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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended February 2, 1997
Commission file number 000-12704
WILLIAMS-SONOMA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
California 94-2203880
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(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
3250 Van Ness Avenue, San Francisco, CA 94109
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 421-7900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by checkmark 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 _____
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 27, 1997, the approximate aggregate market value of voting
stock held by non-affiliates of the Registrant was $556,339,000 using the
closing sales price on this day of $30.75. It is assumed for purposes of this
computation an affiliate includes all persons registered as Company insiders
with the Securities and Exchange Commission, as well as the Company's Employee
Profit Sharing and Stock Incentive Plan.
As of March 27, 1997, 25,556,814 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents have been incorporated herein by
reference:
1) Registrant's Annual Report to Shareholders for the Fiscal Year ended
February 2, 1997 (the "1996 Annual Report") in Parts I and II hereof and
attached hereto as Exhibit 13;
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2) Registrant's Proxy Statement for the 1996 Annual Meeting (the "Proxy
Statement") in Part III hereof.
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WILLIAMS-SONOMA, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED FEBRUARY 2, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C> <C> <C>
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security 7
Holders
PART II
Item 5. Market for the Registrant's Common Equity 8
and Related Stockholder Matters
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants 9
on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the 10
Registrant
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial 10
Owners and Management
Item 13. Certain Relationships and Related Transactions 10
PART IV
Item 14. Exhibits, Financial Statement Schedules 11
and Reports on Form 8-K
</TABLE>
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PART I
ITEM 1. BUSINESS
Williams-Sonoma, Inc., together with its subsidiaries (the Company), is a
national specialty retailer of fine quality cooking and serving equipment, home
furnishings and home and garden accessories, which it markets through 256
retail stores and five mail order catalogs. The Company believes that it is one
of the country's largest specialty retailers of such equipment, furnishings and
accessories. Retail sales accounted for approximately 63% of the Company's net
sales during the fiscal year ended February 2, 1997 (Fiscal 1996), while mail
order sales accounted for the balance.
The Company offers high quality, home-centered merchandise through five
concepts, each of which is focused on a different area of the home:
Williams-Sonoma offers culinary and serving equipment; Pottery Barn features
items in casual home furnishings, flatware and table accessories; Hold
Everything offers innovative household storage products; Gardeners Eden
features home gardening equipment and accessories; and Chambers offers high
quality bed and bath products. Together, these concepts help customers satisfy
their home-centered needs from the kitchen and garden to the bedroom and bath.
The Company was founded in 1956 in Sonoma, California, by Charles E. Williams,
currently Vice Chairman and a director of the Company. Williams-Sonoma was one
of the first retailers of fine quality cookware in the United States. Two
years later, the Sonoma store was moved to San Francisco. In 1972, the Company
began to offer its Williams-Sonoma kitchen products through mail order
catalogs. The Company expanded into areas of the home-centered business beyond
kitchen products by acquiring: Gardeners Eden, a mail order merchandiser of
home gardening and outdoor-related products, in 1982; Pottery Barn, a retailer
of home furnishings, accessories and housewares, in 1986; and California Closet
Company, Inc., a direct marketer and installer of customized closet systems, in
1990. The Company also internally developed Hold Everything, a retail and
mail order merchandiser of innovative household storage products, and Chambers,
a mail order merchandiser of high-quality bed and bath products. In August
1994 the Company sold California Closet Company, Inc., which accounted for 2%
of sales for the fiscal year ended January 30, 1994 (Fiscal 1993).
MERCHANDISING CONCEPTS
The Company has five merchandising concepts: Williams-Sonoma, Pottery Barn,
Hold Everything, Gardeners Eden, and Chambers. The Company believes that these
specialty concepts together can fulfill a customer's home-centered needs, from
the kitchen and garden to the bedroom and bath.
3
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RETAIL STORES
Three of the Company's five merchandising concepts are marketed through retail
stores - Williams-Sonoma, Pottery Barn and Hold Everything. Williams-Sonoma
stores offer a wide selection of culinary and serving equipment, including
cookware, cookbooks, cutlery, informal dinnerware, glassware and table linen.
In addition, these stores carry a variety of quality foods, including a line of
Williams-Sonoma food products, such as gourmet coffees and pasta sauces.
Pottery Barn stores feature a large assortment of items in casual home
furnishings, flatware and table accessories from around the world that are
designed to be combined to create a dynamic look in the home. The Hold
Everything concept was developed by the Company to offer innovative solutions
to household storage needs by providing efficient organization solutions for
every room in the house.
As of February 2, 1997 the Company operated 256 retail stores, located in 36
states and the District of Columbia. This represents 145 Williams-Sonoma, 76
Pottery Barn, 32 Hold Everything, and 3 outlet stores, of which 56
Williams-Sonoma and 33 Pottery Barn stores are large-format. The prototypical
large-format stores range from 5,400-8,100 selling square feet for Pottery Barn
stores, and 3,000-3,800 selling square feet for Williams-Sonoma stores, and
enable the Company to more clearly display merchandise. The Company opened its
first large-format store in fiscal 1994. As leases on older stores are
expiring, the Company is closing the old store and replacing it with a
large-format store in the same market. The Company plans to open 39 new
large-format stores in fiscal 1997 (20 Pottery Barn and 19 Williams-Sonoma) and
close 14 smaller ones.
MAIL ORDER OPERATIONS
The Company's mail order business began in 1972 when it introduced its flagship
catalog, "A Catalog for Cooks," which markets the Williams-Sonoma concept.
Since then, it has expanded its mail order business to include the four other
concepts - Pottery Barn, Hold Everything, Gardeners Eden and Chambers. The
mail order business complements the retail business by building customer
awareness of a concept and acting as an effective advertising vehicle. In
addition, the Company believes that the mail order catalogs act as a cost
efficient means of testing market acceptance of new products.
The Company sends its catalogs to addresses from its proprietary customer list,
as well as to names from lists which the Company receives in exchange or rents
from other mail order merchandisers, magazines and other companies. In
accordance with prevailing industry practice, the Company rents its list to
other merchandisers. The Company's customer list is continually updated to
include new prospects and eliminate non-responders.
During the year, the Company completed the expansion and upgrade of its mail
order equipment and systems at its Memphis distribution facility and installed
a new senior management team. The Company also opened a call center in
Summerlin, Nevada, dramatically increasing its telephone capacity. As a
result, mail order operations functioned smoothly during the 1996 holiday
season and avoided many of the difficulties faced in 1994 and 1995 associated
with increased volume.
SUPPLIERS
The Company purchases its merchandise from numerous foreign and domestic
manufacturers and importers, none of which accounted for more than 4% of
purchases during Fiscal 1996. Approximately 38% of the Company's merchandise
is foreign-sourced. The primary sources for imported merchandise are located
in Europe and Asia. The Company relies on long-standing arrangements with many
of its buying agents.
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MANAGEMENT INFORMATION SYSTEMS
In 1996, in order to address problems experienced in 1995 with mail order
fulfillment, the Company significantly upgraded the information systems and
order processing equipment at its mail order distribution facility. Also in
1996, the Board of Directors approved a three-year, $25 million systems
initiative, the purpose of which is to support the Company as it grows into a
billion-dollar business and beyond. In 1997, in the first phase of the
initiative, the Company plans to spend approximately $10 million on development
and implementation of information systems, including merchandise planning and
inventory management systems.
COMPETITION AND SEASONALITY
The specialty retail business is highly competitive. The Company's specialty
retail stores and mail order catalogs compete with other retail stores,
including specialty stores and department stores and other mail order catalogs.
Certain of the Company's competitors have greater financial, distribution and
marketing resources than the Company. The recent substantial sales growth in
the mail order catalog industry has encouraged the entry of many new
competitors and an increase in competition from established companies. The
Company competes on the basis of the quality of its merchandise, service to its
customers and its proprietary customer list.
The Company's business is subject to substantial seasonal variations in demand.
Historically, a significant portion of the Company's sales and net income have
been realized during the period from October through December, and levels of
net sales and net income have generally been significantly lower during the
period from February through July. The Company believes this is the general
pattern associated with the mail order and retail industries. In anticipation
of its peak season, the Company hires a substantial number of additional
employees in its retail stores and mail order processing and distribution
areas, and incurs significant fixed catalog production and mailing costs. (See
Quarterly Financial Information on page 54 of the 1996 Annual Report which is
incorporated herein by reference).
EMPLOYEES
At February 2, 1997, the Company employed approximately 10,300 persons,
approximately 3,200 of whom were full-time employees. During the 1996 peak
season the Company hired approximately 4,000 temporary employees in its stores
and in its mail order processing and distribution areas.
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ITEM 2. PROPERTIES
The Company's corporate offices are located in two facilities in San Francisco,
California. The primary headquarters building was purchased in 1993 and is
security for a mortgage agreement entered into with a bank in April of 1994.
The second corporate office and San Francisco call center are held under a
lease which was amended in January 1996. A third facility was in use as a call
center at the end of the 1995 fiscal year but was subsequently closed and its
employees relocated to the remaining offices.
In July 1984, the Company began distributing its merchandise through a
centralized leased facility of approximately 243,000 square feet located in
Memphis, Tennessee. In October 1986 an additional 190,000 square feet of
distribution center was constructed. The lessor is a partnership consisting of
two directors and/or officers of the Company. The construction of the entire
facility was financed by the partnership through the aggregate issuance of
$2,900,000 of industrial development bonds. The lease had an initial
non-cancelable term of ten years expiring on June 30, 1994 with two optional
five-year renewals by the Company. In December 1993, the Company exercised the
two five-year renewal options and is now obligated to lease the space until
June 30, 2004. In addition, the Company is obligated to renew the lease
annually so long as the bonds which financed the project are outstanding.
Effective July 1, 1994, the fixed basic monthly rent is $51,500. In connection
with the December 1993 transaction, both the partnership and the Company
provided to an unaffiliated bank an indemnity against certain environmental
liabilities.
In August 1990, the Company entered into a lease agreement for an additional
307,000 square feet of distribution space adjacent to its existing Memphis
facility. The lessor is a partnership that includes three directors and/or
officers of the Company. The construction was financed by the partnership
through the sale of $10,550,000 of industrial development bonds. In September
1994 the lease was amended to include an approximately 306,000 square-foot
expansion, financed by the lessor through a $500,000 capital contribution from
its partners and the sale of $9,825,000, 9.01% principal amount of industrial
development bonds. The expansion was completed in October 1995. The amended
lease has an initial, non-cancelable term of fifteen years, with three optional
five-year renewals, and mandatory annual renewals so long as the bonds are
outstanding. (See Note F of the Company's Consolidated Financial Statements).
On January 2, 1996, the Company entered an agreement to lease a 35,867
square-foot build-to-suit call center in Summerlin, Nevada. The lease covers a
ten-year term with three optional five-year renewals. Rent commenced in August
1996 at an annual basic rent amount of $529,000 for each of the first five
years of the lease and will increase to $598,000 annually for the remaining
five years. In the event that the Company should require more space to support
growth, the agreement includes an option to expand into an additional 17,920
square feet.
In July 1996, the Company secured an additional 400,232 square foot warehouse
in Memphis, Tennessee to more efficiently process non-conveyable merchandise.
The lease for the warehouse covers a nine-year term with termination rights
available after the third and sixth years, subject to penalty fees. Rent
commenced in July 1996 at a rate of $60,000 a month for the first ten months of
the lease and is scheduled to increase to $92,000 a month for the following 26
months. For the remainder of the term, the rent will increase based on a rate
to be determined using the Consumer Price Index but not to exceed five percent
of the minimum rental payments.
The Company's net selling area totaled approximately 839,000 square feet of
leased space at February 2, 1997 for 256 stores. All of the existing stores
are leased by the Company with original lease terms ranging from three to
twenty-five years, expiring between 1997 and 2015, except for one store with a
49-year lease term extending through 2040. Most leases for the Company's
stores provide for contingent rent based upon sales. (See Note E of the
Company's Consolidated Financial Statements).
6
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ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is, however, involved in routine litigation arising in the ordinary
course of its business, and, while the results of the proceedings cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a materially adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the 1996 fiscal year.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is currently traded on the NASDAQ National Market
System. Information contained under the caption "Common Stock" on page 54 of
the 1996 Annual Report is incorporated herein by reference. The closing sales
price of the Company's stock in the NASDAQ National Market System on March 27,
1997 was $30.75.
SHAREHOLDERS
The number of shareholders of record as of March 27, 1997 was approximately
537. This number excludes shareholders whose stock is held in nominee or
street name by brokers.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its common stock. In
addition, the Company is prohibited from doing so by certain covenants in its
bank credit agreement, and is limited to a maximum dollar amount as determined
in accordance with covenants in its 7.2% Senior Note agreement.
STOCK SPLITS
In January 1994 the Company declared a 3-for-2 stock split to shareholders of
record as of January 28, 1994. The split was effected on February 18, 1994
with the issuance of 5,574,594 additional shares.
In August 1994 the Company declared a 3-for-2 stock split to shareholders of
record as of September 7, 1994. The split was effected on September 27, 1994
with the issuance of 8,414,056 additional shares.
ITEM 6. SELECTED FINANCIAL DATA
Information contained under the caption "Five Year Selected Financial Data" on
page 39 of the 1996 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information contained under the caption "Management's Discussion and Analysis"
on pages 40 - 42 of the 1996 Annual Report is incorporated herein by reference.
8
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are incorporated by reference to pages 43 through 53 of
the 1996 Annual Report to Shareholders filed as Exhibit 13 to this Annual
Report on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of February 2,
1997 and January 28, 1996
Consolidated Statements of Earnings for the 53
week period ended February 2, 1997, for the 52
week period ended January 28, 1996 and for the
52 week period ended January 29, 1995
Consolidated Statements of Shareholders' Equity
for the 53 week period ended February 2, 1997,
for the 52 week period ended January 28, 1996
and for the 52 week period ended January 29,
1995
Consolidated Statements of Cash Flows for the 53
week period ended February 2, 1997, for the 52
week period ended January 28, 1996 and for the
52 week period ended January 29, 1995
Notes to Consolidated Financial Statements
The quarterly information contained under the caption "Quarterly Financial
Information" on page 54 of the 1996 Annual Report is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
9
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained in the table under the caption "Election of Directors" in
the Proxy Statement is incorporated herein by reference.
Information contained in the last paragraph under the caption "Voting
Securities and Principal Shareholders" on page 4 of the Proxy Statement is
incorporated herein by reference.
At each Annual Meeting, directors are elected to serve until the next annual
meeting of shareholders or until the election and qualification of their
successors. The Company's Bylaws provide for not less than six nor more than
eleven directors, the exact number having been fixed by the Board of Directors
at ten.
Executive officers of the Company are elected by the Board of Directors at the
annual organizational meeting held immediately following the Annual Meeting and
serve at the pleasure of the Board. Information contained in the first table
under the caption "Information Concerning Executive Officers" on page 7 of the
Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to the aggregate cash compensation paid by the Company to
each of its five most highly compensated executive officers for the fiscal year
ended February 2, 1997, is contained under the caption "Executive Compensation"
on pages 8 through 12 of the Proxy Statement and is incorporated herein by
reference (except the information contained in the Compensation Committee
Report and the Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
a) Information with respect to those persons known to the Company to be
beneficial owners of more than 5% of its common stock as of March 27,
1997, is contained under the caption "Voting Securities and Principal
Shareholders" on pages 2 through 4 of the Proxy Statement and is
incorporated herein by reference.
b) Information concerning the beneficial ownership of the Company's common
stock by its directors, by each executive officer named in the "Summary
Compensation Table" set forth on page 8 of the Proxy Statement, and by
its directors and officers as a group, as of March 27, 1997, is
contained in the tables under the captions "Voting Securities and
Principal Shareholders" and "Election of Directors" on pages 1 through
10 of the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
contained under the caption "Certain Transactions" on page 7 of the Proxy
Statement and is incorporated herein by reference (see Note F of Notes to
Consolidated Financial Statements).
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Documents filed as part of the Form 10-K: See Item 8 for a list of
Financial Statements incorporated herein by reference.
(a)(2) Financial Statement Schedules
Description Page
Independent Auditors' Report on Financial Statement Schedule 12
Schedule II Valuation and Qualifying Accounts 13
Schedules other than those referred to above have been omitted because
they are not required or are not applicable.
(b) Reports on Form 8-K: No Form 8-K filings were made during the last
quarter of the fiscal year ended February 2, 1997.
(c) Exhibits: See Exhibit Index on pages 16 through 20.
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[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT ON FINANCIAL
STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Williams-Sonoma, Inc.:
We have audited the consolidated financial statements of Williams-Sonoma, Inc.
and subsidiaries as of February 2, 1997 and January 28, 1996, and for each of
the three fiscal years in the period ended February 2, 1997, and have issued
our report thereon dated March 26, 1997; such financial statements and report
are included in your 1996 Annual Report to Shareholders and are incorporated
herein by reference. Our audits also included the financial statement schedule
of Williams-Sonoma, Inc. and subsidiaries listed in Item 14. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
San Francisco, California
March 26, 1997
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SCHEDULE II
WILLIAMS-SONOMA, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
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Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
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<S> <C> <C> <C> <C> <C>
Period Ended January 29, 1995:
Allowance for Doubtful Accounts $338,000 $ 14,000 $113,000 (B) $239,000
Period Ended January 28, 1996:
Allowance for Doubtful Accounts $239,000 $119,000 $120,000 (A) $238,000
Period Ended February 2, 1997:
Allowance for Doubtful Accounts $238,000 $86,000 $138,000 (A) $186,000
</TABLE>
(A) Consists of direct write-offs charged against the allowance account during
the period.
(B) Includes $4,000 of direct write-offs and $109,000 allowance included in the
financial statements of a wholly-owned subsidiary that was sold in August
1994.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
WILLIAMS-SONOMA, INC.
Date: April 22, 1997 By/s/W. Howard Lester
---------------------------
Chairman and
Chief Executive Officer
Director
Pursuant to the requirements of Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Date: April 22, 1997 /s/W. Howard Lester
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W. Howard Lester
Chairman
Chief Executive Officer
Director
Date: April 22, 1997 /s/Dennis A. Chantland
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Dennis A. Chantland
Executive Vice President
Chief Administrative
Officer
Secretary
Date: April 22, 1997 /s/Jerry S. B. Dratler
----------------------------
Jerry S. B. Dratler
Vice President, Finance
Controller
Chief Accounting Officer
Date: April 22, 1997 /s/Charles E. Williams
----------------------------
Charles E. Williams
Founder and Vice-Chairman
Director
Date: April 22, 1997 /s/Gary G. Friedman
----------------------------
Gary G. Friedman
Chief Merchandising Officer
President-Retail Division
Director
14
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Date: April 22, 1997 /s/Patrick J. Connolly
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Patrick J. Connolly
Executive Vice President
General Manager, Catalog
Director
Date: April 22, 1997 /s/James A. McMahan
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James A. McMahan
Director
Date: April 22, 1997 /s/Nathan Bessin
----------------------------
Nathan Bessin
Director
Date: April 22, 1997 /s/F. Warren Hellman
----------------------------
F. Warren Hellman
Director
Date: April 22, 1997 /s/Millard S. Drexler
----------------------------
Millard S. Drexler
Director
Date: April 22, 1997 /s/John Martin
----------------------------
John Martin
Director
Date: April 22, 1997 /s/James M. Berry
----------------------------
James M. Berry
Director
15
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EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE
FISCAL YEAR ENDED FEBRUARY 2, 1997
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
3.1 Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Report on Form 10-Q for the period
ended October 29, 1995, as filed with the Commission on December 12,
1995)
3.2 Restated and Amended Bylaws of Registrant (incorporated by reference
to Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal
year ended January 31, 1988, as filed with Commission on April 29,
1988)
10.1 1983 Incentive Stock Option Plan and Form of Agreement (incorporated
by reference to Exhibit 10.2 to the Company's Registration Statement
on Form S-1, as filed with the Commission on May 25, 1983)
10.1 A 1976 Stock Option Plan and Form of Agreement as amended
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1993 as
filed with the Commission on May 3, 1993)
10.1 B 1993 Stock Option Plan and Form of Agreement (incorporated by
reference to Exhibit 10.22 to the Company's Report on Form 10-Q for
the period ended May 2, 1993 as filed with the Commission on June
16, 1993)
10.1 C Amended and Restated 1993 Stock Option Plan
10.2 Warehouse - distribution facility lease dated July 1, 1983 between
the Lester-McMahan Partnership as lessor and the Company as lessee
(incorporated by reference to Exhibit 10.28 to the Company's Report
on Form 10-Q for the period ended September 30, 1983, as filed with
the Commission on October 14, 1983)
10.2 A The Amendment, dated December 1, 1985, to the lease for the
distribution center, dated July 1, 1983 between the Company as
lessee and the Lester-McMahan Partnership as lessor (incorporated by
reference to Exhibit 10.48 to the Company's Report on Form 10-K for
the fiscal year ended February 3, 1985, as filed with the Commission
on April 26, 1985)
10.2 B The Sublease, dated as of August 1, 1990, by and between Hewson-
Memphis Partners and the Company (incorporated by reference to
Exhibit 10 to the Company's Report on Form 10-Q for the period ended
October 28, 1990, as filed with the Commission on December 12, 1990)
</TABLE>
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<TABLE>
<S> <C>
10.2 C Second Amendment to Lease between the Company and the Lester-McMahan
Partnership, dated December 1, 1993 (incorporated by reference to
Exhibit 10.27 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 30, 1994 as filed with the Commission on
April 29, 1994)
10.2 D Second Amendment to Sublease between the Company and Hewson-Memphis
Partners, dated September 1, 1994 (incorporated by reference to
Exhibit 10.38 to the Company's Report on Form 10-Q for the period
ended October 30, 1994 as filed with the Commission on December 13,
1994)
10.2 E Third Amendment to Sublease between the Company and Hewson-Memphis
Partners, dated October 24, 1995 (incorporated by reference to
Exhibit 10.2E to the Company's Report on Form 10-Q for the period
ended October 29, 1995 as filed with the Commission on December 12,
1995)
10.3 The lease for the Company's Corporate Offices at 100 North Point
Street, San Francisco, California dated January 13, 1986, between
the Company as lessee and Northpoint Investors as lessor
(incorporated by reference to Exhibit 10.49 to the Company's Report
on Form 10-K for the year ended February 3, 1985, as filed with the
Commission on April 26, 1985)
10.3 A First amendment to the lease for the Company's Corporate Offices at
100 North Point Street, San Francisco, California dated January 5,
1996, between the Company as lessee and Northpoint Investors as
lessor (incorporated by reference to Exhibit 10.3A to the
Company's Report on Form 10-K for the year ended January 28, 1996,
as filed with the Commission on April 26, 1996)
10.4 Joint Venture Agreement and Trade Name and Trade Mark Licensing
Agreement, dated May 3, 1988 between the Company and Tokyu
Department Store Co., Ltd. (incorporated by reference to Exhibit
10.1 to the Company's Report on Form 10-Q for the period ended July
31, 1988, as filed with the Commission on September 15, 1988)
10.4 A Stock Purchase Agreement dated as of May 15, 1989, by and between
the Company and Tokyu Department Store Co., Ltd. (incorporated by
reference to Exhibit 4.1 to the Company's registration statement on
Form S-2 filed with the Commission on June 28, 1990 as amended by
amendment Number 1 on Form S-2 filed with the Commission on July 17,
1990)
10.5 Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive
Plan effective as of February 1, 1989 (incorporated by reference to
Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed
February 22, 1990)
10.5 A Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive
Plan Trust Agreement, dated September 20, 1989 (incorporated by
reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-
33693) filed February 22, 1990)
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C>
10.5 B Amendment Number One to the Williams-Sonoma, Inc. Employee Profit
Sharing and Stock Incentive Plan, dated April 27, 1990 (incorporated
by reference to Exhibit 10.20 to the Company's Annual Report on Form
10-K for the fiscal year ended February 3, 1991, as amended by a
Form 8 Amendment to Form 10-K, filed with the Commission on July 26,
1991)
10.5 C Amendment Number Two to the Williams-Sonoma, Inc. Employee Profit
Sharing and Stock Incentive Plan, dated December 12, 1990
(incorporated by reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 3, 1991, as
amended by a Form 8 Amendment to Form 10-K, filed with the
Commission on July 26, 1991)
10.5 D Amendment Number Three to the Williams-Sonoma, Inc. Employee Profit
Sharing and Stock Incentive Plan, dated March 10, 1992 (incorporated
by reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1993 as filed with the
Commission on May 3, 1993)
10.5 E Amendment Number Four to the Williams-Sonoma, Inc. Employee Profit
Sharing and Stock Incentive Plan, dated June 9, 1993 (incorporated
by reference to Exhibit 10.24 to the Company's Report on Form 10-Q
for the period ended May 2, 1993 as filed with the Commission on
June 16, 1993)
10.6 Purchase and Sale Agreement between the Company and Bancroft-
Whitney, a division of Thomson Legal Publishing, Inc., dated
December 14, 1993 (incorporated by reference to Exhibit 10.29 to
the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 1994 as filed with the Commission on April 29, 1994)
10.6 A Standing Loan Agreement and Deed of Trust between the Company and
Bank of America, NT & SA, dated March 9, 1994 (incorporated by
reference to Exhibit 10.31 to the Company's Annual Report on Form
10-K for the fiscal year ended January 30, 1994 as filed with the
Commission on April 29, 1994)
10.6 B Indemnity Agreement by the Company in favor of Bank of America, NT &
SA, dated December 1, 1993 (incorporated by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 30, 1994 as filed with the Commission on April
29, 1994)
10.7 Second Amended and Restated Credit Agreement between the Company and
Bank of America, NT & SA, dated March 29, 1996 (incorporated by
reference to Exhibit 10.6G to the Company's Report on Form 10-K for
the period ended January 28, 1996 as filed with the Commission on
April 26, 1996 )
</TABLE>
18
<PAGE> 20
<TABLE>
<S> <C>
10.7 A Continuing Guaranty from Pottery Barn East Inc. to Bank of America,
NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit
10.6 F to the Company's Report on Form 10-Q for the period ended
July 30, 1995 as filed with the Commission on September 12, 1995)
10.7 B Continuing Guaranty from Hold Everything, Inc. to Bank of America,
NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit
10.6 G to the Company's Report on Form 10-Q for the period ended
July 30, 1995 as filed with the Commission on September 12, 1995)
10.7 C Continuing Guaranty from Williams-Sonoma Stores, Inc. to Bank of
America, NT & SA, dated August 7, 1995 (incorporated by reference to
Exhibit 10.6 H to the Company's Report on Form 10-Q for the period
ended July 30, 1995 as filed with the Commission on September 12,
1995)
10.7 D Continuing Guaranty from Chambers Catalog Company, Inc. to Bank of
America, NT & SA, dated August 7, 1995 (incorporated by reference to
Exhibit 10.6 I to the Company's Report on Form 10-Q for the period
ended July 30, 1995 as filed with the Commission on September 12,
1995)
10.7 E Continuing Guaranty from Gardener's Eden, Inc. to Bank of America,
NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit
10.6 J to the Company's Report on Form 10-Q for the period ended
July 30, 1995 as filed with the Commission on September 12, 1995)
10.8 Note Agreement for $40,000,000 7.2% Senior Notes, dated August 1,
1995 (incorporated by reference to Exhibit 10.9 to the Company's
Report on Form 10-Q for the period ended July 30, 1995 as filed with
the Commission on September 12, 1995)
10.8 A Guaranty Agreement for $40,000,000 Senior Notes, dated August 1,
1995 (incorporated by reference to Exhibit 10.9A to the Company's
Report on Form 10-Q for the period ended July 30, 1995 as filed with
the Commission on September 12, 1995)
10.8 B Intercreditor Agreement for $40,000,000 Senior Notes, dated August
1, 1995 (incorporated by reference to Exhibit 10.9B to the Company's
Report on Form 10-Q for the period ended July 30, 1995 as filed with
the Commission on September 12, 1995)
10.9 Purchase Agreement for $40,000,000 5.25% Convertible, Subordinated
Notes, dated April 10, 1996 (incorporated by reference to Exhibit
10.10 to the Company's Report on Form 10-K for the period ended
January 28, 1996 as filed with the Commission on April 26, 1996)
10.9 A Indenture for $40,000,000 5.25% Convertible, Subordinated Notes,
dated April 15, 1996 (incorporated by reference to Exhibit 10.10A to
the Company's Report on Form 10-K for the period ended January 28,
1996 as filed with the Commission on April 26, 1996)
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C>
10.9 B Registration Rights Agreement relating to $40,000,000 5.25%
Convertible, Subordinated Notes, dated April 15, 1996 (incorporated
by reference to Exhibit 10.10B to the Company's Report on Form 10-K
for the period ended January 28, 1996 as filed with the Commission
on April 26, 1996 )
10.10 Settlement Agreement and General Release between Williams-Sonoma,
Inc. and Robert K. Earley dated February 14, 1997.
11 Statement re computation of per share earnings
13 Annual report to security holders
21 Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
20
<PAGE> 1
Exhibit 10.1 C
AMENDED AND
RESTATED 1993 STOCK OPTION PLAN
The Company believes that officers and other key employees should have
a significant stake in the Company's stock price performance under programs
which link compensation to shareholder return. As a result, stock option
grants are an integral part of the Company's compensation program. The Company
currently relies on a single plan -- the 1993 Stock Option Plan -- for these
grants and has less than 150,000 shares of Common Stock remaining under the
plan for future grants. Rather than adopting a new stock option plan at the
present time, the Company proposes to increase the number of shares available
for grant under the existing plan from 2,250,000 shares of Common Stock to
2,750,000 shares of Common Stock, an increase of 500,000 shares or 22%. The
Company also proposes to make several other changes to the plan (discussed
below), some of which are in response to new regulations adopted by the
Securities and Exchange Commission and the Internal Revenue Service.
The following is a summary of the material features of the plan and
the proposed amendments. The summary is qualified in its entirety by reference
to the full text of the amended plan which is attached as Exhibit A to this
Proxy Statement. The attached copy of the plan is restated to reflect the
proposed amendments as well as all prior amendments.
Summary Description of the Proposed Amendments
The Company proposes to amend the plan to implement the following
changes:
o increase the number of shares of Common Stock available for
grant under the plan from 2,250,000 shares to 2,750,000 shares;
o increase the minimum exercise price of nonqualified stock
options from 75% to 100% of the fair market value of a share of
Common Stock on the date of grant;
o limit the size of stock option grants to individual officers
to 200,000 shares of Common Stock per fiscal year;
o change the eligibility requirements for members of the
committee which administers the plan; and
o revise the formula for stock option awards to non-employee
directors (i) to increase the vesting period for the initial
grant to new directors from six months to three years and (ii)
expressly grant the administering committee authority to amend
the formula from time to time without further shareholder
approval.
These changes are discussed in more detail below in the relevant section of the
summary plan description. Some of these changes are intended to conform the
plan to recent developments in the law.
<PAGE> 2
In 1996, the Securities and Exchange Commission significantly amended
the rules under Section 16 of the Securities Exchange Act of 1934 (the "Section
16 Rules"). These amendments simplified the procedures for officers, directors
and principal shareholders to report transactions in the Company's Common Stock
and broadened the exemptions from the short-swing profit recovery provisions of
Section 16 for transactions under employee benefit plans. Prior to the
adoption of the new Section 16 Rules, option grants to executive officers under
the plan were exempt from the short-swing profit recovery provisions of Section
16. The Company believes that the changes to the plan will preserve this
exemption for future stock option grants.
Also in 1996, the Internal Revenue Service finalized the regulations
under Section 162(m) of the Internal Revenue Code of 1986 (the "Section 162(m)
Regulations"). Section 162(m) limits the ability of publicly held companies to
deduct compensation expenses in excess of $1,000,000 paid to certain executive
officers. The term "compensation" generally includes all cash and non-cash
compensation deductible by the Company on its tax return, including the amounts
realized by executives (and normally deductible by the Company) upon the
exercise of non- qualified stock options. However, the $1,000,000 limit does
not apply to the amounts realized upon the exercise of stock options that
qualify as performance-based compensation under the Section 162(m) Regulations.
The Company believes that the exercise of stock options granted under the
amended plan will qualify for this exemption from the limit on deductibility.
Summary Description of the Plan
Shares Subject to the 1993 Plan. The plan currently authorizes the
Company to issue a maximum of 2,250,000 shares of Common Stock upon the
exercise of stock options granted under the plan. As a result of options
previously granted under the plan, the Company has issued approximately 95,000
shares of Common Stock through option exercises and reserved approximately
2,005,000 shares of Common Stock for outstanding options. There are less than
150,000 shares of Common Stock presently remaining under the plan for future
option grants, although some additional shares may become available to the
extent options expire unexercised. The amended plan would increase the maximum
number of shares issuable by 500,000 shares (or 22%) to a total of 2,750,000
shares. In addition, the amended plan would limit the size of stock option
grants to individual officers to 200,000 shares of Common Stock per fiscal
year.
Types of Awards. The Company may award two types of options under the
plan: (i) options intended to qualify as incentive stock options under Section
422A of the Internal Revenue Code and (ii) nonqualified stock options. The
plan does not permit the award of "phantom stock," "stock appreciation rights"
or other similar awards.
Administration. The plan is administered by a committee (the
"Committee") composed of two or more directors of the Company. The Committee
has the authority to (i) select the recipients of awards, (ii) fix the terms of
all awards, (iii) construe, interpret and prescribe rules for the plan and (iv)
make all other determinations necessary or advisable for the administration of
the plan. The plan currently restricts Committee membership to "disinterested
directors" as defined by the Section 16 Rules. However, the Securities and
Exchange Commission eliminated this term when it amended the Section 16 Rules.
The amendments to the plan would instead restrict Committee membership to
"non-employee directors" as defined in the new
<PAGE> 3
Section 16 Rules. The amendments would further restrict Committee membership
to "outside directors" as defined in the Section 162(m) Regulations adopted by
the Internal Revenue Service.
Eligibility and Participation. All directors, executives and other
key employees of the Company or any of its Affiliates (as defined in the plan)
are eligible for selection to participate in the plan. There are approximately
100 individuals currently eligible to participate in the plan. Stock options
are awarded to non-employee directors (as defined in the plan) in accordance
with a formula (discussed below). Under the applicable tax rules, the
Committee may only grant incentive stock options to employees of the Company or
its Affiliates.
Duration of Options. The Committee generally determines the duration
of each option, but no option may have a term of more than ten years. No
incentive stock option is exercisable for more than three months after
termination of the option holder's employment unless the termination is due to
death or disability. In that case, an incentive stock option is exercisable
for no more than one year after the option holder's death or disability.
Duration and Amendment of the Plan. The Committee may continue to
grant stock options under the plan until the earlier of (i) March 17, 2003 (ten
years from the original date of adoption) or (ii) all the stock available under
the plan has been issued. The Committee may amend or suspend the plan at any
time, but shareholder approval is required for amendments which (i) increase
the maximum number of shares available for grant under the plan, (ii) change
the minimum exercise price of incentive stock options, (iii) permit the grant
of options to persons other than employees or directors or (iv) materially
increase the benefits accruing to employees under the plan.
Exercise Price. Options granted under the plan are subject to minimum
exercise prices based on the fair market value of a share of Common Stock on
the date of grant. The minimum exercise prices for incentive and nonqualified
stock options are currently 100% and 75%, respectively, of the fair market
value of a share of Common Stock on the date of grant. The amended plan would
increase the minimum exercise price for nonqualified stock options to 100% of
the fair market value of a share of Common Stock on the date of grant. The
exercise price of an option must be paid in full either in cash or with shares
of Common Stock valued at fair market value. The Committee may permit
"cashless exercises" and authorize payment with a secured promissory note.
Other Terms. Options granted under the plan are only exercised by the
original recipient and are not transferable, except by will or the laws of
descent and distribution or, in the case of nonqualified stock options,
pursuant to a qualified domestic relations order. Options are generally
exercisable in such installments as the Committee decides, but not within six
months of the date of grant, except in cases of death or disability of the
option holder or dissolution, liquidation, reorganization, merger or
consolidation of the Company.
Awards to Directors. The Company's directors do not receive any cash
compensation for services provided as a member of the Board. Directors (other
than employee directors) are automatically awarded nonqualified stock options
annually under the plan. Eligible directors are awarded an option to purchase
6,750 shares of Common Stock upon their initial election to the Board and an
option to purchase 5,250 shares of Common Stock each time they are re-elected
to the Board. The term of the options is ten years, and the exercise price is
fixed at the
<PAGE> 4
fair market value of a share of Common Stock on the date of the relevant annual
meeting. The plan currently provides that these options vest six months after
the date of grant. The amended plan would change the vesting period for the
initial grant to three years. The amended plan would also expressly authorize
the Committee to amend the terms and number of future option awards to eligible
directors without further shareholder approval, but not more than once every
six months unless required to comply with changes in certain laws.
Special Terms Applicable to Large Shareholders. In addition to the
other restrictions contained in the plan, the plan requires that incentive
stock options granted to persons possessing more than 10% of the total combined
voting power of all classes of stock of the Company (i) have an exercise price
of not less than 110% of the fair market value of a share of Common Stock on
the date of grant and (ii) expire not later than five years from the date of
grant.
Federal Income Tax Consequences
Nonqualified Stock Options. Under current federal income tax law, the
grant of a nonqualified stock option has no tax effect on the Company or the
option holder. If the shares received on exercise of an option are not subject
to restrictions on transfer or risk of forfeiture imposed by the Committee, the
exercise of a nonqualified stock option will result in ordinary income to the
option holder equal to the excess of the fair market value of the shares at the
time of exercise over the option price. The amount taxed to the option holder
as ordinary income is treated as earned income. The option holder's tax basis
in the shares will be equal to the aggregate exercise price paid by the option
holder plus the amount of taxable income recognized upon the exercise of the
option. Upon any subsequent disposition of the shares, any further gain or
loss recognized by the option holder will be treated as capital gain or loss
and will be long-term capital gain or loss if the shares are held for more than
one year after exercise. The Company will normally be allowed, at the time of
recognition of ordinary income by the option holder upon exercise, to take a
deduction for federal income tax purposes in an amount equal to such recognized
income.
Incentive Stock Options. The federal income tax consequences
associated with incentive stock options are generally more favorable to the
optionee and less favorable to the employer than those associated with
nonqualified stock options. Under current federal income tax law, the grant of
an incentive stock option does not result in income to the optionee or in a
deduction for the Company at the time of the grant. The exercise of an
incentive stock option will not result in income for the option holder if the
option holder (i) does not dispose of the shares within two years after the
date of grant nor within one year after exercise and (ii) is an employee of the
Company or any of its Affiliates from the date of grant until three months
before the exercise date. If these requirements are met, the basis of the
shares upon later disposition would be the option price. Any gain will be
taxed to the option holder as long-term capital gain and the Company will not
be entitled to a deduction. The excess of the market value on the exercise
date over the option price is an item of tax preference, potentially subject to
the alternative minimum tax. If the option holder disposes of the shares prior
to the expiration of either of the holding periods described above, the option
holder would have compensation taxable as ordinary income, and the Company
would be entitled to a deduction equal to the lesser of the fair market value
of the shares on the exercise date minus the option price or the amount
realized on disposition minus the option price. If the price realized in any
such premature sale of the shares exceeds the fair market value of the shares
on the exercise
<PAGE> 5
date, the excess will be treated as long-term or short-term capital gain
depending on the option holder's holding period for the shares.
Vote Required
Under the Company's Bylaws and the terms of the plan, the amended plan
must be approved by the shareholders holding (i) a majority of shares present,
or represented, and voting at the Annual Meeting, and (ii) a majority of the
required quorum. For this purpose, abstentions and broker non-votes will have
no effect on the outcome of the vote unless such shares are necessary to
satisfy the quorum requirement, in which case abstentions and broker non-votes
will have the effect of a vote against the proposal. A majority of the shares
entitled to vote, represented in person or by proxy, constitutes a quorum. The
Company believes that shareholder approval in accordance with its Bylaws will
also satisfy the shareholder approval requirement of the Section 162(m)
Regulations.
Furthermore, because the directors would benefit from the amended
plan, under Section 310 of the California Corporations Code, the person
asserting the validity of the grant of an option to a director under the
amended plan would have the burden of proving that such grant was just and
reasonable as to the Company at the time that the grant was authorized,
approved or ratified, unless the amended plan is approved by shareholders
holding (a) a majority of shares present, or represented, and voting at the
Annual Meeting, with the shares owned by the directors not being entitled to
vote thereon, and (b) a majority of the required quorum, which, in this case,
is the majority of outstanding shares other than the shares owned by the
directors. For this purpose, abstentions and broker non-votes will have no
effect on the outcome of the vote unless such shares are necessary to satisfy
the quorum requirement, in which case such abstentions and broker non-votes
will have the effect of a vote against the proposal.
<PAGE> 1
Exhibit 10.10
SETTLEMENT AGREEMENT
AND GENERAL RELEASE
This SETTLEMENT AGREEMENT AND GENERAL RELEASE of claims is entered
into by and between Williams-Sonoma, Inc., its predecessors, successors,
subsidiaries, officers, directors, agents, attorneys, employees and assigns,
(hereinafter collectively referred to as "Company"), on the one hand, and
Robert K. Earley (hereinafter "Individual"), on the other hand.
WITNESSETH:
WHEREAS, Individual began employment at Company on or about June 6,
1983;
WHEREAS, the parties mutually desire to terminate their employment
relationship; and
WHEREAS, the parties wish to preserve the good will which exists
between them and settle all disputes which may exist between them.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and for other good and sufficient consideration, receipt of which is
hereby acknowledged, the parties agree as follows:
A. Company agrees as follows:
1. That it fully and forever releases and discharges
Individual from any claims and damages and causes of action it may
have against him and covenants not to sue or otherwise institute or
cause to be instituted or in any way participate in legal or
administrative proceedings against Individual with respect to any
matter arising out of or connected with Individual's employment with
Company or the termination of that employment, including any and all
liabilities, claims, demands, contracts, debts, obligations and causes
of action of every nature, kind and description, in law, equity, or
otherwise, whether or not now known or ascertained, which heretofore
do or may exist.
2. That upon the expiration of seven (7) days following the date
Individual executes this Agreement, Company promises to promptly pay
Individual as follows, less all applicable withholdings, a sum to
which Individual is not otherwise entitled:
(a) His normal base salary of $210,000 per year ($8,076.92
bi-weekly) through January 31, 1998;
(b) Continued group health insurance coverage through January
31, 1998;
(c) Continued Williams-Sonoma, Inc. Executive Medical
Supplement coverage for the same period as outlined above;
1
<PAGE> 2
(d) Continued automobile lease payment, the terms of which
are understood to include a contribution by Individual of
$590.00 per month. Individual may at his option purchase said
leased vehicle on February 1, 1998 at the leased vehicle's
then remaining value as determined by leasing company.
Insurance of above leased vehicle shall be individual's
responsibility; and, Individual agrees to purchase insurance
in and amount satisfactory to the Company;
(e) A 1996 bonus commensurate with Individual's performance
and that of his business unit as outlined in the Company's
Profit Improvement plan document;
(f) His country club dues through January 31, 1998. Said
amount shall be limited to the "dues" portion only. Other
club expenses are deemed to be the Individual's personal
responsibility.
B. Individual for himself, his heirs, executors, administrators,
assigns, and successors, agrees as follows:
1. To forever fully release, remise, acquit and discharge Company and
covenant not to sue or otherwise institute or cause to be instituted or any way
participate in (except at the request of the Company) legal or administrative
proceedings against Company with respect to any matter arising out of or
connected with his employment with Company or the termination of that
employment, including any and all liabilities, claims, demands, contracts,
debts, obligations and causes of action of every nature, kind and description,
in law, equity, or otherwise, whether or not now known or ascertained, which
heretofore do or may exist.
2. That his employment with Company will terminate on January 31,
1998; that he shall have no right to employment with Company after that date;
and that he shall not apply for re-employment with Company after that date.
3. That upon January 31, 1998, he will receive full payment for all
vacation earned but unused while employed by Company. Individual further
agrees that prior to the execution of this Agreement he was not entitled to
receive any further monetary payments from Company and that the only payments
and benefits that he is entitled to receive from Company in the future are
those specified in this Agreement, which shall be promptly paid without
reduction or setoff, except as is set out above.
4. Vesting in any unvested stock options ceases upon Individual's
termination (January 31, 1998). Vested but not exercised options may be
exercised at any time during the period of ninety (90) days following date of
termination. Failure to exercise during the ninety (90) day period will result
in forfeiture of the un-exercised options.
5. Until January 31, 1998 or Individual's full time employment
(whichever comes first), he will remain bound by the Company Conflict of
Interest and Corporate Ethics Guidelines that was executed by him on February
2, 1996, a copy of which is attached hereto as Exhibit A, provided that the
time limits described in this paragraph
2
<PAGE> 3
shall not apply to the section of the Williams-Sonoma, Inc. Conflict of
Interest and Corporate Ethics Guidelines entitled "Confidential Information".
6. That he is waiving any rights he may have had, now has, or in the
future may have to pursue any and all remedies available to him under any
employment-related cause of action against Company, except for any breach by
the Company of this Agreement, including without limitation, claims of wrongful
discharge, emotional distress, defamation, breach of contract, breach of the
covenant of good faith and fair dealing, violation of the provisions of the
California Labor Code, the Employee Retirement Income Security Act, and any
other laws and regulations relating to employment. Individual further
acknowledges and expressly agrees that he is waiving any and all rights he may
have had, now has, or in the future may have to pursue any claim of
discrimination, including but not limited to, any claim of discrimination based
on sex, age, race, national origin, or on any other basis, under Title VII of
the Civil Rights Act of 1964, as amended, the California Fair Employment and
Housing Act, the California Constitution, the Equal Pay Act of 1963, the Age
Discrimination in Employment Act of 1967, the Civil Rights Act of 1866, and all
other laws and regulations relating to employment.
7. That Individual will not, except as may be mandated by statutory
or regulatory requirements or as may be required by legal process, disclose to
others the terms of this settlement, the amounts referred to in this Agreement,
or the fact of the payment of said amounts, except that he may disclose to his
attorneys, accountants or other professional advisors to whom the disclosure is
necessary to effectuate the purposes for which he has consulted with such
professional advisors. Individual understands that this covenant of
non-disclosure is a material inducement to Company for the making of this
settlement and that, for the breach thereof, Company will be entitled to pursue
its legal and equitable remedies, including, without limitation, the right to
seek injunctive relief. The Company shall likewise not disclose any reason for
the Individual's termination, except as may be mandated by statutory or
regulatory requirements or as may be required by the legal process.
C. Company and Individual, for himself, his heirs, executors,
administrators, assigns, and successors, jointly agree as follows:
1. That nothing contained in this Settlement Agreement or General
Release shall constitute or be treated as an admission by Company or Individual
of liability, of wrong doing, or of any violation of law.
2. That if any provision of this Settlement Agreement and General
Release is found to be unenforceable, it shall not affect the enforceability of
the remaining provisions and the Court shall enforce all remaining provisions
to the extent permitted by law.
3. That except as expressly provided herein, this Settlement
Agreement and General Release shall supersede and render null and void any and
all prior agreements between the parties.
3
<PAGE> 4
4. That this Agreement extends to all claims of every nature and
kind, known or unknown, suspected or unsuspected, past or present, arising from
or attributable to Individual's employment with Company or the termination of
that employment, and that any and all rights granted to Company and Individual
under Section 1542 of the California Civil Code or any analogous state law or
federal law or regulation are hereby expressly waived. Said Section 1542 of
the Civil Code of the Sate of California reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which, if known by him, must have
materially affected his settlement with the debtor.
5. That this Settlement Agreement and General Release shall bind and
benefit Individual's heirs, executors, administrators, successors, assigns, and
each of them; it shall also bind and benefit Company and its successors and
assigns.
6. That this Settlement Agreement and General Release shall be deemed
to have been entered into in the Sate of California and shall be construed and
interpreted in accordance with the laws of that state.
7. That should there hereafter be any litigation between or among any
of the parties to this Agreement alleging a breach of the Agreement or seeking
enforcement of the Agreement, the prevailing party in such litigation shall be
entitled to recover his or its reasonable attorney's fees and costs of such
litigation from the other party.
8. That each party hereby agrees to accept and assume the risk that
any fact, with respect to any matter covered by this Agreement, may hereafter
be found to be other than or different from the facts it believes, at the time
of this Agreement, to be true, and agrees that this Agreement shall be and will
remain effective notwithstanding any such difference in fact.
9. That Individual hereby acknowledges and understands and Individual
agrees that:
(a) Individual may have, and has had, at least twenty-one (21) days
after receipt of the Agreement within which he may review and
consider, discuss with an attorney of his own choosing, and decide
to execute or not execute this Agreement;
(b) Individual has seven (7) days after the execution of this
Agreement within which he may revoke this Agreement;
(c) in order to revoke this Agreement, Individual must deliver to
the Company's Senior Vice-President Human Resources, Andy Rich, on
or
4
<PAGE> 5
before seven (7) days after the execution of this Agreement, a
letter stating that he is revoking this Agreement, and;
(d) that this Agreement shall not become effective or enforceable
until after the expiration of seven (7) days following the date
Individual executes this Agreement.
10. That they have read and understand the foregoing Settlement
Agreement and General Release, and that they affix their signatures hereto
voluntarily and without coercion. Individual further acknowledges that he has
been given an opportunity to consult with any attorney of his choosing
concerning the waivers contained in and the terms of this Agreement, and that
the waivers he has made and the terms he has agreed to herein are knowing,
conscious and with full appreciation that he is forever foreclosed from
pursuing any of the rights so waived.
Williams-Sonoma, Inc.
By: /s/ Dennis Chantland
__________________________________
Dennis Chantland
Its Executive Vice-President
2/20/97
Dated:____________________________
/s/ Robert K. Earley
__________________________________
Robert K. Earley
2/14/97
Dated:____________________________
5
<PAGE> 1
EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
53 Weeks Ended 52 Weeks Ended 52 Weeks Ended
February 2, 1997 January 28, 1996 January 29, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net earnings $22,742,000 $2,536,000 $19,572,000
----------- ----------- -----------
Average shares of common
stock outstanding during
period 25,463,000 25,362,000 25,155,000
Incremental shares from
assumed exercise of stock
options (primary) 823,000 776,000 972,000
----------- ----------- -----------
26,286,000 26,138,000 26,127,000
----------- ----------- -----------
Primary earnings per share $0.87 $0.10 $0.75
=========== =========== ===========
Average shares of common
stock outstanding during
period 25,463,000 25,362,000 25,155,000
Incremental shares from
assumed conversion of
Convertible Debt 1,215,000 n/a n/a
Incremental shares from
assumed exercise of stock
options (fully diluted) 933,000 792,000 1,001,000
----------- ----------- -----------
27,611,000 26,154,000 26,156,000
----------- ----------- -----------
Fully diluted earnings per
share $0.86 $0.10 $0.75
=========== =========== ===========
</TABLE>
Note: Amounts have been restated to reflect the 3-for-2 stock splits in
February 1994 and September 1994.
<PAGE> 1
EXHIBIT 13
1996 ANNUAL REPORT TO SHAREHOLDERS
This is available as a separate document. It is included as
Exhibit 13 only in the electronic filing format.
<PAGE> 2
EXHIBIT 13
WILLIAMS-SONOMA, INC.
Corporate profile
Williams-Sonoma, Inc. operates high-quality, service-oriented retail concepts
focused on the home: Williams-Sonoma professional-style cooking and related
products, Pottery Barn casual home decor, Hold Everything organizational
solutions, Gardeners Eden garden-related merchandise and Chambers luxury linens.
Each concept is marketed throughout the United States via direct mail catalogs,
with mailings totaling 136 million catalogs in 1996. The company operates 256
Williams-Sonoma, Pottery Barn and Hold Everything stores in 36 states and
Washington, D.C. (A joint venture with Tokyu Department Store handles
Williams-Sonoma direct mail, specialty shops within Tokyu stores and other
retail locations in Japan.) Williams-Sonoma, Inc. common stock is quoted on the
NASDAQ National Market System under the symbol WSGC.
Financial highlights
<TABLE>
<CAPTION>
Fiscal Year
Dollars in thousands
except per share data 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $811,758 $644,653 $528,543 $410,056 $344,944
Net Earnings 22,742 2,536 19,572 11,221 1,799
Net Earnings Per Share .86 .10 .75 .44 .07
Total Assets $404,417 $319,096 $217,878 $167,604 $147,087
Working Capital 96,568 39,076 49,506 40,405 32,909
Stockholders' Equity $146,038 $121,653 $118,216 $95,311 $83,540
</TABLE>
<PAGE> 3
WILLIAMS-SONOMA, INC.
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Dollars and amounts in thousands
except percentages, per share amounts and Year Ended
retail stores data Feb. 2, 1997(2) Jan. 28, 1996 Jan. 29, 1995 Jan. 30, 1994 Jan. 31, 1993
--------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Result of Operations
Net Sales $ 811,758 $ 644,653 $ 528,543 $ 410,056 $ 344,944
Earnings before income taxes 39,197 4,373 33,435 19,398 3,048
Net earnings 22,742 2,536 19,572 11,221 1,799
Primary net earnings per share(1) .87 .10 .75 .44 .07
Fully diluted net earnings per share(1) $ .86 $ .10 $ .75 $ .44 $ .07
Financial Position
Working capital $ 96,568 $ 39,076 $ 49,506 $ 40,405 $ 32,909
Long-term debt and other liabilities 89,319 46,757 6,781 587 723
Total assets 404,417 319,096 217,878 167,604 147,087
Shareholders' equity per share (book value)(1) $ 5.72 $ 4.78 $ 4.70 $ 3.80 $ 3.34
Retail Stores
Number of stores at year-end 256 240 214 209 213
Comparable store sales growth 4.6% 3.4% 16.5% 13.8% 2.1%
Store selling area at year-end (sq. ft.) 839,112 690,256 537,969 487,883 493,434
Catalog Sales
Catalogs mailed in year 136,489 131,800 126,833 99,807 94,326
Catalog sales growth 19.1% 16.2% 55.0% 23.9% (.2%)
Catalog sales as percent of total sales 36.7% 38.8% 40.8% 33.9% 32.4%
Number of orders filled during year 2,970 2,828 2,729 1,921 1,749
</TABLE>
(1) Per share amounts have been restated to reflect the 3-for-2 stock splits
in February 1994 and September 1994.
(2) The year ended February 2, 1997 includes 53 weeks.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net Sales
Net sales consist of the following components:
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands Feb. 2, 1997 % Total Jan. 28, 1996 % Total Jan. 29, 1995 % Total
------------ ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Retail sales $ 513,592 63.3% $ 394,281 61.2% $ 307,327 58.1%
Catalog sales 298,166 36.7% 250,372 38.8% 215,458 40.8%
California Closet revenue - - - - 5,758 1.1%
Total net sales $ 811,758 100.0% $ 644,653 100.0% $ 528,543 100.0%
</TABLE>
Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 53
weeks ended February 2, 1997 (fiscal 1996) increased $167,105,000 (26%) compared
to net sales for the 52 weeks ended January 28,1996 (fiscal 1995). Net sales for
fiscal 1995 increased 22% over net sales for the 52 weeks ended January 29, 1995
(fiscal 1994). In August of 1994 the Company sold California Closet Company,
Inc., a wholly-owned subsidiary which markets custom home closet systems,
primarily through a network of franchise stores.
Retail Sales
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Comparable store sales $ 375,959 $ 289,236 $ 282,632
Non-comparable store sales 137,633 105,045 24,695
Retail sales $ 513,592 $ 394,281 $ 307,327
Retail growth percentage 30.3% 28.3% 17.9%
Comparable store sales growth 4.6% 3.4% 16.5%
Number of stores-beginning of year 240 214 209
Number of new stores 30 43 20
Number of closed stores 14 17 15
Number of stores-end of year 256 240 214
Store selling area at year-end (square feet) 839,112 690,256 537,969
</TABLE>
Comparable store sales 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.
Retail sales for fiscal 1996 increased 30% over retail sales in fiscal 1995,
primarily due to new store openings. During fiscal 1996, the Company opened 30
stores (15 Williams-Sonoma, 13 Pottery Barn, 1 Hold Everything and 1 outlet) and
closed 14 (9 Williams-Sonoma, 4 Pottery Barn and 1 Hold Everything), resulting
in a 22% net increase in selling square footage. Comparable stores sales grew
4.6% in 1996. Retail sales in fiscal 1995 grew 28% over the prior fiscal year,
principally due to a net increase of 26 stores. Comparable store sales growth in
fiscal 1995 was 3.4%. Pottery Barn, with 30% of the store locations at the end
of fiscal 1996 accounted for 61% and 50% of the retail sales growth in fiscal
1996 and 1995, respectively.
The company opened its first large-format store in fiscal 1994. As leases on
older stores are expiring, the Company is closing the old store and replacing it
with a large-format store in the same market. The prototypical large-format
stores range from 5,400-8,100 selling square feet for Pottery Barn stores, and
3,000-3,800 selling square feet for Williams-Sonoma, and enable the Company to
more clearly display merchandise. Due to the growth in new, non-comparable
stores (which include replacements of existing stores and new stores in new
markets), same store sales comprise 73% of total retail sales in both fiscal
1996 and 1995, as opposed to 92% of total retail sales in 1994. Large-format
stores accounted for only 5% of total comparable store sales in fiscal 1995 and
30% in fiscal 1996. The Company plans to open 39 new large-format stores in
fiscal 1997 (20 Pottery Barn and 19 Williams-Sonoma) and close 14 smaller ones.
<PAGE> 5
Catalog Sales
Catalog sales in fiscal 1996 and 1995 increased 19% and 16%, respectively,
over those of the prior year. The number of catalogs mailed increased
approximately 4% in both periods. The following table reflects catalog sales
growth percentages by concept:
<TABLE>
<CAPTION>
Year Ended
Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Williams-Sonoma 13.4% 5.8% 60.6%
Pottery Barn 27.6% 40.0% 90.5%
Hold Everything 12.3% 14.1% 54.8%
Gardeners Eden 8.7% (4.0%) 9.1%
Chambers 22.7% 1.2% 31.3%
Total catalog 19.1% 16.2% 55.0%
</TABLE>
Combined sales for Williams-Sonoma and Pottery Barn, the Company's principal
concepts, increased to 67% of total catalog sales in fiscal 1996, from 62% in
fiscal 1994. Pottery Barn sales comprised 41% of total catalog sales in fiscal
1996, and 32% in fiscal 1994. Williams-Sonoma sales as a percent of the total
decreased 4 percentage points during the same period, to 26% in fiscal 1996 from
30% in fiscal 1994. This reflects the Company's development of the Pottery Barn
assortment over the last 3 years and the enhanced consumer brand recognition
achieved through the Pottery Barn catalog and Design Studio stores. The Company
expects Pottery Barn to continue to grow faster than the other merchandise
concepts. Other factors which have contributed to the overall growth in catalog
sales are the effectiveness of the Company's mailing and marketing strategies
and an assortment of goods that continues to reflect market trends.
Cost of Goods Sold and Occupancy
Cost of goods sold and occupancy expenses expressed as a percentage of net sales
in fiscal 1996 decreased 2.9 percentage points to 60.8% from 63.7% in fiscal
1995. Merchandise margins improved 3.0 percentage points, primarily as a result
of markdowns taken in the fourth quarter of fiscal 1995, which significantly
reduced overstocks and slow-moving items. Occupancy expense expressed as a
percent of net sales remained relatively flat. Increased depreciation rates,
primarily for the Company's Memphis distribution center and in the Pottery Barn
retail stores, were mostly offset by decreases in rent and other occupancy
expense rates. In fiscal 1995, cost of goods sold and occupancy expenses
expressed as a percentage of net sales increased 3.8 percentage points to 63.7%
from 59.9% in fiscal 1994. Gross margins were adversely affected by higher
occupancy expenses, a promotional program initiated in the fourth fiscal quarter
to reduce excess inventory, a reserve established at year-end for excess
inventory and higher-than-planned shortage results. Higher occupancy expenses
were partly attributable to the cost of temporary off-site storage facilities
for inventory. Excess inventory was due to the combined effect of above-plan
inventory purchases and delayed retail store openings.
Selling, General and Administrative
Selling, general and administrative expenses expressed as a percent of net sales
decreased 1.2 percentage points in fiscal 1996 to 33.8% from 35.0% in fiscal
1995. The majority of the improvement is due to lower advertising expense rates
due to improved profitability of the mail-order catalogs and the accelerating
growth in retail sales as compared to catalog sales. Selling, general and
administrative expense increased 1.5 percentage points in fiscal 1995 to 35.0%
from 33.5% in fiscal 1994. The increase was generally attributable to higher
operating expenses in most areas of the business. Operational and execution
problems at the Company's distribution and telemarketing facilities also
contributed significantly to the increase. Sales volumes exceeded the capacity
of these facilities during the 1995 peak holiday season for October through
December. As a result, the Company was required to hire substantially more
seasonal employees than normal.
Interest Expense
During fiscal 1996, the Company reduced its dependency on short-term debt
through the issuance of $40,000,000 principal amount of convertible,
subordinated notes due April 15, 2003. The notes were issued on April 15, 1996
and bear interest at 5.25% per annum. Partially as a result of this transaction
and partially due to significantly improved cash flow from operations (discussed
below), average month-end short-term borrowings decreased $34,847,000, from
$47,033,000 in fiscal 1995 to $12,186,000 in fiscal 1996. The Company's weighted
average interest rate on short-term borrowings decreased to 6.7% in fiscal 1996
from 7.0% in
<PAGE> 6
fiscal 1995. Net interest expense in fiscal 1996 increased $438,000 from
$4,527,000 in 1995 to $4,965,000 in 1996. On August 8, 1995, the Company issued
$40,000,000 in principal amount of 10-year unsecured 7.2% Senior Notes. In
December 1993, the Company purchased a new headquarters building with working
capital and then secured a seven-year, $7 million, 7.8% mortgage on the building
in April 1994. Net interest expense in fiscal 1995 increased $3,218,000 from the
prior year.
Income Taxes
The Company's effective tax rate was 42.0% for fiscal 1996 and fiscal 1995, and
41.5% for fiscal 1994. These rates reflect the effect of aggregate state tax
rates based on the mix of retail sales and catalog sales in the various states
where the Company has sales or conducts business.
Liquidity
Cash and working capital at February 2, 1997 increased by $74,636,000 and
$57,492,000, respectively, over that at January 28, 1996. Net cash provided by
operating activities increased from $2,353,000 in fiscal 1995 to $112,238,000 in
fiscal 1996. The improvement is primarily attributable to the $20,206,000
increase in net earnings, the related increase in the income tax liability and a
$10,901,000 reduction in merchandise inventories. The decrease in merchandise
inventories is primarily due to stronger inventory control and increased sales
volumes. Merchandise levels in 1997 are expected to remain at the current ratio
of inventory to forecasted sales, and inventory on hand will increase in
response to higher sales and new stores. Cash flow from investing activities, a
use of funds, was $46,012,000 in fiscal 1996. $33,737,000 was spent on new
stores, $11,072,000 on the completion of the Memphis distribution center
expansion and upgrade and $1,979,000 on the Summerlin call center. The Company
is planning approximately $64,500,000 of gross capital expenditures in 1997,
including approximately $10,000,000 for information systems.
Cash provided by financing activities was $8,410,000. On April 15, 1996, the
Company issued $40,000,000 principal amount of 5.25% Convertible Notes due April
15, 2003. The Convertible Notes are convertible into shares of the Company's
common stock at a conversion price of $26.10 per share (or 38.3 shares per
$1,000 principal amount). Proceeds from the notes were used primarily to reduce
bank borrowings.
The Company's existing credit agreement, which provides for a combined
line-of-credit and letter-of-credit facility, will expire on May 1, 1997. The
Company has received a signed commitment from its bank to replace it with a
360-day facility that provides for $60 million in cash advances and $35 million
for letters of credit. This represents a larger letter-of-credit facility and
smaller line-of-credit facility than is available under the current agreement.
Impact of Inflation
The impact of inflation on results of operations has not been significant.
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 has
been realized during the period from October through December, and levels of net
sales and net income have generally been significantly lower during the period
from February through July. The Company believes this is the general pattern
associated with the mail-order and retail industries. In anticipation of its
peak season, the Company hires a substantial number of additional employees in
its retail stores and mail-order processing and distribution areas, and incurs
significant fixed catalog production and mailing costs.
Forward-Looking Statements
Except for historical information contained herein, the matters discussed in
this Annual Report to Shareholders 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 new large-format stores, 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 Form
10-K and its other filings with the Securities and Exchange Commission.
<PAGE> 7
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended
Dollars and shares in thousands, except per share amounts Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Net sales $ 811,758 $ 644,653 $ 528,543
Costs and expenses
Cost of goods sold and occupancy 493,179 410,335 316,827
Selling, general and administrative 274,417 225,418 176,972
Interest expense - net 4,965 4,527 1,309
Earnings before income taxes 39,197 4,373 33,435
Income taxes 16,455 1,837 13,863
Net earnings $ 22,742 $ 2,536 $ 19,572
Primary earnings per share $ .87 $ .10 $ .75
Fully diluted earnings per share $ .86 $ .10 $ .75
Average number of common shares outstanding
Primary 26,286 26,138 26,127
Fully diluted 27,611 26,154 26,156
</TABLE>
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
Dollars and shares in thousands Shares Amount Earnings Total
------ ------ -------- -----
<S> <C> <C> <C> <C>
Balance at January 30, 1994 25,086 $ 44,083 $ 51,228 $ 95,311
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 256 3,333 - 3,333
Net earnings - - 19,572 19,572
Balance at January 29, 1995 25,342 47,416 70,800 118,216
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 85 901 - 901
Net earnings - - 2,536 2,536
Balance at January 28, 1996 25,427 48,317 73,336 121,653
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 117 1,643 - 1,643
Net earnings - - 22,742 22,742
Balance at February 2, 1997 25,544 $ 49,960 $ 96,078 $ 146,038
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands, except per share amounts Feb. 2, 1997 Jan. 28, 1996
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 78,802 $ 4,166
Accounts receivable (less allowance for doubtful
accounts of $186 and $238) 11,918 13,157
Merchandise inventories 110,702 121,603
Prepaid expenses and other assets 8,674 6,506
Prepaid catalog expenses 11,925 15,613
Deferred income taxes 4,028 139
Total current assets 226,049 161,184
Property and equipment-net 172,093 147,302
Investments and other assets
(less accumulated amortization of $1,076 and $778) 5,824 6,570
Deferred income taxes 451 4,040
$ 404,417 $ 319,096
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 64,409 $ 58,295
Accrued expenses 12,820 8,323
Accrued salaries and benefits 16,116 8,666
Customer deposits 13,801 9,587
Income taxes payable 15,715 1,947
Line of credit - 29,600
Current portion of long-term obligations 125 125
Other liabilities 6,495 5,565
Total current liabilities 129,481 122,108
Deferred lease credits 39,579 28,578
Long-term debt and other liabilities 89,319 46,757
Shareholders' equity
Preferred stock, $.01 par value,
authorized 7,500,000 shares, none issued - -
Common stock, $.01 par value, authorized 126,562,500 shares,
issued and outstanding, 25,543,887 and 25,426,890 shares, respectively 49,960 48,317
Retained earnings 96,078 73,336
Total shareholders' equity 146,038 121,653
$ 404,417 $ 319,096
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 22,742 $ 2,536 $ 19,572
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 24,332 16,476 11,632
Loss on disposal of assets and store closing reserve 1,826 740 884
Amortization of deferred lease incentives (3,462) (1,950) (1,122)
Change in deferred rents (258) (57) 290
Change in deferred income taxes (300) 101 1,305
Tax benefit from sale of optioned stock by employees 619 343 2,167
Reserve for termination of corporate headquarters leases - - (2,000)
Change in:
Accounts receivable 1,239 (7,614) (2,433)
Merchandise inventories 10,901 (33,654) (18,510)
Prepaid catalog expenses 3,688 (4,408) (5,487)
Prepaid expenses and other assets (2,168) (657) (3,216)
Accounts payable 7,934 8,389 14,298
Accrued expenses and other liabilities 16,656 11,783 3,998
Deferred lease incentives 14,721 16,707 1,622
Income taxes payable 13,768 (6,382) (1,271)
Net cash provided by operating activities 112,238 2,353 21,729
Cash flows from investing activities:
Purchase of property and equipment (47,627) (86,513) (30,145)
Proceeds from the sale of property and equipment - 797 -
Other 1,615 (58) 87
Net cash used in investing activities (46,012) (85,774) (30,058)
Cash flows from financing activities:
Change in cash overdrafts (1,820) 549 7,095
Borrowings under line of credit 192,480 226,600 120,400
Repayments under line of credit (222,080) (197,000) (120,400)
Proceeds from issuance of long-term debt 40,000 40,000 7,000
Debt issuance costs (1,393) (460) -
Repayments of long-term debt (125) (141) (208)
Proceeds from exercise of stock options 1,024 558 1,166
Change in other long-term liabilities 324 - -
Net cash provided by financing activities 8,410 70,106 15,053
Net increase (decrease) in cash and cash equivalents 74,636 (13,315) 6,724
Cash and cash equivalents at beginning of year 4,166 17,481 10,757
Cash and cash equivalents at end of year $ 78,802 $ 4,166 $ 17,481
</TABLE>
In 1994, in a non-cash transaction, the Company received a $2,100,000 note as
partial proceeds from the sale of a subsidiary.
See Notes to Consolidated Financial Statements.
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A Summary of Significant Accounting Policies
The Company and its subsidiaries are specialty retailers of products for the
home, which are merchandised through five direct-mail catalogs and three retail
businesses: Williams-Sonoma, Pottery Barn, Hold Everything, Chambers (catalog
only) and Gardeners Eden (catalog only). Based on net sales, retail accounts for
63.3% of the business and catalog accounts for 36.7%. The principal concepts in
both retail and catalog are Williams-Sonoma and Pottery Barn, which sell
cookware essentials and contemporary tableware and home furnishings,
respectively. The catalogs reach customers throughout the United States, while
the three retail businesses currently operate 256 stores in 36 states and
Washington D.C. These consolidated financial statements include Williams-Sonoma,
Inc. and its subsidiaries. Significant intercompany transactions and accounts
have been eliminated.
The Company's fiscal year ends on the Sunday closest to January 31, based on
a 52/53-week year. Fiscal years 1996, 1995 and 1994 ended on February 2, 1997,
January 28, 1996 and January 29, 1995, respectively. The year ended February 2,
1997 includes 53 weeks.
Cash equivalents consist of short-term investments with original maturities
of 90 days or less.
Merchandise inventories are stated at the lower of cost (moving
weighted-average method) or market. Approximately 38% of the Company's
merchandise is foreign-sourced, primarily from Europe and Asia.
Prepaid catalog expenses consist of the cost to produce, print and
distribute catalogs. Such costs are amortized over the expected sales life of
each catalog. Typically, over 90% of the cost of a catalog is amortized in the
first four months. At February 2, 1997 and January 28, 1996, $11,925,000 and
$15,613,000, respectively, of prepaid advertising was reported as current
assets. Catalog advertising expenses amounted to $87,699,000, $78,131,000 and
$62,816,000 in fiscal 1996, 1995 and 1994, respectively.
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated remaining useful lives of the
assets ranging from 3 to 49 years. Amortization of improvements to leased
properties is based upon the shorter of the remaining term of the applicable
lease or the estimated useful lives of such assets. In 1996, the Company adopted
the provisions of Statement of Financial Accounting Standards NO. 121 (SFAS NO.
121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of." SFAS NO. 121 establishes recognition and measurement
criteria for impairment losses when a company no longer expects to recover the
carrying value of a long-lived asset. Based on management's evaluation, as of
February 2, 1997, there is no impairment of long-lived assets.
Investments and other assets include long-term deposits, lease rights and
interests, which are being amortized over the life of the respective leases (5
to 49 years), and debt-issuance costs which are amortized over the life of the
debt.
Deferred lease incentives include construction allowances received from
landlords, which are amortized on a straight-line basis over the initial lease
term. For leases which contain fixed escalations of the minimum annual lease
payment during the original term of the lease, the Company recognizes rental
expense on a straight-line basis and records the difference between rent expense
and the amount currently payable as deferred lease incentives.
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion (APB) NO.
25, Accounting for Stock Issued to Employees.
Primary and fully diluted earnings per share were computed based on the
weighted average number of common shares outstanding during the year, plus
common stock equivalents consisting of shares subject to stock options and
shares from assumed conversion of convertible debt. Earnings per share, number
of shares and stock options for all periods have been restated to reflect a
3-for-2 stock split in February 1994 and September 1994.
Impact of new accounting standards: In February 1997, Statement of Financial
Accounting Standards NO. 128 (SFAS NO. 128), Earnings per Share was issued. SFAS
NO. 128 requires dual presentation of basic EPS and diluted EPS on the face of
all income statements issued after December 15, 1997 for all entities with
complex capital structures. Basic EPS is computed as net income divided by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities.
<PAGE> 11
The pro forma effect assuming adoption of SFAS NO. 128 at the beginning of each
period is presented below:
<TABLE>
<CAPTION>
Year Ended
Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Pro forma
EPS
Basic $ .89 $ .10 $ .78
Diluted $ .86 $ .10 $ .75
</TABLE>
Management estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain items in the prior years' consolidated financial
statements have been reclassified to conform to the fiscal 1996 presentation.
Note B Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consist of the following:
Dollars in thousands Feb. 2, 1997 Jan. 28, 1996
------------ -------------
<S> <C> <C>
Land and buildings $ 11,046 $ 11,008
Leasehold improvements 138,465 113,040
Fixtures and equipment 99,518 70,278
Construction in progress 6,988 16,707
256,017 211,033
Less accumulated depreciation and amortization 83,924 63,731
Total property and equipment-net $ 172,093 $ 147,302
</TABLE>
Note C Borrowing Arrangements
<TABLE>
<CAPTION>
Long-term debt consists of the following:
Dollars in thousands Feb. 2, 1997 Jan. 28, 1996
------------ -------------
<S> <C> <C>
Convertible notes $ 40,000 -
Senior notes 40,000 $ 40,000
Mortgage 6,654 6,780
Obligations under capital leases and other liabilities 2,790 102
89,444 46,882
Less current maturities 125 125
Total long-term debt $ 89,319 $ 46,757
</TABLE>
On April 15, 1996, the Company issued $40,000,000 principal amount of 5.25%
convertible, subordinated notes due April 15, 2003 (Convertible Notes). Net
proceeds from the transaction amounted to $38,607,000 and were used to provide
the Company with a long-term source of working capital. Interest is payable
semi-annually and began in October 1996. The Convertible Notes are convertible
into shares of common stock at a conversion price of $26.10 per share
(equivalent to a conversion rate of 38.3 shares per $1,000 principal amount).
The conversion price is subject to adjustment in certain events, including stock
splits and stock dividends. Except as discussed below, the Convertible Notes are
redeemable at the option of the Company in the form of cash or common stock, on
or after April 15, 1998, in whole or in part, at redemption prices (expressed as
a percentage of principal amount) ranging
<PAGE> 12
from 103.75% to 100% in the last year. For the period April 15, 1998, through
April 14, 2000, redemption may not occur unless the ratio of the stock price to
the conversion price has achieved a minimum as defined in the agreement. In the
event of a change in control, holders of the Convertible Notes may, at their
option, require the Company to repurchase all or any portion of the principal
amount. The agreement does not restrict the Company from incurring additional
indebtedness.
On August 8, 1995, the Company issued $40,000,000 principal amount of Senior
Notes to reduce the Company's dependency on short-term bank borrowings and to
fund new store and corporate infrastructure expansion. The Senior Notes are due
on August 8, 2005, and interest is payable semi-annually at 7.2%. Annual
principal payments of $5,714,000 begin on August 8, 1999, and continue through
August 8, 2004. The remaining principal amount is due and payable upon maturity.
The Senior Notes contain certain restrictive loan covenants, including minimum
net-worth requirements, fixed-charge coverage ratios and limitations on current
and funded debt.
On April 1, 1994, the Company entered into an agreement with a bank for a
$7,000,000 mortgage at LIBOR plus 1.25%. The Company then fixed the mortgage
interest rate at 7.8% for the full term by entering into an interest-rate swap
agreement with the bank. Interest and principal payments are due quarterly
through March 2001. The mortgage is secured by the new corporate headquarters
building purchased by the Company in December 1993.
On March 29, 1996, the Company renewed its line of credit and entered into a
second amended and restated credit agreement. The agreement consists of a single
revolving credit facility for cash advances maturing May 1, 1997, and letters of
credit maturing April 1, 1998. The aggregate amount under the facility varied
during the year, from a minimum of $60,000,000 (with a maximum of $35,000,000 in
the form of cash advances) up to $90,000,000 (with a maximum of $80,000,000 in
the form of cash advances). The Company has a choice of interest rates between
the bank's reference rate or the offshore dollar cost of funds plus .75%. The
agreement contains certain restrictive loan covenants, including minimum
debt-to-equity ratios, minimum tangible net worth, restrictions on capital
expenditures and a prohibition on payment of cash dividends.
At February 2, 1997, $60,000,000 and $25,000,000 were available in
line-of-credit and letter-of-credit facilities, respectively, of which $0 and
$22,848,000 were outstanding, respectively.
The Company has a signed commitment to replace the existing agreement with a
360-day line of credit and letter of credit facility. The commitment provides
for $60 million in cash advances and $35 million for letters of credit.
Interest expense was $5,795,000, $4,703,000 and $1,509,000 for fiscal 1996,
1995 and 1994, respectively, excluding capitalized interest of $695,000 in
fiscal 1996 and $663,000 in fiscal 1995. There was no capitalized interest in
1994. Interest paid was $5,404,000, $3,805,000 and $1,505,000 for the same
periods.
Accounts payable at February 2, 1997, and January 28, 1996, includes cash
overdrafts of $15,465,000 and $17,285,000, respectively, for checks issued and
not presented to the bank for payment.
As of February 2, 1997, the Company's debt, including the Convertible Notes
and assuming they are not converted, is scheduled to mature as follows: $125,000
in fiscal year 1997, $1,147,000 in fiscal 1998, $6,381,000 in fiscal 1999,
$6,244,000 in fiscal 2000, $6,026,000 in fiscal 2001 and $69,521,000 thereafter.
Note D Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Current payable
Federal $ 12,020 $ 1,338 $ 10,910
State 4,735 397 1,648
16,755 1,735 12,558
Deferred
Federal 146 193 1,067
State (446) (91) 238
(300) 102 1,305
$ 16,455 $ 1,837 $ 13,863
</TABLE>
<PAGE> 13
Income taxes paid were $3,510,000, $10,453,000 and $11,535,000 for fiscal 1996,
1995 and 1994, respectively. A reconciliation of income taxes at the federal
statutory corporate rate to the effective rate is as follows:
<TABLE>
<CAPTION>
Year Ended
Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Federal income taxes at the statutory rate 35.0% 35.0% 35.0%
State income tax rate, less federal benefit 6.5% 6.5% 5.9%
Other .5% .5% .6%
42.0% 42.0% 41.5%
</TABLE>
Significant components of the Company's deferred tax accounts are as follow:
<TABLE>
<CAPTION>
Feb. 2, 1997 Jan. 28, 1996
Dollars in thousands Deferred Deferred Deferred Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Current:
Compensation $ 2,116 - $ 1,662 -
Inventory 2,719 - 4,056 -
Accrued liabilities 4,204 $ 62 1,102 $ 123
Deferred catalog costs - 4,949 - 6,558
Total current 9,039 5,011 6,820 6,681
Non-Current:
Depreciation 2,352 - 5,059 -
Deferred rent 741 - 859 -
Deferred lease incentives - 2,642 - 1,878
Capital loss 5,160 - 5,160 -
Valuation allowance (5,160) - (5,160) -
Total non-current 3,093 2,642 5,918 1,878
Total $ 12,132 $ 7,653 $ 12,738 $ 8,559
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has a
valuation allowance as of February 2, 1997, and January 28, 1996, due to the
uncertainty of realizing future tax benefits from its capital loss
carryforwards.
Note E Leases
The Company leases store locations, its warehouses, call centers and certain
equipment under operating and capital leases for original terms ranging from 3
to 25 years extending through 2015, except for one store lease with a 49-year
term extending through 2040. Most store leases require the payment of minimum
rentals against percentage rentals based on store sales. Certain leases contain
renewal options for periods of up to 20 years.
On January 2, 1996, the Company entered into an agreement to lease a
35,867-square-foot build-to-suit call center in Summerlin, Nevada. The lease
covers a ten-year term with three optional five-year renewals. Rent commenced in
August 1996 at an annual basic rent amount of $529,000 for each of the first
five years of the lease and will increase to $598,000 annually for the remaining
five years. In the event that the Company should require more space to support
growth, the agreement includes an option to expand into an additional 17,920
square feet.
In July 1996, the Company secured an additional 400,232-square-foot
warehouse in Memphis, Tennessee to more efficiently process non-conveyable
merchandise. The lease for the warehouse covers a nine-year term with
termination rights available after the third and sixth years, subject to penalty
fees. Rent commenced in July 1996 at a rate of $60,000 a month for the first ten
months of the lease and is scheduled to increase to $92,000 a month for the
following 26 months. For the remainder of the term, the rent will increase based
on a rate to be determined using the Consumer Price Index but not to exceed five
percent of the minimum rental payments.
<PAGE> 14
Total rental expense for all operating leases was as follows:
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands Feb. 2, 1997 Jan. 28, 1996 Jan. 29, 1995
------------ ------------- -------------
<S> <C> <C> <C>
Minimum rent expense, stores $ 33,133 $ 27,462 $ 21,766
Equipment rent 6,065 5,957 3,791
Contingent rent expense 3,932 2,261 2,407
Total rent expense $ 43,130 $ 35,680 $ 27,964
</TABLE>
The aggregate minimum annual rental payments under noncancelable operating
leases in effect at February 2, 1997, were as follow:
Dollars in thousands
<TABLE>
<S> <C> <C>
Fiscal 1997 $ 41,463
Fiscal 1998 39,598
Fiscal 1999 36,263
Fiscal 2000 34,801
Fiscal 2001 32,554
Later years 166,961
Total minimum lease commitment $ 351,640
</TABLE>
Note F Related Party Lease Transactions
The Company's warehouse and distribution center is located in Memphis,
Tennessee, and leased from two partnerships whose partners include directors,
executive officers and/or significant shareholders of the Company. The
distribution center consists of two separate facilities - one for mail-order
operations and one for retail store operations.
Mail-Order Operating Facility In July 1984, the Company entered into an
agreement to lease a 243,000-square-foot distribution center. The lessor is a
partnership comprised of W. Howard Lester, chairman, chief executive officer and
significant shareholder of the Company, and James A. McMahan, a director and
significant shareholder of the Company and member of the Compensation Committee.
The partnership financed the construction through the sale of $6,300,000
principal amount of industrial development bonds due June 2008. The lease had an
initial, noncancelable term of ten years expiring on June 30, 1994, with two
optional five-year renewals by the Company. In December 1985, the partnership
financed the construction of an additional 190,000 square feet of space through
the sale of $2,900,000 principal amount of industrial development bonds due
2010. The Company's lease with the partnership was amended to include additional
rent plus interest on the new bonds for the same lease term as the original
lease. In December 1993, the Company exercised the two five-year renewal options
and is now obligated to lease the space until June 30, 2004. Effective July 1,
1994, the fixed basic monthly rent is $51,500. Rental payments consist of the
basic monthly rent, plus interest on the bonds (a floating rate equal to 55% of
the prime rate of a designated bank), applicable taxes, insurance and
maintenance expenses. In connection with the December 1993 transaction, both the
partnership and the Company provided to an unaffiliated bank an indemnity
against certain environmental liabilities.
Retail Store Operating Facility In August 1990, the Company entered into a
separate agreement to lease a second distribution center, consisting of
approximately 307,000 square feet adjacent to the existing distribution center
in Memphis, Tennessee. The lessor is a partnership that includes Messrs. Lester,
McMahan and Robert K. Earley, former Senior Vice President of Distribution. The
partnership financed the construction of the distribution center through the
sale of $10,550,000, 10.36% principal amount of industrial development bonds due
August 2015.
<PAGE> 15
In September 1994, this lease was amended to include an approximately
306,000-square-foot expansion of the facility. The expansion was completed in
October 1995. The lessor financed the construction of the expansion through a
$500,000 capital contribution from its partners and the sale of $9,825,000,
9.01% principal amount of industrial development bonds due in August 2015. The
amended lease has an initial, noncancelable term of 15 years beginning in August
1991 and ending in July 2006, with three optional five-year renewals. Rentals
(including interest on the bonds, sinking fund payments and fees) for the
primary term are payable at an average rate of $711,000 per quarter plus
applicable taxes, insurance and maintenance expenses.
Both facilities (including the 1994 expansion) are constructed to the
Company's specifications. After the option periods, the Company is obligated to
renew each lease annually so long as the bonds which financed the specific
projects remain outstanding. The facility leases qualify as operating leases for
accounting purposes. The Company believes that the facility leases are on terms
no less favorable than the Company could have obtained from third parties in
arm's-length transactions.
Note G Stock Options
The Company's 1993 Stock Option Plan (the 1993 Plan), which provides for grants
of incentive and non-qualified stock options up to an aggregate of 2,250,000
shares, was approved and adopted in 1993. The 1993 Plan replaces the 1976
non-qualified plan which was terminated and the 1983 Incentive Stock Option
Plan, which expired on March 27, 1993. Options granted under the 1976 and 1983
Plans remain in force until they are exercised or expire. All incentive stock
option grants made under the 1993 Plan have a maximum term of ten years, except
those issued to 10% shareholders which have a term of five years. The exercise
price of all incentive stock options shall be 100% of the fair market value of
the stock at the option grant date or 110% for a 10% shareholder. The exercise
price for non-qualified options shall not be less than 75% of the fair market
value of the stock at the option grant date.
The following table reflects the aggregate activity under the Company's
stock option plans:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
------- --------------
<S> <C> <C>
Balance at January 30, 1994 1,481,705 $ 6.98
Granted 279,075 21.84
Exercised 256,145 4.57
Canceled 10,631 10.91
Balance at January 29, 1995 1,494,004 10.14
Granted (weighted average fair value of $9.83) 414,150 18.92
Exercised 84,791 6.58
Canceled 132,275 17.66
Balance at January 28, 1996 1,691,088 11.88
Granted (weighted average fair value of $11.18) 514,450 21.48
Exercised 117,177 9.32
Canceled 108,202 17.19
Balance at February 2, 1997 1,980,159 $ 14.24
Exercisable, year-end 1995 722,573 $ 8.32
Exercisable, year-end 1996 884,218 $ 10.25
</TABLE>
Options to purchase 694,654 shares were available for grant at year-end 1996.
<PAGE> 16
The Company continues to account for its stock-based awards using the intrinsic
value method in accordance with APB NO. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.
Statement of Financial Accounting Standards NO. 123, "Accounting for
Stock-Based Compensation" (SFAS NO. 123), requires the disclosure of proforma
net earnings and earnings per share as if the Company had adopted the fair value
method as of the beginning of fiscal 1995. Under SFAS NO. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
The Company's calculations are based on a single-option valuation approach
and forfeitures are recognized as they occur. However, the impact of outstanding
unvested stock options granted prior to 1995 has been excluded from the proforma
calculation; accordingly, the 1995 and 1996 proforma adjustments are not
indicative of future period proforma adjustments. Had compensation cost been
determined consistent with SFAS NO. 123, the Company's net earnings and earnings
per share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands, except per share amounts Feb. 2, 1997 Jan. 28, 1996
------------ -------------
<S> <C> <C>
Net earnings
As reported $ 22,742 $ 2,536
Pro forma 21,647 2,091
Primary net earnings per share
As reported $ .87 $ .10
Pro forma .83 .08
Fully diluted net earnings per share
As reported $ .86 $ .10
Pro forma .83 .08
</TABLE>
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended
Feb. 2, 1997 Jan. 28, 1996
------------ -------------
<S> <C> <C>
Dividend yield - -
Volatility 50.0% 50.0%
Risk-free interest 6.26% 6.33%
Expected term (years) 5.0 5.0
</TABLE>
The following table summarizes information about fixed stock options outstanding
at February 2, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Contractual Exercise Exercisable at Exercise
Feb. 2, 1997 Life (Years) Price Feb. 2, 1997 Price
------------ ------------ ----- ------------ -----
Range of exercise prices
<S> <C> <C> <C> <C> <C>
$ 3.85- $ 5.28 466,404 4.3 $ 4.73 365,114 $ 4.60
$ 5.89- $ 8.37 270,715 6.0 6.97 172,794 6.90
$ 11.56- $ 15.00 249,200 6.9 14.13 146,500 14.11
$ 18.00- $ 26.88 970,840 8.6 20.47 199,810 20.66
$ 28.69- $ 36.38 23,000 9.7 31.79 - -
$ 3.85- $ 36.38 1,980,159 7.1 $14.24 884,218 $10.25
</TABLE>
<PAGE> 17
Note H Employee Profit-Sharing and Stock-Incentive Plan
In fiscal 1989, the Company established a defined contribution retirement plan,
which is qualified under the Internal Revenue Code 401(a) and 401(k), for
eligible employees. The amount of the annual profit-sharing contribution is
determined by the Board of Directors subject to limitations based upon
resolutions adopted by the directors.
The plan permits employees to make salary-deferral contributions in
accordance with Internal Revenue Code Section 401(k) regulations. The fund
options were determined by the Administrative Committee and represent a money
market reserve fund, a balanced mutual fund portfolio and Williams-Sonoma, Inc.
stock. The Company matches a portion of the employee's contributions invested in
Williams-Sonoma, Inc. stock under a predetermined formula. The Company's
contributions under this plan vest on behalf of the employee over a five-year
period.
The Company accrued a profit-sharing contribution of $720,000 in fiscal
1996. The Company contributed $0 in fiscal 1995, and $770,000 in fiscal 1994.
Note I Estimated Fair Value of Financial Instruments
Statement of Financial Accounting Standards NO. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of the estimated fair value
of financial instruments. The carrying value of cash and cash equivalents,
accounts receivable, investments, accounts payable and debt approximates their
estimated fair values at February 2, 1997, and January 28, 1996.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and the Shareholders of Williams-Sonoma, Inc.:
We have audited the accompanying consolidated balance sheets of Williams-Sonoma,
Inc. and subsidiaries (the Company) as of February 2, 1997, and January 28,
1996, and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the three fiscal years in the period ending February
2, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Williams-Sonoma, Inc. and
subsidiaries as of February 2, 1997, and January 28, 1996, and the results of
its operations and its cash flows for each of the three fiscal years in the
period ending February 2, 1997, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 26, 1997
<PAGE> 18
QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Fiscal 1996, dollars in thousands Quarter Ended
except per share amounts April 28 July 28 October 27 February 2
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $157,396 $ 155,499 $171,154 $ 327,708
Gross profit 54,621 53,855 62,632 147,472
Earnings (loss) before income taxes (4,100) (1,072) 398 43,971
Net earnings (loss) (2,378) (622) 231 25,512
Primary earnings (loss) per share(1) $ (.09) $ (.02) $ .01 $ .96
Fully diluted earnings (loss) per share(1) $ (.09) $ (.02) $ .01 $ .92
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1995, dollars in thousands Quarter Ended
except per share amounts April 30 July 30 October 29 January 28
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $118,160 $ 127,733 $138,363 $ 260,397
Gross profit 44,382 43,628 48,130 98,178
Earnings (loss) before income taxes (552) (1,404) (6,230) 12,559
Net earnings (loss)(2) (326) (814) (3,669) 7,345
Primary and fully diluted
earnings (loss) per share $ (.01) $ (.03) $ (.14) $ .28
</TABLE>
(1) The sum of the quarterly primary earnings per share does not agree to the
year-to-date amount due to rounding differences. The sum of the quarterly
fully-diluted earnings per share amounts does not agree to the year-to-date
amount due to the effect of assumed conversion of the Convertible Notes in
the fourth quarter and year-to-date.
(2) The fourth quarter ended January 28, 1996, includes an after-tax charge to
net earnings of $1,679,000 ($.06 per share) primarily related to the
reserves established for inventory.
Common Stock
Williams-Sonoma's common stock is traded on the Over-The-Counter Market under
the NASDAQ symbol WSGC. The following table sets forth the high and low closing
sales prices in the NASDAQ National Market System for the periods indicated.
On March 21, 1997, there were 538 shareholders of record, excluding
shareholders whose stock is held in nominee or street name by brokers. The
Company's present policy is to retain its earnings to finance future growth, and
it does not intend to pay cash dividends. In addition, the Company's bank line
of credit prohibits payment of cash dividends (see Note C of Notes to
Consolidated Financial Statements).
<TABLE>
<CAPTION>
Fiscal 1996 High Low
---- ---
<S> <C> <C>
1st Quarter 23 3/16 13 3/4
2nd Quarter 29 1/4 18 3/16
3rd Quarter 31 18 1/4
4th Quarter 36 1/2 26 7/8
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1995 High Low
---- ---
<S> <C> <C>
1st Quarter 28 17 7/8
2nd Quarter 24 1/2 16 3/4
3rd Quarter 23 1/8 15 13/16
4th Quarter 21 5/8 13 3/4
</TABLE>
<PAGE> 19
Williams-Sonoma, Inc.
Directors and Officers
W. Howard Lester
Director, Chairman of the Board
and Chief Executive Officer of the Company
Charles E. Williams
Director, Founder and
Vice Chairman of the Board of the Company
James M. Berry
Director, Executive Vice President, Finance
Belk Stores Services, Inc.
Nathan Bessin
Director, Managing Partner, J. Arthur Greenfield and Company,
Certified Public Accountants
Dennis A. Chantland
Executive Vice President,
Chief Administrative Officer and Secretary of the Company
Patrick J. Connolly
Director, Executive Vice President of the Company,
General Manager, Catalog
Millard S. Drexler
Director, Chief Executive Officer and President, The GAP, Inc.
Gary Friedman
Director, Chief Merchandising Officer of the Company and
President, Retail Division
F. Warren Hellman
Director, Partner, Hellman and Friedman
Richard Hunter
Senior Vice President of the Company,
International Operations and Development
John E. Martin
Director, Chairman and Chief Executive Officer,
PepsiCo Casual Restaurants International
James A. McMahan
Director, Chief Executive Officer, McMahan Furniture Company
G. Andrew Rich
Senior Vice President of the Company,
Human Resources
<PAGE> 20
Williams-Sonoma, Inc.
Corporate Headquarters
Williams-Sonoma, Inc.
3250 Van Ness Avenue San Francisco, CA 94109
Distribution Center
4300 Concorde Road Memphis, TN 38118
Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
50 California Street 10th Floor San Francisco, CA 94111
Independent Auditors
Deloitte & Touche LLP San Francisco, CA
Trademarks
A Catalog for Cooks, Gardeners Eden, Hold Everything,
Pottery Barn and Chambers are trademarks of
Williams-Sonoma, Inc.
<PAGE> 1
EXHIBIT 21: SUBSIDIARIES OF WILLIAMS-SONOMA, INC.
AS OF FISCAL YEAR END FEBRUARY 2, 1997
Subsidiary Name State/Date of Incorporation
Williams-Sonoma Stores, Inc. California, October 29, 1984
Gardener's Eden, Inc. California, October 29, 1984
The Pottery Barn East, Inc. California, August 18, 1986
Hold Everything, Inc. California, September 30, 1986
Chambers Catalog Company, Inc. California, February 1, 1995
<PAGE> 1
DELOITTE &
TOUCHE LLP
- ----------- --------------------------------------------------------------
50 Fremont Street Telephone: (415)247-4000
San Francisco, California 94105-2230 Facsimile: (415)247-4329
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
2-89801, No. 33-28490, No. 33-33693, No. 33-60787, and No. 33-65656 on Form S-8
and No. 333-7851 on Form S-3 of Williams-Sonoma, Inc. of our reports dated
March 26, 1997, appearing in and incorporated by reference in the Annual Report
on Form 10-K of Williams-Sonoma, Inc. for the fiscal year ended February 2,
1997.
/s/ DELOITTE & TOUCHE, LLP
- --------------------------
Deloitte & Touche, LLP
San Francisco, California
April 24, 1997
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED FEBRUARY 2, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-END> FEB-02-1997
<CASH> 78,802
<SECURITIES> 0
<RECEIVABLES> 11,918
<ALLOWANCES> 0
<INVENTORY> 110,702
<CURRENT-ASSETS> 226,049
<PP&E> 172,093
<DEPRECIATION> 0
<TOTAL-ASSETS> 404,417
<CURRENT-LIABILITIES> 129,481
<BONDS> 89,319
0
0
<COMMON> 11,466
<OTHER-SE> 111,831
<TOTAL-LIABILITY-AND-EQUITY> 404,417
<SALES> 811,758
<TOTAL-REVENUES> 811,758
<CGS> 493,179
<TOTAL-COSTS> 493,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,965
<INCOME-PRETAX> 39,197
<INCOME-TAX> 16,455
<INCOME-CONTINUING> 22,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,742
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
</TABLE>
