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 October 31, 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 Identification No.) of 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 December 6, 1999, 56,413,988 shares of the Registrant's Common Stock were outstanding.
2 WILLIAMS-SONOMA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 1999 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> PAGE ---- <S> <C> <C> Item 1. Financial Statements Condensed Consolidated Balance Sheets (3) October 31, 1999, January 31, 1999, and November 1, 1998 Condensed Consolidated Statements of Operations Thirteen weeks ended October 31, 1999 and November 1, 1998 Thirty-nine weeks ended October 31, 1999 and November 1, 1998 Condensed Consolidated Statements of Cash Flows Thirty-nine weeks ended October 31, 1999 and November 1, 1998 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations (8) and Financial Condition Item 3. Quantitative and Qualitative Disclosure (11) about Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings (13) Item 6. Exhibits and Reports on Form 8-K (14) </TABLE>
3 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> October 31, January 31, November 1, 1999 1999 1998 ----------- ----------- ----------- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,791 $107,308 $ 4,039 Accounts receivable (net) 29,980 20,082 27,496 Merchandise inventories 301,665 173,160 220,267 Prepaid expenses and other assets 10,968 8,985 9,252 Prepaid catalog expenses 27,068 13,154 25,253 Deferred income taxes 4,077 4,077 3,680 -------- -------- -------- Total current assets 378,549 326,766 289,987 Property and equipment (net) 302,718 243,119 233,310 Investments and other assets (net) 9,576 6,360 5,792 -------- -------- -------- Total assets $690,843 $576,245 $529,089 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $106,115 $ 70,964 $ 85,204 Accrued expenses 21,750 24,003 20,127 Line of credit 61,980 -- 19,950 Customer deposits 30,515 26,659 20,592 Income taxes payable 6,481 19,529 -- Current portion of long-term obligations 5,966 6,368 125 Other liabilities 7,691 6,377 8,330 -------- -------- -------- Total current liabilities 240,498 153,900 154,328 Deferred lease credits 85,610 72,327 72,512 Deferred tax liability 3,339 3,339 2,439 Long-term debt and other liabilities 40,206 44,649 50,384 Commitments and contingencies -- -- -- Shareholders' equity 321,190 302,030 249,426 -------- -------- -------- Total liabilities and shareholders' equity $690,843 $576,245 $529,089 ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements.
4 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended ----------------------------- ---------------------------- October 31, November 1, October 31, November 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 324,148 $ 241,298 $ 846,823 $ 662,770 Costs and expenses: Cost of goods sold and occupancy 192,748 146,494 518,720 409,665 Selling, general and administrative 114,880 85,648 298,062 233,343 --------- --------- --------- --------- Total costs and expenses 307,628 232,142 816,782 643,008 --------- --------- --------- --------- Earnings from operations 16,520 9,156 30,041 19,762 Gain/(loss) on sale of assets (23) -- 3,977 -- Interest expense (net) 1,226 686 1,901 1,138 --------- --------- --------- --------- Earnings before income taxes 15,271 8,470 32,117 18,624 Income taxes 6,032 3,472 12,686 7,635 --------- --------- --------- --------- Net earnings $ 9,239 $ 4,998 $ 19,431 $ 10,989 ========= ========= ========= ========= Earnings per share: Basic $ 0.17 $ 0.09 $ 0.35 $ 0.20 Diluted $ 0.16 $ 0.09 $ 0.33 $ 0.20 Shares used in calculation of earnings per share: Basic 55,827 55,613 55,761 53,988 Diluted 58,908 57,838 58,502 56,326 </TABLE> See Notes to Condensed Consolidated Financial Statements.
5 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Thirty-Nine Weeks Ended ----------------------------- October 31, November 1, 1999 1998 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 19,431 $ 10,989 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 31,126 24,089 Net gain on disposition of assets (2,325) -- Amortization of deferred lease incentives (6,215) (4,694) Other 165 -- Change in: Accounts receivable (9,898) (12,258) Merchandise inventories (131,177) (87,816) Prepaid catalog expenses (15,543) (11,657) Prepaid expenses and other assets (1,983) (1,261) Accounts payable 35,151 26,708 Accrued expenses and other liabilities 2,858 (9,747) Deferred lease incentives 19,498 21,049 Income taxes payable (13,048) (17,216) --------- --------- Net cash used in operating activities (71,960) (61,814) --------- --------- Cash flows from investing activities: Purchases of property and equipment (95,009) (59,202) Proceeds from sale of property and equipment 11,192 2,117 Purchase of investment (2,000) -- Other (130) -- --------- --------- Net cash used in investing activities (85,947) (57,085) --------- --------- Cash flows from financing activities: Borrowings under line of credit 132,850 36,200 Repayments under line of credit (70,870) (16,250) Repayment of long-term obligations (6,319) (461) Proceeds from exercise of stock options 4,467 6,235 Repurchase of common stock (4,738) -- --------- --------- Net cash provided by financing activities 55,390 25,724 --------- --------- Net decrease in cash and cash equivalents (102,517) (93,175) Cash and cash equivalents at beginning of period 107,308 97,214 --------- --------- Cash and cash equivalents at end of period 4,791 4,039 ========= ========= Non-cash financing transaction: Conversion of Convertible Notes to equity $ 39,004 </TABLE> See Notes to Condensed Consolidated Financial Statements.
6 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Thirteen and Thirty-nine Weeks Ended October 31, 1999 and November 1, 1998 (Unaudited) NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of October 31, 1999 and November 1, 1998, the condensed consolidated statements of operations for the thirteen and thirty-nine week periods ended October 31, 1999 and November 1, 1998 and the condensed consolidated statements of cash flows for the thirty-nine week periods ended October 31, 1999 and November 1, 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 thirty-nine 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 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 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 thirty-nine weeks ended October 31, 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. During the third quarter, the Company amended its letter-of-credit agreement to add a facility for up to $50,000,000 in cash advances in order to meet its seasonal working capital needs. This additional facility expired on December 1, 1999. At October 31, 1999, the Company had $50,000,000 of borrowings outstanding under the line of credit facility, $48,316,000 in outstanding letters of credit, and $11,980,000 of outstanding cash advances under the letter of credit facility.
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, and the Internet. In 1999 the Company sold its Gardners Eden catalog business to Brookstone, Inc. As a result of this sale, the Company recorded a $3,977,000 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> Thirteen Weeks Ended October 31, 1999 Revenues $189,732 $134,416 $ -- $324,148 Earnings before income taxes 12,052 21,195 (17,976) 15,271 Thirteen Weeks Ended November 1, 1998 Revenues $153,245 $ 88,053 $ -- $241,298 Earnings before income taxes 7,057 14,851 (13,438) 8,470 </TABLE> Dollars in thousands <TABLE> <CAPTION> Retail Catalog Unallocated Total -------- -------- ----------- -------- <S> <C> <C> <C> <C> Thirty-Nine Weeks Ended October 31, 1999 Revenues $520,583 $326,240 $ -- $846,823 Earnings before income taxes 33,040 51,395 (52,318) 32,117 Segment Assets 446,693 185,156 58,994 690,843 Thirty-Nine Weeks Ended November 1, 1998 Revenues $423,919 $238,851 $ -- $662,770 Earnings before income taxes 26,121 30,899 (38,396) 18,624 Segment Assets 376,329 100,856 51,904 529,089 </TABLE>
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 Thirty-Nine Weeks Ended October 31, 1999 November 1, 1998 October 31, 1999 November 1, 1998 ------------------- ------------------- ------------------- ------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Retail Sales $189,732 58.5% $153,245 63.5% $520,583 61.5% $423,919 64.0% Catalog Sales 134,416 41.5% 88,053 36.5% 326,240 38.5% 238,851 36.0% -------- ----- -------- ----- -------- ----- -------- ----- Total Net Sales $324,148 100.0% $241,298 100.0% $846,823 100.0% $662,770 100.0% </TABLE> Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 13 weeks ended October 31, 1999 (Third Quarter of 1999) were $324,148,000 -- an increase of $82,850,000 (34.3%) over net sales for the 13 weeks ended November 1, 1998 (Third Quarter of 1998). Net sales for the 39-week period ended October 31, 1999 (Year-to-Date 1999) were $846,823,000, an increase of $184,053,000, or 27.8%, from the 39-week period ended November 1, 1998 (Year-to-Date 1998). RETAIL SALES <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended (Dollars in thousands) October 31, November 1, October 31, November 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Total retail sales $ 189,732 $ 153,245 $ 520,583 $ 423,919 Retail sales growth percentage 23.8% 17.3% 22.8% 20.0% Comparable store sales growth 9.6% 2.4% 7.9% 4.3% Number of stores - beginning of period 314 285 298 276 Number of new stores 24 27 44 52 Number of closed stores 2 8 6 24 Number of stores - end of period 336 304 336 304 Store selling area at quarter-end (sq. ft.) 1,420,903 1,219,940 1,420,903 1,219,940 Store leased area at quarter-end (sq. ft.) 2,197,588 1,872,709 2,197,588 1,872,709 </TABLE> Retail sales for the third quarter of 1999 increased 23.8% over retail sales for the third quarter of 1998 primarily due to a net increase of 32 stores. During the Third Quarter of 1999, the Company opened 24 stores (9 Pottery Barn, 13 Williams-Sonoma, 1 Hold Everything and 1 Outlet) and closed 2 stores (1 Pottery Barn and 1 Williams-Sonoma). Pottery Barn accounted for 65.3% of the growth in retail sales during this period and 63.2% of the growth in Year-to-Date retail sales. Total retail sales for Year-To-Date 1999 grew 22.8% 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 9.6% in the Third Quarter of 1999, and 7.9% for Year-to-Date 1999, and were particularly strong in Pottery Barn. The prototypical 1999 large-format stores range from 4,500 - 10,200 selling square feet for Pottery Barn stores and 2,800 - 3,700 selling square feet for Williams-Sonoma stores. Management believes that the large-format stores enable the Company to display merchandise more effectively. At the end of the Third
9 Quarter of 1999, 216 stores (123 Williams-Sonoma and 93 Pottery Barn) were in the large format, comprising 76.8% of the Company's total selling square footage. Large-format stores accounted for 76.1% of total retail sales in the Third Quarter of 1999 and 68.7% in the Third Quarter of 1998. CATALOG SALES <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended October 31, November 1, October 31, November 1, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Total catalog sales $ 134,416 $ 88,053 $ 326,240 $ 238,851 Percent growth in catalog sales 52.7% 20.2% 36.6% 13.9% Percent growth in gross 49.3% 16.8% 26.3% 16.8% number of pages mailed Percent growth in number of catalogs mailed 28.4% 3.5% 12.7% 4.5% </TABLE> Catalog sales increased 52.7% in the Third Quarter of 1999 and 36.6% for Year-to-Date 1999, primarily due to the strength of Pottery Barn (which includes Pottery Barn Kids). Pottery Barn catalog sales grew 85.3% in the Third Quarter of 1999 as compared to the same period of the prior year. Pottery Barn Kids, which debuted in January 1999, accounted for 40.2% of the total growth in Pottery Barn. The number of pages mailed and number of catalogs mailed for Pottery Barn (excluding Pottery Barn Kids), increased 55.3% and 26.0%, respectively, in the Third Quarter of 1999. 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. Excluding Gardeners Eden, which was sold in May 1999, Pottery Barn accounted for 90.4% of the growth in Third Quarter 1999 catalog sales as compared to the prior year. Sales for Williams-Sonoma (excluding Internet) increased 20.2% in the Third Quarter of 1999 as compared to the Third Quarter of 1998. The Company attributes this in part to the redesign of the Williams-Sonoma catalog, which was introduced in the Second Quarter. In 1999, the Company recognized a $3,977,000 pre-tax gain ($2,406,000 after-tax) as a result of the sale of the assets of Gardeners Eden to Brookstone, Inc. The Company decided to sell Gardeners Eden to allow greater focus on existing Williams-Sonoma, Inc. brands and the Internet. In June 1999, the Company launched its Williams-Sonoma Internet Wedding and Gift Registry application, and on November 1, 1999, the Company launched its Williams-Sonoma e-commerce site. Management expects to add a Pottery Barn e-commerce site in the summer of 2000. COST OF GOODS SOLD AND OCCUPANCY Cost of goods sold and occupancy expenses expressed as a percent of net sales in the Third Quarter of 1999 decreased 1.2 percentage points to 59.5% from 60.7% in the same period of the prior year. Merchandise margin improved 0.8 percentage points, principally due to a lower cost of merchandise. The Company believes this is a direct result of its investment in product development, sourcing and quality control personnel over the last several years. Occupancy expenses expressed as a percentage of net sales improved 0.4 percentage points in the Third Quarter of 1999 as compared to the same period of the prior year, principally due to increased sales volume. For the Year-to-Date 1999, cost of goods sold and occupancy expenses as a percent of net sales decreased 0.5 percentage points, from 61.8% for the same period of 1998 to 61.3%. This decrease was primarily due
10 to improved merchandise margins as a result of lower cost of merchandise and an improved occupancy expense rate. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses expressed as a percent of net sales decreased slightly in the Third Quarter of 1999, from 35.5% in 1998 to 35.4% in 1999. The Year-to-Date 1999 selling, general and administrative expense rates remained unchanged compared with the Year-to-Date 1998. INTEREST EXPENSE Net interest expense for the Third Quarter of 1999 increased $540,000 to $1,226,000 from $686,000 for the Third Quarter of 1998. This is primarily due to increased borrowing under the Company's line of credit and letter of credit facilities. INCOME TAXES The Company's effective tax rate was 39.5% for the Third Quarter and Year-to-Date of 1999 and 41.0% for the Third Quarter and Year-to-Date of 1998. The reduction in the 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 1999, cash used in operating activities was $71,960,000 representing an increase of $10,146,000 from the $61,814,000 of cash used in operating activities for the same period of 1998. This was principally attributable to an increase in merchandise inventories, partially offset by higher net earnings and improved cash flow from changes in accounts payable and accrued expenses as compared to the prior year. Management believes that the Company's merchandise levels are in line with planned sales for the fourth quarter. Net cash used in investing activities was $85,947,000 for Year-to-Date 1999. Purchases of property and equipment were $95,009,000, which includes approximately $54,000,000 for stores, $17,600,000 for warehouse and computer equipment in a new, leased distribution facility and $19,500,000 for systems development. Net proceeds from the sale of the assets of the Gardeners Eden catalog were $9,101,000. Additionally, there were net proceeds from the sale of land of $2,091,000. The Company is planning approximately $130,000,000 - $135,000,000 of gross capital expenditures in 1999. For Year-to-Date 1999, cash provided by financing activities was $55,390,000, comprised primarily of net borrowings under Company's line of credit facility. For Year-to-Date 1998, cash provided by financing activities was $25,724,000, principally as a result of net borrowings under the line of credit facility. 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. During the third quarter, the Company amended its letter-of-credit agreement to add a facility for up to $50,000,000 in cash advances in order to meet its seasonal working capital needs. This additional facility expired on December 1, 1999.
11 On October 31, 1999, the Company had $50,000,000 of borrowings outstanding under the line of credit facility, $48,316,000 in outstanding letters of credit, and $11,980,000 of outstanding cash advances under the letter of credit facility. 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 in the final stages of completing its program to address the "Year 2000" problem. The Company previously identified those areas that could be affected by the Year 2000 issue, and developed a comprehensive, risk-based plan. This plan addressed both IT and non-IT systems and products, as well as dependencies on those with whom the Company does significant business. The status of this plan is as follows: Earlier in the year, the Company completed an inventory and risk-assessment of its computer systems and related technology. In the third quarter of 1999, the Company substantially completed testing and remediation of its critical business processes, and believes that all significant issues that were identified as a result of this process have been resolved. However, the Company can not guarantee that its systems will not encounter difficulties when attempting to interface with certain internal or 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 has resolved all significant outstanding issues to the best of its ability. 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 fourth quarter cost for the remediation and testing of computer applications and related products is approximately $250,000. Approximately $2.5 million of external costs have been expensed to date. The Company presently believes 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 has assessed these risks and uncertainties, and has developed 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. 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 0.85 percentage points (a 10% change from the bank's reference rate as of October 31, 1999), the Company's results from operations and cash flows would not be materially affected. In addition, the
12 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.
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 statements taken as a whole.
14 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- <S> <C> 10.1 Fifth Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated September 22, 1999 10.2 Fourth Amendment to Syndicated Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated September 22, 1999. 10.3 Sixth Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated October 29, 1999 11 Statement re computation of per share earnings. 27 Financial Data Schedule. </TABLE> (b) The Company filed the following reports on Form 8-K during the third quarter of fiscal 1999. (1) A report dated September 22, 1999 disclosing the ratification of the proposed Restated Bylaws of the Company with respect to the indemnification of officers, directors, and employees, and an advance notice provision regarding director nominations and shareholder proposals.
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: December 13, 1999
16 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION ------- ------------------- <S> <C> 10.1 Fifth Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated September 22, 1999 10.2 Fourth Amendment to Syndicated Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated September 22, 1999. 10.3 Sixth Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated October 29, 1999 11 Statement re computation of per share earnings. 27 Financial Data Schedule. </TABLE>