOTE B. DEBT The Company's amended and restated syndicated line of credit facility, which expires on May 31, 2001, provides for $50,000,000 in cash advances, and contains certain restrictive loan covenants, including minimum tangible net worth, a minimum out-of-debt period, fixed charge coverage requirements and a prohibition on payment of cash dividends. Additionally, the Company has a one-year $65,000,000 letter-of-credit agreement expiring on May 31, 2000 with its lead bank. On August 1, 1999, the Company had $8,000,000 of borrowings outstanding under the line of credit facility and $49,878,000 of outstanding letters of credit. 5
7 NOTE C. EARNINGS PER SHARE Basic earnings per share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. NOTE D. SEGMENT REPORTING Williams-Sonoma, Inc. has two reportable segments: retail and catalog. The retail segment sells products for the home through its three retail concepts: Williams-Sonoma, Pottery Barn and Hold Everything. The catalog segment sells similar products through its four direct-mail catalogs: Williams-Sonoma, Pottery Barn (including Pottery Barn Kids), Hold Everything and Chambers. In May 1999 the Company sold its Gardners Eden catalog business to Brookstone, Inc. As result of this sale, the Company recorded a $4 million pre-tax gain, which is reflected in catalog earnings before income taxes in the segment information below. These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because each business unit utilizes two distinct distribution and marketing strategies. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting policies detailed in the Company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission. Williams-Sonoma uses earnings before unallocated corporate overhead, interest and taxes to evaluate segment profitability. Unallocated assets include corporate cash and equivalents, the net book value of corporate facilities and related information systems, deferred tax amounts and other corporate long-lived assets. SEGMENT INFORMATION -- Dollars in thousands <TABLE> <CAPTION> Retail Catalog Unallocated Total -------- -------- ----------- -------- <S> <C> <C> <C> <C> Second Quarter 1999 Revenues $172,500 $ 91,500 $ -- $264,000 Earnings before income taxes 10,853 18,517 (17,934) 11,436 Second Quarter 1998 Revenues $141,658 $ 73,604 $ -- $215,262 Earnings before income taxes 9,917 9,239 (12,641) 6,515 </TABLE> Dollars in thousands <TABLE> <CAPTION> Retail Catalog Unallocated Total -------- -------- ----------- -------- <S> <C> <C> <C> <C> Second Quarter 1999 - YTD Revenues $330,851 $191,825 $ -- $522,676 Earnings before income taxes 20,988 30,200 (34,342) 16,846 Segment Assets 386,476 136,627 55,090 578,193 Second Quarter 1998 - YTD Revenues $270,675 $150,797 $ -- $421,472 Earnings before income taxes 19,064 16,048 (24,958) 10,154 Segment Assets 294,207 76,789 82,618 453,614 </TABLE> 6
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION NET SALES Net sales consists of the following components (dollars in thousands): <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended --------------------------------------- --------------------------------------- August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 ----------------- ----------------- ----------------- ----------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Retail Sales $172,500 65.3% $141,658 65.8% $330,851 63.3% $270,675 64.2% Catalog Sales 91,500 34.7% 73,604 34.2% 191,825 36.7% 150,797 35.8% -------- ----- -------- ----- -------- ----- -------- ----- Total Net Sales $264,000 100.0% $215,262 100.0% $522,676 100.0% $421,472 100.0% </TABLE> Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 13 weeks ended August 1, 1999 (Second Quarter of 1999) were $264,000,000 -- an increase of $48,738,000 or 22.6% over net sales for the 13 weeks ended August 2, 1998 (Second Quarter of 1998). Net sales for the 26-week period ended August 1, 1999 (Year-to-Date 1999) were $522,676,000, an increase of $101,204,000 or 24.0%, from the 26-week period ended August 2, 1998 (Year-to-Date 1998). RETAIL SALES <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------- -------------------------------- (Dollars in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Total retail sales $ 172,500 $ 141,658 $ 330,851 $ 270,675 Retail growth percentage 21.8% 21.8% 22.2% 21.6% Comparable store sales growth 6.8% 5.8% 6.9% 5.4% Number of stores - beginning of period 305 276 298 276 Number of new stores 12 17 20 25 Number of closed stores 3 8 4 16 Number of stores - end of period 314 285 314 285 Store selling area at quarter-end (sq. ft.) 1,294,858 1,098,734 1,294,858 1,098,734 Store leased area at quarter-end (sq. ft.) 2,008,683 1,688,314 2,008,683 1,688,314 </TABLE> Retail sales for the Second Quarter of 1999 increased 21.8% over retail sales for the Second Quarter of 1998 primarily due to a net increase of 29 stores. During the Second Quarter of 1999, the Company opened 12 stores (5 Pottery Barn and 7 Williams-Sonoma stores) and closed 3 stores (1 Pottery Barn, 1 Williams-Sonoma and 1 Hold Everything store). Pottery Barn accounted for 58.1% of the growth in retail sales during this period and 61.9% for Year-to-Date 1999. Total retail sales for Year-to-Date 1998 grew 21.6% over the same period of the prior year, primarily due to new store openings. Comparable stores are defined as those whose gross square feet did not change by more than 20% in the previous twelve months and which have been open for at least twelve months. Comparable store sales are compared monthly for purposes of this analysis. In any given period, the set of stores comprising comparable stores may be different than the comparable stores in the previous period, depending on store opening and closing activity. Comparable store sales grew 6.8% in the Second Quarter of 1999 as compared to the same period of the prior year, and 6.9% for Year-to-Date 1999. For these periods, comparable store sales growth was strong in both Williams-Sonoma and Pottery Barn. The prototypical 1999 large-format stores range from 4,500 - 10,200 selling square feet (9,000 - 13,300 leased square feet) for Pottery Barn stores and 2,800 - 3,700 selling square feet (4,000 - 7,800 leased square feet) for Williams-Sonoma stores, and enable the Company to display merchandise more 7
9 effectively. At the end of the Second Quarter of 1999, 194 stores (110 Williams-Sonoma and 84 Pottery Barn) were in the large format, comprising 76.1% of the Company's total selling square footage. Large-format stores accounted for 74.1% of total retail sales in the Second Quarter of 1999 and 65.4% in the Second Quarter of 1998. During fiscal year 1999, the Company plans to increase leased square footage by approximately 21%. CATALOG SALES Catalog sales increased 24.3% in the Second Quarter of 1999, primarily due to the strength of Pottery Barn. The number of catalogs mailed in this period as compared to the same period of the prior year increased 18.5% in total, and 40.1% for Pottery Barn. Year-to-date 1999 catalog sales increased 27.2% over the same period of the prior year, and circulation increased 11.4%. The following table reflects catalog sales growth (decline) percentages by concept: Percentage Growth (Decline) <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------ --------------------------------- August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Williams-Sonoma 21.0% (15.1)% 11.0% (6.6)% Pottery Barn 54.7% 33.8% 57.1% 28.4% Hold Everything (2.1)% 0.3% 3.2% 5.5% Gardeners Eden (99.6)% (7.1)% (70.2)% (15.6)% Chambers 3.1% (2.8)% (4.2)% (4.0)% Total catalog 24.3% 11.2% 27.2% 10.5% </TABLE> In the Second Quarter of 1999, Pottery Barn, which includes Pottery Barn Kids, accounted for 67.5% of total catalog sales as compared to 54.2% in the Second Quarter of 1998. Pottery Barn Kids, which debuted in January 1999, accounted for 33.8% of the total growth in Pottery Barn. The growth of Pottery Barn over the last several years and the initial success of Pottery Barn Kids reflect the Company's development of the assortment and the enhanced consumer brand recognition achieved through the Pottery Barn catalogs and Design Studio stores. In the Second Quarter of 1999, the Company introduced a new format for the Williams-Sonoma catalog, and has been pleased with the initial response. In May 1999, the Company sold the assets of its Gardeners Eden catalog to Brookstone, Inc., and recognized a $4,000,000 pre-tax gain ($2,420,000 after-tax) as a result of this sale. The Company decided to sell Gardeners Eden to allow greater focus on existing Williams-Sonoma, Inc. brands and the Internet. Also in the Second Quarter of 1999, the Company launched its Williams-Sonoma Internet Wedding and Gift Registry application. The Company intends to add a Williams-Sonoma general e-commerce site in the fourth quarter. COST OF GOODS SOLD AND OCCUPANCY Cost of goods sold and occupancy expenses expressed as a percent of net sales in the Second Quarter of 1999 increased 0.1 percentage points to 62.9% from 62.8% in the same period of the prior year. Merchandise margin improved 0.1 percentage points, principally due to a lower cost of merchandise. Occupancy expenses expressed as a percent of net sales increased slightly in the Second Quarter of 1999 as compared to the same period of the prior year, principally due to higher depreciation expense for catalog systems, including the Internet. For the Year-to-Date 1999 and the same period of 1998, cost of goods sold and occupancy expenses as a percent of net sales remained constant at 62.4%. 8
10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses expressed as a percent of net sales decreased 0.1 percentage points to 34.0% in the Second Quarter of 1999 from 34.1% in the Second Quarter of 1998. Second Quarter 1999 selling, general and administrative expenses include charges for employment costs related to recent additions to the senior management team and costs associated with the relocation of the Company's distribution center. These costs were primarily offset by an improved advertising expense rate in the catalog division as a result of increased sales volume. Selling, general and administrative expenses expressed as a percentage of net sales improved 0.1 percentage points for Year-to-Date 1999, to 35.0%. The improvement is due primarily to an improved advertising expense rate partially offset by higher employment costs. INTEREST EXPENSE Net interest expense for the Second Quarter of 1999 was $638,000, an increase of $475,000 from the same period of the prior year. The increase was primarily due to a decrease in short-term investment income. Net interest expense for Year-to-Date 1999 increased to $675,000, from $452,000 for Year-to-date 1998. This is principally attributable to a decrease in short-term investment income, offset by interest savings as a result of the 1998 conversion of the Company's Convertible Notes to common stock. INCOME TAXES The Company's effective tax rate was 39.5% for the Second Quarter and Year-to-Date of 1999 and 41.0% for the Second Quarter and Year-to-Date of 1998. The reduction in the tax rate reflects decreases in state tax liability resulting from revisions in the corporate structure which are being undertaken in order to conform more closely to the Company's operations. LIQUIDITY AND CAPITAL RESOURCES For Year-to-Date 1999, cash used in operating activities was $59,872,000, representing an increase of $23,917,000 from the $35,955,000 of cash used in operating activities for the same period of 1998. This was principally attributable to increases in merchandise inventories, offset by improved cash flow from changes in accounts payable and other accrued expenses as compared to the prior year. The growth in the level of merchandise inventories reflects the Company's investment in additional inventory to support new stores, Internet initiatives, and strong sales in both Pottery Barn retail and catalog businesses. The Company expects inventory levels to increase in the third quarter in preparation for the holiday season. Net cash used in investing activities was $45,274,000 for the Year-to-Date 1999. Purchases of property and equipment were $54,273,000, which includes approximately $27,000,000 for stores, $14,500,000 for warehouse and computer equipment in a new, leased distribution facility and $8,100,000 for systems development. Net proceeds from the sale of the assets of the Gardeners Eden catalog were $9,101,000. The Company is planning approximately $130,000,000 to $135,000,000 of gross capital expenditures for fiscal 1999. For Year-to-Date 1999, cash provided by financing activities was $4,057,000, comprised primarily of proceeds from borrowings under the Company's line of credit facility, partially offset by cash used to repurchase shares of common stock. For Year-to-Date 1998, cash provided by financing activities was $5,753,000, principally as a result of the exercise of stock options. The Company's amended and restated syndicated line of credit facility, which expires on May 31, 2001, provides for $50,000,000 in cash advances, and contains certain restrictive loan covenants, including minimum tangible net worth, a minimum out-of-debt period, fixed charge coverage requirements and a prohibition on payment of cash dividends. Additionally, the Company has a one-year $65,000,000 letter-of-credit agreement expiring on May 31, 2000 with its primary bank. In the third quarter of 1999, the 9
11 Company expects to negotiate a short-term increase in the line of credit facility in order to meet seasonal working capital needs. On August 1, 1999, the Company had $8,000,000 of borrowings outstanding under the line of credit facility and $49,878,000 of outstanding letters of credit. IMPACT OF INFLATION The impact of inflation on results of operations has not been significant. YEAR 2000 COMPLIANCE As is the case with most other companies using computers in their operations, the Company is addressing the "Year 2000" problem. The Company has conducted a review of its information technology ("IT") and non-IT systems to identify those areas that could be affected by the Year 2000 issue, and has developed a comprehensive, risk-based plan. This plan addresses both IT and non-IT systems and products, as well as dependencies on those with whom the Company does significant business. In connection with the plan, the Company completed an inventory and risk-assessment of its computer systems and related technology. The Company expects to complete comprehensive testing of its critical business processes and any necessary remediation by the end of the third quarter of 1999. The Company can not guarantee that its compliant systems will not encounter difficulties when attempting to interface or interconnect with third party systems, whether or not those systems are claimed to be "compliant", and the Company can not guarantee that such failure to interface or interconnect will not have a materially adverse effect on the Company's operations. With regard to outside vendors, the Company believes the greatest Year 2000 exposure is with its service providers (customs broker, logistics providers, etc.). The Company believes the Year 2000 risk with its merchandise suppliers is low because no vendor accounts for more than 3% of purchases and many of the vendors are small artisan manufacturers with simple business systems. The Company has completed its compliance review of major vendors and will resolve any outstanding issues by the end of the third quarter of 1999. Despite this approach, there can be no guarantee that the systems of other companies on which the Company is reliant will be converted timely, or that a failure by another company to convert would not have a materially adverse effect on the Company. The Company is using both internal and external resources to complete this project. In total, the estimated remaining cost for the remediation and testing of computer applications and related products in fiscal 1999 is $315,000. Approximately $2.3 million has been expensed to date. The Company presently believes, with modification to existing software and converting to new software, the Year 2000 problem will not pose significant operational risk. While the Company can not accurately predict a "worst case scenario" with regard to its Year 2000 issues, the failure by the Company and/or vendors to complete Year 2000 compliance work in a timely manner could have a materially adverse effect on the Company's operations. The Company is in the process of assessing these risks and uncertainties and developing appropriate contingency plans and procedures in an attempt to minimize the effects of such a scenario. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risks, which include changes in U.S. interest rates and, to a lesser extent, foreign exchange rates. The Company does not engage in financial transactions for trading or speculative purposes. 10
12 Interest Rate Risk: The interest payable on the Company's bank line of credit is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on existing variable rate debt rose 0.8 percentage points (a 10% change from the bank's reference rate as of August 1, 1999), the Company's results from operations and cash flows would not be materially affected. In addition, the Company has fixed and variable income investments consisting of cash equivalents and short-term investments, which are also affected by changes in market interest rates. The Company does not use derivative financial investments in its investment portfolio. Foreign Currency Risks: The Company enters into a significant amount of purchase obligations outside of the U.S. which are settled in U.S. Dollars, and, therefore, has only minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that foreign currency exchange risk is immaterial. FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the matters discussed in this quarterly report are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, the Company's ability to continue to improve planning and control processes and other infrastructure issues, the potential for construction and other delays in store openings, the Company's dependence on external funding sources, the potential for changes in consumer spending patterns, consumer preferences and overall economic conditions, the Company's dependence on foreign suppliers, increasing competition in the specialty retail business, and the Company's ability to successfully resolve its Year 2000 issues. Other factors that could cause actual results to differ materially from those set forth in such forward-looking statements include the risks and uncertainties detailed in the Company's most recent annual report on Form 10-K and its other filings with the Securities and Exchange Commission. 11
13 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 material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Shareholders was held on May 26, 1999. (b) At the Company's 1999 Annual Meeting of Shareholders, the shareholders took the following actions: (I) The shareholders re-elected each of the following persons by the vote indicated to serve as a director of the Company until the next Annual Meeting of Shareholders or until his or her successor is elected and qualified: <TABLE> <CAPTION> Name For Withheld ---- --- -------- <S> <C> <C> Charles E. Williams 47,928,147 1,118,092 W. Howard Lester 48,021,156 1,025,083 James A. McMahan 48,015,011 1,031,228 Nathan Bessin 47,988,911 1,057,328 Patrick J. Connolly 48,029,894 1,016,345 Gary G. Friedman 48,028,960 1,017,279 James M. Berry 47,991,549 1,054,690 John E. Martin 40,813,725 8,232,514 Adrian D.P. Bellamy 40,582,005 8,464,234 Janet L. Emerson 48,028,260 1,017,979 </TABLE> (II) The shareholders approved, by the vote indicated, the amendment to the Company's restated Articles of Incorporation: <TABLE> <CAPTION> For Against Withheld --- ------- -------- <S> <C> <C> 41,511,330 1,928,118 52,904 </TABLE> (III) The shareholders ratified by the vote indicated the selection of Deloitte & Touche LLP as the independent accountants for the Company's fiscal year ending January 30, 2000: <TABLE> <CAPTION> For Against Withheld --- ------- -------- <S> <C> <C> 49,008,444 17,157 20,638 </TABLE> 12
14 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- <S> <C> 10.1 Fourth Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated May 26, 1999. 10.2 Third Amendment to Syndicated Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated November 13, 1999. 10.3 Guarantee by Williams-Sonoma Stores, LLC in favor of Bank of America National Trust and Savings Association, dated November 13, 1998. 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 is being filed. 13
15 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/ John W. Tate ------------------------------------- John W. Tate Senior Vice President Chief Financial Officer Dated: September 10, 1999 14
16 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- <S> <C> 10.1 Fourth Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated May 26, 1999. 10.2 Third Amendment to Syndicated Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated November 13, 1999. 10.3 Guarantee by Williams-Sonoma Stores, LLC in favor of Bank of America National Trust and Savings Association, dated November 13, 1998. 11 Statement re computation of per share earnings. 27 Financial Data Schedule. </TABLE>