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 July 30, 2000. [ ] 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 of (I.R.S. Employer Identification No.) Incorporation or Organization) 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, 2000, 55,719,705 shares of the Registrant's Common Stock were outstanding.
2 WILLIAMS-SONOMA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 30, 2000 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> PAGE ---- <S> <C> <C> Item 1. Financial Statements (3) Condensed Consolidated Balance Sheets July 30, 2000, January 30, 2000 and August 1, 1999 Condensed Consolidated Statements of Operations Thirteen weeks ended July 30, 2000 and August 1, 1999 Twenty-six weeks ended July 30, 2000 and August 1, 1999 Condensed Consolidated Statements of Cash Flows Twenty-six weeks ended July 30, 2000 and August 1, 1999 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (9) PART II. OTHER INFORMATION Item 1. Legal Proceedings (14) Item 4. Submission of Matters to a Vote of Security Holders (14) Item 6. Exhibits and Reports on Form 8-K (15) </TABLE> 2
3 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> July 30, January 30, August 1, 2000 2000 1999 -------- ----------- --------- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,036 $ 92,843 $ 6,219 Accounts receivable (net) 22,377 22,427 25,321 Merchandise inventories 293,503 257,342 234,358 Prepaid expenses and other assets 13,981 13,326 10,989 Prepaid catalog expenses 20,824 14,677 12,859 Deferred income taxes 9,265 9,265 4,077 -------- -------- -------- Total current assets 363,986 409,880 293,823 Property and equipment (net) 428,596 313,171 276,734 Investments and other assets (net) 8,425 15,891 7,636 -------- -------- -------- Total assets $801,007 $738,942 $578,193 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 85,493 $102,462 $ 72,417 Accrued expenses 31,882 33,971 22,134 Line of credit 107,237 -- 8,000 Customer deposits 41,309 40,087 27,603 Income taxes payable 5,015 26,062 1,075 Current portion of long-term obligations 6,196 5,839 6,368 Other liabilities 8,329 7,366 6,426 -------- -------- -------- Total current liabilities 285,461 215,787 144,023 Deferred lease credits 91,305 90,873 76,811 Deferred income tax liabilities 8,520 8,520 3,339 Long-term debt 34,848 35,466 40,988 Other liabilities 5,583 4,987 4,327 Commitments and contingencies -- -- -- Shareholders' equity Common stock 104,967 122,887 106,191 Retained earnings 270,323 260,422 202,514 -------- -------- -------- Total shareholders' equity 375,290 383,309 308,705 -------- -------- -------- Total liabilities and shareholders' equity $801,007 $738,942 $578,193 ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements. 3
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 ----------------------- ----------------------- July 30, August 1, July 30, August 1, 2000 1999 2000 1999 -------- --------- -------- --------- <S> <C> <C> <C> <C> Net sales $343,966 $264,000 $686,967 $522,676 Cost of goods sold and occupancy expenses 214,425 166,078 422,356 325,972 -------- -------- -------- -------- Gross margin 129,541 97,922 264,611 196,704 Selling, general and administrative expenses 118,919 89,848 244,851 183,183 Gain on sale of assets -- 4,000 -- 4,000 Interest expense (net) 2,389 638 3,661 675 -------- -------- -------- -------- Earnings before income taxes 8,233 11,436 16,099 16,846 Income taxes 3,170 4,518 6,198 6,654 -------- -------- -------- -------- Net earnings $ 5,063 $ 6,918 $ 9,901 $ 10,192 ======== ======== ======== ======== Earnings per share: Basic $ 0.09 $ 0.12 $ 0.18 $ 0.18 Diluted $ 0.09 $ 0.12 $ 0.17 $ 0.17 Shares used in calculation of earnings per share: Basic 55,579 55,671 55,986 55,725 Diluted 58,080 58,294 58,250 58,402 </TABLE> See Notes to Condensed Consolidated Financial Statements. 4
5 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended ------------------------- July 30, August 1, 2000 1999 --------- --------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 9,901 $ 10,192 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 27,696 19,448 Loss (gain) on disposal of assets 351 (2,850) Amortization of deferred lease credits (4,997) (3,953) Other -- 112 Changes in: Accounts receivable 50 (5,238) Merchandise inventories (36,161) (63,870) Prepaid catalog expenses (6,147) (1,334) Prepaid expenses and other assets (655) (2,005) Accounts payable (16,969) 1,453 Accrued expenses and other liabilities 1,182 (1,810) Deferred lease credits 5,429 8,437 Income taxes payable (21,047) (18,454) --------- --------- Net cash used in operating activities (41,367) (59,872) --------- --------- Cash flows from investing activities: Purchases of property and equipment (62,918) (54,273) Purchase of corporate facilities, net of deposit (73,303) -- Net proceeds from the sale of Gardeners Eden -- 9,101 Other (275) (102) --------- --------- Net cash used in investing activities (136,496) (45,274) --------- --------- Cash flows from financing activities: Borrowings under line of credit 152,049 8,000 Repayments under line of credit (44,812) -- Repayment of long-term obligations (261) (427) Proceeds from exercise of stock options 615 1,222 Repurchase of common stock (18,535) (4,738) --------- --------- Net cash provided by financing activities 89,056 4,057 --------- --------- Net decrease in cash and cash equivalents (88,807) (101,089) Cash and cash equivalents at beginning of period 92,843 107,308 --------- --------- Cash and cash equivalents at end of period $ 4,036 $ 6,219 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 5
6 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Thirteen and Twenty-six Weeks Ended July 30, 2000 and August 1, 1999 NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of July 30, 2000 and August 1, 1999 and the condensed consolidated statements of operations and cash flows for the thirteen and twenty-six week periods ended July 30, 2000 and August 1, 1999 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 30, 2000, 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 30, 2000. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America 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 30, 2000. Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for years beginning after June 15, 2000. The impact of adoption of the standard by the Company has not yet been determined. Certain reclassifications have been made to the prior period financial statements to conform to the presentation used in the current period. The results of operations for the thirteen and twenty-six weeks ended July 30, 2000 are not necessarily indicative of the operating results of the full year. NOTE B. DEBT As of July 30, 2000, the Company had $33,975,000 of outstanding borrowings under its syndicated line of credit facility, and $73,262,000 outstanding under a line of credit agreement with its lead bank. The latter agreement was added in February 2000 to finance the purchase of a new corporate facility in San Francisco. On August 23, 2000, both of these debt facilities were repaid and replaced with a new debt agreement. The new debt agreement provides for $200,000,000 in cash advances, and contains certain restrictive loan covenants, including minimum tangible net worth, maximum leverage ratios, fixed charge coverage requirements and a prohibition on payment of cash dividends. Within the first two years of the agreement, the Company has the option of increasing the cash advance facility to a maximum of $250,000,000. The Company has a choice of interest rates between the bank's reference rate or LIBOR plus premium, as defined in the agreement. The agreement expires on August 23, 2003. In addition, the Company had a $90,000,000 combined letter of credit and cash advance facility with its lead bank. Effective with the new debt agreement, this agreement was amended to eliminate the cash advance facility and reduce the letter of credit facility to $65,000,000. This amended agreement expires on October 31, 2000. The Company is currently in negotiations with several of its banks and expects to replace this facility by the end of the third quarter. As of July 30, 2000, $59,756,000 in letters of credit were outstanding under this facility. 6
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. The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations: <TABLE> <CAPTION> Weighted Net Average Per-Share Earnings Shares Amount ----------- ----------- --------- <S> <C> <C> <C> Thirteen weeks ended July 30, 2000 Basic $ 5,063,000 55,579,217 $ 0.09 ======== Effect of dilutive stock options -- 2,500,815 ---------------------------- Diluted $ 5,063,000 58,080,032 $ 0.09 =========== =========== ======== Thirteen weeks ended August 1, 1999: Basic $ 6,918,000 55,670,513 $ 0.12 ======== Effect of dilutive stock options -- 2,623,593 ---------------------------- Diluted $ 6,918,000 58,294,106 $ 0.12 =========== =========== ======== Twenty-six weeks ended July 30, 2000 Basic $ 9,901,000 55,986,229 $ 0.18 ======== Effect of dilutive stock options -- 2,263,620 ---------------------------- Diluted $ 9,901,000 58,249,849 $ 0.17 =========== =========== ======== Twenty-six weeks ended August 1, 1999: Basic $10,192,000 55,724,622 $ 0.18 ======== Effect of dilutive stock options -- 2,677,729 ---------------------------- Diluted $10,192,000 58,402,351 $ 0.17 =========== =========== ======== </TABLE> Options for which the exercise price was greater than the average market price of common shares for the period were not included in the computation of diluted earnings per share. These options to purchase shares were 447,050 in the Second Quarter of 2000 and 187,250 in the Second Quarter of 1999. 7
8 NOTE D. SEGMENT REPORTING Williams-Sonoma, Inc. has two reportable segments: retail and direct-to-customer. The retail segment sells products for the home through its three retail concepts: Williams-Sonoma, Pottery Barn and Hold Everything. The direct-to-customer segment sells similar products through its six mail order catalogs, Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything and Chambers, and three e-commerce websites. The third website, www.potterybarn.com, was introduced on August 1, 2000 and is not included in the direct-to-customer segment information presented below. These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize 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. The Company 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. The 1999 direct-to-customer earnings before income taxes includes the $4 million pre-tax gain from the sale of the Gardeners Eden catalog in May. SEGMENT INFORMATION Dollars in thousands <TABLE> <CAPTION> Direct-to- Retail Customer Unallocated Total --------- ---------- ----------- --------- <S> <C> <C> <C> <C> Thirteen weeks ended July 30, 2000 Revenues $ 206,726 $ 137,240 $ -- $ 343,966 Earnings before income taxes 11,479 18,992 (22,238) 8,233 Thirteen weeks ended August 1, 1999 Revenues $ 172,500 $ 91,500 $ -- $ 264,000 Earnings before income taxes 10,853 18,517 (17,934) 11,436 </TABLE> <TABLE> <CAPTION> Direct-to- Retail Customer Unallocated Total --------- ---------- ----------- --------- <S> <C> <C> <C> <C> Twenty-six weeks ended July 30, 2000 Revenues $ 402,654 $ 284,313 $ -- $ 686,967 Earnings before income taxes 27,175 33,903 (44,979) 16,099 Assets 484,416 167,635 148,956 801,007 Twenty-six weeks ended August 1, 1999 Revenues $ 330,851 $ 191,825 $ -- $ 522,676 Earnings before income taxes 20,988 30,200 (34,342) 16,846 Assets 386,476 136,627 55,090 578,193 </TABLE> 8
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION NET SALES Net sales consists of the following components: <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended ----------------------------------------------- ----------------------------------------------- Dollars in thousands July 30, 2000 August 1, 1999 July 30, 2000 August 1, 1999 -------------------- -------------------- -------------------- -------------------- %Total %Total %Total %Total <S> <C> <C> <C> <C> <C> <C> <C> <C> Retail sales $206,726 60.1% $172,500 65.3% $402,654 58.6% $330,851 63.3% Direct-to-customer sales 137,240 39.9% 91,500 34.7% 284,313 41.4% 191,825 36.7% -------- ------ -------- ------ -------- ------ -------- ------ Total Net Sales $343,966 100.0% $264,000 100.0% $686,967 100.0% $522,676 100.0% </TABLE> Net sales for Williams-Sonoma, Inc. and its subsidiaries (the Company) for the thirteen weeks ended July 30, 2000 (Second Quarter of 2000), were $343,966,000 - -- an increase of $79,966,000 (30.3%) over net sales for the thirteen weeks ended August 1, 1999 (Second Quarter of 1999). Net sales for the twenty-six week period ended July 30, 2000 (Year-to-Date 2000) were $686,967,000, an increase of $164,291,000 (31.4%) from the twenty-six week period ended August 1, 1999 (Year-to-Date 1999). Direct-to-customer sales include catalog and Internet sales. RETAIL SALES <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended --------------------------- --------------------------- Dollars in thousands July 30, August 1, July 30, August 1, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Retail sales $ 206,726 $ 172,500 $ 402,654 $ 330,851 Retail sales growth percentage 19.8% 21.8% 21.7% 22.2% Comparable store sales growth 7.0% 6.8% 8.0% 6.9% Number of stores - beginning of period 336 305 344 298 Number of new stores 14 12 16 20 Number of closed stores 3 3 13 4 Number of stores - end of period 347 314 347 314 Store selling square footage at quarter-end (sq. ft.) 1,547,947 1,294,858 1,547,947 1,294,858 Store leased square footage at quarter-end (sq. ft.) 2,396,370 2,008,683 2,396,370 2,008,683 </TABLE> Retail sales for the Second Quarter of 2000 increased 19.8% over retail sales for the Second Quarter of 1999 primarily due to new store openings in the last twelve months. During the Second Quarter of 2000, the Company opened 14 stores (9 large-format Williams-Sonoma, 3 large-format Pottery Barn, 1 Hold Everything and 1 Outlet), and closed 3 smaller stores (3 Williams-Sonoma). Total retail sales for Year-to-Date 2000 grew 21.7% 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 12 months and which have been open for at least 12 months. Comparable store sales are computed monthly for purposes of this analysis. Comparable store sales grew 7.0% for the Second Quarter of 2000 as compared to the same period of the prior year, and 8.0% for Year-to-Date 2000. Pottery Barn led the increase in both periods. Large-format stores average 3,439 selling square feet for Williams-Sonoma and 7,250 selling square feet for Pottery Barn. As of the end of the Second Quarter of 2000, 242 stores (138 Williams-Sonoma and 104 Pottery Barn) were large-format, comprising 79.4% of the Company's total selling square footage. Large-format stores accounted for 78.7% of retail sales in the Second Quarter of 2000, as compared to 74.1% in the Second Quarter of 1999. 9
10 The Company intends to capitalize on the success of its Pottery Barn Kids catalog by opening seven retail stores in Fall 2000. By the end of fiscal 2000, the Company plans to increase leased square footage by approximately 20% as compared to fiscal year-end 1999. DIRECT-TO-CUSTOMER SALES <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------ ------------------------ July 30, August 1, July 30, August 1, 2000 1999 2000 1999 -------- --------- -------- --------- <S> <C> <C> <C> <C> Catalog sales $130,742 $ 90,661 $273,199 $190.986 Internet sales 6,498 839 11,114 839 -------- -------- -------- -------- Total direct-to-customer sales $137,240 $ 91,500 $284,313 $191,825 Percent growth in direct-to-customer sales 50.0% 24.3% 48.2% 27.2% Percent growth in number of catalogs mailed 45.7% 18.5% 24.5% 11.4% </TABLE> Direct-to-customer sales increased 50.0% in the Second Quarter of 2000 and 24.3% in the Second Quarter of 1999, as compared to the same periods of the respective prior years. These increases were primarily due to the strength of Pottery Barn & Pottery Barn Kids. For Year-to-Date 2000, direct-to-customer sales increased 48.2%, also as a result of strong sales performance by Pottery Barn and Pottery Barn Kids. Catalog The Pottery Barn brand and its extensions (Pottery Barn Kids and Pottery Barn Bed + Bath) accounted for 84.5% of the growth in Second Quarter 2000 direct-to-customer sales, and the majority of the growth in the number of catalogs mailed. Management believes that the success of the Pottery Barn brand and its brand extensions reflects the Company's continuing investment in product design and quality, and the consumer recognition achieved through the Pottery Barn catalogs and design studio stores. The Company successfully introduced the Pottery Barn Bed + Bath catalog in May 2000. In May 1999, the Company sold the assets of its Gardeners Eden catalog, and as a result recorded a $2,437,000 after-tax gain. Internet In June 1999, the Company launched its Williams-Sonoma Wedding and Gift Registry Web site, and in November 1999 launched its Williams-Sonoma e-commerce site. Combined sales from these sites were $6,498,000 in the Second Quarter of 2000 and $11,114,000 for Year-to-Date 2000. The Company unveiled its Pottery Barn e-commerce site in August 2000. COST OF GOODS SOLD AND OCCUPANCY EXPENSES Cost of goods sold and occupancy expenses expressed as a percentage of net sales for the Second Quarter of 2000 decreased 0.6 percentage points as compared to the same quarter of the prior year, to 62.3% from 62.9%. Merchandise margins improved slightly due to an improved cost of merchandise rate, partially offset by increased retail freight costs. Occupancy expenses expressed as a percentage of total sales improved, primarily due to increased sales volume. For Year-to-Date 2000, cost of goods sold and occupancy expenses expressed as a percent of net sales decreased 0.9 percentage points, to 61.5% from 62.4%. This improvement was primarily driven by improved merchandise markup and a lower occupancy expense rate. 10
11 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses expressed as a percent of net sales increased by 0.6 percentage points to 34.6% in the Second Quarter of 2000 from 34.0% in the Second Quarter of 1999. For Year-to-Date 2000, the selling, general and administrative expense rate increased 0.6 percentage points to 35.6%. For both these periods, the increase in direct-to-customer business as a percentage of total sales resulted in a higher advertising expense rate, which was partially offset by improvements in shipping and other administrative costs. INTEREST EXPENSE Net interest expense increased $1,751,000, from $638,000 in the Second Quarter of 1999 to $2,389,000 in the Second Quarter of 2000, and increased $2,986,000 for Year-to-Date 2000. These increases resulted primarily from increased borrowings of $73,262,000 for the Company's purchase of a new corporate facility, discussed below. INCOME TAXES The Company's effective tax rate was 38.5% for Year-to-Date 2000 and 39.5% for Year-to-Date 1999. The reduction in the effective tax rate reflects decreases in state taxes 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 2000, cash used in operating activities was $41,367,000 representing a decrease of $18,505,000 from the $59,872,000 of cash used in operating activities for the same period of 1999. This decrease is primarily attributable to a reduction in purchases of merchandise inventories and increased operating income, partially offset by increased cash used for accounts payable. Inventories for the period grew 25% compared to sales growth of 30%. This trend is consistent with the Company's objective to improve inventory turns relative to sales growth. Net cash used in investing activities was $136,496,000 for Year-to-Date 2000 as compared to $45,274,000 for the same period of 1999. Year-to-Date 2000 purchases of property and equipment include approximately $73,303,000 (net of deposit) for the purchase of a 204,000 square-foot corporate facility. The new facility was purchased in February 2000 for the purpose of consolidating certain headquarters staff and to provide for future growth. Additional expenditures in fiscal 2000 include $33,200,000 for stores and $12,600,000 for systems development, including the Internet. Year-to-Date 1999 expenditures were primarily for new stores and a new, leased retail distribution facility. These expenditures were partially offset with the proceeds from the sale of assets of the Gardeners Eden catalog in May of 1999. For Year-to-Date 2000, cash provided by financing activities was $89,056,000, comprised primarily of proceeds from the line of credit financing, partially offset by repurchases of 825,200 shares of the Company's common stock for $18,535,000. For Year-to-Date 1999, cash provided by financing activities was $4,057,000, 11
12 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. As of July 30, 2000, the Company had $33,975,000 of outstanding borrowings under its syndicated line of credit facility, and $73,262,000 outstanding under a line of credit agreement with its lead bank. The latter agreement was added in February 2000 to finance the purchase of a new corporate facility in San Francisco. On August 23, 2000, both of these debt facilities were repaid and replaced with a new debt agreement. The new debt agreement provides for $200,000,000 in cash advances, and contains certain restrictive loan covenants, including minimum tangible net worth, maximum leverage ratios, fixed charge coverage requirements and a prohibition on payment of cash dividends. Within the first two years of the agreement, the Company has the option of increasing the cash advance facility to a maximum of $250,000,000. The Company has a choice of interest rates between the bank's reference rate or LIBOR plus premium, as defined in the agreement. The agreement expires on August 23, 2003. In addition, the Company had a $90,000,000 combined letter of credit and cash advance facility with its lead bank. Effective with the new debt agreement, this agreement was amended to eliminate the cash advance facility and reduce the letter of credit facility to $65,000,000. The amended agreement expires on October 31, 2000. The Company is currently in negotiations with several of its banks and expects to replace this facility by the end of the third quarter. As of July 30, 2000, $59,756,000 in letters of credit were outstanding under this facility. IMPACT OF INFLATION The impact of inflation on results of operations has not been significant. 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. Interest Rate Risk The interest payable on the Company's bank lines of credit are based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on existing variable rate debt rose 95 basis points (a 10% change from the bank's reference rate as of July 30, 2000), 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 instruments 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. 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 January through September. The Company believes this is the general pattern associated with the direct-to-customer and retail industries. In anticipation of its peak season, the Company hires a substantial 12
13 number of additional employees in its retail stores and direct-to-customer processing and distribution areas, and incurs significant fixed catalog production and mailing costs. 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 potential for changes in consumer spending patterns, consumer preferences and overall economic conditions, the Company's dependence on foreign suppliers, and increasing competition in the specialty retail business. 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. 13
14 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 31, 2000. (b) At the Company's 2000 Annual Meeting of Shareholders, the shareholders took the following actions: (I) The shareholders 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 44,959,430 1,267,843 W. Howard Lester 41,879,073 4,348,200 James A. McMahan 44,945,589 1,281,684 Nathan Bessin 44,973,063 1,254,210 Patrick J. Connolly 45,008,676 1,218,597 Gary G. Friedman 45,007,551 1,219,722 James M. Berry 44,982,633 1,244,640 John E. Martin 39,556,031 6,671,242 Adrian D.P. Bellamy 40,768,142 5,459,131 Michael R. Lynch 45,010,144 1,217,129 Edward A. Mueller 45,005,728 1,221,545 </TABLE> (II) The shareholders approved and adopted, by the vote indicated, the amendment to the Company's restated bylaws to increase the authorized number of members of the Company's Board of Directors from not less than six and no more than eleven to not less than seven and no more than thirteen: <TABLE> <CAPTION> For Against Withheld --- ------- -------- <S> <C> <C> <C> 37,006,020 88,509 29,066 </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 28, 2001: <TABLE> <CAPTION> For Against Withheld --- ------- -------- <S> <C> <C> <C> 46,204,473 17,675 5,125 </TABLE> 14
15 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ ------------------- <S> <C> 10.1 Amended and Restated Credit Agreement between the Company and Bank of America, National Association, dated August 23, 2000 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. 15
16 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 12, 2000 16