<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 000-12704
WILLIAMS-SONOMA, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
California 94-2203880
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3250 Van Ness Avenue, San Francisco, CA 94109
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code (415) 421-7900
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ]
As of December 3, 1998, 55,719,575 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
WILLIAMS-SONOMA, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 1, 1998
TABLE OF CONTENTS
<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
November 1, 1998, February 1, 1998, and November 2, 1997
Condensed Consolidated Statements of Operations
Thirteen weeks ended November 1, 1998 and
November 2, 1997
Thirty-nine weeks ended
November 1, 1998 and November 2, 1997
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended November 1, 1998 and
November 2, 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
November 1, February 1, November 2,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,039 $ 97,214 $ 3,624
Accounts receivable (net) 27,496 15,238 25,768
Merchandise inventories 220,267 132,451 169,792
Prepaid expenses and other assets 9,252 7,991 7,756
Prepaid catalog expenses 25,253 13,596 18,437
Deferred income taxes 3,680 3,680 4,028
-------- -------- --------
Total current assets 289,987 270,170 229,405
Property and equipment (net) 233,310 201,020 194,734
Investments and other assets (net) 5,792 6,039 6,237
Deferred income taxes -- -- 451
-------- -------- --------
Total assets $529,089 $477,229 $430,827
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 85,204 $ 58,496 $ 61,708
Accrued expenses 6,739 15,619 8,057
Accrued salaries and benefits 13,388 15,863 13,035
Line of Credit 19,950 -- 24,600
Customer deposits 20,592 19,617 14,893
Income taxes payable -- 17,216 690
Current portion of long-term obligations 125 125 125
Other liabilities 8,330 8,710 6,607
-------- -------- --------
Total current liabilities 154,328 135,646 129,715
Deferred lease credits 72,512 56,157 56,441
Deferred tax liability 2,439 2,439 --
Long-term debt and other liabilities 50,384 89,789 89,527
Shareholders' equity 249,426 193,198 155,144
-------- -------- --------
Total liabilities and shareholders' equity $529,089 $477,229 $430,827
======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 4
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 1, November 2, November 1, November 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $241,298 $203,863 $662,770 $562,825
Costs and expenses:
Cost of goods sold and occupancy 146,494 126,525 409,665 353,219
Selling, general and administrative 85,648 70,458 233,343 194,461
-------- -------- -------- --------
Total costs and expenses 232,142 196,983 643,008 547,680
-------- -------- -------- --------
Earnings from operations 9,156 6,880 19,762 15,145
Interest expense (net) 686 1,285 1,138 2,988
-------- -------- -------- --------
Earnings before income taxes 8,470 5,595 18,624 12,157
Income taxes 3,472 2,350 7,635 5,106
-------- -------- -------- --------
Net earnings $ 4,998 $ 3,245 $ 10,989 $ 7,051
======== ======== ======== ========
Earnings per share:
Basic $ 0.09 $ 0.06 $ 0.20 $ 0.14
Diluted $ 0.09 $ 0.06 $ 0.20 $ 0.13
Average number of common shares outstanding:
Basic 55,613 51,550 53,988 51,240
Diluted 57,838 54,115 56,326 53,507
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 5
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
November 1, November 2,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 10,989 $ 7,051
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization 24,089 21,074
Amortization of deferred lease incentives (4,694) (3,461)
Change in:
Accounts receivable (12,258) (13,850)
Merchandise inventories (87,816) (59,090)
Prepaid catalog expenses (11,657) (6,512)
Prepaid expenses and other assets (1,261) 918
Accounts payable 26,708 (2,701)
Accrued expenses and other liabilities (9,747) (5,284)
Deferred lease incentives 21,049 20,323
Income taxes payable (17,216) (15,025)
-------- --------
Net cash used in operating activities (61,814) (56,557)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (59,202) (44,804)
Proceeds from sale of property and equipment 2,117 --
-------- --------
Net cash used in investing activities (57,085) (44,804)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit 36,200 35,100
Repayments under line of credit (16,250) (10,500)
Repayment of long-term obligations (461) (472)
Proceeds from exercise of stock options 6,235 2,055
-------- --------
Net cash provided by financing activities 25,724 26,183
-------- --------
Net decrease in cash and cash equivalents (93,175) (75,178)
Cash and cash equivalents at beginning of period 97,214 78,802
-------- --------
Cash and cash equivalents at end of period 4,039 $ 3,624
======== ========
Non-cash financing transaction (see Note B):
Conversion of Convertible Notes to common stock $39,004 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE> 6
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Thirty-nine Weeks Ended November 1, 1998 and November 2, 1997
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The condensed consolidated balance sheets as of November 1, 1998 and November 2,
1997, the condensed consolidated statements of operations for the thirteen and
thirty-nine week periods ended November 1, 1998 and November 2, 1997 and the
condensed consolidated statements of cash flows for the thirty-nine week periods
ended November 1, 1998 and November 2, 1997 have been prepared by
Williams-Sonoma, Inc., (the Company) without audit. In the opinion of
management, the financial statements include all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
at the balance sheet dates and the results of operations for the thirteen and
thirty-nine weeks then ended. These financial statements include
Williams-Sonoma, Inc., and its wholly-owned subsidiaries. Significant
intercompany transactions and accounts have been eliminated. The balance sheet
at February 1, 1998, presented herein, has been derived from the audited balance
sheet of the Company included in the Company's Form 10-K for the fiscal year
ended February 1,1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report to Shareholders for the fiscal year ended February 1, 1998.
Certain reclassifications have been made to the prior period financial
statements to conform to classifications used in the current period.
The results of operations for the thirteen and thirty-nine weeks ended November
1, 1998 are not necessarily indicative of the operating results of the full
year.
NOTE B. DEBT
On April 15, 1996, the Company issued 5 1/4% Convertible Subordinated Notes due
April 15, 2003 in the principal amount of $40,000,000 (the "Convertible Notes").
In March 1998, the Company notified the holders of the Convertible Notes of the
Company's intention to redeem the Convertible Notes on April 21, 1998. Prior to
such redemption, substantially all of the Convertible Notes were converted into
approximately 3,064,000 shares of the Company's common stock. As a result, the
Company recorded a net increase to paid-in capital of $39,004,000, representing
$39,999,000 from the conversion of the Convertible Notes, net of $995,000 of
related unamortized debt issuance costs. There was no income statement impact as
a result of this conversion.
On June 1, 1998, the Company renewed its syndicated line of credit facility and
entered into a second amended and restated credit agreement which expires on May
31, 2001. The amended facility provides for $50,000,000 in cash advances, and
contains certain restrictive loan covenants, including minimum tangible net
worth, a minimum out-of-debt period, fixed charge coverage requirements and a
prohibition on payment of cash dividends. Additionally, the Company has a
one-year $50,000,000 letter-of-credit agreement expiring on May 31, 1999 with
its primary bank.
On November 1, 1998, $50,000,000 and $50,000,000 were available under the
line-of-credit and letter-of-credit facilities, respectively, of which
$19,950,000 and $42,271,000 were outstanding, respectively.
<PAGE> 7
NOTE C. EARNINGS PER SHARE
Basic earnings per share is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities. Prior
year share and earnings per share amounts in these financial statements have
been restated to reflect such presentation.
NOTE D. STOCK SPLIT
A two-for-one stock split was announced on March 12, 1998 and was effected on
May 15, 1998. Prior year share and earnings-per-share amounts have been restated
to give retroactive recognition to this stock split.
NOTE E. NEW ACCOUNTING STANDARDS
In September 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1
defines the types of costs that may be capitalized for computer software
projects and requires that all other costs be expensed in the period incurred.
SOP 98-1 states that in order for costs to be capitalized they must be intended
to create a new system or add identifiable functionality to an existing system.
This statement is effective for Williams-Sonoma's fiscal year ending January 31,
1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. Adoption of this statement will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. This
statement is effective for Williams-Sonoma's fiscal year ending January 31,
1999.
In April 1998, the AICPA finalized SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that costs incurred for start-up activities, such as
store openings, be expensed as incurred. This SOP, which is effective in the
first quarter of 1999, is not expected to have a material impact on the
Company's financial statements.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
NET SALES
Net sales consists of the following components (dollars in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 1, 1998 November 2, 1997 November 1, 1998 November 2, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Sales $153,245 63.5% $130,638 64.1% $423,919 64.0% $353,159 62.7%
Catalog Sales 88,053 36.5% 73,225 35.9% 238,851 36.0% 209,666 37.3%
-------- ----- -------- ----- -------- ------- -------- -----
Total Net Sales $241,298 100.0% $203,863 100.0% $662,770 100.0% $562,825 100.0%
</TABLE>
Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 13
weeks ended November 1, 1998 (Third Quarter of 1998) were $241,298,000 -- an
increase of $37,435,000 (18.4%) over net sales for the 13 weeks ended November
2, 1997 (Third Quarter of 1997). Net sales for the 39-week period ended November
1, 1998 (Year-to-Date 1998) were $662,770,000, an increase of $99,945,000, or
17.8%, from the 39-week period ended November 2, 1997 (Year-to-Date 1997).
RETAIL SALES
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
(Dollars in thousands) November 1, November 2, November 1, November 2,
----------- ----------- ----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total retail sales $ 153,245 $ 130,638 $ 423,919 $ 353,159
Retail sales growth percentage 17.3% 21.4% 20.0% 18.3%
Comparable store sales growth 2.4% 1.3% 4.3% 1.4%
Number of stores - beginning of period 285 264 276 256
Number of new stores 27 20 52 42
Number of closed stores 8 6 24 20
Number of stores - end of period 304 278 304 278
Store selling area at quarter-end (sq ft.) 1,219,940 1,015,594 1,219,940 1,015,594
Store leased area at quarter-end (sq ft.) 1,872,709 1,553,244 1,872,709 1,533,244
</TABLE>
Retail sales for the third quarter of 1998 increased 17.3% over retail sales for
the third quarter of 1997 primarily due to a net increase of 26 stores. Year-
to-Date 1998 retail sales increased 20.0% over the same period of the prior
year. The Company operated 304 stores at the end of the Third Quarter of 1998 as
compared to 278 stores at the end of the same period of the prior year. During
the Third Quarter of 1998, the Company opened 27 stores (12 Pottery Barn, 13
Williams-Sonoma and 2 Hold Everything) and closed 8 stores (4 Pottery Barn and 4
Williams-Sonoma). Pottery Barn, with 49.7% of the Company's total selling square
feet at the end of the Third Quarter of 1998, accounted for 62.5% and 66.5% of
the growth in retail sales for the Third Quarter and Year-to-Date 1998,
respectively.
Comparable store sales are defined as sales from stores whose gross square feet
did not change by more than 20% in the previous twelve months and which have
been open for at least twelve months. Comparable store sales are compared
monthly for purposes of this analysis. In any given period, the set of stores
comprising comparable stores may be different than the comparable stores in the
previous period, depending on store opening and closing activity. Comparable
store sales grew 2.4% in the Third Quarter of 1998, and 4.3% for Year-to-Date
1998.
<PAGE> 9
The prototypical 1998 large-format stores range from 5,800-10,400 selling square
feet (7,000 - 15,200 leased square feet) for Pottery Barn stores and 2,900-4,500
selling square feet (4,100 - 6,400 leased square feet) for Williams-Sonoma
stores, and enable the Company to display merchandise more effectively. At the
end of the Third Quarter of 1998, 170 stores (95 Williams-Sonoma and 75 Pottery
Barn) were in the large format, comprising 71.8% of the Company's total selling
square footage. Large-format stores accounted for 68.7% and 66.1% of Third
Quarter of 1998 and Year-to Date 1998 total retail sales, respectively.
CATALOG SALES
Catalog sales in the Third Quarter of 1998 increased 20.2% as compared to the
Third Quarter of 1997. For Year-to-Date 1998, catalog sales increased 13.9% over
the same period of 1997. The total number of catalogs mailed, as compared to the
same period of the respective prior years, increased 3.5% in the Third Quarter
of 1998 and 8.0% in the Third Quarter of 1997. The increased circulation in
these periods was in markets with stores. Management believes that the mailing
of catalogs into markets with stores builds brand recognition and supports new
store openings. Typically, these mailings generate less revenue for the catalog
division than mailings into non-store markets.
The following table reflects catalog sales growth (decline) percentages by
concept:
Percentage Growth (Decline)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 1, 1998 November 2, 1997 November 1, 1998 November 2, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Williams-Sonoma (5.4%) 6.5% (6.1%) 18.9%
Pottery Barn 44.7% 28.1% 34.5% 17.4%
Hold Everything (0.8%) 9.6% 3.4% 14.1%
Gardeners Eden 0.3% (6.7%) (12.1%) (6.2%)
Chambers (8.9%) 0.1% (5.6%) (2.5%)
Total catalog 20.3% 15.3% 13.9% 13.0%
</TABLE>
Combined sales for Williams-Sonoma and Pottery Barn, the Company's primary
concepts, comprised approximately 77.9% and 72.9% of total catalog sales for the
Third Quarter of 1998 and Year-to Date 1998, respectively. For Pottery Barn, the
number of catalogs mailed in the Third Quarter of 1998 as compared to the same
period of 1997 increased 14.8%. Also contributing to the Third Quarter 1998
sales growth of Pottery Barn was increased page count, resulting in an expanded
merchandise assortment. For Williams-Sonoma, the number of catalogs mailed in
the Third Quarter and Year-to-Date 1998 decreased 0.4% and 0.3%, respectively,
as compared to the same periods of the respective prior years.
COST OF GOODS SOLD AND OCCUPANCY
Cost of goods sold and occupancy expenses expressed as a percent of net sales in
the Third Quarter of 1998 decreased 1.4 percentage points to 60.7% from 62.1% in
the same period of the prior year. Merchandise margin improved 1.3 percentage
points, principally due to a lower cost of merchandise. The Company believes
this is a direct result of its investment in product development, sourcing and
quality control personnel over the last several years. Occupancy expenses
expressed as a percentage of net sales decreased slightly in the Third Quarter
of 1998 as compared to the same period of the prior year.
For the Year-to-Date 1998, cost of goods sold and occupancy expenses as a
percent of net sales decreased 1.0 percentage points, from 62.8% for the same
period of 1997 to 61.8%. This decrease was primarily due to improved merchandise
margins as a result of lower cost of merchandise.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
<PAGE> 10
Selling, general and administrative expenses expressed as a percent of net sales
increased 1.0 percentage points to 35.5% in the Third Quarter of 1998 from 34.5%
in the Third Quarter of 1997. The majority of the increase was due to increased
employment and advertising costs.
Higher employment costs were principally attributable to increased expense at
Pottery Barn stores and the distribution center. In an effort to improve its
"in-stock" position throughout the holiday season in order to maximize sales,
the Company increased its pre-holiday inventory levels over historical norms.
This caused the distribution center to exceed its capacity, resulting in labor
inefficiencies. The majority of the remainder of the increase in employment
expense was attributable to the Pottery Barn stores.
Increased advertising costs for the Third Quarter of 1998 are primarily
attributable to the Pottery Barn catalog.
The Year-to-Date 1998 selling, general and administrative expense rates
increased .7 percentage points over the Year-to-Date 1997. The majority of the
increase is due to increased employment costs, principally in the retail
division.
INTEREST EXPENSE
Net interest expense for the Third Quarter of 1998 decreased $599,000 to
$686,000 from $1,285,000 for the Third Quarter of 1997. This is primarily due to
interest savings as a result of the conversion of the Company's Convertible
Notes in April 1998 (see Note B). Net interest expense for Year-to-Date 1998
decreased to $1,138,000 from $2,988,000 for the same period of the prior year.
This is principally due to the conversion of the Convertible Notes and an
increase in short-term investment income. During Year-to-Date 1998, the Company
had an average investment balance of $47,655,000, as compared to $30,000,000 for
Year-to-Date 1997.
INCOME TAXES
The Company's effective tax rate was 41.0% for the Third Quarter and
Year-to-Date of 1998 and 42.0% for the Third Quarter and Year-to-Date of 1997.
This rate reflects the effect of aggregate state tax rates based on the mix of
retail sales and catalog sales in the various states in which the Company has
sales or conducts business.
LIQUIDITY AND CAPITAL RESOURCES
For Year-to-Date 1998, cash used in operating activities was $61,814,000
representing an increase of $5,257,000 from the $56,557,000 of cash used in
operating activities for the same period of 1997. This was principally
attributable to an increase in prepaid catalog expenses and increases in
merchandise inventories partially offset by increases in accounts payable.
Net cash used in investing activities of $57,085,000 was primarily for new
stores. The Company is planning approximately $80,000,000 - $85,000,000 of gross
capital expenditures in 1998, including up to $14,000,000 for information
systems.
For Year-to-Date 1998, cash provided by financing activities was $25,724,000,
comprised primarily of net borrowings under the line of credit. On April 15,
1996, the Company had issued 5 1/4% Convertible Subordinated Notes due April 15,
2003 in the principal amount of $40,000,000. In March of 1998, the Company
notified the holders of the Convertible Notes of the Company's intention to
redeem the Convertible Notes on April 21, 1998. Prior to such redemption,
substantially all of the Convertible Notes were converted into approximately
3,064,000 shares of the Company's common stock. As a result, the Company
recorded a net increase to paid-in-capital of $39,004,000, representing
$39,999,000 from the
<PAGE> 11
Conversion of the Notes, net of $995,000 of related unamortized debt issuance
costs. See Note B to the condensed consolidated financial statements.
On June 1, 1998, the Company renewed its syndicated line of credit facility and
entered into a second amended and restated credit agreement which expires in May
31, 2001. The amended facility provides for $50,000,000 in cash advances, and
contains certain restrictive loan covenants, including minimum tangible net
worth, a minimum out-of-debt period, fixed charge coverage requirements and a
prohibition on payment of cash dividends. Additionally, the Company has a
one-year $50,000,000 letter-of-credit agreement expiring of May 31, 1999 with
its primary bank.
On November 1, 1998, $50,000,000 and $50,000,000 were available under the
line-of-credit and letter-of-credit facilities, respectively, of which
$19,950,000 and $42,271,000 were outstanding, respectively.
IMPACT OF INFLATION
The impact of inflation on results of operations has not been significant.
YEAR 2000 COMPLIANCE
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the "Year 2000" problem. The Company
has conducted a review of its information technology ("IT") and non-IT systems
to identify those areas that could be affected by the Year 2000 issue, and has
developed a comprehensive, risk-based plan. This plan addresses both IT and
non-IT systems and products, as well as dependencies on those with whom the
Company does significant business.
In connection with the plan, the Company has completed an inventory and
risk-assessment of its computer systems and related technology, and has begun
the testing and remediation process. The Company expects to complete this
process, including integration testing of its critical business processes, by
mid-1999. However, the Company can not guarantee that its compliant systems will
not encounter difficulties when attempting to interface or interconnect with
third party systems, whether or not those systems are claimed to be "compliant",
and the Company can not guarantee that such failure to interface or interconnect
will not have a materially adverse effect on the Company's operations. The
Company has also completed an inventory and risk assessment of its outside
vendors, and believes the greatest Year 2000 exposure is with its service
providers (customs broker, logistics providers, etc.). The Company is currently
in the process of communicating with these vendors and performing testing to
determine their Year 2000 readiness. The Company believes the Year 2000 risk
with its merchandise suppliers is low because no vendor accounts for more than
3% of purchases and many of the vendors are small artisan manufacturers with
simple business systems. The Company expects to identify any significant
vendor-compliance problems by the first quarter of 1999, and to resolve those
issues by the end of the third quarter 1999. Despite this approach, there can be
no guarantee that the systems of other companies on which the Company is reliant
will be converted timely, or that a failure by another company to convert would
not have a materially adverse effect on the Company.
The Company is using both internal and external resources to complete this
project. In total, the estimated cost for the remediation and testing of
computer applications and related products could range as high as $4.5 million
over the two-year period 1998 through 1999, of which approximately $1,324,000
has been incurred to date.
The Company presently believes, with modification to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational risk. While the Company can not accurately predict a "worst case
scenario" with regard to its Year 2000 issues, the failure by the Company and or
vendors to complete Year 2000 compliance work in a timely manner could have a
materially adverse effect on the Company's operations. The Company is in the
process of assessing these risks and uncertainties and
<PAGE> 12
developing appropriate contingency plans and procedures in an attempt to
minimize the effects of such a scenario.
SEASONALITY
The Company's business is subject to substantial seasonal variations in demand.
Historically, a significant portion of the Company's sales and net income have
been realized during the period from October through December, and levels of net
sales and net income have generally been significantly lower during the period
from February through October. The Company believes this is the general pattern
associated with the mail order and retail industries. In anticipation of its
peak season, the Company hires a substantial number of additional employees in
its retail stores and mail order processing and distribution areas, and incurs
significant fixed catalog production and mailing costs.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed in
this quarterly report are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward-looking statements. Such risks and
uncertainties include, without limitation, the Company's ability to continue to
improve planning and control processes and other infrastructure issues, the
potential for construction and other delays in store openings, the Company's
dependence on external funding sources, the potential for changes in consumer
spending patterns, consumer preferences and overall economic conditions, the
Company's dependence on foreign suppliers, increasing competition in the
specialty retail business, and the Company's ability to successfully resolve its
Year 2000 issues. Other factors that could cause actual results to differ
materially from those set forth in such forward-looking statements include the
risks and uncertainties detailed in the Company's most recent Annual Report on
Form 10-K and its other filings with the Securities and Exchange Commission.
<PAGE> 13
WILLIAMS-SONOMA, INC. AND SUBSIDIARIES
FORM 10-Q
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is, however, involved in routine litigation arising in the
ordinary course of its business, and, while the results of the proceedings
cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
<PAGE> 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
10.1 First Amendment to the Reimbursement Agreement between the
Company and Hewson Properties, dated October 15, 1998.
10.2 Second Amendment to the Reimbursement Agreement between the
Company and Hewson Properties, dated November 15, 1998.
11 Statement re computation of per share earnings.
27 Financial Data Schedule.
</TABLE>
(b) There have been no reports on Form 8-K filed during the quarter for which
this report is being filed.
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS-SONOMA, INC.
By: /s/ Dennis A. Chantland
-----------------------
Dennis A. Chantland
Executive Vice President
Chief Administrative Officer
Secretary
Dated: December 11, 1998
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
10.1 First Amendment to the Reimbursement Agreement between the
Company and Hewson Properties, dated October 15, 1998.
10.2 Second Amendment to the Reimbursement Agreement between the
Company and Hewson Properties, dated November 15, 1998.
11 Statement re computation of per share earnings.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT
THIS FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT (the "Amendment") made and
entered into as of the 15th day of October, 1998, by and between
WILLIAMS-SONOMA, INC., a California corporation ("Williams-Sonoma"), and HEWSON
PROPERTIES, INC., a California corporation ("Hewson"):
W I T N E S S E T H :
WHEREAS, Williams-Sonoma and Hewson have made and entered into that
certain Reimbursement Agreement dated August 17, 1998 (the "Reimbursement
Agreement"), regarding certain "Put" and "Call" rights between the parties with
respect to the Phase 1 Site and the Phase 2 Site (any defined term not
specifically defined herein shall have the meaning ascribed to such term in the
Reimbursement Agreement); and
WHEREAS, Williams-Sonoma and Hewson now desire to amend the Reimbursement
Agreement in the manner hereinafter set out:
NOW, THEREFORE, for and in consideration of the premises, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed by the parties as follows:
1. All references in the Reimbursement Agreement to the date "October
15, 1998" are hereby deleted and the date "November 15, 1998" is hereby
substituted in lieu thereof.
2. Exempt as amended hereby, the Reimbursement Agreement remains
unchanged and in full force and effect.
3. This Amendment may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, Williams-Sonoma and Hewson have executed this
document by and and through their respective, duly-authorized officers as of
the date first above written.
"WILLIAMS-SONOMA"
WILLIAMS-SONOMA COMPANY, INC.
By: /s/ HOWARD LESTER
----------------------------------
Title: Chairman & CEO
-------------------------------
"HEWSON"
HEWSON PROPERTIES, INC.
By: /s/ ROBERT MYERS
----------------------------------
Title: VP/CFO
-------------------------------
<PAGE> 1
EXHIBIT 10.2
SECOND AMENDMENT TO REIMBURSEMENT AGREEMENT
THIS SECOND AMENDMENT TO REIMBURSEMENT AGREEMENT (the "Amendment"), made
and entered into as of the 15th day of November, 1998, by and between
WILLIAMS-SONOMA, INC., a California corporation ("Williams-Sonoma"), and
HEWSON PROPERTIES, INC., a California corporation ("Hewson");
WITNESSETH:
WHEREAS, Williams-Sonoma and Hewson have made and entered into that
certain Reimbursement Agreement dated August 17, 1998, as amended by that
certain First Amendment to Reimbursement Agreement dated October 15, 1998 (as
amended, the "Reimbursement Agreement"), regarding certain "Put" and "Call"
rights between the parties with respect to the Phase 1 Site and the Phase 2
Site (any defined term not specifically defined herein shall have the meaning
ascribed to such term in the Reimbursement Agreement); and
WHEREAS, Williams-Sonoma and Hewson now desire to amend the Reimbursement
Agreement in the manner hereinafter set out;
NOW, THEREFORE, for and in consideration of the premises, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is agreed by the parties as follows:
1. All references in the Reimbursement Agreement to the date "November
15, 1998" are hereby deleted and the date "December 15, 1998" is hereby
substituted in lieu thereof.
2. The reference in Section 1 of the Reimbursement Agreement to nine
percent (9%) per annum is hereby deleted and eight percent (8%) per annum is
hereby substituted in lieu thereof.
3. The reference in Section 2 of the Reimbursement Agreement to December
15, 1998 is hereby changed to January 15, 1999.
4. Except as amended hereby, the Reimbursement Agreement remains
unchanged and in full force and effect.
5. This Amendment may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
<PAGE> 2
IN WITNESS WHEREOF, Williams-Sonoma and Hewson have executed this document
by and through their respective, duly-authorized officers as of the date first
above written.
"WILLIAMS-SONOMA"
WILLIAMS-SONOMA COMPANY, INC.
By: /s/ HOWARD LESTER
-------------------------
Title: Chairman & CEO
----------------------
"HEWSON"
HEWSON PROPERTIES, INC.
By: /s/ ROBERT MYERS
-------------------------
Title: Robert Myers, VP/CFO
----------------------
A-2
<PAGE> 1
EXHIBIT 11: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Net Weighted Average Per-Share
Earnings Shares Amount
<S> <C> <C> <C>
Thirteen weeks ended November 1, 1998:
Basic $ 4,998,000 55,612,921 $ 0.09
Effect of dilutive stock options -- 2,224,919
----------- ----------
Diluted $ 4,998,000 57,837,840 $ 0.09
=========== ========== ========
Thirteen weeks ended November 2, 1997:
Basic $ 3,245,000 51,550,166 $ 0.06
Effect of dilutive stock options -- 2,565,270
----------- ----------
Diluted $ 3,245,000 * 54,115,436 $ 0.06
=========== ========== ========
Thirty-nine weeks ended November 1, 1998:
Basic $10,989,000 53,987,790 $ 0.20
Effect of dilutive stock options -- 2,338,001
----------- ----------
Diluted $10,989,000 56,325,792 $ 0.20
=========== ========== ========
Thirty-nine weeks ended November 2, 1997:
Basic $ 7,051,000 51,240,006 $ 0.14
Effect of dilutive stock options -- 2,266,552
----------- ----------
Diluted $ 7,051,000 * 53,506,558 $ 0.13
=========== ========== ========
</TABLE>
* Incremental shares from assumed conversion of convertible debt are
antidilutive for diluted earnings per share and therefore not included.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> NOV-01-1998
<CASH> 4,039
<SECURITIES> 0
<RECEIVABLES> 27,496
<ALLOWANCES> 0
<INVENTORY> 220,267
<CURRENT-ASSETS> 289,987
<PP&E> 357,856
<DEPRECIATION> 124,546
<TOTAL-ASSETS> 529,089
<CURRENT-LIABILITIES> 154,328
<BONDS> 47,812
0
0
<COMMON> 11,466
<OTHER-SE> 237,960
<TOTAL-LIABILITY-AND-EQUITY> 529,089
<SALES> 662,770
<TOTAL-REVENUES> 662,770
<CGS> 409,665
<TOTAL-COSTS> 643,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,138
<INCOME-PRETAX> 18,624
<INCOME-TAX> 7,635
<INCOME-CONTINUING> 10,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,989
<EPS-PRIMARY> 0.20<F1>
<EPS-DILUTED> 0.20
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
