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 2, 1998. [ ] 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 September 3, 1998, 55,612,581 shares of the Registrant's Common Stock were outstanding.
2 WILLIAMS-SONOMA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 2, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets August 2, 1998, February 1, 1998, and August 3, 1997 Condensed Consolidated Statements of Operations Thirteen weeks ended August 2, 1998 and August 3, 1997 Twenty-six weeks ended August 2, 1998 and August 3, 1997 Condensed Consolidated Statements of Cash Flows Twenty-six weeks ended August 2, 1998 and August 3, 1997 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K
3 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> August 2, February 1, August 3, 1998 1998 1997 -------- -------- -------- <S> <C> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 37,896 $ 97,214 $ 27,266 Accounts receivable (net) 18,408 15,238 15,273 Merchandise inventories 152,247 132,451 125,709 Prepaid expenses and other assets 9,333 7,991 10,322 Prepaid catalog expenses 12,485 13,596 6,993 Deferred income taxes 3,680 3,680 4,028 -------- -------- -------- Total current assets 234,049 270,170 189,591 Property and equipment (net) 213,742 201,020 185,256 Investments and other assets (net) 5,823 6,039 6,160 Deferred income taxes -- -- 451 -------- -------- -------- Total assets $453,614 $477,229 $381,458 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 44,697 $ 58,496 $ 46,120 Accrued expenses 10,362 15,619 12,064 Accrued salaries and benefits 13,666 15,863 13,183 Customer deposits 19,171 19,617 13,672 Income taxes payable 153 17,216 2,900 Current portion of long-term obligations 125 125 125 Other liabilities 5,516 8,710 6,235 -------- -------- -------- Total current liabilities 93,690 135,646 94,299 Deferred lease credits 62,641 56,157 46,318 Deferred tax liability 2,439 2,439 -- Long-term debt and other liabilities 50,587 89,789 89,534 Shareholders' equity 244,257 193,198 151,307 -------- -------- -------- Total liabilities and shareholders' equity $453,614 $477,229 $381,458 ======== ======== ======== </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 Twenty-Six Weeks Ended -------------------------- -------------------------- August 2, August 3, August 2, August 3, 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $215,262 $182,427 $421,472 $358,962 Costs and expenses: Cost of goods sold and occupancy 135,248 116,667 263,171 226,694 Selling, general and administrative 73,336 60,662 147,695 124,003 -------- -------- -------- -------- Total costs and expenses 208,584 177,329 410,866 350,697 -------- -------- -------- -------- Earnings from operations 6,678 5,098 10,606 8,265 Interest expense (net) 163 929 452 1,703 -------- -------- -------- -------- Earnings before income taxes 6,515 4,169 10,154 6,562 Income taxes 2,671 1,752 4,163 2,756 -------- -------- -------- -------- Net earnings $ 3,844 $ 2,417 $ 5,991 $ 3,806 ======== ======== ======== ======== Earnings per share: Basic and diluted $ 0.07 $ 0.05 $ 0.11 $ 0.07 Average number of common shares outstanding: Basic 55,484 51,201 53,587 51,171 Diluted 57,852 *53,604 55,947 *53,356 </TABLE> * Incremental shares from assumed conversion of convertible debt are antidilutive for diluted earnings per share and therefore not included. 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> Twenty-Six Weeks Ended --------------------------- August 2, August 3, 1998 1997 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 5,991 $ 3,806 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 15,571 13,745 Amortization of deferred lease incentives (2,959) (2,173) Other 151 -- Change in: Accounts receivable (3,170) (3,355) Merchandise inventories (19,796) (15,007) Prepaid catalog expenses 1,111 4,932 Prepaid expenses and other assets (1,342) (1,648) Accounts payable (13,799) (18,289) Accrued expenses and other liabilities (10,092) (2,537) Deferred lease incentives 9,442 8,913 Income taxes payable (17,063) (12,815) -------- -------- Net cash used in operating activities (35,955) (24,428) -------- -------- Cash flows from investing activities: Purchases of property and equipment (31,233) (27,751) Proceeds from landlord for store closure 2,117 -- Other investments -- (506) -------- -------- Net cash used in investing activities (29,116) (28,257) -------- -------- Cash flows from financing activities: Borrowings under line of credit -- 3,900 Repayments under line of credit -- (3,900) Repayment of long-term obligations (311) (313) Proceeds from exercise of stock options 6,064 1,462 -------- -------- Net cash provided by financing activities 5,753 1,149 -------- -------- Net decrease in cash and cash equivalents (59,318) (51,536) Cash and cash equivalents at beginning of period 97,214 78,802 -------- -------- Cash and cash equivalents at end of period $ 37,896 $ 27,266 ======== ======== Non-cash financing transaction (see Note B): Conversion of Convertible Notes to common stock $ 39,004 -- </TABLE> See Notes to Condensed Consolidated Financial Statements.
6 WILLIAMS-SONOMA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Thirteen and Twenty-six Weeks Ended August 2, 1998 and August 3, 1997 (Unaudited) NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION The condensed consolidated balance sheets as of August 2, 1998 and August 3, 1997, the condensed consolidated statements of operations for the thirteen and twenty-six week periods ended August 2, 1998 and August 3, 1997 and the condensed consolidated statements of cash flows for the twenty-six week periods ended August 2, 1998 and August 3, 1997 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 February 1, 1998, 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 February 1, 1998. 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 February 1, 1998. 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 2, 1998 are not necessarily indicative of the operating results of the full year. NOTE B. DEBT On April 15, 1996, the Company issued 5 1/4% Convertible Subordinated Notes due April 15, 2003 in the principal amount of $40,000,000 (the "Convertible Notes"). In March 1998, the Company notified the holders of the Convertible Notes of the Company's intention to redeem the Convertible Notes on April 21, 1998. Prior to such redemption, substantially all of the Convertible Notes were converted into approximately 3,064,000 shares of the Company's common stock. As a result, the Company recorded a net increase to paid-in capital of $39,004,000, representing $39,999,000 from the conversion of the Convertible Notes, net of $995,000 of related unamortized debt issuance costs. There was no income statement impact as a result of this conversion. On June 1, 1998, the Company renewed its syndicated line of credit facility and entered into a second amended and restated credit agreement which expires on May 31, 2001. The amended facility 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 $50,000,000 letter-of-credit agreement expiring on May 31, 1999 with its primary bank. On August 2, 1998, $50,000,000 and $50,000,000 were available under the line-of-credit and letter-of-credit facilities, respectively, of which $0 and $41,602,000 were outstanding, respectively.
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. Prior year share and earnings per share amounts in these financial statements have been restated to reflect such presentation. NOTE D. STOCK SPLIT A two-for-one stock split was announced on March 12, 1998 and was effected on May 15, 1998. Prior year share and earnings-per-share amounts have been restated to give retroactive recognition to this stock split. NOTE E. NEW ACCOUNTING STANDARDS In April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities, which requires costs of start-up activities and organization costs to be expensed as incurred. The SOP requires entities to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets. The SOP will be effective for fiscal years beginning after December 15, 1998. The Company's adoption of the new accounting standard will involve the recognition of the cumulative effect of the change in accounting principle required by the SOP as a one-time charge against earnings, net of any related income tax effect, retroactive to the beginning of the fiscal year of adoption. Management believes that adoption of this standard will not have a material impact on the Company's earnings or financial position.
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 2, 1998 August 3, 1997 August 2, 1998 August 3, 1997 ---------------------- ---------------------- ---------------------- ---------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Retail Sales $141,658 65.8% $116,264 63.7% $270,675 64.2% $222,520 62.0% Catalog Sales 73,604 34.2% 66,163 36.3% 150,797 35.8% 136,442 38.0% -------- ---- -------- ---- -------- ---- -------- ---- Total Net Sales $215,262 100.0% $182,427 100.0% $421,472 100.0% $358,962 100.0% </TABLE> Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 13 weeks ended August 2, 1998 (Second Quarter of 1998) were $215,262,000 -- an increase of $32,835,000 (18.0%) over net sales for the 13 weeks ended August 3, 1997 (Second Quarter of 1997). Net sales for the 26-week period ended August 2, 1998 (Year-to-Date 1998) were $421,472,000, an increase of $62,510,000, or 17.4%, from the 26-week period ended August 3, 1997 (Year-to-Date 1997). RETAIL SALES <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended (Dollars in thousands) August 2, 1998 August 3, 1997 August 2, 1998 August 3, 1997 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Total retail sales $ 141,658 $ 116,264 $ 270,675 $ 222,520 Retail growth percentage 21.8% 16.5% 21.6% 16.6% Comparable store sales growth 5.8% 2.7% 5.4% 1.4% Number of stores - beginning of period 276 260 276 256 Number of new stores 17 16 25 22 Number of closed stores 8 12 16 14 Number of stores - end of period 285 264 285 264 Store selling area at quarter-end (sq.ft.) 1,098,734 900,361 1,098,734 900,361 Store leased area at quarter-end (sq.ft.) 1,688,314 1,368,748 1,688,314 1,368,748 </TABLE> Retail sales for the Second Quarter of 1998 increased 21.8% over retail sales for the Second Quarter of 1997 primarily due to a net increase of 21 stores. Year-to-Date 1998 retail sales increased 21.6% over the same period of the prior year. The Company operated 285 stores at the end of the Second Quarter of 1998 as compared to 264 stores at the end of the same period during the prior year. During the Second Quarter of 1998, the Company opened 17 stores (7 Pottery Barn, 6 Williams-Sonoma, 2 Hold Everything and 2 Clearance Center stores) and closed 8 stores (4 Pottery Barn, 2 Williams-Sonoma and 2 Hold Everything stores). Pottery Barn, with 30.9% of the locations at the end of the Second Quarter of 1998, accounted for 70.6% and 68.4% of the growth in retail sales for the Second Quarter of 1998 and Year-to-Date 1998, respectively. Comparable store sales are defined as sales from stores 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 5.8% in the Second Quarter of 1998, and 5.4% for Year-to-Date 1998.
9 The prototypical 1998 large-format stores range from 5,800 - 10,400 selling square feet (7,000 - 15,200 leased square feet) for Pottery Barn stores and 2,900 - 4,500 selling square feet (4,100 - 6,400 leased square feet) for Williams-Sonoma stores, and enable the Company to display merchandise more effectively. At the end of the Second Quarter of 1998, 145 stores (82 Williams-Sonoma and 63 Pottery Barn) were in the large format, comprising 67.6% of the Company's total selling square footage. Large-format stores accounted for 65.4% and 64.6% of Second Quarter of 1998 and Year-to-Date 1998 total retail sales, respectively. By the end of fiscal 1998, the Company plans to increase leased square footage by approximately 21% as compared to leased square footage as of the 1997 fiscal year-end. CATALOG SALES Catalog sales in the Second Quarter of 1998 increased 11.2% as compared to the Second Quarter of 1997. For Year-to-Date 1998, catalog sales increased 10.5% over the same period of 1997. The total number of catalogs mailed, as compared to the same period of the respective prior years, increased 3.8% in the Second Quarter of 1998 and 17.6% in the Second Quarter of 1997. The increased circulation in these periods was in markets with stores. Management believes that the mailing of catalogs into markets with stores builds brand recognition and supports new store openings. Typically, these mailings generate less revenue for the catalog division than mailings into non-store markets. The following table reflects catalog sales growth (decline) percentages by concept: <TABLE> <CAPTION> Percentage Growth (Decline) Thirteen Weeks Ended Twenty-Six Weeks Ended August 2, 1998 August 3, 1997 August 2, 1998 August 3, 1997 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Williams-Sonoma (15.1%) 36.8% (6.6%) 27.7% Pottery Barn 33.8% 27.7% 28.4% 11.9% Hold Everything 0.3% 29.1% 5.5% 16.5% Gardeners Eden (7.1%) (9.1%) (15.6%) (6.1%) Chambers (2.8%) (20.3%) (4.0%) (3.7%) Total catalog 11.2% 18.7% 10.5% 11.8% </TABLE> Combined sales for Williams-Sonoma and Pottery Barn, the Company's primary concepts, comprised approximately 69.7% and 69.9% of total catalog sales for the Second Quarter of 1998 and Year-to-Date 1998, respectively. For Pottery Barn, the number of catalogs mailed in the Second Quarter of 1998 as compared to the same period of 1997 increased 11.8%. Also contributing to the Second Quarter 1998 sales growth of Pottery Barn was a broadening of the merchandise assortment. For Williams-Sonoma, the number of catalogs mailed in the Second Quarter of 1998 decreased 6.9% as compared to the same period of the prior year, in part reflecting the Company's decision to eliminate the summer book from its 1998 circulation plan. Instead, the Company will mail the spring catalog later into the spring season and will mail the fall catalog earlier in the fall season. 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 1998 decreased 1.2 percentage points to 62.8% from 64.0% in the same period of the prior year. Merchandise margin improved 1.1 percentage points, principally due to a lower cost of merchandise. Occupancy expenses expressed as a percentage of net sales decreased slightly in the Second Quarter of 1998 as compared to the same period of the prior year.
10 For the Year-to-Date 1998, cost of goods sold and occupancy expenses as a percent of net sales decreased 0.8 percentage points, from 63.2% for the same period of 1997 to 62.4%. This decrease was primarily due to improved merchandise margins as a result of lower cost of merchandise. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses expressed as a percent of net sales increased .8 percentage points to 34.1% in the Second Quarter of 1998 from 33.3% in the Second Quarter of 1997. The majority of the increase was due to increased employment costs and lower net shipping income. The reduction in net shipping income was due in part to the growth of Pottery Barn as compared to the other concepts. Pottery Barn historically has generated higher merchandise revenue per order than the other concepts, which typically results in higher shipping expense expressed as a percent of the shipping income collected. The Year-to-Date 1998 selling, general and administrative expense rates increased .5 percentage points over the Year-to-Date 1997. This is primarily due to increased employment and other general operating costs. INTEREST EXPENSE Net interest expense for the Second Quarter of 1998 decreased $766,000 to $163,000 from $929,000 for the Second Quarter of 1997. This is primarily due to interest savings as a result of the conversion of the Company's Convertible Notes in April 1998 (see Note B), and an increase in short-term investment income. Net interest expense for Year-to-Date 1998 decreased to $452,000 from $1,703,000 for the same period of the prior year. This is principally attributable to an increase in short-term investment income. During Year-to-Date 1998, the Company had an average investment balance of $62,104,000, as compared to $38,213,000 for Year-to-Date 1997. INCOME TAXES The Company's effective tax rate was 41.0% for the Second Quarter and Year-to-Date of 1998 and 42.0% for the Second Quarter and Year-to-Date of 1997. This rate reflects the effect of aggregate state tax rates based on the mix of retail sales and catalog sales in the various states in which the Company has sales or conducts business. LIQUIDITY AND CAPITAL RESOURCES For Year-to-Date 1998, cash used in operating activities was $35,955,000, representing an increase of $11,527,000 from the $24,428,000 of cash used in operating activities for the same period of 1997. This was principally attributable to increases in merchandise inventories, payment of the Company's 1997 income tax liability, and payment of accrued expenses and other liabilities, including sales tax liabilities. Net cash used in investing activities of $29,116,000 was primarily for new stores. The Company is planning approximately $70,000,000 - $75,000,000 of gross capital expenditures in 1998, including $10,000,000 for information systems. For Year-to-Date 1998, cash provided by financing activities was $5,753,000, comprised primarily of proceeds from exercise of stock options. On April 15, 1996, the Company had issued 5 1/4% Convertible Subordinated Notes due April 15, 2003 in the principal amount of $40,000,000. In March of 1998, the Company notified the holders of the Convertible Notes of the Company's intention to redeem the Convertible Notes on April 21, 1998. Prior to such redemption, substantially all of the Convertible Notes
11 were converted into approximately 3,064,000 shares of the Company's common stock. As a result, the Company recorded a net increase to paid-in-capital of $39,004,000, representing $39,999,000 from the Conversion of the Notes, net of $995,000 of related unamortized debt issuance costs. See Note B to the condensed consolidated financial statements. On June 1, 1998, the Company renewed its syndicated line of credit facility and entered into a second amended and restated credit agreement which expires on May 31, 2001. The amended facility 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 $50,000,000 letter-of-credit agreement expiring on May 31, 1999 with its primary bank. On August 2, 1998, $50,000,000 and $50,000,000 were available under the line-of-credit and letter-of-credit facilities, respectively, of which $0 and $41,602,000 were outstanding, respectively. 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 process of 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 has completed an inventory and risk-assessment of its computer systems and related technology, and has begun the testing and remediation process. The Company expects to complete this process, including integration testing of its critical business processes, by mid-1999. However, 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. The Company has also completed an inventory and risk assessment of its outside vendors, and believes the greatest Year 2000 exposure is with its service providers (customs broker, logistics providers, etc.). The Company is currently in the process of communicating with these vendors and performing testing to determine their Year 2000 readiness. 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 expects to identify any significant vendor-compliance problems by the first quarter of 1999, and to resolve those issues by the end of the third quarter. 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 cost for the remediation and testing of computer applications and related products could range as high as $4.5 million over the two-year period 1998 through 1999, of which approximately $710,000 has been incurred 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. 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
12 from February through September. The Company believes this is the general pattern associated with the mail order and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and mail order processing and distribution areas, and incurs significant fixed catalog production and mailing costs. 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, a limited operating history for the Company's large-format stores, 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 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 27, 1998. (b) At the Company's 1998 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 23,650,317 48,599 W. Howard Lester 23,674,647 24,269 James A. McMahan 23,650,618 48,298 Nathan Bessin 23,650,575 48,341 Patrick J. Connolly 23,672,494 26,422 Gary G. Friedman 23,673,191 25,725 James M. Berry 23,653,196 45,720 John E. Martin 23,675,579 23,337 Adrian D.P. Bellamy 23,675,389 23,527 Janet L. Emerson 23,673,540 25,376 </TABLE> (II) The shareholders approved, by the vote indicated, the amendment to the Company's Amended and Restated 1993 Stock Option Plan: <TABLE> <CAPTION> For Against Withheld --- ------- -------- <S> <C> <C> 19,710,470 876,720 30,731 </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 31, 1999: <TABLE> <CAPTION> For Against Withheld --- ------- -------- <S> <C> <C> 23,578,563 115,462 4,891 </TABLE>
14 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits <TABLE> <CAPTION> EXHIBIT NUMBER EXHIBIT DESCRIPTION <S> <C> 10.1 Amendment Number Eight to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated September 16, 1997. 10.2 First Amendment to Syndicated Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated May 29, 1998 10.3 Second Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated May 29, 1998 10.4 Second Amendment to Syndicated Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated June 30, 1998 10.5 Third Amendment to Letter of Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated June 30, 1998 10.6 Memorandum of Understanding between the Company and the State of Mississippi, Mississippi Business Finance Corporation, Desoto County, Mississippi, the City of Olive Branch, Mississippi and Hewson Properties, Inc., dated August 24, 1998 10.7 Reimbursement Agreement between the Company and Hewson Properties, dated August 17, 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.
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/ Dennis A. Chantland --------------------------------- Dennis A. Chantland Executive Vice President Chief Administrative Officer Secretary Dated: September 11, 1998