<PAGE> 1
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 January 31, 1999
Commission file number 000-12704
WILLIAMS-SONOMA, INC.
(Exact Name of Registrant as Specified in Its Charter)
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)
Registrant's Telephone Number, Including Area Code (415) 421-7900
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Securities registered pursuant to Section 12(g) of the Act: None
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 26, 1999, the approximate aggregate market value of voting
stock held by non-affiliates of the Registrant was $1,234,494,000 using the
closing sales price on this day of $28.50. It is assumed for purposes of this
computation an affiliate includes all persons registered as Registrant insiders
with the Securities and Exchange Commission, as well as the Registrant's
Associate Stock Incentive Plan.
As of March 26, 1999, 55,807,965 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
January 31, 1999 (the "1998 Annual Report") in Parts I and II hereof and
attached hereto as Exhibit 13;
2) Registrant's Proxy Statement for the 1999 Annual Meeting (the "Proxy
Statement") in Part III hereof.
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WILLIAMS-SONOMA, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JANUARY 31, 1999
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
<S> <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 Holders 7
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 9
PART III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 10
</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 298 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 65% of the Company's net
sales during the fiscal year ended January 31, 1999 (Fiscal 1998), 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; and Pottery Barn, a retailer of
home furnishings, accessories and housewares, in 1986. 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.
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.
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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 January 31, 1999 the Company operated 298 retail stores, located in 39
states and the District of Columbia. This represents 163 Williams-Sonoma, 96
Pottery Barn, 33 Hold Everything, and 6 outlet stores, of which 98
Williams-Sonoma and 77 Pottery Barn stores are large-format. The prototypical
1998 large-format stores range from 5,800 - 10,500 selling square feet for
Pottery Barn stores, and 2,800-4,500 selling square feet for Williams-Sonoma
stores and enable the Company to more clearly display merchandise. Large-format
stores accounted for 68% of retail sales in fiscal 1998 versus 58% of retail
sales in fiscal 1997. In fiscal 1999, the Company plans to increase leased
square footage by approximately 21%.
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 brand. 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
brand 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.
SUPPLIERS
The Company purchases its merchandise from numerous foreign and domestic
manufacturers and importers, none of which accounted for more than 3% of
purchases during fiscal 1998. Approximately 42% of the Company's payments for
merchandise are to foreign vendors, most of which are located in Europe and
Asia.
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MANAGEMENT INFORMATION SYSTEMS
In fiscal 1998, the Company spent approximately $12 million on information
systems which included the development of an on-line decision support and
inventory management system for mail order. In fiscal 1999, the Company is
planning to spend approximately $22 million on information systems, including
the development of an Internet web site, order management system and the
relocation of the Company's corporate data center.
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.
The substantial sales growth in the mail order catalog industry within the last
decade 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 January 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 47 of the 1998 Annual Report which is incorporated herein by
reference).
EMPLOYEES
At January 31, 1999, the Company employed approximately 15,000 persons,
approximately 3,800 of whom were full-time employees. During the 1998 peak
season the Company hired approximately 5,600 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 1994. The
second corporate office is held under a lease which was amended in January 1996.
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
W. Howard Lester, chairman, chief executive officer and significant shareholder
of the Company and James A. McMahan, director and significant shareholder of the
Company. The construction of the entire facility was financed by the partnership
through the aggregate issuance of $9,200,000 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. (See Note F of the Company's Consolidated Financial
Statements).
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 Messrs. Lester and McMahan.
The construction was financed by the partnership through the sale of
$10,550,000, 10.36% principal amount 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).
In January 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.
(See Note E of the Company's Consolidated Financial Statements).
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. At this
point, the Company has no intention of exercising its right to terminate. Rent
commenced in July 1996 at a rate of $60,000 a month for the first ten months of
the lease and increased 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. (See Note E of the Company's Consolidated Financial
Statements).
In February 1998, the Company entered into an agreement to lease a 35,862
square-foot build-to-suit call center in Oklahoma City, Oklahoma. The lease
covers a ten-year term with three optional five-year renewals. Rent commenced in
August 1998 at an annual basic rent of $506,000 for each of the first five years
of the lease and will increase to $550,000 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 15,000
square feet. (See Note E of the Company's Consolidated Financial Statements).
In December 1998 the company entered into an agreement to lease a 750,000 square
foot retail distribution facility located in Olive Branch, Mississippi. The
lease covers a 22.5 year term with two optional five-year renewals. Rent will
commence upon completion of the facility, currently anticipated to be
approximately July 1, 1999. Rental payments for the primary term are estimated
to average $3.1 million annually. These estimated rental payments are subject to
adjustment upon completion of construction and finalization of costs.
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The Company's net selling area, at January 31, 1999, totaled approximately
1,217,000 square feet of leased space for 298 stores compared to approximately
1,016,000 square feet for 276 stores at the end of the prior year. All of the
existing stores are leased by the Company with original lease terms ranging from
three to twenty-two years, expiring between 1999 and 2018, 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).
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 1998 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 New York Stock Exchange
(NYSE) under the ticker symbol "WSM". Information contained under the caption
"Common Stock" on page 47 of the 1998 Annual Report is incorporated herein by
reference. The closing sales price of the Company's stock in the New York Stock
Exchange (NYSE) on March 26, 1999 was $28.50.
SHAREHOLDERS
The number of shareholders of record as of March 26, 1999 was approximately 550.
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. (See Note C of the
Company's Consolidated Financial Statements).
STOCK SPLITS
In March 1998, the Company declared a 2-for-1 stock split to shareholders of
record as of May 4, 1998. The split was effected on May 15, 1998 with the
issuance of 27,718,144 additional shares.
ITEM 6. SELECTED FINANCIAL DATA
Information contained under the caption "Five Year Selected Financial Data" on
page 27 of the 1998 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 28 - 31 of the 1998 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information contained under the caption "Quantitative and Qualitative Disclosure
About Market Risk" on page 31 of the 1998 Annual Report is incorporated herein
by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are incorporated by reference to pages 32 through 46 of
the 1998 Annual Report to Shareholders filed as Exhibit 13 to this Annual Report
on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets as of January 31, 1999 and February 1, 1998
Consolidated Statements of Earnings for the 52-week period ended January
31, 1999, 52-week period ended February 1, 1998 and for the 53-week period
ended February 2, 1997
Consolidated Statements of Shareholders' Equity for the 52-week period
ended January 31, 1999, 52-week period ended February 1, 1998 and for the
53-week period ended February 2, 1997
Consolidated Statements of Cash Flows for the 52-week period ended January
31, 1999, 52-week period ended February 1, 1998 and for the 53-week period
ended February 2, 1997
Notes to Consolidated Financial Statements
The unaudited quarterly information contained under the caption "Quarterly
Financial Information" on page 47 of the 1998 Annual Report is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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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 on page 3 of the Proxy Statement in the last paragraph
under the caption "Voting Securities and Principal Shareholders" 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 following the May 26, 1999 Annual Meeting
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 January 31, 1999, 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 26,
1999, is contained under the caption "Voting Securities and Principal
Shareholders" on pages 1 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 26, 1999, 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).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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(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
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Description Page
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Independent Auditors' Report on Financial Statement Schedule 12
Schedule II Valuation and Qualifying Accounts 13
</TABLE>
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 January 31, 1999.
(c) Exhibits: See Exhibit Index on pages 16 through 21.
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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 January 31, 1999 and February 1, 1998, and for each of
the three fiscal years in the period ended January 31, 1999, and have issued our
report thereon dated March 24, 1999; such financial statements and report are
included in your 1998 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(a)(2). 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 24, 1999
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SCHEDULE II
WILLIAMS-SONOMA, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
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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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Period Ended February 2, 1997:
Allowance for Doubtful Accounts $238,000 $86,000 $138,000(A) $186,000
Period Ended February 1, 1998:
Allowance for Doubtful Accounts $186,000 $20,000 -- $206,000
Period Ended January 31, 1999:
Allowance for Doubtful Accounts $206,000 $24,000 -- $230,000
</TABLE>
(A) Consists of direct write-offs charged against the allowance account during
the period.
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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 30, 1999 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.
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Date: April 30, 1999 /s/ W. HOWARD LESTER
----------------------------------
W. Howard Lester
Chairman
Chief Executive Officer
Director
Date: April 30, 1999 /s/ DENNIS A. CHANTLAND
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Dennis A. Chantland
Executive Vice President
Chief Administrative Officer
Secretary
Date: April 30, 1999 /s/ JERRY S. B. DRATLER
----------------------------------
Jerry S. B. Dratler
Vice President, Finance
Chief Accounting Officer
Date: April 30, 1999 /s/ CHARLES E. WILLIAMS
----------------------------------
Charles E. Williams
Founder and Vice-Chairman
Director
Date: April 30, 1999 /s/ GARY G. FRIEDMAN
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Gary G. Friedman
Chief Merchandising Officer
President-Retail Division
Director
Date: April 30, 1999 /s/ PATRICK J. CONNOLLY
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Patrick J. Connolly
Executive Vice President
General Manager-Catalog
Director
Date: April 30, 1999 /s/ ADRIAN D. P. BELLAMY
----------------------------------
Adrian D.P. Bellamy
Director
</TABLE>
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<TABLE>
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Date: April 30, 1999 /s/ JAMES M. BERRY
----------------------------------
James M. Berry
Director
Date: April 30, 1999 /s/ NATHAN BESSIN
----------------------------------
Nathan Bessin
Director
Date: April 30, 1999 /s/ JANET L. EMERSON
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Janet L. Emerson
Director
Date: April 30, 1999 /s/ JAMES A. MCMAHAN
----------------------------------
James A. McMahan
Director
Date: April 30, 1999 /s/ JOHN E. MARTIN
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John E. Martin
Director
</TABLE>
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EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE
FISCAL YEAR ENDED JANUARY 31, 1999
<TABLE>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE NO.
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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)
10.1A 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)
10.1B Amended and Restated 1993 Stock Option Plan and Form of Agreement
(incorporated by reference to Exhibit 10.1B to the Company's
Annual Report on Form 10-K for the fiscal year ended February 1,
1998 as filed with the Commission April 22, 1998)
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)
10.2A 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 Annual Report on
Form 10-K for the fiscal year ended February 3, 1985, as filed
with the Commission on April 26, 1985)
10.2B 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)
10.2C 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)
</TABLE>
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<TABLE>
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10.2D 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)
10.2E 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 Memorandum of Understanding between the Company and the State of
Mississippi, Mississippi Business Finance Corporation, Desoto
County, Mississippi, the City of Olive Branch, Mississippi and
Hewson Properties, Inc., dated August 24, 1998 (incorporated by
reference to Exhibit 10.6 to the Company's Report on Form 10-Q
for the period ended August 2, 1998 as filed with the Commission
on September 14, 1998)
10.3A Reimbursement Agreement between the Company and Hewson
Properties, dated August 17, 1998 (incorporated by reference to
Exhibit 10.7 to the Company's Report on Form 10-Q for the period
ended August 2, 1998 as filed with the Commission on September
14, 1998)
10.3B First Amendment to the Reimbursement Agreement between the
Company and Hewson Properties, dated October 15, 1998
(incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the period ended November 1, 1998 as
filed with the Commission on December 14, 1998).
10.3C Second Amendment to the Reimbursement Agreement between the
Company and Hewson Properties, dated November 15, 1998
(incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 10-Q for the period ended November 1, 1998 as
filed with the Commission on December 14, 1998).
10.3D Olive Branch distribution facility lease between the Company as
lessee and Hewson/Desoto Phase I, L.L.C. as lessor, dated
December 1, 1998
10.4 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
Annual Report on Form 10-K for the year ended February 3, 1985,
as filed with the Commission on April 26, 1985)
10.4A 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 10.3 A
to the Company's Annual Report on Form 10-K for the year ended
January 28, 1996, as filed with the Commission on April 26, 1996)
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)
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C>
10.5A 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)
10.5B 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)
10.5C 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)
10.5D 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)
10.5E 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)
10.5F Amendment Number Seven to the Williams-Sonoma, Inc. Employee
Profit Sharing and Stock Incentive Plan, dated May 1, 1997
(incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q for the period ended August 3, 1997 as filed
with the Commission on September 16, 1997).
10.5G Amendment Number Eight to the Williams-Sonoma, Inc. Employee
Profit Sharing and Stock Incentive Plan, dated September 16, 1997
(incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the period ended August 2, 1998 as filed
with the Commission on September 14, 1998).
10.5H Amendment Number Nine to the Williams-Sonoma, Inc. Employee
Profit Sharing and Stock Incentive Plan, dated September 30, 1998
10.5I Amendment Number Ten to the Williams-Sonoma, Inc. Employee Profit
Sharing and Stock Incentive Plan, dated December 31, 1998
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)
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
10.6A 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 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)
10.7A 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)
10.7B 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)
10.8 Amended and Restated Standing Loan Agreement between the Company
and Bank of America, NT & SA, dated June 1, 1997 (incorporated by
reference to Exhibit 10.1 to the Company's Report on Form 10-Q
for the period ended May 4, 1997 as filed with the Commission on
June 17, 1997).
10.9 Credit Agreement between the Company and Bank of America, NT &
SA, dated June 1, 1997 (incorporated by reference to Exhibit 10.2
to the Company's Report on Form 10-Q for the period ended May 4,
1997 as filed with the Commission on June 17, 1997).
10.9A Agreement re: Intercreditor Agreement, dated May 22, 1997
(incorporated by reference to Exhibit 10.2A to the Company's
Report on Form 10-Q for the period ended May 4, 1997 as filed
with the Commission on June 17, 1997).
10.9B Continuing Guaranty from Pottery Barn East, Inc. to Bank of
America, NT & SA, dated June 1, 1997 (incorporated by reference
to Exhibit 10.2B to the Company's Report on Form 10-Q for the
period ended May 4, 1997 as filed with the Commission on June 17,
1997).
10.9C Continuing Guaranty from Hold Everything, Inc. to Bank of
America, NT & SA, dated June 1, 1997 (incorporated by reference
to Exhibit 10.2C to the Company's Report on Form 10-Q for the
period ended May 4, 1997 as filed with the Commission on June 17,
1997).
10.9D Continuing Guaranty from Williams-Sonoma Stores, Inc. to Bank of
America, NT & SA, dated June 1, 1997 (incorporated by reference
to Exhibit 10.2D to the Company's Report on Form 10-Q for the
period ended May 4, 1997 as filed with the Commission on June 17,
1997).
10.9E Continuing Guaranty from Chambers Catalog Company, Inc. to Bank
of America, NT & SA, dated June 1, 1997 (incorporated by
reference to Exhibit 10.2E to the Company's Report on Form 10-Q
for the period ended May 4, 1997 as filed with the Commission on
June 17, 1997).
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C>
10.9F Continuing Guaranty from Gardeners Eden, Inc. to Bank of America,
NT & SA, dated June 1, 1997 (incorporated by reference to Exhibit
10.2F to the Company's Report on Form 10-Q for the period ended
May 4, 1997 as filed with the Commission on June 17, 1997).
10.10 Letter of Credit Agreement between the Company and Bank of
America, NT & SA dated June 1, 1997 (incorporated by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the period
ended May 4, 1997 as filed with the Commission on June 17, 1997)
10.10A One Bank Guaranty from Pottery Barn East, Inc. to Bank of
America, NT & SA, dated June 1, 1997 (incorporated by reference
to Exhibit 10.3A to the Company's Report on Form 10-Q for the
period ended May 4, 1997 as filed with the Commission on June 17,
1997).
10.10B One Bank Guaranty from Hold Everything, Inc. to Bank of America,
NT & SA, dated June 1, 1997 (incorporated by reference to Exhibit
10.3B to the Company's Report on Form 10-Q for the period ended
May 4, 1997 as filed with the Commission on June 17, 1997).
10.10C One Bank Guaranty from Williams-Sonoma Stores, Inc. to Bank of
America, NT & SA, dated June 1, 1997 (incorporated by reference
to Exhibit 10.3C to the Company's Report on Form 10-Q for the
period ended May 4, 1997 as filed with the Commission on June 17,
1997).
10.10D One Bank Guaranty from Chambers Catalog Company, Inc. to Bank of
America, NT & SA, dated June 1, 1997 (incorporated by reference
to Exhibit 10.3D to the Company's Report on Form 10-Q for the
period ended May 4, 1997 as filed with the Commission on June 17,
1997).
10.10E One Bank Guaranty from Gardeners Eden, Inc. to Bank of America,
NT & SA, dated June 1, 1997 (incorporated by reference to Exhibit
10.3E to the Company's Report on Form 10-Q for the period ended
May 4, 1997 as filed with the Commission on June 17, 1997).
10.10F First Amendment to Syndicated Credit Agreement between the
Company and Bank of America National Trust and Savings
Association, dated May 29, 1998 (incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 10-Q for the period
ended August 2, 1998 as filed with the Commission on September
14, 1998).
10.10G Second Amendment to Syndicated Credit Agreement between the
Company and Bank of America National Trust and Savings
Association, dated June 30, 1998 (incorporated by reference to
Exhibit 10.4 to the Company's Report on Form 10-Q for the period
ended August 2, 1998 as filed with the Commission on September
14, 1998)
10.10H Second Amendment to Letter of Credit Agreement between the
Company and Bank of America National Trust and Savings
Association, dated May 29, 1998 (incorporated by reference to
Exhibit 10.3 to the Company's Report on Form 10-Q for the period
ended August 2, 1998 as filed with the Commission on September
14, 1998)
10.10I Third Amendment to Letter of Credit Agreement between the Company
and Bank of America National Trust and Savings Association, dated
June 30, 1998 (incorporated by reference to Exhibit 10.5 to the
Company's Report on Form 10-Q for the period ended August 2, 1998
as filed with the Commission on September 14, 1998)
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
10.11 Second Amendment and Restatement of the Williams-Sonoma, Inc.
Executive Deferral Plan dated November 23, 1998
10.12 Office lease between TJM Properties, L.L.C. and Williams-Sonoma,
Inc., dated as of February 13, 1998 (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1998 as filed with the Commission
on April 22, 1998)
11 Statement re computation of per share earnings (Incorporated
herein by reference to Note G Earnings Per Share on page 41 of
the Company's Annual Report for the fiscal year ended January 31,
1999)
13 Annual Report to security holders
21 Subsidiaries
23.1 Independent Auditors' Consent
27 Financial Data Schedule (FDS) for January 31, 1999
</TABLE>
21
<PAGE> 1
EXHIBIT 10.3D
OLIVE BRANCH DISTRIBUTION FACILITY LEASE
<PAGE> 2
LEASE AGREEMENT
BY AND BETWEEN
HEWSON/DESOTO PHASE I, L.L.C.
AND
WILLIAMS-SONOMA, INC.
DATED: AS OF DECEMBER 1, 1998
PREPARED BY:
BAKER, DONELSON, BEARMAN & CALDWELL
2000 FIRST TENNESSEE BUILDING
165 MADISON AVENUE
MEMPHIS, TENNESSEE 38103
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
ARTICLE I TERM
1.1. Initial Term............................................................................ 3
1.2. Improvements; Occupancy................................................................. 3
1.3. Fixtures; Equipment..................................................................... 5
1.4. Option Periods.......................................................................... 6
ARTICLE II RENT
2.1 Rent..................................................................................... 8
2.2 Net-Net-Net Lease........................................................................ 10
2.3 Proration of Taxes....................................................................... 14
2.4 Payment of Taxes; Payment Deferral....................................................... 15
2.5 Evidence of Tax Payment.................................................................. 16
2.6 Global Basic Rent Adjustment............................................................. 16
2.7 Option Period Rent Rates................................................................. 17
ARTICLE III USE, OPERATION, MAINTENANCE AND ALTERATION
3.1 Use & Occupancy.......................................................................... 20
3.2 Use of Insurance Proceeds................................................................ 24
3.3 Alterations; Improvements................................................................ 28
3.4 Signage.................................................................................. 33
3.5 Liens; Encumbrances...................................................................... 33
3.6 Indemnification.......................................................................... 34
3.7 Inspection of Project.................................................................... 35
3.8 Landlord's Entry to Project Following Default............................................ 35
ARTICLE IV INSURANCE
4.1 Insurance Requirements................................................................... 36
4.2 Form of Policy........................................................................... 38
4.3 Notice of Damage or Destruction.......................................................... 39
4.4 Net Proceeds............................................................................. 39
ARTICLE V CONDEMNATION
5.1 Notice of Condemnation................................................................... 40
5.2 Partial Condemnation..................................................................... 40
5.3 Substantial Condemnation; Condemnation in Excess of $5,000,000........................... 42
ARTICLE VI SALES, MORTGAGES, ETC. AND GENERAL CONDITIONS
6.1 Assignment by Tenant..................................................................... 46
6.2 Exercise of Rights or Remedies by Landlord............................................... 47
6.3 Tenant's Right of First Refusal.......................................................... 47
6.4 Financial Covenants of Lessee............................................................ 48
6.5 Compliance with Bond Documents by Landlord............................................... 53
</TABLE>
<PAGE> 4
<TABLE>
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6.6 Financial Statements of Tenant........................................................... 54
ARTICLE VII DEFAULT
7.1 Events of Default........................................................................ 55
7.2 Landlord Remedies........................................................................ 56
7.3 Re-Entry................................................................................. 60
7.4 Remedies Cumulative...................................................................... 60
7.5 Lessee's Indemnification; Attorney Fees.................................................. 60
7.6 Mutual Indemnification; Costs............................................................ 61
7.7 Right of Offset.......................................................................... 61
7.8 Certification by Subtenants.............................................................. 62
ARTICLE VIII ARBITRATION
8.1 Submission to Board of Arbitrators....................................................... 62
ARTICLE IX COVENANT OF QUIET ENJOYMENT
9.1 Quiet Enjoyment; Non-Disturbance......................................................... 64
ARTICLE X MISCELLANEOUS
10.1 Tenancy Beyond Lease Term............................................................... 64
10.2 Notices................................................................................. 65
10.3 Definition of "Landlord."............................................................... 66
10.4 Headings; Table of Contents............................................................. 66
10.5 Counterparts............................................................................ 67
10.6 Governing Law........................................................................... 67
10.7 Cure on Behalf of Landlord.............................................................. 67
10.8 Binding on Successors and Assigns....................................................... 67
10.9 Authority of Signatories................................................................ 67
10.10 Benefits of the Act..................................................................... 68
10.11 [RESERVED.]............................................................................ 69
10.12 Waivers................................................................................ 69
10.13 Mechanic's Liens....................................................................... 69
10.14 Utilities.............................................................................. 70
10.15 [RESERVED.]............................................................................ 70
10.16 Cure on Behalf of Tenant............................................................... 70
10.17 Severability........................................................................... 70
10.18 Venue.................................................................................. 71
10.19 [RESERVED.]............................................................................ 71
10.20 Waiver of Jury Trial................................................................... 71
10.21 Waiver of Right of Recovery............................................................ 72
10.22 Design and Construction Indemnity...................................................... 72
10.23 Landlord Waiver of Liens............................................................... 73
10.24 Tenant Right to Terminate.............................................................. 73
10.25 Litigation............................................................................. 75
10.26 Costs of Action........................................................................ 75
</TABLE>
<PAGE> 5
<TABLE>
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10.27 Nondisturbance......................................................................... 75
10.28 Tenant Subordination of Lease.......................................................... 76
10.29 Agency................................................................................. 76
10.30 Amendment.............................................................................. 77
</TABLE>
Exhibits:
<TABLE>
<S> <C> <C>
Exhibit "A" Real Property Description................................................. A-1
Exhibit "B" Plans for Building and Improvements....................................... B-1
Exhibit "C" Rent Schedule............................................................. C-1
Exhibit "D" Environmental Notices..................................................... D-1
Exhibit "E" Easements Affecting Real Property......................................... E-1
Exhibit "F" Letter Regarding Future Phases............................................ F-1
Exhibit "G" Existing Indebtedness..................................................... G-1
</TABLE>
<PAGE> 6
LEASE AGREEMENT
THIS LEASE, entered into as of the 1st day of December, 1998, by and
between HEWSON/DESOTO PHASE I, L.L.C., an Arizona limited liability company (the
"Landlord"), and WILLIAMS-SONOMA, INC., a California corporation (the "Tenant");
W I T N E S S E T H, that:
This Lease constitutes a financing agreement for the purposes of Sections
57-10-409 and 27-7-22.3 of the Mississippi Code of 1972, as amended.
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord for
the term of this Lease, at the rental and subject to the provisions herein set
forth, that entire certain parcel of land (the "Property"), containing 66.847
acres, more or less, and the easements and appurtenances thereto, located in the
County of DeSoto, State of Mississippi, as described in Exhibit "A" attached
hereto and made a part hereof, together with the building, and on-site and
off-site improvements, all as described in the Plans (as defined in the Loan
Agreement, as hereinafter defined) in Exhibit "B," attached hereto (the
"Improvements") (the Property and Improvements being herein sometimes called the
"Project"). The Tenant shall, during the course of and upon completion of the
construction of the Improvements, at the Tenant's sole cost and expense, install
in the Improvements certain fixtures ("Fixtures") and equipment (the
"Equipment"). The Project is to be financed through the issuance of $30,300,000
Taxable Industrial Development Revenue Bonds, Series 1998 (Hewson/DeSoto Phase
I, L.L.C. Project) (the "Bonds") by the Mississippi Business Finance Corporation
(the "Issuer"), pursuant to a Loan Agreement of even date herewith between the
Issuer and Landlord (the "Loan Agreement"). The Bonds are issued pursuant to the
Trust Indenture ("Indenture") of even date herewith executed by and between the
Issuer and Union Planters National Bank, N.A., as Trustee (the "Trustee"), and
are secured by a deed of trust of even date herewith and executed by Landlord in
favor of the Issuer (the "Deed of Trust"), which has been assigned by the Issuer
to the Trustee pursuant to the Indenture. Interests of various parties in the
Project are further subject to a Tenant Estoppel, Subordination,
<PAGE> 7
Non-Disturbance and Attornment Agreement (the "Non-Disturbance Agreement") of
even date herewith by and among the Landlord, the Tenant, the Issuer and the
Trustee.
Tenant expressly acknowledges that, as security for Landlord's obligations
under the Loan Agreement and as additional security for the Bonds, the Landlord
has assigned its interests hereunder to the Issuer pursuant to an Assignment of
Rents, Leases and Profits of even date herewith (the "Assignment"), the Issuer's
interest in which has been assigned to the Trustee pursuant to the Indenture. As
such, any rights or obligations of Landlord hereunder, including, but not
limited to, approvals, consents and enforcement of remedies may, but need not
be, exercised or performed by the Trustee and/or the holders of any Bonds (the
"Holders" or the "Bondholders") so long as any of the Bonds remain Outstanding
(as defined in the Indenture). So long as the Tenant is not in default under
this Lease, such approvals or consents shall not be unreasonably withheld unless
this Lease or the Loan Agreement otherwise specifically provides. When no Bonds
remain Outstanding and the Loan Agreement has been terminated and the Indenture
released, references to the Trustee herein shall have no further force or
effect.
This Lease is made upon the following terms, provisions, conditions and
limitations, and the parties respectively covenant and agree as follows:
ARTICLE I
TERM
I.1. Initial Term. The initial term of this Lease shall commence on the
Occupancy Commencement Date (as hereinafter defined) and continues until January
1, 2022 (the "Primary Term"). Thereafter, as used herein, unless the context
shall otherwise require, the phrase "term of this Lease" shall mean the Primary
Term plus the option periods exercised pursuant to Section 1.4 hereof.
I.2. Improvements; Occupancy. (a) The parties hereto understand and agree
that the Improvements to be erected as part of the Project are anticipated to be
complete and ready for occupancy as evidenced by a Certificate of Occupancy to
be issued by the relevant jurisdiction on or about the 1st day of June, 1999
(the "Estimated Completion Date"). Landlord shall exert its best efforts toward
the end that the Improvements be
<PAGE> 8
completed on or before June 1, 1999. Landlord agrees to give Tenant written
notice as to whether or not the Improvements will be completed by the Estimated
Completion Date as soon as possible, but in any event not later than thirty (30)
days prior to the Estimated Completion Date.
(b) Tenant's responsibility for payment of amounts set forth in Article II
hereof shall commence on that date (the "Rental Commencement Date") which is the
earliest of (i) ten (10) business days following receipt by the Tenant of a copy
of those items required under Section 4.4 of the Loan Agreement, (ii) that date
on which Tenant commences actual productive use (as distinct from installation
of Fixtures and Equipment) of the Project as a distribution facility, or (iii)
November 1, 1999. Tenant's occupancy of the Project shall commence on that date
(the "Occupancy Commencement Date") which is the earlier of (i) ten (10)
business days following receipt by the Tenant of a copy of those items required
under Section 4.4 of the Loan Agreement or (ii) that date on which Tenant
commences actual productive use (as distinct from installation of Fixtures and
Equipment) of the Project as a distribution facility. Notwithstanding anything
to the contrary herein, Tenant shall have no obligation to pay Company Payments
(as hereinafter defined) until after the Occupancy Commencement Date and until
after all amounts (if any) due to Tenant under the Agreement and Indemnification
(as hereinafter defined) have been paid in full.
(c) Tenant's obligation to pay those amounts set forth in Article II
hereof (other than Company Payments) shall arise on the Rental Commencement Date
regardless of any disputes which may occur between Landlord and Tenant
concerning construction of the Improvements, subject to the provisions of
paragraph 7.7.
(d) The Landlord shall construct or cause to be constructed the
Improvements substantially in accordance with the Plans. The Landlord shall
obtain all approvals requisite to the construction of the Project, and shall
construct the Project in material compliance with all federal, State and local
laws and regulations. On or before the Occupancy Commencement Date, the Landlord
will furnish to the Tenant copies of all required permits and authorizations
except those permits and authorizations which Tenant must obtain, authorizing
the occupancy and uses of the Project for the purposes contemplated by the
Tenant. The Landlord will take such action and institute such proceedings as
shall be necessary to cause and require all contractors and material suppliers
to complete their
<PAGE> 9
contracts, including the correction of any defective work, and the Landlord
agrees that the Tenant may, from time to time, in its own name, or in the name
of the Landlord, take such action as may be necessary or advisable, as
determined by the Tenant, to assure that the construction of the Improvements
will proceed in an efficient and workmanlike manner. Any amounts recovered as
damages, refunds, adjustments or otherwise in connection with the foregoing (a)
shall be paid to the Tenant if the Tenant has corrected, at its own expense, the
matter which gave rise to such default or breach, or (b) shall be paid to the
Landlord if the Landlord has corrected, at its own expense, the matter which
gave rise to such default or breach, or (c) shall be paid to the Landlord if the
matter which gave rise to such default or breach has not yet been corrected and
if such payment is prior to the Occupancy Commencement Date (in which event
Landlord shall thereafter promptly apply such amount to the correction of such
matter, with the balance, if any, disposed of as set forth in Section 4.5 of the
Loan Agreement), or (d) shall be paid to the Tenant if the matter which gave
rise to such default or breach has not yet been corrected and if such payment is
after the Occupancy Commencement Date (in which event Tenant shall thereafter
promptly apply such amount to the correction of such matter, with the balance,
if any, disposed of as set forth in Section 3.2(b) of this Lease).
I.3. Fixtures; Equipment. The parties hereto understand and agree that
the Landlord has no responsibility whatsoever regarding the delivery and
installation of the Fixtures and Equipment in the Project, and that this Lease
and the Tenant's covenants and agreements contained herein are in no way
conditioned upon such delivery or installation.
I.4. Option Periods. (a) In addition to the Primary Term of this Lease
and in partial consideration of Tenant's entering into this Lease, Landlord
hereby grants to Tenant an option to extend the term of this Lease for an
additional period equal to five (5) years plus the number of months (if any),
rounded to the nearest whole month by which the Rental Commencement Date
precedes the Occupancy Commencement Date, commencing at the conclusion of the
Primary Term (as such Primary Term may be extended pursuant to the provisions of
Section 3.3(a)(iii) hereof) (hereinafter referred to as the "First Option
Period") at the rental to be determined in accordance with Section 2.7(a) and
(b) hereof, but otherwise upon the same terms and conditions as those set forth
in this Lease.
<PAGE> 10
(b) In addition to the Primary Term of this Lease and in addition to the
First Option Period and in partial consideration of Tenant's entering into this
Lease, Landlord hereby grants to Tenant an additional option to further extend
the term of this Lease for an additional five (5) year period commencing at the
conclusion of the First Option Period (hereinafter referred to as the "Second
Option Period") at the rental to be determined in accordance with Section 2.7(a)
and (c) hereof, but otherwise upon the same terms and conditions as those set
forth in this Lease, together with any additions or amendments made for the
First Option Period.
(c) [RESERVED.]
(d) [RESERVED.]
(e) (i) The options under this Section 1.4 may be exercised solely at
the discretion of Tenant. Tenant may exercise the option for the First
Option Period by delivering written notice of such exercise to Landlord at
any time prior to that date which precedes the conclusion of the Primary
Term of this Lease by one (1) year (the "First Option Exercise Date"). If
Tenant has not delivered to Landlord written notice of Tenant's exercise
of the option for the First Option Period by the First Option Exercise
Date, the options for the First Option Period and the Second Option Period
under this Section 1.4 shall lapse and be deemed of no further effect.
(ii) Tenant may exercise the option for the Second Option Period by
delivering written notice of such exercise to Landlord at any time during
the First Option Period prior to that date which precedes the conclusion
of the First Option Period by one (1) year (the "Second Option Exercise
Date"). If Tenant has not delivered to Landlord written notice of Tenant's
exercise of the option for the Second Option Period by the Second Option
Exercise Date, the option for the Second Option Period under this Section
1.4 shall lapse and be deemed of no further effect.
<PAGE> 11
(iii) Neither the option for the First Option Period nor the option
for the Second Option Period may be exercised at any time during which
Tenant is in default under any of the terms of this Lease.
(f) As used hereinafter, "Option Period" shall be deemed to mean either
the First Option or the Second Option Period.
ARTICLE II
RENT
II.1 Rent. (a) From and after the Rental Commencement Date, Tenant shall
pay Global Basic Rent, subject to adjustment as provided in Section 2.6 hereof;
"Global Basic Rent" being defined (i) during the Primary Term (as such Primary
Term may be extended pursuant to the provisions of Section 3.3(a)(iii) hereof)
as the sum of Basic Rent (as defined below) and Company Payments (as defined
below) (provided, however, that Tenant shall have no obligation to pay Company
Payments until after the Occupancy Commencement Date and until after all amounts
due to Tenant under the Agreement and Indemnification have been paid in full);
and (ii) during the Option Periods, as set forth in Section 2.7 hereof
(provided, however, that during said Option Periods all Global Basic Rent shall
also constitute Company Payments hereunder);
(b) During the Primary Term, the Global Basic Rent shall be payable in the
amounts set forth in Exhibit "C" attached hereto ("Rent Schedule") and made a
part hereof, subject to adjustment of the Basic Rent as provided in Section 2.6
hereof. Any such Basic Rent adjustment will be documented by an amended Exhibit
"C," agreed to by the parties, at the time of such adjustment. During any Option
Period, the Global Basic Rent shall be determined as set forth in Section 2.7
hereof; and
(c) From and after the Rental Commencement Date and so long as any Bonds
remain Outstanding or the Indenture has not been released during the Primary
Term, Tenant shall timely pay to Trustee in accordance with
<PAGE> 12
the terms of the Loan Agreement at Union Planters Bank, N.A., Corporate Trust
Department, 6200 Poplar Avenue, Memphis, Tennessee 38119 or such other person or
at such other place as Trustee designates in writing to Tenant, without previous
demand therefor and without deduction or offset, the amount of quarterly
payments of interest accruing on Outstanding Bonds and semi-annual Mandatory
Sinking Fund Payments (as defined in the Indenture) due on the Bonds (the "Basic
Rent"). Attached as part of Exhibit "C" is a schedule of payments of Basic Rent
over the term of the Bonds assuming no prepayments and assuming no change in the
rate of interest borne by the Bonds as described in Section 2.6(b). All payments
of Basic Rent by Tenant to Trustee shall be credited against Tenant's obligation
to pay Global Basic Rent. Attached as part of Exhibit "C" is a schedule of
Company Payments for the Primary Term assuming no prepayment under Section
2.6(a). Provided that all amounts due to Tenant under the Agreement and
Indemnification have been paid in full, from and after the Occupancy
Commencement Date and during the Primary Term, Tenant shall pay such amounts
("Company Payments") to Landlord, _ Hewson Properties, Inc. at 4636 E.
University Drive, Suite 265, Phoenix, Arizona 85034, or to such other person or
place as Landlord designates in writing to Tenant, quarterly (on the same day as
quarterly interest payments are due on the Bonds), without previous demand
therefor, in an amount equal to one-quarter ( 1/4) of the difference between (i)
the then applicable Global Basic Rent (as adjusted in Section 2.6 hereof during
the Primary Term) for the applicable lease year and (ii) the Basic Rent for the
applicable lease year ("lease year" being the successive one (1) year periods).
Should the Primary Term be extended as provided in Section 3.3(a)(iii) hereof,
the Company Payments shall be made for the period of such extension as provided
in Section 3.3(a)(iii). During any Option Period, all Global Basic Rent shall be
deemed to be Company Payments for purposes of this Lease, and shall be paid to
Landlord quarterly as set forth in this Section 2.1(c).
II.2 Net-Net-Net Lease. (a) This Lease constitutes what is commonly known
as a "net-net-net lease," it being understood that the Trustee and the Landlord
shall receive the Basic Rent and Company Payments, respectively, free and clear
of any and all impositions, taxes, liens, charges or expenses of any nature
whatsoever in connection with Landlord's ownership and leasing of the Project.
In addition to the Global Basic Rent provided for in Section 2.1 hereof, from
and after the Rental Commencement Date, the Tenant shall pay to Landlord or to
third parties as provided herein (particularly in Sections 2.3 and 2.4) as
additional rent ("Additional Rent") all impositions, taxes, payments or fees in
lieu of taxes, insurance premiums, operating charges, costs and expenses
<PAGE> 13
which arise or may be contemplated under any provisions of this Lease during the
Primary Term and any Option Periods. Upon the failure of Tenant to pay any of
such costs, charges or expenses, Landlord shall have the same rights and
remedies as otherwise provided in this Lease for the failure of Tenant to pay
Basic Rent. It is the intention of the parties hereto that Tenant shall in no
event be entitled to any abatement of or reduction in Global Basic Rent payable
hereunder except as expressly provided herein. Any present or future law to the
contrary shall not alter this agreement of the parties.
Amounts payable by Tenant hereunder shall include, but not be limited to,
the following:
(i) Insurance premiums required to maintain the insurance policies
described in Article IV hereof;
(ii) Expenses of occupying, operating, altering, maintaining and
repairing the Project throughout the term of this Lease; and
(iii) All taxes, assessments, fees in lieu of taxes and other
governmental charges, as set forth in Section 6.2 of the Loan Agreement,
except as hereinafter provided in subsection 2.4 and except as prorated
pursuant to Section 2.3(a) of this Lease, and all other expenses and
charges (including any asserted by the Issuer or the Trustee, including
but not limited to Trustee's regular and extraordinary fees, as to all of
which Landlord shall be entitled to prompt reimbursement by Tenant) which
during the term of this Lease shall be levied, assessed or imposed by any
governmental authority upon or with respect to, or incurred in connection
with the ownership, possession, occupation, operation, alteration,
maintenance, repair or use of the Project.
If at any time during the term of this Lease under the laws of the State
of Mississippi or any political subdivision thereof in which the Project is
situated, a tax or excise on rents or other tax, however described, is levied or
assessed by said State or political subdivision against Landlord or the rentals
set forth in Section 2.1 hereof, Tenant covenants to pay and discharge such tax
or excise on rents or other tax, but only to the extent of the
<PAGE> 14
amount thereof which is lawfully assessed or imposed upon Landlord and which was
so assessed or imposed as a direct result of Landlord's interest in the Project,
or of this Lease or of the rentals accruing hereunder, it being the intention of
the parties hereto that all sums payable by Tenant hereunder (including, without
limitation, Basic Rent, Company Payments, Additional Rent and all other sums,
all of which are herein sometimes collectively called "Rent") shall be paid to
Landlord absolutely net without offset of any kind or deduction of any nature
whatsoever except as expressly provided in this Lease with respect to Company
Payments. Any payment or discharge by Tenant of any tax or excise on rents or
other tax referred to in the preceding sentence shall not be deemed to be
Additional Rent. Nothing in this Lease shall be construed to require Tenant to
pay any franchise, estate, inheritance, succession, capital levy or transfer tax
of Landlord, or any income, excess profits or revenue tax or any other tax or
impost charged or levied against Landlord upon the rentals payable by Tenant
under this Lease, except to the extent hereinabove provided. In the case of any
assessment for public improvement wherein the cost of the public improvement is
permitted to be paid in installments, then and in such event only, such
installments falling due during the term of this Lease shall be paid by Tenant,
and all such installments falling due subsequent to the term of this Lease shall
be paid by Landlord, notwithstanding the provisions of Section 2.3 hereof. For
the purpose of the foregoing sentence, an installment is due on the last day
prior to the date upon which such an installment becomes delinquent.
Upon the occurrence and continuation of an event of default hereunder (an
"Event of Default"), the Landlord may require the Tenant to deposit with the
Trustee (or Landlord if there is no Trustee) in an escrow account bearing
interest for the benefit of Tenant (i) an amount equal to (A) all taxes which
are due and payable which Tenant is obligated to pay under this Section,
including accrued ad valorem taxes, if any, or, in the alternative all amounts
due as payments or fees in lieu of taxes, with respect to the Project plus (B)
any then delinquent insurance premiums with respect to the insurance required
under Section 4.1 hereof, and (ii) thereafter, each month, an amount equal to
one-twelfth (1/12th) of the annual charges for taxes to be paid under this
Section 2.2 and insurance premiums.
Tenant covenants to cooperate fully with Landlord in taking any actions
necessary to apply for and receive ad valorem tax relief for the Property,
including, but not limited to, meeting the requirements of Mississippi Code
<PAGE> 15
Section 27-31-101 and Section 27-31-104. Tenant expressly acknowledges that no
right of offset with respect to payment of Basic Rent to the Trustee or the
payment of other amounts (except Company Payments) hereunder shall arise in the
event of the loss of ad valorem tax relief. Landlord agrees that, so long as
Tenant is not in default hereunder, if any actions on the part of Landlord
result in the occurrence of an event of default under the Loan Agreement or
leads to a foreclosure on the Deed of Trust or any other event the result of
which is the loss of ad valorem tax relief under the Loan Agreement, Landlord
will indemnify Tenant to the extent Tenant is required under this Section 2.2.
to pay ad valorem taxes in excess of the payments in lieu of taxes which
otherwise would have been paid by Tenant hereunder.
(b) Tenant agrees, within six (6) months following the earlier of (i) the
Occupancy Commencement Date or (ii) the date of issuance of the Series 1998
Bonds, the Tenant will certify in writing to the Landlord as to the number of
jobs created or, if prior to the Occupancy Commencement Date, anticipated to be
created, as a result of the Project.
(c) Tenant will reimburse Landlord with respect to certain environmental
inspection matters as follows:
(i) On an annual basis, Tenant will reimburse Landlord for the costs
of a "walk-through" inspection of the Project by a qualified environmental
engineer reasonably acceptable to Tenant.
(ii) If such inspection yields evidence of any potential
environmental hazards related to Tenant's use and occupancy of the
Project, Tenant will reimburse Landlord for such additional environmental
inspections and reports as are deemed reasonably necessary by such
engineer.
II.3 Proration of Taxes. (a) The taxes, fees in lieu of taxes, and other
charges and expenses described in Section 2.2(a) above shall be prorated when
appropriate between Landlord and Tenant in order that all of such taxes and
other charges and expenses which relate to the period prior to the Occupancy
Commencement Date and the period subsequent to the termination of the term of
this Lease shall be borne by Landlord and in order that all
<PAGE> 16
of such taxes and other charges and expenses which relate to the term of this
Lease shall be borne by Tenant. Such proration shall be computed in accordance
with generally accepted accrual accounting principles and Landlord and Tenant
shall each indemnify and hold the other harmless from any taxes and other
charges and expenses relating to their respective periods of responsibility
which may have become a charge upon the other.
(b) Tenant shall not enter into any non-terminable contracts or agreements
with respect to the Project extending beyond the term of this Lease without the
prior written consent of Landlord, which consent Landlord may not withhold
unreasonably and arbitrarily.
II.4 Payment of Taxes; Payment Deferral. (a) Tenant shall pay each sum
payable pursuant to Section 2.2(a) above prior to the time that such sum becomes
delinquent; provided, however, that if any authority having jurisdiction or
alleging to have jurisdiction assesses real estate taxes or assessments (or fees
in lieu thereof), personal property taxes or assessments (or fees in lieu
thereof), or assesses or levies any other charges against the Project as
contemplated and provided in this Lease, and Tenant deems the same or any of
them excessive, improper or illegal, Tenant may defer payment thereof to the
extent permitted by law so long as the validity or amount thereof is contested
by Tenant in good faith. In such event, if an Event of Default has occurred and
is continuing, Tenant, if requested by Landlord or Trustee so to do, shall
furnish to Landlord and Trustee a corporate surety bond, satisfactory to
Landlord and Trustee as beneficiary, in an amount equal to the aggregate of (a)
the taxes, assessments, or other charges so assessed, plus (b) all penalties and
interest which may reasonably be estimated to be incurred if such contest is
adversely determined thereon at the annual rate provided for by law. In the
event that during the period of such deferred payment, and while such Event of
Default remains unwaived or uncured, such penalties and interest increase to an
amount beyond the amount of such bond, Tenant shall furnish to Landlord and
Trustee such additional corporate surety bond or bonds, satisfactory to Landlord
and Trustee as beneficiary, in such amount as may be necessary to fully cover
such increases in said taxes, assessments, or other charges and penalties and
interest thereon as aforesaid.
(b) With the exception of Global Basic Rent, which shall be due and
payable as set forth in Section 2.1, Tenant shall pay, within twenty (20) days
after receipt of Landlord's written demand and supporting documentation therefor
unless otherwise specified herein, all amounts which Tenant shall otherwise be
obligated to
<PAGE> 17
pay to Landlord or otherwise by reason of the provisions of this Lease, provided
that Tenant shall not be required to pay any amount prior to the date such
amount is due and payable hereunder.
II.5 Evidence of Tax Payment. At any time upon request, Tenant shall
provide Landlord with a true copy of a receipted bill, if available, for any
tax, assessment or other governmental charge which has become due and payable by
Tenant under this Lease or any other evidence reasonably satisfactory to
Landlord of the payment thereof.
II.6 Global Basic Rent Adjustment. (a) The parties hereto contemplate that
the Costs of the Project leased hereunder ("Costs of the Project"), as defined
in Section 1.1 of the Loan Agreement, will equal the aggregate sum of Thirty
Million Three Hundred Thousand Dollars ($30,300,000.00), such amount being
herein also sometimes called the "Target Cost." If the Project is completed for
less than the Target Cost (resulting in the transfer of such surplus amount of
Bond proceeds from the Acquisition Fund to the Bond Fund (each as defined in the
Loan Agreement) under Section 5.3(b) of the Indenture, the application of such
amount by the Trustee under Section 5.4(a) of the Indenture to the redemption of
Bonds at par pro rata at the earliest possible date and the corresponding
reduction in the amount of principal and interest payments due on the Bonds),
the Global Basic Rent during the Primary Term shall be reduced as follows: (1)
Basic Rent during the portion of the Primary Term occurring after the Occupancy
Commencement Date shall be reduced proportionately, and (2) quarterly Company
Payments shall be reduced by an amount equal to (x) the product of 0.5% times
such surplus amount of bond proceeds divided by (y) four (4).
(b) The Bonds are subject to an interest rate increase on July 1, 2009 or
if such day is not a business day, the next succeeding business day (the "Rate
Adjustment Date"), as provided in Section 2.2 of the Indenture, up to a maximum
of thirteen percent (13%) per annum. Landlord and Tenant agree that, upon
receiving notice from the Trustee that such an increase in rate has occurred,
the Basic Rent component of the Global Basic Rent during the remaining portion
of the Primary Term shall be increased accordingly.
<PAGE> 18
(c) Following the occurrence of any circumstances set forth in Section 6.9
of the Loan Agreement requiring or permitting the partial prepayment of Bonds,
such amounts will be used to redeem Bonds as provided in Section 3.1 of the
Indenture. If any such redemption occurs during the Primary Term, the Basic Rent
component of the Global Basic Rent during the remaining portion of the Primary
Term shall be reduced proportionately.
II.7 Option Period Rent Rates. (a) The Global Basic Rent for the First
Option Period and for any subsequent Option Period shall be determined as set
forth hereinafter prior to the commencement of each such Option Period by
negotiation between the parties hereto and shall, within the limitations
hereinafter set forth, be based on a negotiated fair market rental rate based
upon the prevailing rental rate for similar industrial space in the vicinity of
Olive Branch, Mississippi including southeast Shelby County, Tennessee,
comparably improved (without reference, however, to Tenant's Fixtures and
Equipment), and of substantially similar age, quality, layout, building size and
land size as that existing in the Project ("Fair Market Rental").
If the parties hereto fail to reach agreement on the Global Basic Rent for
any Option Period within thirty (30) days prior to the commencement of such
Option Period, the Fair Market Rental determination underlying the relevant
amount of Global Basic Rent for such Option Period shall be determined as
follows:
(i) Landlord and Tenant shall each appoint a qualified, licensed,
experienced real estate appraiser, who is a Member of the American
Institute of Appraisers, and who is familiar with the rentals being
charged in the vicinity of Olive Branch, Mississippi, including southeast
Shelby County, Tennessee for industrial space of a similar kind and
nature, the appointment of each appraiser to be made within fifteen (15)
days following written notice of either party to the other of the
necessity of making such appointment.
(ii) The two (2) appraisers, as so selected, shall themselves select
a third appraiser whose qualifications meet those set forth for the first
two (2) appraisers, the appointment of the third appraiser to take place
within fifteen (15) days following the appointment of the first two (2)
appraisers.
<PAGE> 19
(iii) The three (3) appraisers shall then reach a determination as
to whether the parties shall employ, as the Fair Market Rental upon which
the Global Basic Rent for the Option Period in dispute will be based, the
rentals proposed by the Landlord or the rentals proposed by the Tenant.
(iv) The decision of a majority of the three (3) appraisers shall be
binding.
(v) Each party shall pay the costs, fees and expenses of its own
appraiser, and the cost of the third appraiser shall be shared equally by
the parties. If either party shall fail to select an appraiser within the
time set forth above, the non-defaulting party may select such appraiser
for the defaulting party. If two (2) appraisers, as selected, fail to
agree upon an appointed third appraiser, both appraisers shall be
dismissed and the matter shall be submitted to arbitration under the
applicable provisions of the American Arbitration Association.
(b) During the First Option Period, the Global Basic Rent shall be the
Fair Market Rental of the Project.
(c) During the Second Option Period, the Global Basic Rent shall be the
Fair Market Rental of the Project.
(d) [RESERVED.]
(e) [RESERVED.]
(f) Any rental payment not made when due shall be subject to the Default
Rate (as defined in the Loan Agreement).
ARTICLE III
<PAGE> 20
USE, OPERATION, MAINTENANCE AND ALTERATION
III.1 Use & Occupancy. (a) Tenant agrees to use and occupy the Project as
a distribution facility, for any other lawful uses in connection with its
business, and for other permitted related uses, all of which shall be consistent
with the provisions of Section 57-10-401, et seq. of the Mississippi Code of
1972, as amended, and for no other purpose. Tenant further agrees that in the
use and occupancy of the Project and in the conduct of its business therein,
Tenant will comply with all requirements of all applicable laws, ordinances,
orders and regulations of all governmental authorities having jurisdiction.
Tenant represents that, to its best knowledge, no Hazardous Substances (as
hereinafter defined) have been stored, processed or disposed of on or released
or discharged (including ground water contamination) from the Property which
would materially and adversely affect the value of the Project and no above or
underground storage tanks exist on the Property, and except as set forth on
Exhibit "D" attached hereto, no private or governmental lien or judicial or
administrative notice or action related to Hazardous Substances or other
environmental matters has been filed against the Property or otherwise issued to
or received by Tenant with respect to the Property.
Tenant will maintain at all times all the Property in material compliance
with all Environmental Laws (as hereinafter defined), will handle any Hazardous
Substances located, stored, used or processed at the Property in material
compliance with all Environmental Laws and will not dispose of, release,
discharge, handle, use, process or store any Hazardous Substances in violation
of any Environmental Laws, and will promptly notify the Landlord and Trustee
following receipt of any notice, action, lien or other similar action alleging
either the location of any Hazardous Substances or the violation of any
Environmental Laws with respect to the Property.
As used herein, "Environmental Laws" means all local, state or federal
laws, rules or regulations pertaining to environmental regulation, contamination
or cleanup, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1976 or any state lien or superlien
or environmental cleanup statutes.
<PAGE> 21
Also as used herein, "Hazardous Substances" shall mean and include all
hazardous and toxic substances, wastes or materials, any pollutants or
contaminants (including, without limitation, asbestos and raw materials which
include hazardous constituents), or any other similar substances or materials
which are included under or regulated by any Environmental Laws.
Except as to those arising or resulting from the acts or omissions of the
Landlord or its agents, the Tenant agrees to indemnify and save the Landlord,
the Issuer and the Trustee harmless from any and all claims, damages, demands,
expenses, liabilities and losses of any nature whatsoever (including, without
limitation, all reasonable attorney's fees and expenses) asserted by or on
behalf of any person arising out of, resulting from, or in any way connected
with any and all claims, demands, judgments, damages, actions, causes of action,
injuries, administrative orders, consent agreements and orders, liabilities,
penalties, costs, and expenses of any kind whatsoever including claims arising
out of loss of life, injury to persons, property, or business and/or damages to
natural resources in connection with the activities of Tenant or its
predecessors in interest, or third parties who have trespassed on the Project,
or any of them, whether or not occasioned wholly or in part by any condition,
accident or event caused by any act or omission of Tenant which (i) arises out
of the actual, alleged or threatened discharge, dispersal, release, storage,
treatment, generation, disposal or escape of pollutants or other toxic or
Hazardous Substances, including any solid, liquid, gaseous or thermal irritant
or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals
and waste (including materials to be recycled, reconditioned or reclaimed), or
(ii) actually or allegedly arises out of the use, specification or inclusion of
any product, material or process containing chemicals, the failure to detect the
existence or proportion of chemicals in the soil, air, surface water or
groundwater, or the performance or failure to perform the abatement of any
pollution source or the replacement or removal of any soil, water, surface water
or groundwater containing chemicals.
(b) Subject to Tenant's rights under Sections 3.2 and 5.3 hereof,
throughout the Primary Term of this Lease (and all Option Periods) Tenant will,
at its own expense, keep the Project, including, but not limited to, the HVAC
and roof of the building, in good condition, repair and working order (ordinary
wear and tear excepted) making all repairs and replacements thereto (whether
ordinary or extraordinary, structural or non-structural, foreseen or
unforeseen), and operate the Project in a sound and economic manner (provided,
however, that nothing
<PAGE> 22
contained herein shall be construed to impair any rights of Tenant against third
parties). Notwithstanding the foregoing, but subject to the provisions of
Section 10.21, Landlord shall be responsible for all damages (and repairs
necessitated thereby) caused by Landlord, its agents, employees, invitees and/or
contractors. Nothing contained in this Lease shall give Tenant any right to
offset against amounts due as Basic Rent for claims it may have against
Landlord. Subject to Tenant's rights under Sections 3.2 and 5.3 hereof, at its
expense Tenant will maintain the Project in compliance with (i) all laws,
ordinances, orders and regulations of all governmental authorities applicable to
the Project, and (ii) all requirements of those insurance companies with which
Tenant maintains the insurance policies required by Article IV hereof (provided,
however, that nothing contained herein shall be construed to impair any rights
of Tenants against third parties). Tenant also shall comply with and abide by
all covenants, restrictions, conditions and other matters, if any, to which
title to the Project is subject as of the Occupancy Commencement Date,
including, without limitation, those certain easements described on Exhibit "E"
hereto, and shall comply with all such matters becoming effective subsequent to
the Occupancy Commencement Date if such matters were created by the acts of or
agreed to by Tenant. A final unappealable judgment of any court of competent
jurisdiction or the admission by Tenant in any action or proceeding that Tenant
has violated any laws, statutes, ordinances, rules, regulations, requirements or
such matters affecting title in the use of the Project shall conclusively
determine that fact as between the Landlord and the Tenant. In connection with
any repairs, renewals or replacements which are covered by warranties received
by Landlord in connection with the construction or purchase of the Project,
Landlord shall exert its best efforts to cause the issuer of such warranties, if
any, to make such repairs, renewals or replacements.
(c) In the event that any building, structure or other improvement erected
or made by Tenant, at any time during the term of this Lease, shall encroach
upon any property, street, right-of-way, easement or set-back line or shall
violate the agreements or conditions contained in any restrictive covenant
affecting the Project, then, promptly after written request of the Trustee or of
any person affected by any such encroachment, violation, hindrance, obstruction
or impairment, the Tenant shall, at its expense, either: (i) obtain valid and
effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation, hindrance, obstruction or
impairment; or (ii) make such changes in the buildings, structures or other
improvements and take
<PAGE> 23
such other action as shall be necessary to remove such encroachments, hindrances
or obstructions or to end such violations or impairments.
(d) The Tenant anticipates that the Project will result in the creation of
134 full-time jobs.
III.2 Use of Insurance Proceeds. (a) In the event of damage or destruction
resulting in an award of Net Proceeds (as defined in Section 4.4 hereof) in
excess of $5,000,000, Tenant shall not be required to repair or restore the
Project if, while any Bonds remain Outstanding, the award is made during the
last year of the term of this Lease, or if no Bonds remain Outstanding, during
the last year of the Primary Term or any Option Period, unless the Tenant has
previously exercised an option to extend for the next ensuing Option Period (if
any then be). If the Tenant has exercised its option to extend for the next
ensuing Option Period, Tenant shall be obligated to repair and restore the
portion of the Project remaining after the event of damage or destruction as
provided above. In the event that Tenant has not exercised its option to extend
and is not, therefore, obligated to repair or restore the Project as provided
above, the Landlord shall be required to promptly repair and restore the Project
in accordance with Section 7.1(a) of the Loan Agreement. If, while the Bonds
remain Outstanding or the Indenture has not been released, such repair or
restoration by Landlord is not commenced and prosecuted promptly, Tenant agrees
to promptly repair and restore the Project [in which event, Landlord will
indemnify Tenant for any and all costs and expenses incurred by Tenant with
respect thereto, Tenant expressly acknowledging that no right of offset with
respect to payment of Basic Rent to Trustee or the payment of other amounts
(except Company Payments) hereunder shall arise in such event]. If the building
is structurally sound and the remaining portions accessible, Tenant shall have
the option to remain in the unrestored building on the Property until the end of
the Primary Term of this Lease, or the then current Option Period, as the case
may be, at which time the Tenant's rights of continued occupancy shall cease and
terminate for all purposes.
(b) If the Project shall be less than totally damaged or destroyed at any
time that any Bonds remain Outstanding, the Loan Agreement has not been
terminated or the Indenture has not been released, if the loss is covered by
hazard insurance, subject to the provisions of Section 3.2(a), Net Proceeds of
insurance resulting from any claim in an amount less than $500,000 shall be paid
to Tenant and shall be used promptly to repair and restore
<PAGE> 24
the Project. If such Net Proceeds are in excess of $500,000, such amounts shall
be made payable to and deposited with the Trustee and disbursed in accordance
with the provisions of Section 7.1(a) of the Loan Agreement. If the partial loss
is in excess of $500,000 and is not an insured loss, or if insurance proceeds
required to be deposited with the Trustee are insufficient to cover costs of
repair and reconstruction, subject to Section 3.2(a), Tenant shall deposit sums
sufficient to cover repair and reconstruction costs with the Trustee who shall
disburse in accordance with Section 7.1(a) of the Loan Agreement. If all Bonds
have been redeemed, the Loan Agreement terminated and the Indenture released,
all Net Proceeds shall be made payable to Tenant for use in repair and
restoration of the Project. In either a case of an insured or uninsured loss,
subject to the provisions of this Section 3.2(a), Tenant shall promptly replace,
repair, rebuild or restore the Project to substantially the same condition,
value and utility as an operating entity as existed prior to such damage or
destruction, with such changes, alterations and modifications (including the
substitution and addition of other property) as may be desired by Tenant and
submitted to the Trustee for approval, if required in accordance with Section
3.3 hereof, and as will not impair the overall operating utility, use, value or
service capacity or the character of the Project. Tenant shall be entitled to
retain any balance of such Net Proceeds of insurance remaining after payment of
all costs of such restoration.
(c) (i) If the Project shall be totally destroyed at any time,
whether or not any Bonds remain Outstanding, or the Loan Agreement
terminated or the Indenture released, and if there has been no default
hereunder, Tenant shall have a period of forty-five (45) days from the
date of destruction to decide whether or not to reconstruct the Project,
or to terminate this Lease. If, while any Bonds remain Outstanding, Tenant
elects by written notice to Landlord and Trustee to terminate the Lease,
Landlord shall direct the Trustee to effect a redemption of the Bonds in
whole under Section 3.1(a) of the Indenture with the Net Proceeds of
insurance. If there is any deficiency in Net Proceeds necessary to redeem
the Bonds, Tenant shall pay such amounts; if there are any excess Net
Proceeds following redemption, Tenant shall be entitled to such amounts.
If Tenant elects to repair or reconstruct the Project, Net Proceeds of
insurance shall be deposited with the Trustee and disbursed in accordance
with the provisions of Section 7.1(b) of the Loan Agreement. If the loss
is not an insured loss, or if insurance proceeds are insufficient to cover
the costs of repair and reconstruction, Tenant shall deposit sums
sufficient to cover repair and reconstruction costs with the Trustee who
shall disburse in accordance with Section 7.1(b) of
<PAGE> 25
the Loan Agreement. Following reconstruction of the Project in accordance
with Section 7.1(b) of the Loan Agreement, Tenant shall be entitled to
receive any unexpended Net Proceeds of insurance.
(ii) If at any time following an election by Tenant to repair or
reconstruct the Project under this Section, an Event of Default shall
occur hereunder and be continuing, the Trustee must obtain the written
consent of sixty-six and two-thirds percent (66 2/3%) of Bondholders for
Tenant to obtain funds from the insurance loss trust account held by
Trustee pursuant to the Indenture, which consent shall not be unreasonably
withheld or delayed. While obtaining such consent, the Trustee may cease
to honor requisitions for disbursements for repair and reconstruction and
may proceed to accelerate the Bonds under the Indenture.
(iii) Landlord agrees to join in any direction necessary to effect
the exercise by Tenant of the options set forth in subsection (i).
(iv) For the purposes of this section (c), "totally destroyed" shall
mean damage or destruction to the extent of fifty percent (50%) or more of
the usable floor space in the building on the Project or which has the
effect of reducing Tenant's distribution capacity in the building on the
Project to fifty percent (50%) or less of full, pre-casualty capacity.
(d) All such replacements, repairs, rebuilding or restoration made
pursuant to this Section, whether or not requiring the expenditure of the
Tenant's own money, shall automatically become a part of the Project, as if the
same were specifically described herein.
(e) At all times prior to the termination of this Lease in accordance with
subsection (c) above following total destruction of the Project, Tenant shall
remain liable for Global Basic Rent and all other expenses payable by Tenant in
accordance with this Lease.
<PAGE> 26
III.3 Alterations; Improvements. (a) The provisions of this Section 3.3
shall be subject to, and, if in conflict with, superseded by, the provisions of
Section 3.2 hereof. Subject to the preceding sentence, and subject to the Loan
Agreement, Tenant may make, from time to time, permanent remodeling,
alterations, improvements or expansions to the Project which the parties hereto
understand and intend to constitute fixtures and permanent accessions to the
Project ("Permanent Improvements"), subject, however, in all cases to the
following conditions, which Tenant shall observe and perform:
(i) Prior to making any alterations, improvements or expansions to
the Project which: (A) do not affect the outside or facade of the building
or do not involve removal of any part of any floor, load-bearing wall,
column, girder or other support, or do not affect roof load and (B)
involve a cost which Tenant reasonably and in good faith estimates to be
less than Five Hundred Thousand Dollars ($500,000.00), Tenant shall
furnish to Landlord and Trustee information (including sketches and
drawings which may be prepared by officers or employees of Tenant) as to
the proposed changes in walls and partitions or relocations thereof and
plans and specifications, if available, covering any proposed work, but
Tenant may proceed forthwith to make such specified alterations or
improvements. The cost of all such improvements shall be paid by Tenant.
(ii) Prior to making any alterations, improvements or expansions to
the Project which: (A) affect the outside or facade of the building, or
involve removal of any part of any floor, load-bearing wall, column,
girder or other support, or affect roof load, or (B) involve a cost which
Tenant reasonably and in good faith estimates to be Five Hundred Thousand
Dollars ($500,000.00) or more, Tenant shall furnish to Landlord and
Trustee plans and specifications or other detailed information covering
the proposed work, and Tenant shall not commence such work unless within
thirty (30) business days thereafter, Landlord and Trustee shall either
approve or shall not advise Tenant of Landlord's disapproval of such plans
and specifications, which approval Landlord and Trustee will not
unreasonably withhold. Tenant acknowledges that Trustee will submit the
proposed alteration, improvement or expansion to the Project to the
Bondholders and Trustee will either approve or disapprove of such proposed
work based upon the recommendation of Holders of sixty-six and two-thirds
percent (66 2/3%) of the Bonds then
<PAGE> 27
Outstanding with the affirmative recommendation of such Holders not to be
unreasonably withheld or delayed. The cost of all such improvements shall
be paid by Tenant, and such improvements shall automatically become a part
of the Project as if the same were specifically described herein.
(iii) Notwithstanding the foregoing, Landlord and Tenant contemplate
the future expansion of the Improvements by the construction of an
addition of approximately 320,000 square feet, at a cost not to exceed
$25,000,000 (the "Addition") as to which no further approval of the
Trustee or the Bondholders shall be required. At such time as Tenant in
its sole and absolute discretion determines that it needs the Addition,
Landlord and Tenant shall cooperate in good faith with respect to (a)
development by the Landlord of detailed plans and drawings meeting
Tenant's specifications for the Addition, (b) determination by the
Landlord and approval by Tenant of detailed estimated costs of
construction of the Addition, (c) the setting of an estimated Tenant
occupancy date for the Addition, and (d) issuance by the Issuer and sale
of Additional Bonds (as defined in the Indenture) pursuant to Section 3.2
of the Loan Agreement and Section 2.10 of the Indenture (the "Addition
Additional Bonds") in an amount equal to the full amount of the detailed
estimated costs of construction of the Addition, plus a contingency
reserve and plus a construction period interest reserve, which Addition
Additional Bonds shall be pari passu in ranking and shall share equally
and ratably in all security with the Bonds. At such time as the Addition
Additional Bonds are issued, this Lease shall be amended (subject at all
times to the proviso that, if any of the following specific contemplated
amendments would likely result in Tenant not being allowed to treat this
Lease as amended as an operating lease for Tenant's financial accounting
purposes, the parties hereto shall negotiate alternative amendments in
good faith to allow Tenant to treat this Lease as amended as an operating
lease for Tenant's financial accounting purposes, with such alternative
amendments being as close as possible to the following specific
contemplated amendments) to provide that (a) the Addition shall be part of
the Project; (b) the Primary Term of the Lease shall be extended to end at
the date that is the same date as the stated maturity of the Addition
Additional Bonds; (c) the rent for the Addition during the Primary Term
(i) shall commence on the earlier of the date on which Tenant commences
actual productive use (as distinct from installation of Fixtures and
Equipment) of the Addition as a distribution
<PAGE> 28
facility and (10) business days following receipt by Tenant of a copy of
all items specified in Section 4.4 of the Loan Agreement with respect to
the Addition (the "Addition Rental Commencement Date"), (ii) shall be
equal to the sum of all debt service payments (principal, premium, if any
and interest) on the Addition Additional Bonds (after any reduction in the
principal amount thereof by reason of prepayment thereof as a result of
the actual costs of the Addition being less than the original principal
amount of the Addition Additional Bonds) relating to the period after the
Addition Rental Commencement Date (Basic Rent), plus an annual amount
equal to one-half of one percent (0.5%) of the lesser of (A) the original
principal amount of the Addition Additional Bonds and (B) the actual costs
of construction of the Addition (Company Payments), plus all Additional
Rent applicable to the Addition, and (iii) shall, to the fullest extent
possible, be payable as and when Basic Rent, Company Payments and
Additional Rent are payable pursuant to Article II of this Lease; (d) the
rent for the Property and the Improvements during that portion of the
Primary Term (as amended) that extends beyond the end of the Primary Term
as it existed prior to the amendment shall be equal to that rent which
would otherwise be due under the First Option Period or the Second Option
Period had the Primary Term not been extended, i.e., the Global Basic Rent
during years one through ten of the extended Primary Term shall be equal
to the Fair Market Rental of the Project; and (e) the First Option Period
shall commence at the conclusion of the Primary Term as extended.
Such Permanent Improvements shall become part of the Project and shall be
subject to this Lease. In addition, the parties hereto understand and intend
that such Permanent Improvements shall be subject to the lien of the Deed of
Trust.
(b) The parties hereto intend that any Fixtures and Equipment installed by
Tenant for its use during the term hereof shall be and remain personal property,
shall not constitute fixtures and shall not become part of the Project subject
to this Lease, nor shall the lien of the Deed of Trust attach thereto. Any such
items shall be and remain the property of Tenant and may be removed by Tenant
upon the termination of this Lease. Tenant shall effect such removal solely at
Tenant's expense, subject to the following qualifications:
<PAGE> 29
(i) Tenant at its own expense shall repair any damage to the Project
caused by such removal, including, without limitation, damage caused by
removal of air conditioning installations, equipment, air ducts and vents,
conduits of every nature, false floors and floor ramps, electrical
switches, panels and electrical wiring which were installed by the Tenant.
Such repairs shall include safe and proper covering of any and all exposed
wiring occasioned by removal of any electrical equipment, including
computers. In no event shall Tenant be entitled to remove any items not
installed and paid for by the Tenant.
(ii) Any alterations or improvements installed in accordance with
the terms of this Lease on the Project whether before or after the
Occupancy Commencement Date and not removed by Tenant upon termination of
this Lease shall forthwith become the property of Landlord. However,
should Tenant fail to remove any alterations or improvements to the
Project which Tenant is required to remove, then and in such event,
Landlord may cause the same to be removed at Tenant's expense, and Tenant
shall reimburse Landlord for (A) the reasonable cost of the removal; (B)
the reasonable cost of repairing any damage to the Project caused by such
removal; (C) rent lost from successor lessees during the period of time
reasonably required for such removal; and (D) any other damages suffered
by Landlord as a result thereof.
III.4 Signage. Tenant may install a sign or signs on or in the Project
which sign or signs may be selected by Tenant in its discretion. Tenant shall
remove all such signs at the termination of this Lease and shall promptly
repair, to the reasonable satisfaction of Landlord, any damage to the Project
caused by such removal.
III.5 Liens; Encumbrances. Except as provided in Section 2.4 hereof,
Tenant shall not create or permit to be created or to exist any lien or
encumbrance which might be or become a lien or encumbrance against the Project,
except any lien against Landlord caused by Landlord's actions or inactions and
not by Tenant's actions or inactions. If such lien or encumbrance arises from a
matter other than taxes or assessments by a governmental body, or the payment of
amounts in lieu of taxes to a governmental body, Tenant may defer payment and
suffer the lien to the extent permitted by law so long as the validity or amount
thereof is contested by Tenant in good faith and Tenant has secured a court
order from a court of competent jurisdiction or reasonable assurance from
<PAGE> 30
competent legal counsel that in the interim and during said contest no action
can be taken against the Project by the party holding such lien. If at any time
while an Event of Default has occurred hereunder and is continuing a lien or
encumbrance arises from Tenant's acts or omissions, Tenant, if requested by
Landlord or Trustee so to do, shall furnish to Landlord and Trustee a corporate
surety bond or bonds, satisfactory in form and substance to Landlord and
Trustee, in an amount equal to the amount of the lien, plus all applicable
penalties and interest thereon, which are estimated to accrue during the period
of the contest, such bond to be issued by an insurance company satisfactory to
Landlord and Trustee. In the event that while an Event of Default has occurred
and is continuing during the period of Tenant's good faith contest such
penalties and interest increase to an amount beyond the amount of such corporate
surety bond, Tenant shall furnish to Landlord and Trustee such additional bond
or bonds, similarly satisfactory to Landlord and Trustee, in form and substance,
in such amounts as may be necessary to fully cover the lien and all penalties
and interest thereon and likewise issued by an insurance company satisfactory to
Landlord and Trustee.
III.6 Indemnification. Subject to the provisions of Section 10.21, Tenant
does hereby indemnify Landlord against any liability, penalty, expense or
damages which Landlord may incur or to which Landlord may be subjected by reason
of Tenant's possession, occupation, operation, alteration, maintenance, repair
or use of the Project.
III.7 Inspection of Project. Landlord, Issuer and Trustee shall be
entitled to make reasonable visits to examine and inspect the Project during
normal business hours (but shall be under no obligation to make any such visits
or inspections), all in compliance with Section 12.5 of the Loan Agreement. Such
inspections shall be scheduled at least twenty-four (24) hours in advance so as
not to unduly interfere with Tenant's business activities, except that in case
of emergency, Landlord may enter the Project without prior notice to Tenant.
III.8 Landlord's Entry to Project Following Default. At any time following
the tenth (10th) day after Tenant shall have received from Landlord any notice
of default hereunder and continuing until Tenant shall have cured such default,
and at any time within twelve (12) months prior to the termination of the term
of this Lease, Tenant shall permit Landlord and any authorized representatives
of Landlord to enter the Project during normal business hours to exhibit the
same for the purpose of future leasing and to display on the Project usual "For
Lease"
<PAGE> 31
signs. At any time during the term of this Lease, Landlord and any authorized
representatives of Landlord may enter the Project during normal business hours
to exhibit the Project for the purpose of sale or of mortgage or other
hypothecation. So long as Tenant is not in default hereunder, Landlord shall
give Tenant at least twenty-four (24) hours prior notice of Landlord's intent to
enter to exhibit the Project, and such entry shall be made so as not
unreasonably to interfere with Tenant's use of the Project.
ARTICLE IV
INSURANCE
IV.1 Insurance Requirements. Tenant shall maintain insurance against such
risks and in such amounts as the Landlord and Trustee shall reasonably determine
to be proper for buildings and commercial facilities of like size and type, and
shall pay as the same become due and payable, all premiums with respect thereto,
including, but not necessarily limited to:
(a) All risk or broad form named perils coverage at all times equal
to one hundred percent (100%) of the replacement cost of the Improvements
exclusive of excavations and foundations. Earthquake coverage equal to one
hundred percent (100%) of the replacement cost of the Improvements
exclusive of excavations and foundations (so long as commercially
available);
(b) comprehensive general liability insurance with $5,000,000.00
minimum single limit for injury to persons or property, but in no event
less than that provided under the Tenant's primary and, if any, excess
coverage;
(c) worker's compensation coverage, disability benefits insurance
and any other type of insurance required by the laws of the State of
Mississippi;
(d) Rental value insurance in an amount equal to twelve (12) months
of all Basic Rent payable hereunder.
<PAGE> 32
Any of the insurance required in paragraphs (a) through (d), inclusive,
may provide an all risk deductible provision in an amount not exceeding $500,000
and an earthquake deductible provision not to exceed fifteen percent (15%) of
the building's replacement cost value. The Tenant shall be a self-insurer to the
extent of the amount of the deductibles obtained.
Until such time as the construction of the Improvements shall have been
completed, Landlord shall maintain builder's risk insurance to the full
insurable value (with deductible provision not to exceed $500,000) of the
Improvements, and Landlord shall be a self-insurer to the extent of the amount
of the deductible so obtained. During such construction period, Tenant shall
have the responsibility for maintaining any insurance coverage it deems
necessary with respect to the Fixtures and Equipment installed by Tenant at the
Project. Following the Occupancy Commencement Date, Tenant covenants to maintain
insurance coverage in an amount equal to full replacement value with respect to
any of its property located at the Project, with a deductible provision in an
amount not exceeding $500,000.00.
The insurance required of Tenant by this Section 4.1 shall be maintained
in full force and effect at all times following the Occupancy Commencement Date.
Each insurance policy provided in accordance with this Section 4.1 shall
include a provision to the effect that any act or omission of Tenant or
Landlord, as the case may be, shall not prejudice Issuer's or Trustee's rights
thereunder. Any insurance provided for in this Article IV may be effected by a
policy or policies of blanket insurance provided that the amount of the total
insurance allocated to the Improvements shall be such as to furnish in
protection the equivalent of separate policies in the amounts herein required.
Subject to Section 3.2 hereof, Tenant shall remain liable and responsible to
Landlord for keeping the Project in good repair and condition whether or not
covered by insurance and whether or not said insurance coverage is adequate to
repair and/or replace the Improvements.
IV.2 Form of Policy. (a) Each insurance policy required by Section 4.1
hereof (i) shall be issued by a financially responsible insurer (or insurers) of
recognized standing, legally authorized to write the respective
<PAGE> 33
insurance, (ii) shall be in such form and with such provisions (including,
without limitation, the loss payable clause, the waiver of subrogation clause
and the designation of the named insured parties) as are generally considered
standard provisions for the type of insurance involved, and (iii) shall prohibit
cancellation or modification by the insurer without at least thirty (30) day's
prior written notice to the Landlord and the Trustee. Prior to the expiration of
any such policy, the Tenant shall furnish the Landlord and Trustee satisfactory
evidence that the policy has been renewed or replaced, unless Trustee shall have
informed Tenant in writing that such insurance is no longer required. Without
limiting the generality of the foregoing, all insurance policies maintained
pursuant to Section 4.1(a) hereof shall name the Landlord, Tenant, Issuer and
Trustee as the parties insured thereunder as their respective interests may
appear; all insurance policies maintained pursuant to Section 4.1(b) hereof
shall name the Tenant as the insured and the Landlord and Trustee as additional
insureds; and each such policy shall provide that losses thereunder shall be
adjusted with the insurer by the Tenant or Landlord, on behalf of the insured
parties, in the case of the policy described in Section 4.1(a) hereof, with the
approval of the Trustee as to settlement of any claims in excess of $500,000,
but all such adjustments shall be subject to the provisions hereof. If there is
any claim in excess of $500,000.00 for loss or damage covered under the policy
described in Section 4.1(a) hereof, all proceeds of insurance resulting
therefrom shall be paid directly and solely to the Trustee for application as
provided in Section 7.1 of the Loan Agreement.
(b) Certificates and opinions of the insurers or an agent or agents of the
insurers acceptable to the Trustee, shall be deposited with the Trustee on or
before the Occupancy Commencement Date, upon renewals of policies and at any
other time, at the request of the Trustee.
IV.3 Notice of Damage or Destruction. If the Project shall be damaged or
destroyed (in whole or in part) at any time, Tenant shall promptly give written
notice thereof to the Landlord and the Trustee.
IV.4 Net Proceeds. As used herein, "Net Proceeds," when used with respect
to any insurance or condemnation award, means the gross proceeds from the
insurance or condemnation award with respect to which that term is used
remaining after the payment of all expenses (including reasonable and documented
attorney's fees
<PAGE> 34
and any Extraordinary Expense [as defined in the Loan Agreement] of the Trustee)
incurred in the collection thereof.
ARTICLE V
CONDEMNATION
V.1 Notice of Condemnation. Forthwith upon receipt by Tenant or Landlord
of any notice of the institution of any proceeding for the taking of the Project
or any part thereof by the exercise of any power of condemnation affecting the
Project or any part thereof, the party receiving such notice shall promptly give
written notice thereof to the other party, and the Trustee. Subject to Section
7.4 of the Loan Agreement, Tenant, in cooperation with Landlord, shall have the
right to participate in any such proceedings and to be represented by counsel
for the purpose of protecting its interest hereunder. Landlord and Tenant shall
each bear their own expenses incurred in such proceeding. Notwithstanding
anything to the contrary above, as long as the Bonds remain Outstanding and the
Indenture has not been released, any awards in excess of $500,000.00 resulting
from the damages to or taking of the Project, including without limitation any
awards for the leasehold estate of the Tenant or the fee estate of the Landlord,
shall be paid solely and directly to Trustee for application in accordance with
Section 7.2(a) of the Loan Agreement.
V.2 Partial Condemnation. (a) If at any time any part of title to, or the
partial use of the Project shall be taken by condemnation or pursuant to the
exercise of the power of eminent domain by any governmental authority
("Condemnation") and any Bonds are still Outstanding, the Loan Agreement has not
been terminated or the Indenture has not been released and satisfied, Net
Proceeds of Condemnation resulting from any award in an amount less than
$500,000 shall be paid to Tenant and used promptly to replace such condemned
portion of the Project. If Net Proceeds of Condemnation are in excess of
$500,000, at any time when Bonds remain Outstanding, the Loan Agreement has not
been terminated and the Indenture has not been released, such amount shall be
paid solely and directly to the Trustee and disbursed in accordance with Section
7.2(a) of the Loan Agreement; at any time the Bonds have been redeemed, the Loan
Agreement has been terminated and the Indenture has been released such amounts
shall be disbursed in accordance with Section 5.2(c). In the event such proceeds
are insufficient to
<PAGE> 35
restore the Project, subject to Section 5.3, Tenant shall pay the additional
amounts necessary to carry out such restorations, and if Tenant has been
obligated by this Section 5.2 to deposit Net Proceeds of Condemnation with
Trustee, Tenant shall deposit such additional amount with the Trustee. All such
amounts deposited with the Trustee shall be used to promptly restore the Project
(excluding any part thereof not taken by Condemnation) to substantially the same
condition, value and utility as an operating entity as existed prior to such
Condemnation.
(b) If any Bonds remain Outstanding, or the Indenture has not been
released, then any balance of such proceeds of any Condemnation award remaining
after payment of all costs of such restoration shall be used to redeem Bonds at
par pro rata under Section 3.1(f) of the Indenture. Tenant shall be entitled,
under Section 2.6(c) hereof, to a proportionate reduction in the Basic Rent
component of Global Basic Rent.
(c) Any balance of such Net Proceeds of Condemnation remaining after
payment of all costs of such restoration and, if any Bonds are then Outstanding,
after redemption of all such Bonds as provided in the preceding subsection (b),
shall be allocated between Landlord and Tenant in the proportion which the value
of Landlord's fee interest in the Project and the value of Tenant's leasehold
interest in the Project respectively bear to the total amount of the Net
Proceeds of Condemnation.
If both Landlord and Tenant join in an application to the commissioners or
court in the condemnation or eminent domain proceeding praying that allocation
of the award in accordance with the aforesaid formula be made in such
proceeding, and allocation of the award in accordance with the aforesaid formula
is made in such proceeding, the allocation so made shall be conclusive upon
Landlord and Tenant. If such application and/or such allocation shall not be so
made, the valuation of Landlord's and Tenant's interests and the allocation of
the award shall be determined by agreement between them, or, if they are unable
to agree, the values shall be determined by submission to arbitration pursuant
to Article VIII hereof.
V.3 Substantial Condemnation; Condemnation in Excess of $5,000,000. (a) In
the event that a taking by eminent domain or condemnation will affect
substantially all [fifty percent (50%) or more] of the usable floor space in the
Improvements or will have the effect of reducing Tenant's distribution capacity
in the Improvements to fifty
<PAGE> 36
percent (50%) or less of full, pre-condemnation capacity, Tenant shall have the
option, to be exercised by delivery of a written notice to Landlord and Trustee
within forty-five (45) days after Tenant's receipt of notice from Landlord or
the condemning authority of such taking, to terminate this Lease. While any
Bonds remain Outstanding, upon receipt of such notice, Landlord shall direct the
Trustee to effect a redemption of the Bonds in whole under Section 3.1(a) of the
Indenture with the Net Proceeds of Condemnation. If there is any deficiency in
Net Proceeds necessary to redeem Bonds, Landlord will pay such amounts; any
excess Net Proceeds following redemption shall be allocated between Landlord and
Tenant according to the formula set forth in Section 5.2(c). If Landlord fails
to pay the deficiency, then Tenant shall either: (i) pay such deficiency
required to redeem the Bonds; or (ii) promptly repair or restore the Project in
accordance with Section 7.2 of the Loan Agreement [in which event, Landlord will
indemnify Tenant for any and all costs and expenses incurred by Tenant with
respect thereto, Tenant expressly acknowledging that no right of offset with
respect to payment of Basic Rent to Trustee or the payment of other amounts
(except Company Payments) hereunder shall arise in such event]. Such termination
of this Lease shall only be effective upon the happening of the earlier of the
following events:
(i) The date of delivery of possession to the condemning authority; or
(ii) A date mutually agreed to by Tenant and Landlord which shall not be
less than one (1) year from the date that Tenant gives notice to
Landlord of Tenant's intent to terminate.
(b) Subject to the provisions of Sections 5.2(a) and 5.3 hereof, in the
event that the taking by eminent domain or condemnation will affect less than
fifty percent (50%) of the usable floor space in the Improvements or will not
have the effect of reducing Tenant's distribution capacity in the Improvements
to fifty percent (50%) or less of full, pre-casualty capacity, or in the event
Tenant elects not to exercise the option to terminate set forth in Section
5.3(a) above, this Lease shall remain in full force and effect.
(c) In the event of a taking by eminent domain or Condemnation resulting
in an award of Net Proceeds in excess of $5,000,000, Tenant shall not be
required to repair or restore the Project if, while any Bonds remain Outstanding
the taking is intended to take place during the last year of the Primary Term of
this Lease, or if no
<PAGE> 37
Bonds remain Outstanding, during the last year of the Primary Term or any Option
Period, unless the Tenant has previously exercised an option to extend for the
next ensuing Option Period (if any then be). If the Tenant has exercised its
option to extend for the next ensuing Option Period, Tenant shall be obligated
to repair and restore the portion of the Project remaining after the
condemnation as provided above. In the event that Tenant has not exercised its
option to extend and is not, therefore, obligated to repair or restore the
Project as provided above, the Landlord shall be required to promptly repair and
restore the Project in accordance with Section 7.2 of the Loan Agreement. If,
while the Bonds remain Outstanding or the Indenture has not been released, such
repair or restoration by Landlord is not commenced and prosecuted promptly,
Tenant agrees to promptly repair and restore the Project [in which event,
Landlord will indemnify Tenant for any and all costs and expenses incurred by
Tenant with respect thereto, Tenant expressly acknowledging that no right of
offset with respect to payment of Basic Rent to Trustee or the payment of other
amounts (except Company Payments) hereunder shall arise in such event]. If the
building is structurally sound and the remaining portions accessible, Tenant
shall have the option to remain in the unrestored building on the Property until
the end of the Primary Term of this Lease, or the then current Option Period, as
the case may be, at which time the Tenant's rights of continued occupancy shall
cease and terminate for all purposes.
(d) All such replacements, repairs, rebuilding, or restoration made
pursuant to Sections 5.2 and 5.3 hereof, whether or not requiring the
expenditure of the Tenant's own money, shall automatically become a part of the
Project, as if the same were specifically described herein.
(e) At all times prior to the termination of this Lease in accordance with
subsection (a) above following total Condemnation of the Project, Tenant shall
remain liable for Global Basic Rent and all other expenses payable by Tenant in
accordance with this Lease (provided, however, that Tenant shall be entitled to
offset against Company Payments any amount due from Landlord to Tenant).
(f) If at any time following an election by Tenant to replace the Project
under this Section, an Event of Default shall occur hereunder and be continuing,
the Trustee must obtain the written consent of sixty-six and two-thirds percent
(66 2/3%) of Bondholders for Tenant to obtain funds from the condemnation trust
account held by
<PAGE> 38
Trustee pursuant to the Indenture, which consent shall not be unreasonably
withheld or delayed. While obtaining such consent, the Trustee may cease to
honor requisitions for disbursements for costs of replacement and may proceed to
accelerate the Bonds under the Indenture.
ARTICLE VI
SALES, MORTGAGES, ETC. AND GENERAL CONDITIONS
VI.1 Assignment by Tenant. (a) Except as hereinafter provided, and subject
to the Loan Agreement, the Indenture, and the Deed of Trust, and the
Non-Disturbance Agreement, Tenant shall not transfer, assign or hypothecate this
Lease or its interest hereunder without the written consent of Landlord and
Bondholders, which consent shall not be unreasonably withheld; provided that no
transfer, assignment or hypothecation shall release Tenant from any obligation
or liability under this Lease, and the person or persons to whom this Lease may
be transferred or assigned shall also assume all the obligations of Tenant under
this Lease. A copy of any such proposed assignment shall be delivered to
Landlord and Trustee in advance of its consenting thereto. No subletting and no
acceptance by Landlord of any rent or other sum of money from a sublessee, and
no recognition by Landlord of any subletting shall release Tenant from any of
its obligations under this Lease.
(b) Notwithstanding the provisions of the foregoing Section 6.1(a),
subject to the covenants set forth in Section 6.4 hereof, Tenant shall have the
right to transfer or assign this Lease or sublet the Project or any portion
thereof without the Landlord's consent to any corporation more than fifty
percent (50%) of the stock of which is owned by Tenant, or to any corporation
more than fifty percent (50%) of the stock of which is owned by any corporation
owning more than fifty percent (50%) of Tenant's stock, or to any corporation
surviving or resulting from a merger or consolidation to which Tenant may be a
party, or to any corporation succeeding to all or a substantial portion of the
assets of Tenant; provided, that no such transfer or assignment shall relieve or
release Tenant from any obligation or liability under this Lease, and the party
or parties to whom this Lease may be transferred or assigned shall assume all
the obligations of Tenant hereunder. The sale of stock by Tenant or any
shareholder of Tenant shall not constitute an assignment of this Lease.
<PAGE> 39
VI.2 Exercise of Rights or Remedies by Landlord. No assignment by Tenant
of this Lease or its interest hereunder and no subletting by Tenant of the
Project or any part thereof, whether with or without the consent of Landlord,
shall affect Landlord's right to exercise any of its rights or remedies
hereunder directly against Tenant.
VI.3 Tenant's Right of First Refusal. Subject to the Loan Agreement, the
Indenture, the Deed of Trust, and the Non-Disturbance Agreement, if Landlord
receives a bona fide offer, whether or not solicited by Landlord, to purchase
the Landlord's interest in the Project and Landlord is willing to accept such
offer, Landlord shall give Tenant written notice of the amount and terms of said
offer and the identity of the proposed purchaser. Tenant shall have the option,
exercisable within thirty (30) days after receipt of such notice, to purchase
the Landlord's interest in the Project on the same terms as those contained in
the offer. Landlord may not sell until after said thirty (30) day period and may
then sell only in accordance with the terms and to the party making the original
offer. Any deviation from the original offer constitutes a new offer and must be
submitted to Tenant in accordance with this Section. There shall occur no merger
of the fee and leasehold interests hereunder as a result of acquisition of both
estates by the same party.
VI.4 Financial Covenants of Lessee. For so long as any Bonds remain
Outstanding and the Loan Agreement has not been terminated or the Indenture
released, Tenant agrees:
(a) Not to incur additional Indebtedness or merge or consolidate with any
other entity if, after giving effect to such Indebtedness, merger or
consolidation on a pro forma basis (including pro forma application of the net
proceeds therefrom), the ratio of (i) the sum of (A) the Consolidated Net Income
of the Tenant and its subsidiaries plus (B) an amount equal to any net loss
realized upon the sale or other disposition of any business segment or capital
asset (to the extent such loss was deducted in computing such Consolidated Net
Income), plus (C) any provision for taxes utilized in computing net loss under
clause (B) hereof, plus (D) Consolidated Interest Expense plus one-third (1/3)
of operating lease (including this Lease) base rent (before contingency and
pass-through payments), plus (E) provision for federal and state income taxes to
(ii) Consolidated Interest Expense plus one-third (1/3) of operating lease
(including this Lease) base rent (before contingency/and pass-through payments)
of the Tenant and its subsidiaries for any six (6) (as determined by
<PAGE> 40
Tenant) of the immediately preceding eight (8) full fiscal quarters immediately
preceding the date of such proposed incurrence of indebtedness, merger or
consolidation, is less than 2.0 to 1.0; provided, however, that the foregoing
restrictions shall not apply to the incurrence by Tenant and its consolidated
subsidiaries of Existing Indebtedness, Permitted Refinancing Indebtedness, and
Indebtedness incurred in connection with Fixtures and Equipment to be located at
the Project (including Fixtures and Equipment to be utilized in connection with
future phases of the Project as outlined in that certain letter from Howard
Lester to Mayor Samuel Rikard of the City of Olive Branch dated July 1, 1998 and
affixed hereto as Exhibit "F"); and further provided, however, that accrual of
interest and accretion of accreted value shall not be deemed to be an incurrence
of Indebtedness for purposes of this Section 6.4(a).
(b) Not to permit the Consolidated Net Worth (plus deferred catalog
charges not to exceed 10% of Consolidated Net Worth) of the Tenant and its
subsidiaries to be less than $120,000,000 plus 25% of cumulative Consolidated
Net Income (if positive) from the first day of the first fiscal quarter of
Tenant beginning after the date hereof to the last day of the fiscal quarter of
Tenant ending immediately prior to the date of measurement.
For purposes of this Section 6.4:
A. "Consolidated Interest Expense" means the sum of (without duplication)
(i) the cash and non-cash interest expense of the Tenant and its consolidated
subsidiaries, determined on a consolidated basis in accordance with Generally
Accepted Accounting Principles (including, without limitation, non-cash interest
payments, all net payments and receipts in respect of Interest Rate Agreements,
and the interest component of rental payments under capital leases), (ii)
amortization of debt discount in connection with any Indebtedness of the Tenant
and its consolidated subsidiaries, and (iii) amortization of costs associated
with the issuance of any Indebtedness of the Tenant and its consolidated
subsidiaries; provided, however, that one-time fees paid in connection with the
issuance of any Permitted Refinancing Indebtedness incurred by the Tenant or a
subsidiary thereof, shall not be included in Consolidated Interest Expense.
<PAGE> 41
B. "Consolidated Net Income" means, for any period, without duplication,
the aggregate of the Net Income of the Tenant and its subsidiaries for such
period, on a consolidated basis, determined in accordance with Generally
Accepted Accounting Principles; provided, however, that (i) the Net Income of
any entity that is not a subsidiary of the Tenant or a subsidiary or is
accounted for by the equity method of accounting shall be included only to the
extent of the amount of dividends or distributions paid to the Tenant and its
subsidiaries; (ii) the Net Income of any entity that is a subsidiary [other than
a subsidiary of which at least eighty percent (80%) of the capital stock having
ordinary voting power for the Tenant directly or indirectly through one or more
subsidiaries] shall be included only to the extent of the lesser of (a) the
amount of dividends or distributions paid to the Tenant or a subsidiary, and (b)
the Net Income of such entity; (iii) the Net Income of any entity acquired by
the Tenant or a subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition, shall be excluded; and (iv) there shall
be excluded from such Net Income the Net Income (only if positive) of any
consolidated subsidiary of the Tenant to the extent that the declaration or
payment of dividends or similar distributions by such consolidated subsidiary of
such Net Income is not at the time permitted by operation of the terms of its
charter, or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such subsidiary.
C. "Consolidated Net Worth" means, as of any date, the consolidated equity
of the common and preferred stockholders of the Tenant determined on a
consolidated basis in accordance with Generally Accepted Accounting Principles,
less (i) all write-ups (other than write-ups of assets of a going concern
business made within one year after the acquisition of such business) subsequent
to February 1, 1999 in the book value of any asset owned by the Tenant or a
consolidated subsidiary, (ii) all investments in unconsolidated subsidiaries and
in entities that are not subsidiaries (other than cash equivalents, marketable
securities and other assets held for sale outside of the ordinary course of
business and long term receivables resulting from the sale of assets or
businesses), and (iii) all unamortized debt discount and expense, unamortized
deferred charges (excluding deferred income taxes), goodwill, patents,
trademarks, service marks, trade names, copyrights, organization and
developmental expenses and other intangible items, all of the foregoing as
determined in accordance with Generally Accepted Accounting Principles;
provided, however, that in determining the consolidated equity of any entity,
the Net Income of such entity shall be calculated in the same manner as that
specified for the determination of Net Income.
<PAGE> 42
D. "Existing Indebtedness" means the Indebtedness of Tenant and its
consolidated subsidiaries set forth on Exhibit "G" hereto.
E. "Indebtedness" means all obligations of Tenant and its consolidated
subsidiaries for borrowed money which in accordance with Generally Accepted
Accounting Principles should be classified on the balance sheet of Tenant and
its consolidated subsidiaries as liabilities, and in any event shall include all
obligations of Tenant and its consolidated subsidiaries for (a) borrowed money;
(b) for the deferred portion of the purchase price of assets (other than trade
payables not more than 120 days past due); (c) secured by any liens upon
property or assets owned by Tenant and its consolidated subsidiaries, even
though Tenant and its consolidated subsidiaries have not assumed or become
liable for the payment of such obligations; (d) created or accruing under any
conditional sale or other title retention agreement with respect to property
acquired by Tenant and its consolidated subsidiaries, notwithstanding the fact
that the rights and remedies of the seller, lender or lessor under such
agreement in the event of default are limited to repossession or sale of the
property sold; (e) the non-interest portion of capitalized lease obligations;
and (f) guaranties of obligations of others of the character referred to in this
definition.
F. "Interest Rate Agreement" shall mean any interest rate protection
agreement, interest rate future, interest rate option, interest rate swap,
interest rate cap or other interest rate hedge arrangement, to or under which
the Tenant or any of its subsidiaries is or becomes a party or beneficiary.
G. "Net Income" for any period means, with respect to an entity, the net
income (loss) for such period, determined in accordance with Generally Accepted
Accounting Principles; provided, however, that (i) the net income of any entity
(other than a subsidiary of such entity) in which such entity has a joint
interest with a third party shall be included only to the extent of the amount
of dividends or distributions paid to such entity by such other entity during
such period, (ii) the net income of any entity (other than a subsidiary of such
entity) acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iii) the net income of such
entity shall be reduced by any net after tax gains from any asset sale which
gains were included in net income during such period, (iv) the net income of
such entity, except as already adjusted pursuant to (iii) above,
<PAGE> 43
shall not include, without duplication, any gains which are classified as
extraordinary items in accordance with Generally Accepted Accounting Principles
(other than tax benefits realized in connection with the tax treatment of such
entity's net operating loss carry forwards incurred after the acquisition), and
(v) the net income of such entity shall not include any unrealized gains from
investments other than gains which reverse losses in such period.
H. "Permitted Refinancing Indebtedness" means any Indebtedness of Tenant
and its consolidated subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease, or refund other
Indebtedness of the Tenant and its consolidated subsidiaries permitted to be
incurred under the terms of this Lease, provided, however, that (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount plus accrued
interest (or accreted value, if applicable) and premium (if any) of the
Indebtedness so exchanged, extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable and documented expenses incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
stated maturity later than the final maturity of, and has a weighted average
life to maturity equal to or greater than the weighted average life to maturity
of, the Indebtedness being exchanged, extended, refinanced, renewed, replaced,
defeased or refunded; and (iii) such Permitted Refinancing Indebtedness is
incurred either by the Tenant or by the consolidated subsidiary which is the
obligor on the Indebtedness being exchanged, extended, refinanced, renewed,
replaced, defeased or refunded.
VI.5 Compliance with Bond Documents by Landlord. Tenant agrees that no
provision hereof requiring or permitting the action or inaction of the Tenant or
the action or inaction of the Landlord shall be applicable if it should cause
Landlord to fail to comply in any respect with Landlord's obligations under the
Loan Agreement, the Deed of Trust, the Indenture or the Guaranty.
VI.6 Financial Statements of Tenant. For so long as any Bonds remain
Outstanding and the Loan Agreement has not been terminated or the Indenture has
not been released, Tenant agrees to furnish to the Trustee, the Underwriter (as
defined in the Loan Agreement) and each Bondholder within one hundred twenty
(120) days after the end of each fiscal year of the Tenant audited consolidated
financial statements as of the close of such fiscal year for Tenant. Such
audited financial statements, which shall include comparative financial
information
<PAGE> 44
for the immediately preceding fiscal year, shall be prepared and certified by
Deloitte & Touche or another nationally recognized independent certified public
accounting firm showing the financial condition of Tenant at the close of such
year and the results of operations of the Tenant during such year; and within
sixty (60) days after the end of each of the first three (3) quarters of each
fiscal year, similar financial statements (but not including consolidating
financial statements) for Tenant to those described above, not audited but
certified by the chief financial officer for the Tenant, such balance sheet to
be as of the end of such quarter and such statements of income and surplus to be
for the period from the beginning of such fiscal year to the end of such
quarter, in each case subject only to year-end adjustments. The quarterly
Tenant-prepared financial statements and the annual audited financial statements
shall be accompanied by statements certified by an authorized Tenant
representative to the effect that (i) with respect to loan agreements (or
equivalent documents) unrelated to the Bonds, it has received no notice of any
defaults thereunder, and (ii) is not currently in default under the Lease or if
such a default exists, describing the default.
ARTICLE VII
DEFAULT
VII.1 Events of Default. The following shall constitute Events of Default
hereunder:
(a) If payment of any Basic Rent or Additional Rent, each as adjusted, is
not made within five (5) days of the date when due or if default shall be made
in the due and punctual payment of any Company Payments, as adjusted, payable
under this Lease or any part thereof when and as the same shall become due and
payable in accordance with the terms of this Lease.
(b) If default shall be made by Tenant in keeping, observing or performing
any of the terms, covenants, agreements, provisions, conditions or limitations
contained in this Lease on Tenant's part to be kept, observed or performed,
other than those referred to in the foregoing subsection (a) of this Section,
and such default shall continue for a period of thirty (30) days after written
notice thereof from Landlord or Trustee to Tenant, or in the case of such a
default or a contingency which cannot with due diligence and in good faith be
cured within said thirty (30) days, the Tenant should fail to proceed promptly
and with due diligence and in good faith to cure the
<PAGE> 45
same and thereafter to prosecute the curing of such default with due diligence
and in good faith [it being intended that in connection with a default not
susceptible of being cured with due diligence and in good faith within thirty
(30) days that the time within which to cure the same shall be extended for such
a period as may be necessary for the curing thereof with due diligence and in
good faith]. The foregoing is subject to the proviso that no grace period shall
apply to Tenant's obligations hereunder to keep the Project insured.
(c) An order for relief shall be entered in any federal bankruptcy
proceeding in which the Tenant is the debtor; or bankruptcy, receivership,
insolvency, reorganization, relief, dissolution, liquidation or other similar
proceedings shall be instituted by or against the Tenant or all or any part of
the property of the Tenant under the Federal Bankruptcy Code or any other law of
the United States or any bankruptcy or insolvency law of any state of competent
jurisdiction unless, if such proceedings are instituted against the Tenant, such
proceedings are dismissed or discharged within sixty (60) days after they are
instituted.
(d) The Tenant shall have become insolvent or unable to pay its debts as
they mature, cease doing business as a going concern, make an assignment for the
benefit of creditors, admit in writing its inability to pay its debts as they
become due, or if a trustee, receiver or liquidator shall be appointed for the
Tenant or for any substantial portion of the assets of the Tenant and such
appointment shall not be vacated within sixty (60) days.
(e) If Tenant shall abandon the Project; provided that as long as Tenant
shall continue to pay rent and maintain and protect the Project in accordance
with the terms of this Lease, Tenant shall not be deemed to have abandoned the
Project.
(f) Any certification, representation or warranty made by the Tenant herein
shall prove to have been false when made or deemed to have been made.
VII.2 Landlord Remedies. (a) If an Event of Default shall occur and shall
not have been remedied within any applicable grace period, and in the manner
hereinbefore provided, Landlord, without prejudice to any other right or remedy
of Landlord hereunder or by law, and notwithstanding any waiver of any prior
breach of
<PAGE> 46
condition or Event of Default hereunder, may at its option, and without further
demand or notice, the same being expressly waived:
(i) Terminate this Lease and retake possession of the Project, and
thereupon all rights of Tenant hereunder (and of parties claiming
by, through or under Tenant) shall come to an end, as fully as if
such were the last day of the whole term hereinbefore specified, and
Tenant hereby covenants peaceably and quietly to yield up and
surrender to Landlord the Project and all improvements thereon,
consistent with the provisions of this Lease covering such
improvements and modifications; and Tenant shall execute and deliver
to Landlord such instrument or instruments as shall be required by
Landlord to properly evidence termination of Tenant's rights
hereunder and its interest herein. In the event of such termination
of this Lease, Landlord shall have the right to repossess the
Project and such improvements and modifications (consistent with the
provisions of this Lease covering such improvements and
modifications) as well as the right to sue for and recover from
Tenant:
(A) the worth at the time of the award of any unpaid rent which
had been earned at the time of such termination; plus
(B) the worth at the time of the award of the amount by which the
unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus
(C) the worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
(D) any other amount necessary to compensate Landlord for all of
the detriment proximately caused by Tenant's failure to
perform its obligations under this Lease or which in the
<PAGE> 47
ordinary course of events would be likely to result therefrom
including, but not limited to, payment of any and all
installments for public improvements falling due during the
term of this Lease under Section 2.2(a)(iii) hereof; plus
(E) such other amounts in addition to or in lieu of the foregoing
as may be permitted from time to by time by applicable law.
As used in paragraphs (A), (B) and (C) of this subsection (a)(i), the
"worth at the time of award" is computed by allowing interest at the prime
rate of interest as published from time to time in the "Money Rates"
section of The Wall Street Journal (the "prime rate") plus 1% or by
determining present value using a discount rate equal to the prime rate
plus 1%; or
(ii) Landlord may terminate Tenant's right of possession and may
repossess the Project by forcible entry and detainer suit, by taking
peaceful possession or otherwise, without terminating this Lease,
and may sue for and recover all rents and other sums including
damages at any time and from time to time accruing hereunder and
exercise all such other rights as may be provided by law.
Landlord's efforts to relet the Project or any part thereof or acts
of maintenance or preservation and Landlord's appointment of a
receiver to protect Landlord's interest under this Lease shall not
constitute a termination of Tenant's right to possession; and no
reentry or taking possession of the Project by Landlord shall be
construed an election to terminate this Lease unless a written
notice of such intention be given to Tenant or unless the
termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any attempted reletting without
termination by Landlord because of any default by Tenant, Landlord
may at any time after such attempt elect to terminate this Lease for
any such default.
In the event of any default by Tenant, Landlord shall also have the right,
with or without terminating this Lease, to reenter the Project and remove all
persons and property from the Project; such property may be removed and stored
in public warehouse or elsewhere at the cost of and for the account of Tenant;
if Tenant does not remove
<PAGE> 48
such property from either the Project or the storage area selected by Landlord
in accordance with the above provision within thirty (30) days from the
effective date of said default, such property shall be deemed to be abandoned
and, at the option of Landlord, shall become the property of Landlord.
(b) Mention in this Lease of any particular remedy shall not preclude
Landlord from any other remedy, at law or in equity, including but not limited
to the right of injunction, as if reentry, summary proceedings or other remedies
were not provided for.
(c) The Tenant shall have an affirmative obligation to notify the Trustee
immediately upon its knowledge of the occurrence of any "Event of Default" as
defined in Section 7.1 hereof.
VII.3 Re-Entry. The terms "enter," "re-enter," "entry" and "re-entry," as
used in this Lease, are not restricted to their technical legal meaning.
VII.4 Remedies Cumulative. Each right or remedy of either party provided
for in this Lease shall be cumulative and shall be in addition to every other
right or remedy provided for in this Lease or now or hereafter existing at law
or in equity or by statute or otherwise, and the exercise or the beginning of
the exercise by a party of any one or more of the rights or remedies provided
for in this Lease or now or hereafter existing at law or in equity or by statute
or otherwise shall not preclude the simultaneous or later exercise by that party
of any or all other rights or remedies provided for in this Lease or now or
hereafter existing at law or in equity or by statute or otherwise.
VII.5 Lessee's Indemnification; Attorney Fees. (a) Tenant covenants and
agrees to pay, and to indemnify Landlord against the payment of all costs and
charges, including reasonable counsel fees, incurred by Landlord in obtaining
possession of the Project after default by Tenant or upon expiration or earlier
termination of the term of this Lease, provided Landlord prevails in any action
or proceeding (except arbitration) brought to obtain, or to determine the right
to, possession. This covenant shall include payment of all reasonable and
documented costs and charges of the Issuer and the Trustee, including reasonable
counsel fees of each.
<PAGE> 49
(b) Tenant further agrees that if Tenant defaults under any of the
provisions of this Lease and the Issuer or the Trustee on behalf of the
Bondholders or in its individual capacity employs attorneys or incurs other
expenses in connection with such default, including but not limited to, seeking
legal advice with regards to enforcement rights and for the collection of rent
or the enforcement of performance or of observance of any obligation or
agreement on the part of the Tenant herein contained, or legal advice with
respect thereto, the Tenant agrees that it will on demand therefor pay to the
Issuer or the Trustee the reasonable fees of such attorneys and such other
reasonable and documented expenses as may be incurred by the Issuer and the
Trustee.
VII.6 Mutual Indemnification; Costs. Each party ("indemnitor") covenants
and agrees to pay, and to indemnify the other ("indemnitee") against, all costs
and charges, including reasonable counsel fees, incurred by the indemnitee in
enforcing any agreement or covenant of the indemnitor herein contained, provided
the indemnitee prevails in any action or proceeding (except arbitration) brought
to secure such enforcement.
VII.7 Right of Offset. So long as Tenant has not exercised any right to
terminate this Lease as set forth in Section 10.24(a) hereof, any breach by
Landlord of any term or provisions hereof shall, in addition to those rights set
forth in Section 10.24(a) hereof, give Tenant the right to offset sums due
Tenant from Landlord as a result thereof against sums payable hereunder to
Landlord as Company Payments. In addition, Tenant shall have the right to offset
Company Payments owed to Landlord hereunder against sums owed Tenant from time
to time pursuant to that certain Agreement and Indemnification of even date
herewith among Tenant, Landlord, Hewson Properties, Inc. and Gary J. Hewson. So
long as any Bonds remain Outstanding or the Indenture has not been released,
then notwithstanding a breach by Landlord, Tenant shall remain liable for the
payment of all Basic Rent to the Trustee and payment of other amounts (except
Company Payments) hereunder until the termination of this Lease by Tenant as
provided herein.
VII.8 Certification by Subtenants. Upon request by Landlord, Tenant shall
furnish to Landlord (i) written certification from each subtenant of space
within the Project, confirming the amount of rent due under such subtenant's
lease, stating whether any offsets or defenses exist against the sublessor
thereunder, and covering such
<PAGE> 50
other matters as Landlord may reasonably require, and (ii) such other
certifications by Tenant as Landlord may reasonably require with respect to the
physical condition of the Project and Tenant's compliance with the provisions
hereof.
ARTICLE VIII
ARBITRATION
VIII.1 Submission to Board of Arbitrators. If at any time, or from time to
time during the term of this Lease, any dispute shall arise between Landlord and
Tenant, and (i) such dispute shall relate to damage, destruction, alterations or
improvements to, or the taking by eminent domain or the condemnation of, the
Project, or (ii) this Lease shall specifically identify such dispute as subject
to arbitration, or (iii) Landlord and Tenant shall have agreed in writing to
resolve such dispute by arbitration; then and only then shall such dispute be
submitted to a board of arbitrators. The board of arbitrators shall be three (3)
in number, one to be named by each of the parties hereto no later than thirty
(30) days after the parties hereto have agreed to submit such dispute to
arbitration or no later than thirty (30) days after the parties hereto shall
agree that such dispute cannot be resolved between themselves, and the third
arbitrator shall be selected by the two arbitrators previously named. The
decision of any two of such arbitrators shall be final and conclusive on the
parties hereto. All arbitrators hereto shall be independent, disinterested
persons with experience in the area of the dispute; any question arising between
the parties hereto related to value of the Project shall be determined by
qualified, licensed appraisers who are members of the American Institute of Real
Estate Appraisers or similarly qualified persons, and all questions concerning
the structure of the building on the Project shall be determined by engineers,
architects or similarly qualified persons. If the two arbitrators designated by
the parties fail to select a third arbitrator within fifteen (15) days after the
appointment by such parties, then the parties may apply to any Chancellor of the
Chancery Court of DeSoto County, Mississippi to designate a third arbitrator. If
either party hereto shall fail to designate an arbitrator within said thirty
(30) days, the other party shall have the right to appoint a second arbitrator.
The parties to the arbitration shall have the right to offer evidence and
testify at the hearings, to be represented by counsel and to cross-examine
witnesses (but the arbitrators may not determine issues and questions not
submitted to arbitration and not framed by the facts and data presented by the
parties during such hearings). Subject to the foregoing, the
<PAGE> 51
arbitration shall be conducted in accordance with the then applicable rules of
the American Arbitration Association.
ARTICLE IX
COVENANT OF QUIET ENJOYMENT
IX.1 Quiet Enjoyment; Non-Disturbance. Landlord covenants and agrees that
Tenant, upon paying the rents reserved herein and observing and keeping the
covenants, agreements and stipulations of this Lease on its part to be kept
shall lawfully, peaceably and quietly hold, occupy and enjoy the Project during
the term of this Lease, without hindrance, ejection or molestation by Landlord
or any person or persons claiming under Landlord or claiming by a title superior
to Landlord. Contemporaneously with the execution of this Lease, Landlord and
Tenant have joined in the execution of the Non-Disturbance Agreement.
ARTICLE X
MISCELLANEOUS
X.1 Tenancy Beyond Lease Term. If Landlord has not leased the Project to
others or does not require the use of the Project for itself and if Tenant holds
possession of the Project after the expiration or termination of the term of
this Lease, Tenant shall become a tenant from month to month upon the terms and
conditions herein contained, so far as applicable, at a monthly rental in an
amount equal to one hundred fifty percent (150%) of the average Global Basic
Rent which was in effect during the Primary Term or Option Term, as applicable,
and which shall be payable in advance, and Tenant shall continue to be such a
month to month tenant until thirty (30) days after Tenant shall have given to
Landlord or Landlord shall have given to Tenant a written notice of intention to
terminate such monthly tenancy.
X.2 Notices. All notices, demands and requests which may or are required
to be given to another party hereunder shall be in writing, and each shall be
deemed to have been properly given (a) on the day given when served personally
on an executive officer or general partner of the party to whom such notice is
to be given, (b) on the following Business Day (as defined in the Loan
Agreement) when sent by reputable overnight courier service, or when sent by
telecopy (confirmed promptly by mail), or (c) on the fifth (5th) Business Day
following the
<PAGE> 52
Business Day when sent postage prepaid by first class mail, registered or
certified, return receipt requested, by deposit thereof in a duly constituted
United States Post Office or branch thereof located in one of the states of the
United States of America in a sealed envelope addressed as follows:
(i) To Landlord, Hewson Properties, Inc., 4636 E. University Drive,
Suite 265, Phoenix, Arizona 85034, or such other address as Landlord may
from time to time designate.
(ii) To Tenant, at 3250 Van Ness, San Francisco, California 94109,
Attention: President, or such other address as Tenant may from time to
time designate.
(iii) To Trustee, at Union Planters Bank, N.A., Corporate Trust
Dept., 6200 Poplar Avenue, 3rd Floor, Memphis, Tennessee 38117, Attention:
Ms. Delories Duncan.
A duplicate copy of each notice, certificate or other communication given
hereunder to Tenant and/or Landlord shall also be given to Trustee.
X.3 Definition of "Landlord." The term "Landlord" as used in this Lease so
far as covenants and agreements on the part of Landlord are concerned, shall be
limited to mean and include only the owner or owners of the Landlord's interest
in this Lease at the time in question, and in the event of any transfer or
transfers of such interest authorized herein, except a transfer by way of
security, Landlord herein named (and in case of any subsequent transfer, the
then transferor) shall be automatically freed and relieved from and after the
date of such transfer of all personal liability as respects the performance of
any covenants or agreements on the part of Landlord contained in this Lease
thereafter to be performed; provided, that any funds in the hands of Landlord or
the then transferor at the time of such transfer, in which Tenant has an
interest, shall be turned over to the transferee and any amount then due and
payable to Tenant by Landlord or the then transferor under any provision of this
Lease, shall be paid to Tenant; provided further that, upon any such transfer,
the transferee shall be deemed to have assumed, subject to the limitations of
this Section 10.3, all of the covenants, agreements and conditions in the Lease
contained to be performed on the part of Landlord; it being intended hereby that
the covenants and
<PAGE> 53
agreements contained in this Lease on the part of Landlord shall subject as
aforesaid, be binding on Landlord, its successors and assigns, only during and
in respect of their respective successive periods of ownership.
X.4 Headings; Table of Contents. The headings of the Articles and the
numberings of the Sections and Subsections in this Lease are inserted as a
matter of convenience to the parties and shall not affect the construction of
this Lease. The wording of this Lease has been agreed upon by both parties
hereto and therefore no party hereto is deemed to be the author thereof.
X.5 Counterparts. This Lease may be executed in any number of
counterparts, each of which shall be an original and the counterparts shall
constitute but one and the same instrument.
X.6 Governing Law. This Lease is to be governed and construed in
accordance with the internal laws of the State of Mississippi, without regard to
principles of conflicts of laws.
X.7 Cure on Behalf of Landlord. In the event that there shall occur a
default under any mortgage, deed of trust, security agreement, reimbursement
agreement, and/or bond affecting Landlord's interest in the Project, or if any
other lien or encumbrance is created which may be prior to Tenant's interest
hereunder and threatens Tenant's interest hereunder, Tenant may, upon giving
Landlord written notice at least ten (10) days prior to doing so, take such
action, including the payment of money, as may be required to cure such defect,
or to discharge such lien or encumbrance, and may deduct such sums and/or its
cost and expenses in taking such action, from the Company Payments due hereunder
as they may become due.
X.8 Binding on Successors and Assigns. Except as otherwise provided
herein, this Lease shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, successors and assigns.
X.9 Authority of Signatories. (a) Landlord represents and warrants that
the person executing this Lease on behalf of Landlord is a duly authorized
member of Landlord or is its or his duly authorized attorney-in-fact.
<PAGE> 54
(b) Tenant represents and warrants that all corporate and other
proceedings required to be taken by or on the part of Tenant and its Board of
Directors for the authorization, execution and delivery of this Lease and the
performance of the agreements set forth herein have been duly taken and that the
person executing this Lease on behalf of Tenant has been duly authorized to act
for and in behalf of Tenant.
X.10 Benefits of the Act. Landlord and Tenant acknowledge that the Bonds
are being issued pursuant to the provisions of Section 57-10-401 et seq. of the
Mississippi Code of 1972, as amended (the "Act"), so that Tenant may obtain
certain benefits provided by the Act as set forth in Section 5.6 of the Loan
Agreement. Tenant hereby acknowledges and accepts the obligations set forth in
Section 5.6 of the Loan Agreement on its behalf, and said Section is hereby
incorporated herein by reference. In order to comply with the requirements of
Section 57-10-409 of the Act, Tenant hereby covenants and agrees as follows:
(a) This Lease may be assigned by Tenant (other than to an affiliate
thereof) only upon the prior written consent of the Issuer following the
adoption of a resolution by the Issuer to such effect.
(b) Upon a default by Tenant in the payment of Basic Rent hereunder, the
Trustee, on behalf of the Issuer, may exercise the rights and remedies available
under the Indenture and the Loan Agreement, including but not limited to
acceleration of the Bonds, foreclosure of the Deed of Trust and termination of
this Lease.
X.11 [RESERVED.]
X.12 Waivers. Neither failure by either party to insist upon the strict
performance of any term or condition of this Lease, or to exercise any right or
remedy available on a breach thereof, nor acceptance by Landlord of full or
partial Basic Rent during the continuance of any such breach, shall constitute a
waiver of any such breach or of any such term or condition. No term or condition
of this Lease required to be performed by a party hereto, and no breach thereof,
shall be waived, altered or modified, except by a written instrument executed by
the party making such waiver. No waiver of any breach shall be taken to
constitute a waiver of any other
<PAGE> 55
breach, or of a subsequent breach of the same covenants; and each term or
condition shall continue in full force and effect with respect to any other then
existing or subsequent breach thereof.
X.13 Mechanic's Liens. Under no circumstances shall either party create or
permit the creation of or suffer to exist, any mechanic's lien to be filed
against the Project other than Permitted Encumbrances (as defined in the Loan
Agreement), by reason of any work, labor, services or material supplied or
claimed to have been supplied to the Tenant or to the Landlord. Tenant shall
promptly take all steps necessary to discharge and remove any such lien, except
Permitted Encumbrances, created by the action or inaction of Tenant. Nothing in
this Lease shall be construed in any way as constituting the consent or request
of either party, expressed or implied, by inference or otherwise, to any
contractor, subcontractor, laborer or materialman for the performance of any
labor or the furnishing of any materials for any improvement, alteration, or
repair of or to the Project that would give rise to the assertion of any
mechanics' or materialmen's lien claim against the Project, or as giving either
party the right, power or authority to contract for or to permit the rendering
of any service or the furnishing of any material that would give rise to the
filing of any mechanic's lien claim against the Project.
X.14 Utilities. All heat, water, electric current, gas, or other utilities
used in the Project during the Primary Term and the Option Periods shall be paid
for by the Tenant. In addition, should usage of such utilities during the
construction of the Project exceed that occasioned by construction, due to
installation of Equipment and/or Fixtures by Tenant, Tenant agrees to pay such
additional costs.
X.15 [RESERVED.]
X.16 Cure on Behalf of Tenant. If the Tenant shall be in default
hereunder, and the Tenant shall not have cured such default within the
applicable notice period set forth herein, the Landlord may, at its option, in
addition to any other rights and remedies, cure such default on behalf of the
Tenant, in which event the Tenant shall reimburse the Landlord for all sums paid
to effect such cure, together with interest thereon at the Default Rate (as
defined in the Loan Agreement), and together with such reasonable attorney's
fees as the Landlord may have
<PAGE> 56
incurred in connection with such matter. Any such sum so paid by the Landlord,
together with any interest and attorney's fees, as above provided, shall be due
on the next rental installment date following the date of such cure by Landlord.
X.17 Severability. If any term or provision of this Lease, or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby; and each
term and provision of this Lease shall be valid and be enforced to the fullest
extent permitted by applicable law.
X.18 Venue. As an integral part of the consideration for the Landlord's
willingness to enter into this Lease, it is expressly understood and agreed that
no suit or action shall be commenced by either party, or by any successor,
personal representative, or assignee of either party, with respect to this Lease
or any of the provisions hereof, other than in a state court of competent
jurisdiction in DeSoto County, Mississippi, or in the United States District
Court for the Northern District of Mississippi, Delta Division, and not
elsewhere.
X.19 [RESERVED.]
X.20 Waiver of Jury Trial. TO THE FARTHEST EXTENT PERMITTED BY APPLICABLE
LAW, EACH PARTY TO THIS LEASE AGREEMENT HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS LEASE
AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION HEREWITH, OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALING OF THE PARTIES HERETO WITH RESPECT TO THIS LEASE
AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING; AND EACH PARTY
<PAGE> 57
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO
THIS LEASE AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION
WITH ANY COURT AS EVIDENCE OF SUCH AGREEMENT.
X.21 Waiver of Right of Recovery. Tenant and Landlord hereby waive and
release any and all right of recovery against the other, including employees and
agents, arising during the term of this Lease for any and all loss or damage to
any property located within or constituting a part of the Project which loss or
damage arises from the perils covered by an all risk policy or which right of
recovery arises from loss of earnings or rents resulting from damage caused by
such a peril. This mutual waiver is in addition to any other waiver or release
contained in this Lease. Landlord and Tenant shall each have their insurance
policies issued in such form as to waive any right of subrogation which might
otherwise exist.
X.22 Design and Construction Indemnity. With respect to the manner of
design and construction of the Project, Landlord agrees at Tenant's option, to
save Tenant harmless from and indemnify and defend Tenant against any and all
injury, loss, damage, liability (or any claims in respect of the foregoing),
costs or expenses (including, without limitation, attorney's fees, reasonable
investigation and discovery costs), of whatever nature, to any person or
property caused or claimed to be caused by or resulting from any act, omission
or negligence of Landlord or its employees or agents, provided that Tenant, upon
becoming aware of such claim or damage, shall promptly notify Landlord as soon
as reasonably possible. The provisions of this paragraph as to property damage
shall be subject to the provisions of paragraph 10.21 regarding waiver of
subrogation; and the provisions of this paragraph shall further be subject to
the proviso that any obligation of Landlord to Tenant hereunder with respect to
matters covered by insurance required to be maintained by Tenant hereunder shall
be limited so as to assume that the deductible provision in such policy of
insurance does not exceed (A) $50,000 (thereby limiting Landlord's obligation
hereunder to $50,000 per claim) in the case of insurance coverage required to be
maintained by Tenant under Section 4.1(a)-(d) and (B) $500,000 (thereby limiting
Landlord's liability hereunder to $500,000 per claim) in the case of insurance
coverage on Tenant's personal property required to be maintained by Tenant under
Section 4.1.
<PAGE> 58
X.23 Landlord Waiver of Liens. Landlord waives such liens, if any, to
which it may have a right with respect to the merchandise, furniture, trade
fixtures and other personal property of Tenant located on or about the Property
and shall from time to time execute such documents as Tenant may reasonably
request to acknowledge such waiver.
X.24 Tenant Right to Terminate. (a) Provided that all Bonds are redeemed,
the Loan Agreement terminated and the Indenture released, if Landlord should be
in default in the performance of any of its obligations under this Lease, which
default continues for a period of more than thirty (30) days after receipt of
written notice from Tenant specifying such default, or if such default is of a
nature to require more than thirty (30) days for remedy and continues beyond the
time reasonably necessary to cure [provided Landlord must have undertaken
procedures to cure the default within such thirty (30) day period and diligently
pursue such efforts to cure to completion], Tenant may, in addition to availing
itself of any other remedies available at law and in equity, at its option, upon
written notice, terminate this Lease, or may incur any reasonable expense
necessary to perform the obligation of Landlord specified in such notice and
deduct such expense from the Company Payments next becoming due.
(b) So long as the Bonds remain Outstanding, or the Indenture has not been
released, the obligation of the Tenant to pay Basic Rent and Additional Rent as
provided herein and to make all other payments (other than Company Payments),
provided for in this Lease and to maintain the Project in accordance with this
Lease and to perform its other obligations under the Lease shall be absolute and
unconditional, irrespective of any defense or any rights of set-off, recoupment
or counterclaim it might otherwise have against the Landlord. During such
period, the Tenant (i) will not suspend or discontinue any such payment (other
than Company Payments), (ii) will perform all of its other agreements under this
Lease, and (iii) will not terminate this Lease [other than such termination as
is provided for hereunder in subparagraph (a)] for any cause including, without
limitation, any acts or circumstances that may constitute an eviction or
constructive eviction, failure of consideration, failure of title, or commercial
frustration of purpose, or any damage to or destruction of the Project, or the
taking by eminent domain of title to or the rights to temporary use of all or
any part of the Project or any change in the tax or other laws of the
<PAGE> 59
United States, the State or any political subdivision of either thereof, or any
failure of the Issuer to perform and observe any agreement or covenant, whether
express or implied, or any duty, liability or obligation arising out of or
connected with this Lease. Notwithstanding the foregoing, the Tenant may, at its
own cost and expense, in its own name, prosecute or defend any action or
proceedings or take any other action involving third persons which the Tenant
deems reasonably necessary in order to secure or protect its right of
possession, use and occupancy of the Project and other rights hereunder. Nothing
contained herein shall be construed to prevent or restrict the Tenant from
asserting any rights which the Tenant may have against the Landlord under this
Lease or under any provision of law.
X.25 Litigation. If either party becomes a party to any litigation
concerning this Lease or the Project by reason of any act or omission of the
other party or its authorized representatives, and not by any act or omission of
the party that becomes a party to that litigation or any act or omission of its
authorized representatives, the party that causes the other party to become
involved in the litigation shall be liable to that party for reasonable
attorney's fees, court costs, investigation expenses, discovery costs and costs
of appeal incurred by it in the litigation.
X.26 Costs of Action. If either party commences an action against the
other party arising out of or in connection with this Lease, the prevailing
party shall be entitled to have and recover from the losing party, reasonable
attorney's fees, costs of suit, investigation costs and discovery costs,
including costs of appeal. When this Lease imposes upon a party an obligation to
indemnify the other, the indemnification obligation shall include the obligation
to pay the indemnitee's reasonable attorney's fees, costs and disbursements,
whether the indemnitee be the plaintiff or defendant.
X.27 Nondisturbance. Landlord covenants to obtain from any secured party
benefitting from an encumbrance on the Project [and each lessor, if any, whose
interest in the Project is paramount to Landlord's ("Overlessor")] at the time
of the execution hereof, or at any time prior to the recordation of the
Memorandum of Lease, an executed non-disturbance agreement assuring Tenant that
notwithstanding any default by Landlord to the lender or Overlessor, or any
foreclosure or deed in lieu thereof (or Overlessor's termination proceedings),
Tenant's rights under this Lease shall continue in full force and effect and its
possession of the Project shall remain
<PAGE> 60
undisturbed except in accordance with the provisions of this Lease so long as
Tenant is not in default hereunder so as to prevent Lease termination and that
the proceeds of any insurance recovery or condemnation award shall be used for
the purposes stated in this Lease.
X.28 Tenant Subordination of Lease. Tenant shall upon Landlord's request,
subordinate this Lease in the future to any first lien placed by Landlord on the
Project, with an insurance company, bank or any other institutional lender,
provided that such lender executes a non-disturbance agreement providing that if
Tenant is not then in default under this Lease, this Lease shall not terminate
as a result of the foreclosure of such lien, or conveyance in lieu thereof,
Tenant's rights under this Lease shall continue in full force and effect and its
possession be undisturbed except in accordance with the provisions of this
Lease, and that the proceeds of any insurance recovery or condemnation award
shall be used for the purposes stated in this Lease. Tenant will, upon request
of the lienholder, be a party to such an agreement, and will agree that if such
lienholder succeeds to the interests of Landlord, Tenant will recognize said
lienholder (or successor in interest of the lienholder) as its Landlord under
the terms of this Lease.
X.29 Agency. Nothing contained in this Lease shall be deemed or construed
by the parties hereto or by any third person to create the relationship of
principal and agent, or of partnership, or of joint venture, or of any other
association between the parties other than Landlord and Tenant, or to prevent
Landlord or Tenant from entering into ventures in direct competition with the
Project.
<PAGE> 61
X.30 Amendment. This Lease may be amended only by a written instrument
executed by the Landlord and the Tenant. Additionally, prior to full payment of
the Bonds (or provision for payment thereof having been made in accordance with
the Indenture), except for amendments entered into in connection with the
Addition, the Landlord and the Tenant shall not alter, modify or amend in any
material respect any of the terms of this Lease without the prior written
approval of the Holders of sixty-six and two-thirds percent (66 2/3%) of the
Bonds, which consent absent the existence and continuance of an Event of Default
by Tenant hereunder, shall not be unreasonably withheld.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.
HEWSON/DESOTO PHASE I, L.L.C., an
Arizona limited liability company
BY: HEWSON PROPERTIES, INC.,
a California corporation
By: /s/ GARY J. HEWSON
--------------------------------
Gary J. Hewson,
Chief Executive Officer
LANDLORD
WILLIAMS-SONOMA, INC.,
a California corporation
By: /s/ JERRY S. OWENS
---------------------------------
Title: SVP Distribution
---------------------------------
TENANT
<PAGE> 62
STATE OF TENNESSEE
COUNTY OF SHELBY
Personally appeared before me, Mary Pelham Hunt, the undersigned authority
in and for the said county and state, on this the 10th day of December, 1998,
within my jurisdiction, the within named JERRY E. OWENS, who acknowledged that
he is Executive Vice President of WILLIAMS-SONOMA, INC. and that for and on
behalf of the said corporation, and as its act and deed, he executed and
delivered the above and foregoing instrument, after first having been duly
authorized by said corporation to do so.
/s/ MARY PELHAM HUNT
------------------------------------------
Notary Public
My Commission Expires:
June 22, 1999
- ---------------------
STATE OF TENNESSEE
COUNTY OF SHELBY
Personally appeared before me, Mary Pelham Hunt, the undersigned authority
in and for the said county and state, on this the 10th day of December, 1998,
within my jurisdiction, the within named GARY J. HEWSON, who acknowledged
himself to be Chief Executive Officer of HEWSON PROPERTIES, INC., a California
corporation, which corporation is the manager of HEWSON/DESOTO PHASE I, L.L.C.,
an Arizona limited liability company (the "Maker"), and that for and on behalf
of said corporation and as its act and deed as manager of the Maker and for and
on behalf of the Maker and as its act and deed, he executed and delivered the
foregoing instrument after having been duly authorized so to do.
/s/ MARY PELHAM HUNT
------------------------------------------
Notary Public
My Commission Expires:
June 22, 1999
- ---------------------
<PAGE> 63
EXHIBIT "A"
Real Property Description
TRACT I:
LOCATED IN DESOTO COUNTY, MISSISSIPPI:
BEING A SURVEY OF PART OF THE SOUTHEAST QUARTER OF THE NORTHEAST QUARTER, PART
OF THE SOUTHWEST QUARTER OF THE NORTHEAST QUARTER, PART OF THE NORTHWEST QUARTER
OF THE NORTHEAST QUARTER AND PART OF THE NORTHEAST QUARTER OF THE NORTHEAST
QUARTER, SECTION 25, TOWNSHIP 1 SOUTH, RANGE 6 WEST, DESOTO COUNTY MISSISSIPPI
AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
COMMENCING AT THE NORTHEAST CORNER OF SAID SECTION 25; THENCE
S89(Degree)32'11"W ALONG THE NORTH LINE OF SAID SECTION 25 A DISTANCE OF
80.00 FEET TO A POINT; THENCE S00(Degree)31'04"E ALONG A LINE THAT IS
80.00 FEET WEST OF AND PARALLEL TO THE EAST LINE OF SAID SECTION 25 A
DISTANCE OF 491.49 FEET TO THE POINT OF BEGINNING; THENCE CONTINUING
S00(Degree)31'04"E ALONG A LINE THAT IS 80.00 FEET WEST OF AND PARALLEL TO
THE EAST LINE OF SAID SECTION 25 A DISTANCE OF 1485.00 FEET TO A POINT;
THENCE S89(Degree)13'30"W A DISTANCE OF 1957.52 FEET TO A POINT; THENCE
N00(Degree)46'30"W A DISTANCE OF 1484.99 FEET TO A POINT; THENCE
N89(Degree)13'30"E A DISTANCE OF 1964.19 FEET TO THE POINT OF BEGINNING
AND CONTAINING 2,911,841 SQUARE FEET OR 66.847 ACRES.
TRACT II:
THE RIGHTS BENEFITTING THE FOREGOING TRACT I CREATED BY (A) THAT CERTAIN
RECIPROCAL STORM WATER DRAINAGE AGREEMENT DATED AS OF DECEMBER 1, 1998, BY AND
BETWEEN HEWSON/DESOTO SOUTH, L.L.C. AND HEWSON/DESOTO PHASE I, L.L.C., (B) THAT
CERTAIN RECIPROCAL STORM WATER DETENTION AND DRAINAGE AGREEMENT DATED AS OF
DECEMBER 1, 1998, BY AND BETWEEN HEWSON/DESOTO PHASE I, L.L.C., AND
WILLIAMS-SONOMA, INC., AND (C) THAT A CERTAIN RECIPROCAL CONNECTOR EASEMENT
AGREEMENT BY AND BETWEEN HEWSON/DESOTO PHASE I, L.L.C. AND WILLIAMS-SONOMA, INC.
DATED AS OF DECEMBER 1, 1998 AND (D) THAT CERTAIN PARKING EASEMENT AGREEMENT BY
AND BETWEEN HEWSON/DESOTO PHASE I, L.L.C. AND WILLIAMS SONOMA, INC. DATED AS OF
DECEMBER 1, 1998, EACH RECORDED CONTEMPORANEOUSLY HEREWITH IN THE OFFICE OF THE
CHANCERY CLERK OF DESOTO COUNTY, MISSISSIPPI.
A-1
<PAGE> 64
EXHIBIT "B"
Plans for Building and Improvements
See Attached
B-1
<PAGE> 65
BOOK 79 PAGE 605
<TABLE>
<CAPTION>
EXHIBIT B
- -----------------------------------------------------------------------------------------------------
RETAIL DISTRIBUTION CAMPUS, WILLIAMS SONOMA, OLIVE BRANCH, MS
Plans by OWENS ENGINEERING CO., INC.
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Final
Sheet # Prepared by: Sheet Title Date Revision Date
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cover OWENS Drawing Index 11/5/98
- -----------------------------------------------------------------------------------------------------
CE=2.0 RSM Site Plan 10/15/98
- -----------------------------------------------------------------------------------------------------
CE=2.1 RSM Grading & Drainage Plan 11/5/98
- -----------------------------------------------------------------------------------------------------
CE=2.2 RSM Erosion Control Plan 10/15/98
- -----------------------------------------------------------------------------------------------------
CE=2.3 RSM Construction Details 10/15/98
- -----------------------------------------------------------------------------------------------------
LA=1 RSM Key Sheet and Plant Materials List 10/8/98
- -----------------------------------------------------------------------------------------------------
LA=2 RSM Landscaping Planting Plan 10/8/98
- -----------------------------------------------------------------------------------------------------
LA=3 RSM Landscaping Planting Plan 10/8/98
- -----------------------------------------------------------------------------------------------------
LA=4 RSM Landscaping Planting Plan 10/8/98
- -----------------------------------------------------------------------------------------------------
LA=5 RSM Irrigation Plan 10/8/98
- -----------------------------------------------------------------------------------------------------
LA=6 RSM Irrigation Plan 10/8/98
- -----------------------------------------------------------------------------------------------------
LA=7 RSM Irrigation Plan 10/8/98
- -----------------------------------------------------------------------------------------------------
A=1.0 OWENS Paving, Fencing & Sod Plan 10/6/98 10/28/98
- -----------------------------------------------------------------------------------------------------
A=1.1 OWENS Facility Floor Plan 6/15/98 11/9/98
- -----------------------------------------------------------------------------------------------------
A=1.2 OWENS Office Floor Plan 9/1/98 10/7/98
- -----------------------------------------------------------------------------------------------------
A=1.3 OWENS Enlarged Areas Floor Plan 7/6/98 11/6/98
- -----------------------------------------------------------------------------------------------------
A=1.4 OWENS Mezzanine Plan 9/16/98
- -----------------------------------------------------------------------------------------------------
A=1.5 OWENS Pump House and Storage Tanks Plans & Details 8/19/98 10/21/98
- -----------------------------------------------------------------------------------------------------
A=1.6 OWENS Truck Dispatch House Floor Plan & Details 9/15/98
- -----------------------------------------------------------------------------------------------------
A=2.1 OWENS Door Schedules & Details 9/15/98 11/9/98
- -----------------------------------------------------------------------------------------------------
A=2.2 OWENS Room Finish Schedule Door & Window Details 9/15/98 10/7/98
- -----------------------------------------------------------------------------------------------------
A=3.1 OWENS Building Elevations 6/17/98 11/2/98
- -----------------------------------------------------------------------------------------------------
A=3.2 OWENS Enlarged Building Elevations 9/10/98 11/2/98
- -----------------------------------------------------------------------------------------------------
A=3.3 OWENS S. Wall Tilt-Up Panel Elevations 8/14/98 11/10/98
- -----------------------------------------------------------------------------------------------------
A=3.4 OWENS E. Wall Tilt-Up Panel Elevations 8/14/98 9/28/98
- -----------------------------------------------------------------------------------------------------
A=3.5 OWENS N. Wall Tilt-Up Panel Elevations 8/14/98 10/9/98
- -----------------------------------------------------------------------------------------------------
A=3.6 OWENS W. Wall Tilt-Up Panel Elevations 8/14/98 10/28/98
- -----------------------------------------------------------------------------------------------------
A=3.7 OWENS Restroom Elevations 9/3/98
- -----------------------------------------------------------------------------------------------------
A=3.8 OWENS Architectural Details 9/4/98 11/3/98
- -----------------------------------------------------------------------------------------------------
A=4.1 OWENS Wall Sections 7/8/98
- -----------------------------------------------------------------------------------------------------
A=4.2 OWENS Wall Sections 7/20/98
- -----------------------------------------------------------------------------------------------------
A=4.3 OWENS Wall Sections 8/13/98
- -----------------------------------------------------------------------------------------------------
A=4.4 OWENS Wall Sections 9/10/98
- -----------------------------------------------------------------------------------------------------
A=4.5 OWENS Wall Sections 9/14/98
- -----------------------------------------------------------------------------------------------------
A=4.6 OWENS Wall Sections 11/4/98
- -----------------------------------------------------------------------------------------------------
A=5.1 OWENS Detail 7/23/98
- -----------------------------------------------------------------------------------------------------
A=5.2 OWENS Stair Detail 9/25/98 11/5/98
- -----------------------------------------------------------------------------------------------------
A=6.1 OWENS Glass and Glazing Elevations 10/19/98 11/2/98
- -----------------------------------------------------------------------------------------------------
A=6.2 OWENS Glass and Glazing Detail 10/19/98 11/4/98
- -----------------------------------------------------------------------------------------------------
A=7.1 OWENS Roof Plan 8/17/98 9/25/98
- -----------------------------------------------------------------------------------------------------
A=7.2 OWENS Detail Drawings 8/19/98
- -----------------------------------------------------------------------------------------------------
A=8.1 OWENS Roof Opening Plan Sec. A 10/19/98
- -----------------------------------------------------------------------------------------------------
A=8.2 OWENS Roof Opening Plan Sec. B 10/19/98 10/30/98
- -----------------------------------------------------------------------------------------------------
A=8.3 OWENS Roof Opening Plan Sec. C 10/19/98
- -----------------------------------------------------------------------------------------------------
A=8.4 OWENS Roof Opening Plan Sec. D 10/19/98
- -----------------------------------------------------------------------------------------------------
C=1.1 OWENS Foundation Plan 8/19/98 10/20/98
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 66
BOOK 79 PAGE 606
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
C=1.2 OWENS Misc. Foundation Plans 8/19/98 10/20/98
- -----------------------------------------------------------------------------------------------------
C=1.3 OWENS Office Foundation Plan 9/16/98 10/20/98
- -----------------------------------------------------------------------------------------------------
C=2.1 OWENS Sections and Details 8/19/98 9/16/98
- -----------------------------------------------------------------------------------------------------
C=2.2 OWENS Sections and Details 8/19/98 9/16/98
- -----------------------------------------------------------------------------------------------------
S=1.1 OWENS Roof Framing Plans 8/19/98 9/15/98
- -----------------------------------------------------------------------------------------------------
S=1.2 OWENS Misc. Framing Plans 8/19/98 10/20/98
- -----------------------------------------------------------------------------------------------------
S=1.3 OWENS Office Framing Plans 9/16/98
- -----------------------------------------------------------------------------------------------------
S=1.4 OWENS Misc. Framing Plans 10/20/98
- -----------------------------------------------------------------------------------------------------
S=2.1 OWENS Sections and Details 8/19/98 9/16/98
- -----------------------------------------------------------------------------------------------------
S=2.2 OWENS Sections and Details 8/19/98 10/20/98
- -----------------------------------------------------------------------------------------------------
M=1.1 OWENS Site Utilities Plan 8/19/98 11/9/98
- -----------------------------------------------------------------------------------------------------
M=2.1 OWENS Facility Underground Plumbing 7/27/98 9/28/98
- -----------------------------------------------------------------------------------------------------
M=2.2 OWENS Office Underground Plumbing Plan 7/24/98 10/16/98
- -----------------------------------------------------------------------------------------------------
M=2.3 OWENS Enlarged Areas Underground Plumbing Plan 7/27/98 10/16/98
- -----------------------------------------------------------------------------------------------------
M=2.4 OWENS Underground Riser Diagrams 7/29/98 9/23/98
- -----------------------------------------------------------------------------------------------------
M=3.1 OWENS Facility Overhead Plumbing 7/28/98 11/9/98
- -----------------------------------------------------------------------------------------------------
M=3.2 OWENS Office Overhead Plumbing Plan 7/24/98 10/12/98
- -----------------------------------------------------------------------------------------------------
M=3.3 OWENS Enlarged Areas Overhead Plumbing Plan 7/29/98 10/16/98
- -----------------------------------------------------------------------------------------------------
M=3.4 OWENS Overhead Riser Diagrams 7/29/98 9/28/98
- -----------------------------------------------------------------------------------------------------
M=3.5 OWENS Plumbing Details 7/24/98 9/28/98
- -----------------------------------------------------------------------------------------------------
M=4.1 OWENS Facility HVAC Plan 8/5/98
- -----------------------------------------------------------------------------------------------------
M=4.2 OWENS Office HVAC Plan 9/17/98
- -----------------------------------------------------------------------------------------------------
M=4.3 OWENS Enlarged Areas HVAC Plans 9/16/98
- -----------------------------------------------------------------------------------------------------
M=4.4 OWENS HVAC Sections 8/13/98
- -----------------------------------------------------------------------------------------------------
M=4.5 OWENS HVAC Details 9/14/98
- -----------------------------------------------------------------------------------------------------
M=4.6 OWENS HVAC Schedules & Notes 9/1/98
- -----------------------------------------------------------------------------------------------------
M=5.1 OWENS Facility Fire Protection Sprinkler Plan 9/23/98
- -----------------------------------------------------------------------------------------------------
E=1.1 OWENS Electrical Site Plan 9/15/98
- -----------------------------------------------------------------------------------------------------
E=1.2 OWENS Truck Dispatch & Pump House Electrical Plans 9/21/98
- -----------------------------------------------------------------------------------------------------
E=2.1 OWENS Facility Lighting Plan 7/30/98
- -----------------------------------------------------------------------------------------------------
E=2.1.1 OWENS Facility Lighting Plan Section A 7/31/98 11/6/98
- -----------------------------------------------------------------------------------------------------
E=2.1.2 OWENS Facility Lighting Plan Section B 7/31/98 11/6/98
- -----------------------------------------------------------------------------------------------------
E=2.1.3 OWENS Facility Lighting Plan Section C 7/31/98 11/6/98
- -----------------------------------------------------------------------------------------------------
E=2.1.4 OWENS Facility Lighting Plan Section D 7/31/98 11/6/98
- -----------------------------------------------------------------------------------------------------
E=2.2 OWENS Office Lighting Plan 7/30/98 11/10/98
- -----------------------------------------------------------------------------------------------------
E=2.3 OWENS Enlarged Areas Lighting Plans 6/29/98
- -----------------------------------------------------------------------------------------------------
E=2.4 OWENS Underground Shipping Mezzanine Lighting Plans 8/14/98
- -----------------------------------------------------------------------------------------------------
E=2.5 OWENS Lighting Elevations 8/18/98
- -----------------------------------------------------------------------------------------------------
E=2.6 OWENS Luminaire Schedule & Mounting Detail 8/5/98 11/10/98
- -----------------------------------------------------------------------------------------------------
E=3.1 OWENS Facility Grounding & Panel Feeder Plan 6/15/98
- -----------------------------------------------------------------------------------------------------
E=3.1.1 OWENS Facility Power Plan Section A 7/31/98
- -----------------------------------------------------------------------------------------------------
E=3.1.2 OWENS Facility Power Plan Section B 8/27/98
- -----------------------------------------------------------------------------------------------------
E=3.1.3 OWENS Facility Power Plan Section C 8/27/98
- -----------------------------------------------------------------------------------------------------
E=3.1.4 OWENS Facility Power Plan Section D 8/27/98
- -----------------------------------------------------------------------------------------------------
E=3.2 OWENS Office Power Plan 6/29/98
- -----------------------------------------------------------------------------------------------------
E=3.3 OWENS Enlarged Areas Power Plans 6/29/98
- -----------------------------------------------------------------------------------------------------
E=3.4 OWENS Symbol Schedule & Detail 8/5/98
- -----------------------------------------------------------------------------------------------------
E=4.1 OWENS One Line Diagram 8/4/98
- -----------------------------------------------------------------------------------------------------
E=4.2 OWENS "MSB-2" One Line Diagram 8/27/98
- -----------------------------------------------------------------------------------------------------
E=4.3 OWENS Distribution Panel & Fan Control Schedule 8/4/98
- -----------------------------------------------------------------------------------------------------
E=4.4 OWENS Panelboard Schedules 8/4/98
- -----------------------------------------------------------------------------------------------------
E=4.5 OWENS Panelboard Schedules 8/4/98
- -----------------------------------------------------------------------------------------------------
E=4.6 OWENS Panelboard Schedules 9/22/98
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 67
BOOK 79 PAGE 607
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
E=4.7 OWENS Panelboard Schedules 9/16/98
- -----------------------------------------------------------------------------------------------------
E=4.8 OWENS Panelboard Schedules 9/29/98
- -----------------------------------------------------------------------------------------------------
E=5.1 OWENS Facilities System Plan 10/1/98
- -----------------------------------------------------------------------------------------------------
E=5.2 OWENS Office System Plan 10/1/98
- -----------------------------------------------------------------------------------------------------
E=5.3 OWENS Enlarged Areas System Plan 10/1/98
- -----------------------------------------------------------------------------------------------------
E=5.4 OWENS Systems Riser Diagram, Legend & Details 10/1/98
- -----------------------------------------------------------------------------------------------------
E=5.5 OWENS PA System and CCTV System Riser Diagram & Details 10/8/98
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 68
EXHIBIT "C"
Rent Schedule
See Attached
C-1
<PAGE> 69
EXHIBIT "C"
<TABLE>
<CAPTION>
GLOBAL
LEASE BASIC COMPANY BASIC
QRTS. DATE INTEREST SINK FUND RENT PAYMENT RENT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
04/01/99 $808,000 $0 $808,000 $0 $808,000
0 06/01/99 $0 $0 $0 $12,625 $12,625
1 07/01/99 $606,000 $0 $606,000 $37,875 $643,875
2 10/01/99 $606,000 $0 $606,000 $37,875 $643,875
3 01/01/00 $606,000 $200,000 $806,000 $37,875 $843,875
4 04/01/00 $602,000 $0 $602,000 $37,875 $639,875
5 07/01/00 $602,000 $300,000 $902,000 $37,875 $939,875
6 10/01/00 $596,000 $0 $596,000 $37,875 $633,875
7 01/01/01 $596,000 $300,000 $896,000 $37,875 $933,875
8 04/01/01 $590,000 $0 $590,000 $37,875 $627,875
9 07/01/01 $590,000 $300,000 $890,000 $37,875 $927,875
10 10/01/01 $584,000 $0 $584,000 $37,875 $621,875
11 01/01/02 $584,000 $300,000 $884,000 $37,875 $921,875
12 04/01/02 $578,000 $0 $578,000 $37,875 $615,875
13 07/01/02 $578,000 $300,000 $878,000 $37,875 $915,875
14 10/01/02 $572,000 $0 $572,000 $37,875 $609,875
15 01/01/03 $572,000 $300,000 $872,000 $37,875 $909,875
16 04/01/03 $566,000 $0 $566,000 $37,875 $603,875
17 07/01/03 $566,000 $300,000 $866,000 $37,875 $903,875
18 10/01/03 $560,000 $0 $560,000 $37,875 $597,875
19 01/01/04 $560,000 $300,000 $860,000 $37,875 $897,875
20 04/01/04 $554,000 $0 $554,000 $37,875 $591,875
21 07/01/04 $554,000 $400,000 $954,000 $37,875 $991,875
22 10/01/04 $546,000 $0 $546,000 $37,875 $583,875
23 01/01/05 $546,000 $400,000 $946,000 $37,875 $983,875
24 04/01/05 $538,000 $0 $538,000 $37,875 $575,875
25 07/01/05 $538,000 $400,000 $938,000 $37,875 $975,875
26 10/01/05 $530,000 $0 $530,000 $37,875 $567,875
27 01/01/06 $530,000 $400,000 $930,000 $37,875 $967,875
28 04/01/06 $522,000 $0 $522,000 $37,875 $559,875
29 07/01/06 $522,000 $400,000 $922,000 $37,875 $959,875
30 10/01/06 $514,000 $0 $514,000 $37,875 $551,875
31 01/01/07 $514,000 $400,000 $914,000 $37,875 $951,875
32 04/01/07 $506,000 $0 $506,000 $37,875 $543,875
33 07/01/07 $506,000 $500,000 $1,006,000 $37,875 $1,043,875
34 10/01/07 $496,000 $0 $496,000 $37,875 $533,875
35 01/01/08 $496,000 $500,000 $996,000 $37,875 $1,033,875
</TABLE>
<PAGE> 70
EXHIBIT "C"
<TABLE>
<CAPTION>
GLOBAL
LEASE BASIC COMPANY BASIC
QRTS. DATE INTEREST SINK FUND RENT PAYMENT RENT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
36 04/01/08 $486,000 $0 $486,000 $37,875 $523,875
37 07/01/08 $486,000 $500,000 $986,000 $37,875 $1,023,875
38 10/01/08 $476,000 $0 $476,000 $37,875 $513,875
39 01/01/09 $476,000 $500,000 $976,000 $37,875 $1,013,875
40 04/01/09 $466,000 $0 $466,000 $37,875 $503,875
41 07/01/09 $466,000 $500,000 $966,000 $37,875 $1,003,875
42 10/01/09 $456,000 $0 $456,000 $37,875 $493,875
43 01/01/10 $456,000 $500,000 $956,000 $37,875 $993,875
44 04/01/10 $446,000 $0 $446,000 $37,875 $483,875
45 07/01/10 $446,000 $600,000 $1,046,000 $37,875 $1,083,875
46 10/01/10 $434,000 $0 $434,000 $37,875 $471,875
47 01/01/11 $434,000 $600,000 $1,034,000 $37,875 $1,071,875
48 04/01/11 $422,000 $0 $422,000 $37,875 $459,875
49 07/01/11 $422,000 $600,000 $1,022,000 $37,875 $1,059,875
50 10/01/11 $410,000 $0 $410,000 $37,875 $447,875
51 01/01/12 $410,000 $600,000 $1,010,000 $37,875 $1,047,875
52 04/01/12 $398,000 $0 $398,000 $37,875 $435,875
53 07/01/12 $398,000 $700,000 $1,098,000 $37,875 $1,135,875
54 10/01/12 $384,000 $0 $384,000 $37,875 $421,875
55 01/01/13 $384,000 $700,000 $1,084,000 $37,875 $1,121,875
56 04/01/13 $370,000 $0 $370,000 $37,875 $407,875
57 07/01/13 $370,000 $700,000 $1,070,000 $37,875 $1,107,875
58 10/01/13 $356,000 $0 $356,000 $37,875 $393,875
59 01/01/14 $356,000 $800,000 $1,156,000 $37,875 $1,193,875
60 04/01/14 $340,000 $0 $340,000 $37,875 $377,875
61 07/01/14 $340,000 $800,000 $1,140,000 $37,875 $1,177,875
62 10/01/14 $324,000 $0 $324,000 $37,875 $361,875
63 01/01/15 $324,000 $800,000 $1,124,000 $37,875 $1,161,875
64 04/01/15 $308,000 $0 $308,000 $37,875 $345,875
65 07/01/15 $308,000 $800,000 $1,108,000 $37,875 $1,145,875
66 10/01/15 $292,000 $0 $292,000 $37,875 $329,875
67 01/01/16 $292,000 $900,000 $1,192,000 $37,875 $1,229,875
68 04/01/16 $274,000 $0 $274,000 $37,875 $311,875
69 07/01/16 $274,000 $900,000 $1,174,000 $37,875 $1,211,875
70 10/01/16 $256,000 $0 $256,000 $37,875 $293,875
71 01/01/17 $256,000 $900,000 $1,156,000 $37,875 $1,193,875
72 04/01/17 $238,000 $0 $238,000 $37,875 $275,875
</TABLE>
<PAGE> 71
EXHIBIT "C"
<TABLE>
<CAPTION>
GLOBAL
LEASE BASIC COMPANY BASIC
QRTS DATE INTEREST SINK FUND RENT PAYMENT RENT
- ----- ---- ------- --------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
73 07/01/17 $238,000 $1,000,000 $1,238,000 $37,875 $1,275,875
74 10/01/17 $218,000 $0 $218,000 $37,875 $255,875
75 01/01/18 $218,000 $1,000,000 $1,218,000 $37,875 $1,255,875
76 04/01/18 $198,000 $0 $198,000 $37,875 $235,875
77 07/01/18 $198,000 $1,100,000 $1,298,000 $37,875 $1,335,875
78 10/01/18 $176,000 $0 $176,000 $37,875 $213,875
79 01/01/19 $176,000 $1,100,000 $1,276,000 $37,875 $1,313,875
80 04/01/19 $154,000 $0 $154,000 $37,875 $191,875
81 07/01/19 $154,000 $1,200,000 $1,354,000 $37,875 $1,391,875
85 10/01/19 $130,000 $0 $130,000 $37,875 $167,875
86 01/01/20 $130,000 $1,200,000 $1,330,000 $37,875 $1,367,875
87 04/01/20 $106,000 $0 $106,000 $37,875 $143,875
88 07/01/20 $106,000 $1,200,000 $1,306,000 $37,875 $1,343,875
89 10/01/20 $82,000 $0 $82,000 $37,875 $119,875
90 01/01/21 $82,000 $1,300,000 $1,382,000 $37,875 $1,419,875
91 04/01/21 $56,000 $0 $56,000 $37,875 $93,875
92 07/01/21 $56,000 $1,400,000 $1,456,000 $37,875 $1,493,875
93 10/01/21 $28,000 $0 $28,000 $37,875 $65,875
94 01/01/22 $28,000 $1,400,000 $1,428,000 $0 $1,428,000
$36,902,000 $30,300,000 $67,202,000 $3,421,375 $70,623,375
</TABLE>
<PAGE> 72
EXHIBIT "D"
Environmental Notices
NONE
D-1
<PAGE> 73
EXHIBIT "E"
Easements Affecting Real Property
1. Reciprocal Storm Water Drainage Agreement by and between Hewson/DeSoto
South, L.L.C. and Landlord dated as of the 1st day of December, 1998.
2. Reciprocal Storm Water Detention and Drainage Agreement by and between
Landlord and Tenant dated as of the 1st day of December, 1998.
3. Reciprocal Connector Easement Agreement by and between Landlord and Tenant
dated as of the 1st day of December, 1998.
4. Parking Easement Agreement by and between Landlord and Tenant dated as of
the 1st day of December, 1998.
E-1
<PAGE> 74
EXHIBIT "F"
Letter Regarding Future Phases
F-1
<PAGE> 75
[WILLIAMS-SONOMA, INC. LETTERHEAD]
July 1, 1998
Mayor Samuel Rikard
City of Olive Branch
9189 Pigeon Roost
Olive Branch, MS 38854
Honorable Mayor Rikard:
This letter is respectfully submitted in fulfillment of the requirements of the
Mississippi Department of Economic Development, Mississippi Business Investment
Act (MBIA) Program. The program is designed to promote business and economic
development through job producing programs and by providing loans and grants to
cities and counties to finance improvements. The program requires that any
private company desiring assistance from a city of a county shall submit a
letter of intent to locate, expand, or build a facility entirely or partially
within the city or county.
As required by the MBIA program, the following sets forth the intention of
Williams-Sonoma, Inc. ("Williams-Sonoma") to locate a distribution facility in
Olive Branch, DeSoto County, Mississippi, subject to the satisfaction of the
following conditions:
i) Satisfactory resolutions of all issues relating to annexation,
utilities, infrastructure, local permits for Williams-Sonoma's
intended use, etc.;
ii) The negotiation and documentation of a lease between Hewson
Properties, Inc. ("Hewson Properties") and Williams-Sonoma on terms
reasonably acceptable to Williams-Sonoma (including the treatment
of the lease as an operating lease for Williams-Sonoma's financial
accounting purposes); and
iii) Completion and delivery of the first building by Hewson Properties
on schedule and in accordance with plans approved by Williams-
Sonoma.
This project is eligible for MBIA assistance as a "job producing facility."
<PAGE> 76
Mayor Rikard
7-1-98
Page two
- - A commitment regarding the number of net new full-time equivalent jobs to
be created and maintained by the Project.
It is Williams-Sonoma's hope that, as and when fully implemented, the
Project will cause the creation of 540 net new full-time equivalent jobs as
a result of the loan made pursuant to the Mississippi Business Investment
Act. For the purposes of the MBIA loan, however, Williams-Sonoma agrees to
create and maintain a minimum of 134 full-time equivalent jobs for the ten
(10) year duration of the MBIA loan, provided that the conditions set forth
above have been satisfied. The average wages, excluding fringe benefits,
for these jobs is anticipated to be $10 per hour. The 134 full-time
equivalent jobs are anticipated to be created by the end of the fourth year
following the date of the closing of the loan.
- - An acknowledgment of understanding that penalties may be imposed on the
Private Company, pursuant to the Act and Guidelines, if the Private Company
fails to create and maintain the number of jobs specified in the
application.
Williams-Sonoma acknowledges that if the conditions set forth above have
been satisfied and Williams-Sonoma fails to create and maintain the 134
full-time equivalent jobs specified in this letter of intent, it shall be
liable as follows: (a) an interest charge increase equal to the current New
York Prime Interest Rate plus two percent (2%) for the remainder of the
loan, or (b) prepayment of the outstanding loan amount incurred by the City
of Olive Branch for the project's benefit. The penalties or a portion
thereof may be waived by DECD if Williams-Sonoma's failure to satisfy the
job creation requirement is due to circumstances outside tis control. The
penalties or portion thereof shall be payable in such installments as DECD
deems appropriate.
- - Current employment levels at the Project site and statewide employment of
the Private Company.
<PAGE> 77
Mayor Rikard
7-1-98
Page three
Employment at the project site is zero. Williams-Sonoma
currently employs 15 people statewide
- The estimated dollar costs of the Project and a description of
the private parties investment in the Project and any public or
other private sources of funding.
As you are aware, Hewson Properties is developing the first
building of a two building distribution facility project (the
"Project") for ultimate lease to Williams-Sonoma. The plan is
for this building to be located on a 61 acre parcel east of the
Olive Branch Airport, west of the proposed future Polk Lane,
and north of Goodman Road and the Whispering Woods Golf Course.
At the same time, it is contemplated that Williams-Sonoma will
have the right to acquire an adjacent 61 acre parcel, as the
sites of a future second building (described below).
The first building will be 750,000 square feet and Hewson
Properties has advised us that it will cost approximately
$30,000,000 including land, building and soft costs. In
addition, upon Williams-Sonoma's occupancy of the first building,
Williams-Sonoma will purchase and/or lease approximately
$20,000,000 of equipment for the building. Hewson Properties
informs us that completion and occupancy of this first building
is scheduled for 6/1/99. Upon its occupancy of this phase of
the Project, Williams-Sonoma expects to employ approximately
235 people on an adjusted full-time basis.
The second building occupies 614,000 square feet and we are
informed that it will cost approximately $24,500,000 including
land, building and soft costs. In addition, if and when
Williams-Sonoma occupies the second building, Williams-Sonoma
will purchase and/or lease approximately $11,300,000 of
equipment for the building. While completion and occupancy
of this second building is presently targeted for 6/1/01,
Williams-Sonoma's going forward with implementing plans for
this second building (as well as the expansions of this
building and the first building discussed), as well as definitive
projected occupancy dates, will depend on the continued future
<PAGE> 78
Mayor Rikard
7-1-98
Page four
growth of Williams-Sonoma's business. Upon its occupancy of this phase
of the Project, Williams-Sonoma expects to employ an additional
approximately 131 people on an adjusted full-time basis.
Subsequent to the completion and stabilization of the first two
building, plans call for each building to be expanded as and when
Williams-Sonoma's needs require by 318,000 square feet and 380,000
square feet respectively. We have been advised by Hewson Properties
that the costs of such expansion will be approximately $11,100,000 and
$13,300,000 respectively, for building and soft costs. Williams-Sonoma
expects that each such expansion will contain between $7,000,000 and
$8,500,000 of equipment to be purchased and/or leased by
Williams-Sonoma. We anticipate that as and when these two expansions
go forward, employment for another 174 people on an adjusted full-time
basis will be provided.
The total estimated project cost for the first building alone
(including equipment therein) (but not including the second building
or future expansions of the first and second buildings or equipment
therein) is expected to be approximately $50,000,000. For the purpose
of the MBIA loan and the Economic Development Highway Program Grant,
assuming satisfaction of the conditions set forth above, upon
occupancy of the first building, Williams-Sonoma commits to expend
approximately $20,000,000 in equipment lease payments, machinery, and
equipment for the project with the balance of the project costs to be
financed by the project developer and Williams-Sonoma's anticipated
landlord, Hewson Properties. Other project costs (i.e., necessary
public infrastructure) will be met with an MBIA loan totaling
$2,000,000 and an Economic Development Highway Grant totaling
$6,500,000.
- The time schedule for implementation and completion of the Project,
evidencing an expeditious completion of the Project.
Williams-Sonoma is informed that Hewson Properties expects to begin
work on the first building of the project in June 1998 and expects the
first building to be completed by June 1, 1999. If
<PAGE> 79
Mayor Rikard
7-1-98
Page five
Williams-Sonoma continues to grow at its current rate, it is
anticipated that Williams-Sonoma will want to take occupancy
of the second building by June 1, 2001.
- A verifiable statement that the Project could not be completed
without the infusion of the requested public funds.
Hewson Properties has advised Williams-Sonoma that without
the infusion of MBIA funds, the completion of the project
would not be feasible.
A statement of intention to operate the Project for a time period equal to
the term of the loan to the Local Sponsor.
- Assuming satisfaction of the conditions set forth above, Williams-
Sonoma intends to operate its Olive Branch, DeSoto County facility for
at least the ten (10) year duration of the loan.
- - Any commitment to pay rental on the Project or to make loan payments to
the Local Sponsor.
- The City of Olive Branch will repay the MBIA loan. Neither Hewson
Properties nor Williams-Sonoma intends to pay rental or make loan
payments to the City of Olive Branch.
- - A statement that the specific improvements are necessary for the efficient
and cost effective operation of the Project, together with supporting
financial and engineering documentation.
- The proceeds of the MBIA loan will be used for the construction of
non-road infrastructure improvements to serve the facility. MBIA
funds are necessary for the efficient and cost effective operation
of the project.
- - A notarized statement of willingness to grant a lien on the facility for
which the improvements are being provided or to otherwise collateralize
the loan. Such lien may be foreclosed in the event that the Private Company
fails to operate the Project in accordance with the terms of any agreements
among the parties involved in the financing of the project.
<PAGE> 80
Mayor Rikard
7-1-98
Page six
o The improvements proposed by this project will be publicly owned
infrastructure. Neither Hewson Properties nor Williams-Sonoma will
make loan payments to repay the MBIA loan and, accordingly, neither
Hewson Properties nor Williams-Sonoma will grant any liens on the
facility with respect to such loan.
o A statement of willingness to comply with non-discrimination and equal
employment opportunity requirements.
o Williams-Sonoma will comply with all applicable federal and state laws
governing non-discrimination and equal employment opportunity.
Williams-Sonoma anticipates that Hewson Properties will provide a
similar undertaking.
o Evidence that there will be a Private Match of at least three dollars
($3.00) for every one dollar ($1.00) of MBI assistance.
o The private match ratio is approximately 25 to 1 for the first
building. Other funds - $30,000,000, Hewson Properties land, building
and soft costs, plus $20,000,000 Williams-Sonoma equipment expense.
(Additionally, Economic Development Highway Program will be requested
to provide $6,500,000) and MBIA Funds - $2,000,000.
o Evidence the proposed project will increase at least one (1) net new
full-time equivalent job for every fifteen thousand dollars ($15,000)
either loaned or granted for the Project.
o For the purposes of the MBIA loan and this letter of intent, upon
satisfaction of the conditions set forth above with respect to the
first building, Williams-Sonoma commits to create and maintain 134
jobs on an adjusted full-time basis for a minimum of ten (10) years
after its initial project occupancy. This equals one (1) net new
full-time job for every $15,000 loaned.
o From and after its initial project occupancy, job creation will be
documented by Williams-Sonoma by annually submitting a report entitled
"Statement of Job Creation" to the Mississippi Department of Economic
and Community Development.
<PAGE> 81
Mayor Rikard
7-1-98
Page seven
o The actual number of full-time equivalent jobs may well exceed the
minimum commitment. If the second building and further expansions
of the first and second building are realized as anticipated,
approximately 540 full-time equivalent jobs are expected to be
generated by the Project.
Thank you for your willingness to participate in the MBIA program and for your
cooperation and assistance in making this project become a reality.
If additional information is required, please feel free to contact me at your
convenience.
Sincerely,
/s/ W. Howard Lester
- -----------------------
W. Howard Lester
HL/ea
<PAGE> 82
EXHIBIT "G"
Existing Indebtedness
<PAGE> 83
LEASE EXHIBIT G
WILLIAMS-SONOMA
SCHEDULE OF INDEBTEDNESS
AS OF NOVEMBER 29, 1998
<TABLE>
<CAPTION>
BALANCE AT
NOVEMBER 29, 1998
<S> <C>
7.2% Senior Notes due August 8, 2005, as follows:
Teachers Insurance and Annuity Association of America $20,000,000
Transamerica Life Insurance and Annuity Co. $ 9,000,000
Transamerica Occidental Life Insurance Co. $ 1,000,000
New England Mutual Life Insurance Co. $10,000,000
-----------
Total Senior Notes $40,000,000
Mortgage with Bank of America due March 2001 $ 6,310,300
Various capital leases $ 1,460,200
Executive deferred compensation plan $ 2,543,000
Foreign letters of credit outstanding (contingent)* $42,271,000
-----------
TOTAL INDEBTEDNESS $92,584,500
===========
</TABLE>
Note: The Company has up to $60 m available in a line of credit facility with
Bank of America, of which $0 was outstanding at November 29, 1998.
* Varies from time to time, as Company's importing of goods varies. These are
more in the nature of "trade payables" than Debt, but are disclosed here in an
abundance of caution.
<PAGE> 1
EXHIBIT 10.5H
AMENDMENT NUMBER NINE TO STOCK INCENTIVE PLAN
<PAGE> 2
AMENDMENT NUMBER NINE TO THE
WILLIAMS-SONOMA , INC. ASSOCIATE STOCK INCENTIVE PLAN
Williams-Sonoma, Inc., a California corporation (the "Company")
hereby adopts this Amendment Number Nine to the Williams-Sonoma, Inc. Associate
Stock Incentive Plan, with reference to the following facts:
A. The Company maintains the Williams-Sonoma, Inc. Associate Stock
Incentive Plan, formerly referred to as the Williams-Sonoma, Inc. Employee
Profit Sharing And Stock Incentive Plan (the "Plan").
B. Article XV of the Plan permits the Company to amend the Plan at any
time.
C. The Company desires to amend the Plan as set forth in this Amendment
Number Nine.
NOW, THEREFORE, the Plan is hereby amended, effective as of October 1,
1998, as follows:
1. Section 1.31 of the Plan is hereby amended in its entirety to provide
as follows:
"1.31. 'Participating Company' means the Company and any Affiliate, unless
such Affiliate, with the written consent of the Directors, declines to
permits its Employees to participate in the Plan."
2. The following sentence is added to the end of Section 18.06 of the
Plan:
"Pursuant to Section 414(p)(10) of the Code, benefits may be paid to a
'alternate payee' under a 'qualified domestic relations order' before the
Participant has terminated his employment, reached the age of 59 1/2
years, or reached his 'earliest retirement age' within the meaning of
Section 414(p)(4)(B) of the Code."
3. In all other respects, the terms and provisions of the Plan are hereby
ratified and declared to remain in full force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the Company has executed this Amendment Number Nine
this 30th day of September, 1998, to be effective as of October 1, 1998.
WILLIAMS-SONOMA, INC.
By: /s/ Dennis A. Chantland
----------------------------------------
Dennis A. Chantland
Executive Vice President
Chief Administrative Officer
Secretary
2
<PAGE> 1
EXHIBIT 10.5I
AMENDMENT NUMBER TEN TO STOCK INCENTIVE PLAN
<PAGE> 2
AMENDMENT NUMBER TEN TO THE
WILLIAMS-SONOMA, INC. ASSOCIATE STOCK INCENTIVE PLAN
Williams-Sonoma, Inc., a California corporation (the "Company")
hereby adopts this Amendment Number Ten to the Williams-Sonoma, Inc. Associate
Stock Incentive Plan, with reference to the following facts:
A. The Company maintains the Williams-Sonoma, Inc. Associate Stock
Incentive Plan, formerly referred to as the Williams-Sonoma, Inc. Employee
Profit Sharing And Stock Incentive Plan (the "Plan").
B. Article XV of the Plan permits the Company to amend the Plan at any
time.
C. The Company desires to amend the Plan as set forth in this Amendment
Number Ten.
NOW, THEREFORE, the Plan is hereby amended, effective as of January 1,
1999, as follows:
1. The first sentence of Section 5.01 of the Plan is hereby amended in its
entirety to provide as follows:
"Commencing as of September 1, 1989, a Participant may elect to make
Salary Deferral Contributions of an amount not less than one percent (1%)
and not greater than fifteen percent (15%) of his Plan Year Compensation
(provided that, for all Plan Years beginning on or after February 1, 1990,
such amount must be a whole percentage of Compensation), provided that a
Participant's Salary Deferral Contributions made in any calendar year may
not exceed $7,000, as adjusted for cost of living increases pursuant to
Code Section 402(g)(5)."
2. The last sentence of Section 12.03 of the Plan is hereby stricken.
3. Section 12.04 of the Plan is hereby amended in its entirety to provide
as follows
"12.04 Required Distributions
Notwithstanding any other provision of this Plan, distributions shall be
made in accordance with Section 401(a)(9) of the Code, including the
minimum distribution incidental benefit requirement of Regulation Section
1.401(a)(9)-2. Accordingly, the following provisions, which are intended
to comply with such requirements, shall apply notwithstanding any other
provision of this Plan:
12.04.1 For purposes of this Section 12.04:
(a) In the case of a Participant who is not a Five Percent Owner
(as defined below) for the Plan Year ending with or within the calendar year in
which such Participant attained the age of seventy and one-half (70-1/2) years,
the term "Beginning Date" shall mean the first day of April of the calendar year
following the later of (a) the calendar year in which the Participant attains
the age of seventy and one-half (70-1/2) years, or (b) the calendar year in
which the Participant retires. In the case of a Participant who is a Five
Percent Owner (as defined below) for the Plan Year ending with or within the
calendar year in which such Participant attained the age of seventy and one-half
(70-1/2) years, the term "Beginning Date" shall mean the first day of April of
the calendar year following the calendar year in which the Participant attains
the age of seventy and one-half (70-1/2) years.
<PAGE> 3
(b) The term "Distribution Calendar Year" shall mean a calendar
year for which a minimum distribution is required pursuant to this Section
12.04. For distributions beginning before the Participant's death, the first
Distribution Calendar Year is the calendar year immediately preceding the
calendar year which contains the Participant's Beginning Date. For distributions
beginning after the Participant's death, the first Distribution Calendar Year is
the calendar year in which the distributions are required to begin pursuant to
this Section 12.04.
(c) Life expectancy and joint and last survivor expectancy shall
be computed by the use of the expected return multiples of Tables V and VI of
Regulation Section 1.72-9. Unless otherwise elected by the Participant (or by
the Participant's surviving spouse in the case of distributions described in
Section 12.04.4) by the time distributions are required to begin, life
expectancy shall be recalculated annually. Such election shall be irrevocable as
to the Participant (or surviving spouse) and shall apply to all subsequent
years. The life expectancy of a non-spouse Beneficiary may not be recalculated.
(d) The term "Applicable Life Expectancy" shall mean the life
expectancy (or joint and last survivor expectancy) calculated using the attained
age of the Participant (or the Designated Beneficiary) as of the Participant's
(or the Designated Beneficiary's) birthday in the "Applicable Calendar Year"
reduced by one for each calendar year which has elapsed since the date life
expectancy was first calculated. If life expectancy is being recalculated, the
Applicable Life Expectancy shall be the life expectancy as so recalculated. The
"Applicable Calendar Year" shall be the first Distribution Calendar Year, and if
life expectancy is being recalculated, each succeeding calendar year. If annuity
payments commence in accordance with the provisions of this Section 12.04 before
the Beginning Date, the "Applicable Calendar Year" shall be the year such
payments commence. If a distribution is in the form of an immediate annuity
purchased after the Participant's death with the Participant's remaining
interest, the "Applicable Calendar Year" is the year of purchase.
(e) The term "Participant's Benefit" means the balance in the
Participant's interest in the Trust Fund as of the last Valuation Date in the
calendar year (the "Valuation Calendar Year") immediately preceding the
Distribution Calendar Year increased by the amount of any contributions or
forfeitures allocated to the Participant during the Valuation Calendar Year
after such Valuation Date and decreased by distributions made in the such
Valuation Calendar Year after such Valuation Date; provided, however, that if
any portion of the minimum distribution for the first Distribution Calendar Year
is made in the second Distribution Calendar Year on or before the Beginning
Date, the amount of the minimum distribution made in the second Distribution
Calendar Year shall be treated as if it had been made in the immediately
preceding Distribution Calendar Year.
(f) The term "Five Percent Owner" means any person who owns (or
is considered as owning within the meaning of Section 318 of the Code) more than
five percent (5%) of the outstanding stock of the employer, or stock possessing
more than five percent (5%) of the total combined voting power of all stock in
the employer, or, in the case of an unincorporated business, any person who owns
more than five percent (5%) of the capital or profits interest in such employer.
12.04.2 Each Participant's entire interest in the Trust Fund shall
be distributed, as of the first Distribution Calendar Year, to such Participant
either (a) in full, not later than such Participant's Beginning Date, or (b) in
installments, beginning not later than such Participant's Beginning Date, and
extending over one of the following periods: (1) the life of such Participant,
(2) the lives of such Participant and his Designated Beneficiary, (3) a period
not extending beyond the life expectancy of such Participant or (4) a period not
extending beyond the life expectancy of the Participant and his Designated
Beneficiary. Once distributions have begun to a Five Percent Owner under this
Section 12.04, they must continue to be distributed, even if a Participant
ceases to be a Five Percent Owner in a subsequent year.
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<PAGE> 4
12.04.3 If a Participant dies after distribution of his interest in
the Trust Fund has begun but before his entire interest in the Trust Fund has
been distributed pursuant to Section 12.04.2, the portion of his interest in the
Trust Fund which remains undistributed at his death shall be distributed at
least as rapidly as it would have been distributed under the method of
distribution which was in use pursuant to Section 12.04.2 on the date of his
death.
12.04.4 If a Participant dies before distribution of his interest in
the Trust Fund begins pursuant to Section 12.04.2, distribution of such
Participant's entire interest shall be completed by December 31 of the calendar
year containing the fifth (5th) anniversary of the Participant's death, except
to the extent that an election is made to receive distributions in accordance
with paragraph (a) or paragraph (b) as follows:
(a) If any portion of the Participant's interest is payable to a
Designated Beneficiary, distributions may be made over the life or over a period
certain not greater than the life expectancy of such Designated Beneficiary
commencing on or before December 31 of the calendar year immediately following
the calendar year in which the Participant died, or
(b) If the Designated Beneficiary is the Participant's surviving
spouse, the date distributions are required by begin in accordance with
paragraph (a) above shall not be earlier than the later of (i) December 31 of
the calendar year immediately following the calendar year in which the
Participant died or (ii) December 31 of the calendar year in which the
Participant would have attained the age of seventy and one-half (70-1/2) years.
If such surviving spouse dies before such distributions begin, the provisions of
this Section 12.04.4 shall be applied as if such surviving spouse were the
Participant.
If the Participant has not made an election pursuant to this Section
12.04.4 by the time of his death, the Participant's Designated Beneficiary
must elect the method of distribution no later than the earlier of (i)
December 31 of the calendar year in which the distributions would be
required to begin under this Section 12.04.4, or (ii) December 31 of the
calendar year which contains the fifth (5th) anniversary of the date of
the death of the Participant. If the Participant has no Designated
Beneficiary, or if the Designated Beneficiary does not elect a method of
distribution, distribution of the Participant's entire interest in the
Trust Fund must be completed by December 31 of the calendar year
containing the fifth (5th) anniversary of the Participant's death.
12.04.5 If a Participant's interest is to be distributed in other
than a single sum, the following minimum distribution rules shall apply on or
after the Beginning Date:
(a) If the Participant's Benefit is to be distributed over (i) a
period not extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the Participant's
Designated Beneficiary or (ii) a period not extending beyond the life expectancy
of the Designated Beneficiary, the amount required to be distributed for each
calendar year, beginning with distributions for the first Distribution Calendar
Year, must at least equal the quotient obtained by dividing the Participant's
Benefit by the Applicable Life Expectancy.
(b) For calendar years beginning before January 1, 1989, if the
Participant's spouse is not the Designated Beneficiary, the method of
distribution selected must assure that at least fifty percent (50%) of the
present value of the amount available for distribution is paid within the life
expectancy of the Participant.
(c) For calendar years beginning after December 31, 1988, the
amount to be distributed each year, beginning with distributions for the first
Distribution Calendar Year, shall not be less than the quotient obtained by
dividing the Participant's Benefit by the lesser of (i) the Applicable Life
Expectancy or (ii) if the Participant's spouse is not the Designated
Beneficiary, the applicable divisor
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<PAGE> 5
determined from the table set forth in Regulation Section 1.401(a)(9)-2 Q&A-4.
Distributions after the death of the Participant shall be distributed using the
Applicable Life Expectancy set forth in paragraph (a) above as the relevant
divisor without regard to Regulation Section 1.401(a)(9)-2.
(d) The minimum distribution required for the Participant's first
Distribution Calendar Year must be made on or before the Participant's Beginning
Date. The minimum distribution for other calendar years, including the minimum
distribution for the Distribution Calendar Year in which the Participant's
Beginning Date occurs, must be made on or before December 31 of such
Distribution Calendar Year.
(e) If the Participant's Benefit is distributed in the form of an
annuity purchased from an insurance company, distributions thereunder shall be
made in accordance with the requirements of Section 401(a)(9) of the Code.
12.04.6 For purposes of this Section 12.04, any amount paid to a
child of a Participant shall be treated as if such amount had been paid to such
Participant's surviving spouse if such amount will become payable to such
surviving spouse when such child reaches maturity. For purposes of this Section
12.04, the life expectancy of a Participant and of his surviving spouse may not
be redetermined more frequently than annually (other than in the case of a life
annuity).
12.04.7 For purposes of this Section 12.04, "Designated Beneficiary"
means any individual designated as a Beneficiary by a Participant.
12.04.8 Notwithstanding the foregoing provisions of this Section 7,
any designation properly made by a Participant before January 1, 1984 under
Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 shall
remain in effect."
4. In all other respects, the terms and provisions of the Plan are hereby
ratified and declared to remain in full force and effect.
IN WITNESS WHEREOF, the Company has executed this Amendment Number Ten
this 31st day of December, 1998, to be effective as of January 1, 1999.
WILLIAMS-SONOMA, INC.
By: /s/ Jerry Dratler
-------------------------------------
Jerry Dratler
Vice President Finance
4
<PAGE> 1
EXHIBIT 10.11
AMENDED AND RESTATED EXECUTIVE DEFERRAL PLAN
<PAGE> 2
WILLIAMS-SONOMA, INC.
EXECUTIVE DEFERRAL PLAN
Williams-Sonoma, Inc. (the "Company") hereby adopts this Second Amendment
and Restatement of the Williams-Sonoma, Inc. Executive Deferral Plan effective
as of January 1, 1999, with reference to the following facts:
A. Effective as of July 1, 1995, the Company adopted the Williams-Sonoma,
Inc. Executive Deferral Plan (the "Plan") to provide supplemental retirement
income benefits for a select group of management and highly compensated
employees.
B. Effective as of January 1, 1998, the Company amended and restated the
Plan in its entirety.
C. The Company wishes again to amend and restate the Plan in its entirety
to enhance certain benefits provided to Participants and to clarify certain
provisions of the Plan.
NOW, THEREFORE, the Plan is hereby amended and restated in its entirety,
effective as of January 1, 1999, as follows:
ARTICLE I
TITLE AND DEFINITIONS
I.1 TITLE.
This Plan shall be known as the Williams-Sonoma, Inc. Executive Deferral
Plan.
I.2 DEFINITIONS.
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
"Beneficiary" or "Beneficiaries" shall mean the person or persons
designated under Article VII.
"Board of Directors" or "Board" shall mean the Board of Directors of the
Company.
"Bonus" shall mean any incentive compensation payable to a Participant in
addition to the Participant's Salary.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board to administer
the Plan in accordance with Article VII.
"Company" shall mean Williams-Sonoma, Inc., any successor corporation and
each corporation which is a member of a controlled group of corporations (within
the meaning of Section 414(b) of the Code) of which Williams-Sonoma, Inc. is a
member.
"Compensation" shall mean the Salary and Bonus that the Participant
receives for services rendered to the Company.
<PAGE> 3
"Deferral Account" shall mean the bookkeeping account maintained by the
Committee for each Participant under Article IV, which shall be the sum of the
Participant's Plan Year Subaccounts.
"Disability" shall mean a period of disability during which a Participant
qualifies for benefits under the Company's group long term disability plan or,
if a Participant does not participate in such a plan, a period of disability
during which the Participant would have qualified for benefits under such a plan
had the Participant been a participant in such a plan, as determined in the sole
discretion of the Committee. If the Company does not sponsor such a plan,
Disability shall be determined by the Committee in its sole discretion.
"Distributable Amount" shall mean the amount credited to a Participant's
Plan Year Subaccount as of the date of distribution or withdrawal under Section
6.5.
"Eligible Employee" shall mean each member of a group of select management
or highly compensated employees of the Company who is selected by the Committee
to participate in the Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Fund" or "Funds" shall mean one or more of the mutual funds or investment
vehicles selected by the Committee pursuant to Section 3.2(a).
"Initial Election Period" for an Eligible Employee shall mean the 30-day
period following the date on which the Committee notifies an employee that he or
she has been selected as an Eligible Employee.
"Participant" shall mean any Eligible Employee who elects to defer
Compensation in accordance with Section 3.l.
"Payment Eligibility Date" shall mean (a) for the Plan Year Subaccount for
Plan Years before 1999, the date (which shall be the first day of a calendar
quarter) specified by the Participant on a form provided by the Committee prior
to July 30, 1995 or, if later, within 30 days of the date on which such person
became a Participant, and (b) for each Plan Year Subaccount for the 1999 Plan
Year and later Plan Years, the date (which shall be the first day of a calendar
year at least three years after the first day of the Plan Year for which the
Plan Year Subaccount is maintained) specified by the Participant on a form
prescribed by the Committee when the Participant makes a valid election to defer
Salary for the Plan Year for which the Plan Year Subaccount is maintained. If
the Participant specifies no Payment Eligibility Date for a Plan Year
Subaccount, the Payment Eligibility Date shall be the first day of the calendar
quarter following the Participant's death, Disability, Retirement, or
Termination of Employment.
"Plan" shall mean the Williams-Sonoma, Inc. Executive Deferral Plan set
forth herein.
"Plan Year" shall mean the 12 consecutive month period beginning January
1, and ending December 31, except that the first Plan Year shall be a short year
beginning July 1, 1995 and ending December 31, 1995.
"Plan Year Subaccount" shall mean the bookkeeping account maintained by
the Committee for each Participant under Article IV to reflect, for each Plan
Year, the deferrals of Salary made by such Participant for such Plan Year, the
deferrals of Bonuses made by such Participant for the fiscal year of the Company
which includes the last day of such Plan Year, deemed earnings credited thereon,
and withdrawals and distributions debited thereto. The Committee shall maintain
a single Plan Year Subaccount for all Plan Years before 1999.
"Retirement" shall mean a Participant's Termination of Employment on or
after his or her attainment of both age 55 and five Years of Service for any
reason other than a leave of absence approved
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<PAGE> 4
by the Committee, death, or Disability. For purposes of determining whether a
Participant has "Retired," "Years of Service" shall mean the total number of
full years in which a Participant has been continuously employed by the Company.
For purposes of this definition, a year of employment shall be a 365 day period
(or 366 day period in the case of a leap year) that, for the first year of
employment, commences on the employee's date of hire and that, for any
subsequent year, commences on an anniversary of that hiring date. The Committee
may, in its sole discretion, credit a Participant with any partial year of
employment. Periods during which an Eligible Employee is on a paid leave of
absence or suffers from a Disability shall be deemed to be periods of continuous
employment.
"Retirement Payment Eligibility Date" shall mean the date (which shall be
the first day of a calendar year) a number of years after the Participant's
Retirement or Disability, which such number shall be specified by the
Participant on a form provided by the Committee within the Initial Election
Period, or, if the Participant does not file the form within the Initial
Election Period, at least one year before the Participant's Retirement or
Disability. If the Participant does not validly specify a Retirement Payment
Eligibility Date, the Retirement Payment Eligibility Date shall be the first day
of the calendar quarter following the Participant's Retirement or Disability.
"Salary" shall mean the Participant's base pay.
"Termination of Employment" shall mean the ceasing of a Participant's
employment with the Company for any reason other than a leave of absence
approved by the Committee, death, or Disability. A Participant shall not be
considered to have had a Termination of Employment by virtue of a change in
employment from one corporation which is a member of the controlled group of
corporations (within the meaning of Section 414(b) of the Code) constituting the
Company to another such member. However, if the corporation which employs a
Participant ceases to be a member of the controlled group of corporations
constituting the Company as a result of a sale or other corporate
reorganization, such sale or other corporate reorganization shall be treated as
the Participant's Termination of Employment unless, immediately following such
sale or reorganization and without any break in employment, the Participant
remains employed by another member of the controlled group of corporations
constituting the Company, or the former member of the controlled group which
employs the Participant assumes liability for the benefits of the Participant
under this Plan.
ARTICLE II
PARTICIPATION
II.1 PARTICIPATION.
An Eligible Employee shall become a Participant in the Plan by electing to
defer all or a portion of his or her Compensation in accordance with Section
3.1. The Committee, in its discretion, may require an Eligible Employee, as a
condition to becoming a Participant, to complete an application for the life
insurance benefit described in Section 6.3(a), and to comply with various
medical underwriting requirements of the insurance company.
II.2 CONTINUING PARTICIPATION.
An Eligible Employee who becomes a Participant shall continue to be a
Participant until all of his benefits are distributed under this Plan. The
Committee may determine at any time, in its sole discretion, that a Participant
is no longer an Eligible Employee. Such a Participant shall continue to be a
Participant in this Plan until all of his benefits are distributed under this
Plan, but, from and after the first day of the first Plan Year beginning after
such determination, such Participant shall not be entitled to make any further
deferrals of Compensation under Article III.
ARTICLE III
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<PAGE> 5
DEFERRAL ELECTIONS
III.1 ELECTIONS TO DEFER COMPENSATION.
(a) Initial Election Period. Each Eligible Employee may elect to defer
Compensation by filing with the Committee an election that conforms to the
requirements of this Section 3.1, on a form provided by the Committee, no later
than the last day of his or her Initial Election Period.
(b) General Rule. Subject to the limitations set forth in paragraphs (c)
and (d) below, the amount of Compensation which an Eligible Employee may elect
to defer is as follows:
(1) Any whole percentage of Salary up to 100%; and/or
(2) Any whole percentage or dollar amount of Bonus up to 100%.
(c) Maximum Deferrals. A Participant shall not be entitled to defer an
amount of his Salary or Bonus for any Plan Year to the extent that the amount of
the Salary or Bonus remaining undeferred for that Plan Year is less than the
amount of payroll taxes which the Company will owe on his Compensation and all
other compensation he receives from the Company in that Plan Year. An election
to defer Salary or Bonus shall not be effective to the extent it exceeds the
maximum amount set forth in this Section 3.1(b).
(d) Minimum Deferrals. For each Plan Year for which a Participant elects
to defer any portion of his Salary, the minimum percentage of Salary which may
be deferred under paragraph (b)(1) of this Section 3.1 is 5%. This 5% minimum
deferral for any Plan Year shall be reduced to a lesser percentage (but not
below zero percent) if the Participant deferred any portion of his or her Bonus
paid with respect to the fiscal year of the Company which included the last day
of the preceding Plan Year (the "Prior Year Bonus"). The amount of such
reduction shall be the number of percentage points determined by (1) dividing
the amount of the Prior Year Bonus by the amount of the Participant's annual
Salary at the beginning of the Plan Year for which the minimum deferral is being
computed, and (2) multiplying by 10. For example, if a Participant receives a
Salary of $200,000 for the Plan Year for which the minimum deferral is being
computed, and deferred $20,000 of his Prior Year Bonus, the minimum deferral
will be reduced by (1) $20,000 divided by $200,000, or .10, multiplied by (2)
10, to arrive at a reduction in the maximum percentage of 1.0%. The maximum
deferral percentage will therefore be 5% minus 1%, or 4%.
(e) Effect of Initial Election. An election to defer Compensation made
during an Initial Election Period shall be effective with respect to Salary
earned during the first pay period beginning after the end of the Initial
Election Period and with respect to the Bonus payable for services rendered
during the Company's fiscal year which includes the last day of the Plan Year in
which the election is made.
(f) Duration of Salary Deferral Election. Any Salary deferral election
made under paragraph (a) or paragraph (h) of this Section 3.1 shall be
irrevocable with respect to the Plan Year for which it is made, and shall remain
in effect, notwithstanding any change in the Participant's Salary, until changed
or terminated in accordance with the terms of this paragraph (f); provided,
however, that such election shall terminate under Section 2.2 for any Plan Year
for which the Participant is not an Eligible Employee, or pursuant to Section
3.1(i). Subject to the maximum deferral requirement of Section 3.1(c) and the
minimum deferral requirement of Section 3.1(d), a Participant may increase,
decrease or terminate his or her Salary deferral election, effective for Salary
earned during pay periods beginning after any January 1, by filing a new
election, in accordance with the terms of this Section 3.1, with the Committee
during the preceding December.
(g) Duration of Bonus Deferral Election. Any Bonus deferral election made
under paragraph (a) or paragraph (h) of this Section 3.1 shall be irrevocable
and shall apply only to the Bonus
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<PAGE> 6
payable with respect to services performed during the Company's fiscal year
which includes the last day of the Plan Year for which the election is made. For
each subsequent fiscal year, an Eligible Employee may make a new election,
subject to the limitations set forth in this Section 3.1, to defer a percentage
of his or her Bonus payable with respect to services performed during such
subsequent fiscal year. Such election shall be on forms provided by the
Committee and shall be made during the month of September of the Plan Year which
ends within such fiscal year.
(h) Elections other than Elections during the Initial Election Period.
Subject to the limitations of paragraphs (c) and (d) above, any Eligible
Employee who fails to elect to defer compensation during his or her Initial
Election Period may subsequently become a Participant, and any Eligible Employee
who has terminated a prior Salary deferral election may elect to again defer
Salary, by filing an election, on a form provided by the Committee, to defer
Compensation as described in paragraph (b) above. An election to defer Salary
must be filed during the month of December and will be effective for Salary
earned during pay periods beginning after the following January 1. An election
to defer the Bonus must be filed during the month of September and will be
effective for the Bonus paid with respect to services performed during the
Company's fiscal year which includes such month of September.
(i) At any time during a Plan Year, a Participant may elect, by written
notice to the Committee on a form prescribed by the Committee, to suspend
deferrals of Salary for the remainder of the Plan Year.
III.2 INVESTMENT ELECTIONS.
(a) The Committee shall select the Funds whose performance will measure
the amounts to be credited to the Deferral Accounts of Participants under
paragraph (c) of Article IV. The selection of funds shall be for bookkeeping
purposes only, and the Company shall not be obligated actually to invest any
money in the Funds, or to acquire or maintain any actual investment. The
Committee may, in its discretion, change its selection of the Funds at any time.
If a Participant has elected pursuant to Section 3.2(b) to invest all or a
portion of his Plan Year Subaccount in a Fund which the Committee decides to
discontinue, his Plan Year Subaccount shall be invested after such
discontinuance in the continuing Fund which the Committee determines, in its
discretion, most nearly resembles the discontinued Fund.
(b) The Committee shall provide each Participant with a list of the Funds
available for hypothetical investment, and the Participant shall designate, when
the Participant makes deferral elections under Section 3.1, on a form provided
by the Committee, one or more of such Funds in which each of his or her Plan
Year Subaccounts will be deemed to be invested. The Participant may make a
separate designation for each of his or her Plan Year Subaccounts. In making the
designation pursuant to this Section 3.2(b), the Participant may specify that
all or any whole percentage of at least 10% of his or her Plan Year Subaccount
balance be deemed to be invested in one or more of Funds.
(c) On or prior to the twentieth day of any calendar month (or later day
prescribed by the Committee, but not later than the last day of the calendar
month), a Participant may change the designation of the Funds in which the
balances of any of his Plan Year Subaccounts will be deemed to be invested. Such
change may be made with respect to any whole percentage of at least 10% of a
Plan Year Subaccount balance. Such change shall be made by filing with the
Committee an election on a form provided by the Committee. Such change shall be
effective as of the first day of the following calendar month.
ARTICLE IV
DEFERRAL ACCOUNT
The Committee shall establish and maintain the Plan Year Subaccounts and
the Deferral Account (which shall be the sum of all Plan Year Subaccounts) for
each Participant under the Plan, which
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<PAGE> 7
shall be merely bookkeeping accounts and which need not represent any actual
assets. Each Plan Year Subaccount of each Participant shall be further divided
into separate subaccounts ("Fund Subaccounts"), each of which corresponds to a
Fund elected by the Participant pursuant to Section 3.2(b). Each Plan Year
Subaccount of each Participant shall be credited as follows:
(a) Within five business days after deferred Salary has been withheld from
a Participant's paycheck, the Committee shall credit each of the Participant's
Fund Subaccounts with amounts equal to the deferred Salary in accordance with
the Participant's election under Section 3.2(b); that is, the portion of the
Participant's deferred Salary that the Participant has elected to be deemed to
be invested in a certain Fund shall be credited to the Fund Subaccount
corresponding to that Fund.
(b) Within five business days after the payment of a Bonus, the Committee
shall credit the Participant's Fund Subaccounts with amounts equal to the
portion of the Bonus which the Participant has deferred in accordance with the
Participant's election under Section 3.2(b); that is, the portion of the
Participant's deferred Bonus that the Participant has elected to be deemed to be
invested in a certain Fund shall be credited to the Fund Subaccount
corresponding to that Fund.
(c) At least once in each calendar month, each Fund Subaccount of a
Participant's Plan Year Subaccount shall be credited with deemed earnings on the
Fund corresponding to that Fund Subaccount. The Committee shall determine the
exact times and method for crediting such deemed earnings; provided, however,
that the exact times for crediting such deemed earnings shall be uniform among
all Participants and the exact method for crediting such deemed earnings as of
any time shall be uniform among all Participants.
(d) Any distribution, installment or withdrawal from a Participant's Plan
Year Subaccount shall be charged to the Plan Year Subaccount as soon as
practicable after such distribution, installment or withdrawal is made. The
amount of a distribution, installment, or withdrawal charged to a Participant's
Plan Year Subaccount shall be charged to the Fund Subaccounts in such Plan Year
Subaccount in the proportions of the relative balances of such Fund Subaccounts
as of the date such distribution, installment or withdrawal is charged to the
Plan Year Subaccount.
ARTICLE V
VESTING
Subject to the provisions of Sections 6.1(e), 6.5, 6.7, 11.1, 11.2 and
11.6, a Participant's Deferral Account shall be 100% vested at all times.
ARTICLE VI
DISTRIBUTIONS
VI.1 DISTRIBUTION ON RETIREMENT OR DISABILITY.
(a) Unless a Participant makes a valid election under Section 6.1(b) and
except as provided in Section 6.1(c), a Participant who becomes Disabled or who
Retires shall receive the balance in his or her Deferral Account in the form of
quarterly installments over 15 years beginning on his or her Retirement Payment
Eligibility Date.
(b) Notwithstanding the foregoing, a Participant may elect, pursuant to
this Section 6.1(b), to have the balance in his or her Deferral Account paid in
one of the following optional forms on his or her Retirement Payment Eligibility
Date:
(1) a cash lump sum payable on the Participant's Retirement Payment
Eligibility Date, or
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(2) quarterly installments over five, 10 or 20 years beginning on
the Participant's Retirement Payment Eligibility Date.
An election under this Section 6.1(b) shall be valid only if it is made in
writing in a form prescribed by the Committee either (i) during the Initial
Election Period, or (ii) at least one year before the Participant's Retirement
Payment Eligibility Date.
(c) Notwithstanding the provisions of Sections 6.1(a) and (b), (i) if the
total balance of a Participant's Deferral Account as of his or her Retirement
Payment Eligibility Date is $25,000 or less, such balance in such Deferral
Account shall automatically be distributed in the form of a cash lump sum as
soon as practicable following the Retirement Payment Eligibility Date.
(d) If a Participant's benefits are paid in installments, the
Participant's Deferral Account shall continue to be credited with deemed
earnings pursuant to paragraph (c) of Article IV until all amounts credited to
his or her Deferral Account have been distributed. Such installments shall be as
nearly equal as possible consistent with the requirement of the preceding
sentence.
(e) If a Participant has begun to receive distributions under this Section
6.1 in the form of installments, the Participant may elect to receive
installments over a shorter period of time than the period originally in effect
under Section 6.1(a) or elected under Section 6.1(b), subject to the following
conditions:
(i) such shorter period of time over which the installments shall be
paid shall be five, 10 or 15 years from the Retirement Payment Eligibility Date;
(ii) the election to receive installments over a shorter period of
time shall be made by filing a form prescribed by the Committee with the
Committee at least 15 days before an installment would otherwise be payable;
(iii) ten percent of the balance of the Deferral Account as of the
date the Participant makes the election by filing the form referred to in
Section 6.1(e)(ii) shall be permanently forfeited and the Company shall have no
obligation to the Participant or his Beneficiary with respect to such forfeited
amount;
(iv) the amount distributed in installments over the shorter period
elected by the Participant under this Section 6.1(e) shall be 90% of the balance
of the Deferral Account as of the date the Participant makes the election by
filing the form referred to in Section 6.1(e)(ii).
6.2 SITUATIONS OTHER THAN RETIREMENT, DISABILITY OR DEATH.
The balance of the Deferral Account of a Participant whose Termination of
Employment occurs for any reason other than Retirement, Disability or death
shall be paid to the Participant in the form of a cash lump sum as soon as
practicable following the Participant's Termination of Employment. If a
Participant has not had a Termination of Employment as of the Payment
Eligibility Date for any Plan Year Subaccount, the balance of such Plan Year
Subaccount shall be paid to the Participant in the form of a cash lump sum on
the Payment Eligibility Date.
6.3 EXTENSION OF PAYMENT ELIGIBILITY DATE AND RETIREMENT PAYMENT ELIGIBILITY
DATE.
A Participant may elect to extend any Payment Eligibility Date or the
Retirement Payment Eligibility Date by filing a written election with the
Committee on a form prescribed by the Committee at least one year before such
Payment Eligibility Date or Retirement Payment Eligibility Date; provided,
however, that such extended Payment Eligibility Date or Retirement Payment
Eligibility Date shall be at least two years after the Payment Eligibility Date
or Retirement Payment Eligibility Date in effect before
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such extension. A Payment Eligibility Date or Retirement Payment Eligibility
Date which has been so extended may be further extended by filing another
election in the manner and at the time specified in this Section 6.3.
6.4 DEATH.
(a) If a Participant dies while employed by the Company, the following
benefits shall be provided: That portion of the death benefit of any life
insurance policy purchased by the Company to insure the life of the Participant
(the "Policy") which is equal to two times the Participant's annual Salary at
the time the Participant dies shall be paid to Participant's beneficiary under
the Policy by the insurance company which issued the Policy. Any such Policy
shall be subject to the conditions set forth in a "Split-Dollar Life Insurance
Agreement" between the Participant and the Company, pursuant to which the
Participant may designate a beneficiary with respect to the portion of the
Policy proceeds described in the preceding sentence in the event the Participant
dies prior to terminating employment with the Company. The Participant shall
have the right to designate and change such beneficiary (which need not be his
Beneficiary as determined under Article VIII) at any time on a form provided by
and filed with the insurance company, and the life insurance proceeds designated
in this Section 6.4(a) shall be paid to such beneficiary. The benefit payable
pursuant to this Section 6.4(a) shall be paid only if a Policy has been issued
on the Participant's life and is in force at the time of the Participant's death
and any such payment shall be subject to all conditions and exceptions set forth
in the Policy. A Participant who is entitled to a death benefit pursuant to this
Section 6.4(a) shall not be entitled to any other Company-paid group term life
insurance benefits from the Company under this Plan or any other Policy provided
by the Company. Notwithstanding any provision of this Plan or any other document
to the contrary, the Company shall not have any obligation to pay the
Participant or his Beneficiary any amounts described in this Section 6.4(a). Any
such amounts shall be payable solely from the proceeds of the Policy, and if no
Policy is in force, no payment shall be made. Furthermore, the Company is not
obligated to maintain any Policy; and no death benefit shall be payable under
this Section 6.4(a) if the Company has been notified by the Committee to
discontinue the Policy for the Participant. In addition, no Policy shall be
allocated to any Deferral Account.
(b) If a Participant dies before the beginning of installment payments
under Sections 6.1(a) or (b), the balance of his or her Deferral Account shall
be paid to the Participant's Beneficiary in a cash lump sum as soon as
practicable after the first day of the calendar quarter following the calendar
quarter in which the Participant dies. If a Participant dies after the beginning
of installment payments under Sections 6.1(a) or (b) but before receiving all of
such installments, his beneficiary shall receive a cash lump sum payment as soon
as practicable following the last day of the calendar month in which he dies
equal to the remaining balance of his Deferral Account as of such last day.
6.5 WITHDRAWALS.
A Participant shall be permitted to elect to withdraw amounts from his
Deferral Account as soon as practicable after the first day of any calendar
quarter, whether before or after his Termination of Employment or Payment
Eligibility Date, subject to the following restrictions:
(b) The election to take a withdrawal shall be made by filing a form
provided by and filed with the Committee prior to the end of any calendar month.
(c) The amount of the withdrawal shall equal 90% of the balance of the
Deferral Account as of the end of the calendar month in which the withdrawal
election is made.
(d) The amount described in subsection (b) above shall be paid in a single
cash lump sum as soon as practicable after the end of the calendar month in
which the withdrawal election is made.
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(e) If a Participant receives a withdrawal, the remaining 10% of the
balance (including the withdrawn amount) in his Deferral Account as of the date
of the withdrawal shall be permanently forfeited and the Company shall have no
obligation to the Participant or his Beneficiary with respect to such forfeited
amount.
(f) If a Participant receives a withdrawal, the following rules will apply
for the balance of the Plan Year in which the withdrawal election is made and
for the following Plan Year: (i) the Participant will be ineligible to
Participate in the Plan, and (ii) neither the Participant (nor his Beneficiary
or Beneficiaries) shall be entitled to death benefits under Section 6.4.
(g) A Participant will be limited to a maximum of two withdrawals during
all of his periods of Plan Participation.
6.6 DISTRIBUTION ON AN UNFORESEEABLE EMERGENCY.
The Committee may, pursuant to rules adopted by it and applied in a
uniform manner, accelerate the date of distribution of a Participant's Deferral
Account because of an "Unforeseeable Emergency" at any time; provided, however,
that any determination to accelerate the distribution of the Deferral Account of
any member of the Committee shall be made by the Board. Any acceleration shall
be limited to the amount necessary to meet the Unforeseeable Emergency. Subject
to the foregoing, payment of any amount with respect to which a Participant has
filed a request under this Section 6.6 shall be made as soon as practicable
after approval of such request by the Committee. "Unforeseeable Emergency" shall
mean an unforeseeable, severe financial condition resulting from (a) a sudden
and unexpected illness or accident of the Participant or his dependent (as
defined in Section 152(a) of the Code); (b) loss of the Participant's property
due to casualty; or (c) other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant, but which may not be relieved through other available resources of
the Participant (including reimbursement or compensation by insurance,
liquidation of the Participant's assets, to the extent the liquidation of the
assets would not itself cause severe financial hardship, or by the cessation of
deferrals under the Plan), as determined by the Committee in accordance with
uniform rules adopted by it.
6.7 INABILITY TO LOCATE PARTICIPANT.
If the Committee is unable to locate a Participant or his or her
Beneficiary on any date on which a distribution is to be made from such
Participant's Deferral Account, the Company shall retain the distribution which
was to be made on such date until such time as the Committee can locate the
Participant or Beneficiary; provided, however, that the Company may deduct from
such retained distributions all taxes which are required to be withheld by the
Company. No additional earnings shall be credited pursuant to paragraph (c) of
Article IV on any distribution retained pursuant to this Section 6.7. If the
Committee is unable to locate a Participant or Beneficiary within five years
following a date on which a distribution is to be made from such Participant's
Deferral Account, the amount of such distribution shall be forfeited. In seeking
to locate a Participant or Beneficiary, the Committee may take any reasonable
action, but shall not be required to take any action other than communicating by
registered mail to the address or addresses last provided to the Committee by
the Participant or Beneficiary.
ARTICLE VII
ADMINISTRATION
7.1 COMMITTEE.
A Committee, consisting of not less than one person, shall be appointed by
and serve at the pleasure of the Board of Directors. The number of members
comprising the Committee shall be determined by the Board, which may from time
to time vary the number of members. A member of the
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Committee may resign by delivering a written notice of resignation to the Board.
The Board may remove any member by resolution at any time. Vacancies in the
membership of the Committee shall be filled by the Board.
7.2 COMMITTEE ACTION.
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior or subsequent to such action, a written
consent to the action is signed by all members of the Committee, and such
written consent is filed with the minutes of the proceedings of the Committee. A
member of the Committee shall not vote or act upon any matter which relates
solely to himself or herself as a Participant. The Chairman or any other member
or members of the Committee designated by the Chairman may execute any
certificate or other written direction on behalf of the Committee.
7.3 POWERS AND DUTIES OF THE COMMITTEE.
The Committee shall enforce the Plan in accordance with its terms, shall
be charged with the general administration of the Plan and shall have full
discretion, power, and authority necessary to accomplish its purposes,
including, but not by way of limitation, the following:
(a) To construe and interpret the terms and provisions of this Plan;
(b) To compute and certify to the amount and kind of benefits
payable to Participants and their Beneficiaries;
(c) To maintain all records that may be necessary for the
administration of the Plan;
(d) To provide for disclosure of all information and the filing or
provision of all reports and statements to Participants, Beneficiaries or
governmental agencies as shall be required by law;
(e) To make and publish such rules for the regulation of the Plan
and procedures for the administration of the Plan as are not inconsistent with
the terms hereof;
(f) To appoint a plan administrator or any other agent, and to
delegate to them such powers and duties in connection with the administration of
the Plan as the Committee may from time to time prescribe; and
(g) To determine who are Eligible Employees, subject to the
limitations described in the Plan.
7.4 CONSTRUCTION AND INTERPRETATION.
The Committee shall have full discretion to construe and interpret the
terms and provisions of this Plan, which interpretation or construction shall be
final and binding on all parties, including but not limited to the Company and
any Participant or Beneficiary. The Committee shall administer such terms and
provisions in a uniform and nondiscriminatory manner and in full accordance with
any and all laws applicable to the Plan; provided, however, the Committee shall
have the discretion to determine whether an otherwise Eligible Employee is
selected to participate in the Plan.
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7.5 INFORMATION.
To enable the Committee to perform its functions, the Companies shall
supply full and timely information to the Committee on all matters relating to
the Compensation of all Participants, their death or other cause of termination,
and such other pertinent facts as the Committee may require.
7.6 COMPENSATION AND EXPENSES.
The members of the Committee shall serve without compensation for their
services hereunder. The Committee is authorized at the expense of
Williams-Sonoma, Inc. to employ such legal counsel, accountants, and other
advisers as it may deem advisable to assist in the performance of its duties
hereunder. Expenses and fees in connection with the administration of the Plan
shall be paid by Williams-Sonoma, Inc.
7.7 INDEMNITY.
To the fullest extent permitted by applicable law, Williams-Sonoma, Inc.
shall indemnify, hold harmless, and defend the Committee and each member
thereof, the Board of Directors, and any delegate of the Committee who is an
employee of a Company against any and all expenses, liabilities and claims,
including legal fees as they are incurred to defend against such liabilities and
claims arising out of their discharge in good faith of responsibilities under or
incident to the Plan, other than expenses and liabilities arising out of willful
misconduct. This indemnity shall not preclude such further indemnities as may be
available under insurance purchased by the Company or provided by the Company
under any bylaw, agreement or otherwise.
7.8 PARTICIPANT STATEMENTS.
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Deferral Account on a periodic
basis at least once with respect to each Plan Year.
ARTICLE VIII
BENEFICIARY DESIGNATION
8.1 BENEFICIARY.
Each Participant shall have the right, at any time, to designate his or
her Beneficiary(ies) (both primary as well as contingent) to receive any
benefits payable under the Plan to a beneficiary upon the death of a
Participant. The Beneficiary designated under this Plan may be the same as or
different from the Beneficiary designation under any other plan of the Company
in which the Participant participates.
8.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT.
A Participant shall designate his or her Beneficiary by completing and
signing the Beneficiary Designation Form, and returning it to the Committee or
its designated agent. A Participant shall have the right to change a Beneficiary
by completing, signing and otherwise complying with the terms of the Beneficiary
Designation Form and the Committee's rules and procedures, as in effect from
time to time. If the Participant names someone other than his or her spouse as a
Beneficiary, a spousal consent, in the form designated by the Committee, must be
signed by that Participant's spouse and returned to the Committee. Upon the
acceptance by the Committee of a new Beneficiary Designation Form, all
Beneficiary designations previously filed shall be cancelled. The Committee
shall be entitled to rely on the last Beneficiary Designation Form filed by the
Participant and accepted by the Committee prior to his or her death.
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8.3 ACKNOWLEDGMENT.
No designation or change in designation of a Beneficiary shall be
effective until received, accepted and acknowledged in writing by the Committee
or its designated agent.
8.4 NO BENEFICIARY DESIGNATION.
If a Participant fails to designate a Beneficiary as provided in Sections
8.1, 8.2 and 8.3 above or, if all designated Beneficiaries predecease the
Participant or die prior to complete distribution of the Participant's benefits,
then the Participant's spouse shall be the designated Beneficiary. If the
Participant has no surviving spouse, the benefits remaining under the Plan shall
be paid to the duly appointed and currently acting personal representative of
the Participant's estate (which shall include either the Participant's probate
estate or living trust) shall be the Beneficiary. In any case where there is no
such personal representative of the Participant's estate duly appointed and
acting in that capacity within 90 days after the Participant's death (or such
extended period as the Committee determines is reasonably necessary to allow
such personal representative to be appointed, but not to exceed 180 days after
the Participant's death), then Beneficiary shall mean the person or persons who
can verify by affidavit or court order to the satisfaction of the Committee that
they are legally entitled to receive the benefits under this Plan.
8.5 DOUBT AS TO BENEFICIARY.
If the Committee has any doubt as to the proper Beneficiary to receive
payments pursuant to this Plan, the Committee shall have the right, exercisable
in its discretion, to cause the Company to withhold such payments until this
matter is resolved to the Committee's satisfaction.
8.6 DISCHARGE OF OBLIGATIONS.
The payment of benefits under the Plan to a Beneficiary shall fully and
completely discharge the Company and the Committee from all further obligations
under this Plan with respect to the Participant, and that Participant's rights
under the Plan shall terminate upon such full payment of benefits.
8.7 DEATH OF SPOUSE OR DISSOLUTION OF MARRIAGE.
A Participant's Beneficiary designation shall be deemed automatically
revoked if the Participant names a spouse as Beneficiary and the marriage is
later dissolved. Without limiting the generality of the preceding sentence, the
interest in benefits of a spouse of a Participant who has predeceased the
Participant or whose marriage has been dissolved shall automatically pass to the
Participant, and shall not be transferrable by such spouse in any manner,
including but not limited to such spouse's will, nor shall such interest pass
under the laws of intestate succession.
ARTICLE IX
CLAIMS PROCEDURE
9.1 PRESENTATION OF CLAIM.
Any Participant or Beneficiary of a deceased Participant (such Participant
or Beneficiary being referred to below as a "Claimant") may deliver to the
Committee a written claim for a determination with respect to the amounts
distributable to such Claimant from the Plan. If such a claim relates to the
contents of a notice received by the Claimant, the claim must be made within 60
days after such notice was received by the Claimant. The claim must state with
particularity the determination desired by the Claimant. All other claims must
be made within 180 days of the date on which the event that caused the claim to
arise occurred. The claim must state with particularity the determination
desired by the Claimant.
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9.2 NOTIFICATION OF DECISION.
The Committee shall consider a Claimant's claim within a reasonable time,
and shall notify the Claimant in writing:
(i) that the Claimant's requested determination has been made, and
that the claim has been allowed in full; or
(ii) that the Committee has reached a conclusion contrary, in whole
or in part, to the Claimant's requested determination, and such notice must set
forth in a manner calculated to be understood by the Claimant:
(1) the specific reason(s) for the denial of the claim, or any
part of it;
(2) specific reference(s) to pertinent provisions of the Plan
upon which such denial was based;
(3) a description of any additional material or information
necessary for the Claimant to perfect the claim, and an explanation of why such
material or information is necessary; and
(4) an explanation of the claim review procedure set forth in
Section 9.3 below.
9.3 REVIEW OF A DENIED CLAIM.
Within 60 days after receiving a notice from the Committee that a claim
has been denied, in whole or in part, a Claimant (or the Claimant's duly
authorized representative) may file with the Committee a written request for a
review of the denial of the claim. Thereafter, but not later than 30 days after
the review procedure began, the Claimant (or the Claimant's duly authorized
representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
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9.4 DECISION ON REVIEW.
The Committee shall render its decision on review promptly, and not later
than 60 days after the filing of a written request for review of the denial,
unless a hearing is held or other special circumstances require additional time,
in which case the Committee's decision must be rendered within 120 days after
such date. Such decision must be written in a manner calculated to be understood
by the Claimant, and it must contain:
(d) specific reasons for the decision;
(e) specific reference(s) to the pertinent Plan provisions upon
which the decision was based; and
(f) such other matters as the Committee deems relevant.
9.5 ARBITRATION.
A Claimant's compliance with the foregoing provisions of this Article 9 is
a mandatory prerequisite to a Claimant's right to commence any arbitration
proceeding with respect to any claim for benefits under this Plan.
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ARTICLE X
ARBITRATION
Arbitration shall be the exclusive remedy for resolving any dispute or
controversy between the Company and any employee, Participant or Beneficiary,
including, but not limited to, any dispute regarding an employee's status as a
Participant, a Participant's employment or the termination of a Participant's
employment or any dispute regarding the application, interpretation or validity
of this Plan not otherwise resolved through the claims procedure set forth in
Article 9. Such arbitration shall be conducted in accordance with the then most
applicable rules of the American Arbitration Association. The arbitrator shall
be empowered to grant only such relief as would be available in a court of law.
In the event of any conflict between this Agreement and the rules of the
American Arbitration Association, the provisions of this Agreement shall be
determinative. If the parties are unable to agree upon an arbitrator, they shall
select a single arbitrator from a list designated by the office of the American
Arbitration Association having responsibility for the city in which the
Participant or Beneficiary last resided while employed by the Employer of seven
arbitrators, all of whom shall be retired judges who are actively involved in
hearing private cases or members of the National Academy of Arbitrators. If the
parties are unable to agree upon an arbitrator from such list, they shall each
strike names alternatively from the list, with the first to strike being
determined by lot. After each party has used three strikes, the remaining name
on the list shall be the arbitrator. The fees and expenses of the arbitrator
shall initially be borne equally by the parties; provided, however, that each
party shall initially be responsible for the fees and expenses of its own
representatives and witnesses. If the parties cannot agree upon a location for
the arbitration, the arbitrator shall determine the location. Judgment may be
entered on the award of the arbitrator in any court having jurisdiction. The
prevailing party in the arbitration proceeding, as determined by the arbitrator,
and in any enforcement or other court proceedings, shall be entitled to the
extent provided by law to reimbursement from the other party for all of the
prevailing party's costs (including but not limited to the arbitrator's
compensation), expenses and reasonable attorney's fees.
ARTICLE XI
MISCELLANEOUS
11.1 UNSECURED GENERAL CREDITOR.
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interests in any specific property
or assets of any Company. No assets of the Company shall be held under any
trust, or held in any way as collateral security for the fulfilling of the
obligations of the Company under this Plan. This Plan shall not cause the
Company's assets to be pledged or restricted. The Company's obligation under the
Plan shall be merely that of an unfunded and unsecured promise of that Company
to pay money in the future, and the rights of the Participants and Beneficiaries
shall be no greater than those of unsecured general creditors of the Company.
The Company may, but need not, acquire investments corresponding to the Funds,
and it is not under any obligation to maintain any investment it may make. Any
such investments, if made, shall be in the name of the Company, and shall be its
sole property in which no Participant shall have any interest. The Plan is
intended to be an unfunded plan for purposes of Title I of ERISA.
11.2 RESTRICTION AGAINST ASSIGNMENT.
The Company shall pay all amounts payable hereunder only to the person or
persons designated by the Plan and not to or for any other person. No part of a
Participant's Deferral Account shall be liable for the debts, contracts, or
engagements of any Participant, his or her Beneficiary, or successors in
interest, nor shall a Participant's Deferral Account be subject to execution by
levy, attachment, or garnishment or by any other legal or equitable proceeding,
nor shall any such person have any right to alienate, anticipate, transfer,
commute, pledge, encumber, or assign any benefits or payments hereunder in any
manner whatsoever, except with regard to debts, contracts and engagements owed
to the Company. Any purported alienation, anticipation, transfer, commutation,
pledge, encumbrance, or assignment shall be
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void and of no effect, except with regard to debts, contracts and engagements
owed to the Company. If any Participant, Beneficiary or successor in interest is
adjudicated bankrupt, and the Participant's rights to distribution or payment
under the Plan are subject to involuntary transfer or assignment in any such
proceeding, the Committee may in its discretion cancel such distribution or
payment (or any part thereof) to or for the benefit of such Participant,
Beneficiary or successor in interest.
11.3 WITHHOLDING.
There shall be deducted from each payment to a Participant or Beneficiary
made under the Plan all taxes which are required to be withheld by the Company
from such payment. If any taxes, including employment taxes with respect to the
Deferral Account, are required to be withheld prior to the time of payment, the
Company may withhold such amounts from other compensation paid to the
Participant.
11.4 AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION.
The Board of Directors may amend, modify, suspend or terminate the Plan in
whole or in part, except that no amendment, modification, suspension or
termination shall have any retroactive effect to reduce any amounts allocated to
a Participant's Deferral Account on the date of such termination. On the
termination of this Plan, the Board may cause the Deferral Accounts of
Participants to be immediately paid out in cash lump sum payments, or to be paid
at any other time or in any other manner the Board may determine, but not later
than the times such Deferral Accounts would otherwise be paid to Participants or
Beneficiaries.
11.5 GOVERNING LAW.
This Plan shall be construed, governed and administered in accordance with
the laws of the State of California, to the extent not preempted by ERISA.
11.6 RECEIPT AND RELEASE.
Any payment to a Participant or the Participant's Beneficiary in
accordance with the provisions of the Plan shall, to the extent thereof, be in
full satisfaction of all claims against the Committee and the Company. The
Committee may require such Participant or Beneficiary, as a condition precedent
to such payment, to execute a receipt and release to such effect.
11.7 PAYMENTS ON BEHALF OF PERSONS UNDER INCAPACITY.
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgment of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefor, the Committee
may direct that such payment be made to any person found by the Committee, in
its sole judgment, to have assumed the care of such person. Any payment made
pursuant to such determination shall constitute a full release and discharge of
the Committee and the Company.
11.8 NO EMPLOYMENT RIGHTS.
Participation in this Plan shall not confer upon any person any right to
be employed by the Company nor any other right not expressly provided hereunder.
11.9 HEADINGS NOT PART OF AGREEMENT.
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
11.10 ERISA.
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This Plan constitutes a pension benefit plan within the meaning of Section
3(2) of ERISA, which is unfunded and maintained for the purpose of providing
deferred compensation for a select group of management or highly compensation
employees. This Plan constitutes the "Summary Plan Description" required under
ERISA, as well as the governing document of the Plan. The Committee is the
Administrator of the Plan, within the meaning of Section 3(16) of ERISA, and the
Named Fiduciary thereof, within the meaning of Section 402 of ERISA, is the
Committee.
11.11 VALIDITY.
In case any provision of this Plan shall be illegal or invalid for any
reason, said illegality or invalidity shall not affect the remaining parts
hereof, but this Plan shall be construed and enforced as if such illegal and
invalid provision had never been inserted herein.
11.12 DISTRIBUTION IN THE EVENT OF TAXATION.
If, for any reason, all or any portion of a Participant's benefit under
this Plan becomes taxable to the Participant prior to receipt, a Participant may
petition the Committee for a distribution of that portion of his or her benefit
that has become taxable. Upon the grant of such a petition, which the Committee
may grant or refrain from granting in its sole discretion, the Company shall
distribute to the Participant immediately available funds in an amount equal to
the taxable portion of his or her benefit (which amount shall not exceed the
balance in such Participant's Deferral Account as of the last day of the
calendar month before such distribution). If the petition is granted, the tax
liability distribution shall be made within ninety (90) days of the date when
the Participant's petition is granted.
IN WITNESS WHEREOF, Williams-Sonoma, Inc. has caused this document to be
executed on this 23rd day of November, 1998, to be effective as of January 1,
1999.
WILLIAMS-SONOMA, INC.
By: /s/ Dennis A. Chantland
-------------------------------------
Dennis A. Chantland
Executive Vice President
Chief Administrative Officer
Secretary
17
<PAGE> 1
EXHIBIT 13
1998 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
FIVE-YEAR SELECTED FINANCIAL DATA
Dollars and amounts in thousands except percentages,
per share amounts and retail stores data
<TABLE>
<CAPTION>
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997(2) Jan. 28, 1996 Jan. 29, 1995
------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net Sales $1,103,954 $ 933,257 $ 811,758 $ 644,653 $ 528,543
Earnings before income taxes 90,745 70,022 39,197 4,373 33,435
Net earnings 54,897 41,347 22,742 2,536 19,572
Basic net earnings per share(1) 1.01 .81 .45 .05 .39
Diluted net earnings per share(1) $ .96 $ .75 $ .43 $ .05 $ .37
Financial Position
Working capital $ 172,866 $ 134,524 $ 96,568 $ 39,076 $ 49,506
Long-term debt and other liabilities 44,649 89,789 89,319 46,757 6,781
Total assets 576,245 477,229 404,417 319,096 217,878
Shareholders' equity per share (book value)(1) $ 5.42 $ 3.74 $ 2.86 $ 2.39 $ 2.35
Debt-to-equity ratio 16.9% 46.5% 61.2% 38.4% 5.7%
Retail Stores
Store Count
Williams-Sonoma 163 152 145 139 120
Classic 65 78 89 97 105
Grand Cuisine 98 74 56 42 15
Pottery Barn 96 88 76 67 57
Classic 19 34 43 47 53
Design Studio 77 54 33 20 4
Hold Everything 33 32 32 32 35
Outlets 6 4 3 2 2
Number of stores at year-end 298 276 256 240 214
Comparable store sales growth 5.0% 2.8% 4.6% 3.4% 16.5%
Store selling area at year-end (sq. ft.) 1,217,047 1,015,778 839,112 690,256 537,969
Gross leasable area at year-end (sq. ft.) 1,887,560 1,553,137 1,264,531 1,023,003 746,683
Catalog Sales
Catalogs mailed in year 163,067 154,475 136,489 131,800 126,833
Catalog sales growth 15.7% 11.2% 19.1% 16.2% 55.0%
Catalog sales as percent of total sales 34.8% 35.5% 36.7% 38.8% 40.8%
</TABLE>
(1) Per share amounts have been restated to reflect the 3-for-2 stock splits
in February 1994 and September 1994, as well as reflect the 2-for-1 stock
split in May 1998.
(2) The year ended February 2, 1997 includes 53 weeks.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET SALES
Net sales consist of the following components:
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 53 Weeks Ended
--------------------------- ------------------------- ----------------------------
Dollars in thousands Jan. 31, 1999 % Total Feb. 1, 1998 % Total Feb. 2, 1997 % Total
------------- ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Retail Sales $ 720,320 65.2% $601,738 64.5% $513,592 63.3%
Catalog Sales 383,634 34.8% 331,519 35.5% 298,166 36.7%
Total net sales $1,103,954 100.0% $933,257 100.0% $811,758 100.0%
</TABLE>
Net sales for Williams-Sonoma, Inc. and subsidiaries (the Company) for the 52
weeks ended January 31, 1999 (fiscal 1998) were $1,103,954,000--an increase of
$170,697,000 (18.3%) over net sales for the 52 weeks ended February 1, 1998
(fiscal 1997). Net sales for fiscal 1997 increased 15.0% over net sales for the
53 weeks ended February 2, 1997 (fiscal 1996).
RETAIL SALES
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Retail sales $ 720,320 $ 601,738 $ 513,592
Retail growth percentage 19.7% 17.2% 30.3%
Comparable store sales growth 5.0% 2.8% 4.6%
Number of stores - beginning of year 276 256 240
Number of new stores 57 44 30
Number of closed stores 35 24 14
Number of stores - end of year 298 276 256
Store selling square footage at year-end 1,217,047 1,015,778 839,112
Store leased square footage at year-end 1,887,560 1,553,137 1,264,531
</TABLE>
Retail sales for fiscal 1998 increased 19.7% over retail sales for fiscal 1997
primarily due to new store openings. During fiscal 1998, the Company opened 57
stores (25 large-format Williams-Sonoma, 23 large-format Pottery Barn, 6 Hold
Everything and 3 outlets), and closed 35 stores (14 Williams-Sonoma, 15 Pottery
Barn, 5 Hold Everything and 1 outlet). Pottery Barn accounted for 65.5% of the
growth in selling square footage from fiscal year-end 1997 to fiscal year-end
1998, and 60.2% of retail sales growth as measured for the same period. For the
comparable periods of fiscal 1997 and fiscal 1996, Pottery Barn accounted for
77.7% of the growth in selling square footage and 72.0% of the growth in retail
sales. Total retail sales in fiscal 1997 increased 17.2% over retail sales in
fiscal 1996, principally due to a net increase of 20 stores.
Comparable stores are defined as those whose gross square feet did not
change by more than 20% in the previous twelve months and which have been open
for at least 12 months. Comparable store sales are compared monthly for purposes
of this analysis. Comparable store sales grew 5.0% in fiscal 1998 and 2.8% in
fiscal 1997. Same-store sales growth in Pottery Barn and Williams-Sonoma, the
Company's primary concepts, were similar in fiscal 1998, with both being above
4.7%. Large-format stores accounted for 63% of comparable store sales in fiscal
1998, as compared to 50% in fiscal 1997 and 30% in fiscal 1996.
The prototypical 1998 large-format stores range from 5,800-10,500 selling
square feet (9,500-16,000 gross square feet) for Pottery Barn stores and
2,800-4,500 selling square feet (4,200-7,300 gross square feet) for
Williams-Sonoma, and are intended to enable the Company to display merchandise
more effectively. As of the end of fiscal 1998, 175 stores (98 Williams-Sonoma
and 77 Pottery Barn) were in the large format, comprising 73.8% of the Company's
total selling square footage. Large-format stores accounted for 68% of retail
sales in fiscal 1998, as compared to 58% in fiscal 1997 and 34% in fiscal 1996.
In fiscal 1999, the Company plans to increase leased square footage by
approximately 21%.
<PAGE> 4
CATALOG SALES
Catalog sales in fiscal 1998 and fiscal 1997 increased 15.7% and 11.2%,
respectively, over those of the prior year. The total number of catalogs mailed
in these periods increased 5.6% in fiscal 1998, and 13.2% in fiscal 1997. The
increased circulation in these periods was primarily in markets with stores. The
purpose of this strategy is to build brand recognition and support new store
openings. Typically, mailings into these areas generate less revenue for the
catalog division than mailings into non-store markets.
The following table reflects catalog sales growth (loss) percentages by concept:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Williams-Sonoma (0.6%) 13.0% 13.4%
Pottery Barn 38.0% 18.1% 27.6%
Hold Everything 5.5% 11.7% 12.3%
Gardeners Eden (12.8%) (5.3%) 8.7%
Chambers (5.1%) (7.8%) 22.7%
Total catalog 15.7% 11.2% 19.1%
</TABLE>
In fiscal 1998, Pottery Barn accounted for 51.8% of total catalog sales as
compared to 43.4% for fiscal 1997. The growth of Pottery Barn over the last
several years reflects the Company's development of its assortment and the
enhanced consumer brand recognition achieved through the Pottery Barn catalog
and Design Studio stores. Additionally, the page count of the Pottery Barn
catalogs has been increasing. For Williams-Sonoma, the Company's other primary
concept, the number of catalogs mailed in fiscal 1998 and fiscal 1997 increased
2.8% and 8.9% respectively, over the same periods of the respective prior years.
In 1999, in order to continue to build and strengthen the Williams-Sonoma brand,
the Company intends to redesign this catalog.
In January of 1999, the Company debuted an extension of the Pottery Barn
brand, Pottery Barn Kids, and was extremely pleased with the initial customer
response.
COST OF GOODS SOLD AND OCCUPANCY
Cost of goods sold and occupancy expenses expressed as a percent of net sales in
fiscal 1998 declined 0.7 percentage points to 59.0% from 59.7% in fiscal 1997.
Merchandise margin improved 0.6 percentage points, principally due to lower cost
of merchandise. Occupancy expenses expressed as a percentage of net sales
improved slightly as a result of increased sales volume.
In fiscal 1997, cost of goods sold and occupancy expenses expressed as a
percent of net sales decreased 1.1 percentage points, principally due to lower
cost of merchandise. Occupancy expense as a percent of net sales remained
relatively flat in fiscal 1997 as compared to fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses expressed as a percent of net sales
increased 0.3 percentage points in fiscal 1998 to 32.7% from 32.4% in fiscal
1997. The increase is principally due to higher employment costs in the stores
and distribution center, partially offset by an improved advertising expense
rate. In fiscal 1997, selling, general and administrative expenses as a percent
of net sales decreased 1.4 percentage points, from 33.8% in fiscal 1996 to
32.4%. This improvement was due to improvements in the advertising expense rate,
and lower employment and shipping expense rates in the catalog division.
Fiscal 1997 selling, general and administrative expenses includes a
fourth-quarter pre-tax charge of $2,335,000 for employment costs associated with
the January 1998 closing of the the Company's San Francisco call center. A new
call center opened in Oklahoma City, Oklahoma in the third quarter of 1998.
<PAGE> 5
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
remediated all programs known to be non-compliant. The Company has begun its
comprehensive testing process which is expected to be completed by mid-1999. The
Company cannot 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.
With regard to outside vendors, the Company believes the greatest Year 2000
exposure is with its service providers (customs broker, logistics providers,
etc.). The Company believes the Year 2000 risk with its merchandise suppliers is
low because no vendor accounts for more than 3% of purchases and many of the
vendors are small artisan manufacturers with simple business systems. As of
January 31, 1999, the Company has completed its compliance review of major
vendors and will resolve any outstanding 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. The estimated maximum cost for the remediation and testing of computer
applications and related products in fiscal 1999 is $.5 million. Approximately
$2.1 million has been expensed 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, 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. In order to minimize the
potential adverse impact of such risks, the Company is in the process of
updating its contingency procedures consistent with its disaster recovery plan.
These procedures include: completion of business impact analysis for major
systems, developing work-around procedures, defining emergency roles and
responsibilities and implementing hotlines to handle problem escalation and
resolution procedures.
INTEREST EXPENSE
Net interest expense decreased $2,427,000, from $3,790,000 in fiscal 1997 to
$1,363,000 in fiscal 1998, primarily as a result of the conversion of the
Company's $40,000,000 Convertible Notes, discussed below. Also contributing to
the decrease in net interest expense in fiscal 1998 was an increase in the
Company's short-term investment income. Net interest expense in fiscal 1997
decreased $1,175,000 over net interest expense in fiscal 1996, principally due
to an increase in short-term investment income.
INCOME TAXES
The Company's effective tax rate was 39.5% for fiscal 1998, as compared to 41%
in fiscal 1997 and 42% in fiscal 1996. These reductions in the effective tax
rate over the last several years reflect the Company's commitment to legal
entity restructuring in order to minimize its state tax liability.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in fiscal 1998 was $79,727,000, an
increase of $3,854,000 from the $75,873,000 of cash generated by operating
activities in fiscal 1997. The $40,709,000 increase in merchandise inventories
from February 1, 1998 to January 31, 1999 is in line with the Company's expected
first-quarter 1999 sales.
Net cash used in investing activities for fiscal 1998 was $76,728,000.
Approximately $62,502,000 was spent on stores and approximately $11,998,000 was
used for information systems. The Company is planning approximately $116,000,000
of gross capital expenditures in fiscal 1999, which includes approximately
$57,000,000 for new stores, $22,000,000 for information systems (including
Internet), and $21,000,000 for warehouse equipment in a new leased distribution
facility in Olive Branch, Mississippi.
<PAGE> 6
Cash provided by financing activities in fiscal 1998 and fiscal 1997 was
$7,095,000, and $1,685,000, respectively, most of which was provided through
exercises of stock options.
In 1998, in a non-cash transaction, the Company's Convertible Notes were
converted into shares of common stock. 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 conversion of the Notes, net of
$995,000 of related unamortized debt issuance costs. See Note C to the
consolidated financial statements.
On June 1, 1998, the Company renewed its syndicated line of credit facility
and entered into a second amended and restated credit agreement which expires on
May 31, 2001. The amended facility provides for $50,000,000 in cash advances,
and contains certain restrictive loan covenants, including minimum tangible net
worth, a minimum out-of-debt period, fixed charge coverage requirements and a
prohibition on payments of cash dividends. Additionally, the Company has a
one-year $50,000,000 letter-of-credit agreement expiring on May 31, 1999 with
its lead bank. The Company is currently in negotiations with its lead bank and
expects to replace the letter of credit facility prior to its expiration with a
new agreement having similar terms.
On January 31, 1999, the Company had $33,849,000 of outstanding letters of
credit and no borrowings outstanding under the line of credit facility.
IMPACT OF INFLATION
The impact of inflation on results of operations has not been significant.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. interest
rates and, to a lesser extent, foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
Interest Rate Risk: The interest payable on the Company's bank line of
credit is based on variable interest rates and therefore affected by changes in
market interest rates. If interest rates on existing variable rate debt rose .78
percentage points (a 10% change from the bank's reference rate as of January 31,
1999), the Company's results from operations and cash flows would not be
materially affected. In addition, the Company has fixed and variable income
investments consisting of cash equivalents and short-term investments, which are
also affected by changes in market interest rates. The Company does not use
derivative financial instruments in its investment portfolio.
Foreign Currency Risks: The Company enters into a significant amount of
purchase obligations outside of the U.S. which are settled in U.S. Dollars and,
therefore, has only minimal exposure to foreign currency exchange risks. The
Company does not hedge against foreign currency risks and believes that foreign
currency exchange risk is immaterial.
SEASONALITY
The Company's business is subject to substantial seasonal variations in demand.
Historically, a significant portion of the Company's sales and net income have
been realized during the period from October through December, and levels of net
sales and net income have generally been significantly lower during the period
from January through July. The Company believes this is the general pattern
associated with the catalog and retail industries. In anticipation of its peak
season, the Company hires a substantial number of additional employees in its
retail stores and catalog 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
potential for changes in consumer spending patterns, consumer preferences and
overall economic conditions, the Company's dependence on foreign suppliers, and
increasing competition in the specialty retail business. Other factors that
could cause actual results to differ materially from those set forth in such
forward-looking statements include the risks and uncertainties detailed in the
Company's most recent annual report on Form 10-K and its other filings with the
Securities and Exchange Commission.
<PAGE> 7
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended
Dollars and shares in thousands, -----------------------------------------------------
except per share amounts Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net Sales $1,103,954 $933,257 $811,758
Costs and expenses
Cost of goods sold and occupancy 650,942 556,776 493,179
Selling, general and administrative 360,904 302,669 274,417
Interest expense - net 1,363 3,790 4,965
Earnings before income taxes 90,745 70,022 39,197
Income taxes 35,848 28,675 16,455
Net earnings $ 54,897 $ 41,347 $ 22,742
Basic earnings per share $ 1.01 $ .81 $ .45
Diluted earnings per share $ .96 $ .75 $ .43
Average number of common shares outstanding
Basic 54,267 51,297 50,927
Diluted 57,655 56,666 55,001
</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 28, 1996 50,854 $ 48,317 $ 73,336 $121,653
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 234 1,643 -- 1,643
Net earnings -- -- 22,742 22,742
Balance at February 2, 1997 51,088 49,960 96,078 146,038
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 592 5,813 -- 5,813
Net earnings -- -- 41,347 41,347
Balance at February 1, 1998 51,680 55,773 137,425 193,198
Issuance pursuant to stock option plans and tax
benefit from sale of optioned stock by employees 1,028 14,931 -- 14,931
Issuance pursuant to conversion of Convertible Notes 3,064 39,004 -- 39,004
Net earnings -- -- 54,897 54,897
Balance at January 31, 1999 55,772 $109,708 $192,322 $302,030
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended
----------------------------------
Dollars in thousands, except per share amounts Jan. 31, 1999 Feb. 1, 1998
------------- -------------
ASSETS
<S> <C> <C>
Current asset
Cash and cash equivalents $107,308 $ 97,214
Accounts receivable (less allowance for doubtful accounts of $230 and $206) 20,082 15,238
Merchandise inventories 173,160 132,451
Prepaid expenses and other asset 8,985 7,991
Prepaid catalog expenses 13,154 13,596
Deferred income taxes 4,077 3,680
Total current assets 326,766 270,170
Property and equipment - net 243,119 201,020
Investments and other assets (less accumulated amortization of $544 and $1,448) 6,360 6,039
Total assets $576,245 $477,229
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 70,964 $ 58,496
Accrued expenses 7,182 15,619
Accrued salaries and benefits 16,821 15,863
Customer deposits 26,659 19,617
Income taxes payable 19,529 17,216
Current portion of long-term obligations 6,368 125
Other liabilities 6,377 8,710
Total current liabilities 153,900 135,646
Deferred lease credits 72,327 56,157
Long-term debt and other liabilities 44,649 89,789
Deferred tax liability 3,339 2,439
Commitments and contingencies -- --
Shareholders' equity
Preferred stock, $.01 par value, authorized 7,500,000 shares, none issued -- --
Common Stock, $.01 par value, authorized 253,125,000 shares,
issued and outstanding, 55,771,935 and 51,680,718 shares, respectively 109,708 55,773
Retained earnings 192,322 137,425
Total shareholders' equity 302,030 193,198
Total liabilities and shareholders' equity $576,245 $477,229
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 54,897 $ 41,347 $ 22,742
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 33,021 28,871 24,332
Loss (gain) on disposal of assets and store closing reserve 289 (132) 1,826
Amortization of deferred lease incentives (6,605) (4,853) (3,462)
Change in deferred income taxes 503 3,238 (300)
Tax benefit from sale of optioned stock by employees 7,221 3,507 619
Reserve for termination of San Francisco call center -- 2,335 --
Other -- 687 --
Change in:
Accounts receivable (4,844) (3,320) 1,239
Merchandise inventories (40,709) (21,749) 10,901
Prepaid catalog expenses 442 (1,671) 3,688
Prepaid expenses and other asset (994) 683 (2,168)
Accounts payable 12,468 (5,913) 6,114
Accrued expenses and other liabilities (1,050) 9,911 16,980
Deferred lease incentives 22,775 21,431 14,463
Income taxes payable 2,313 1,501 13,768
Net cash provided by operating activities 79,727 75,873 110,742
Cash flows from investing activities:
Purchase of property and equipment (78,934) (59,299) (47,627)
Proceeds from the disposition of property and equipment 2,206 -- --
Other -- 153 1,615
Net cash used in investing activities (76,728) (59,146) (46,012)
Cash flows from financing activities:
Borrowings under line of credit 53,825 41,000 192,480
Repayments under line of credit (53,825) (41,000) (222,080)
Proceeds from issuance of long-term debt -- -- 40,000
Debt issuance cost -- -- (1,393)
Repayments of long-term debt (615) (621) (125)
Proceeds from exercise of stock options 7,710 2,306 1,024
Net cash provided by financing activities 7,095 1,685 9,906
Net increase in cash and cash equivalents 10,094 18,412 74,636
Cash and cash equivalents at beginning of year 97,214 78,802 4,166
Cash and cash equivalents at end of year $ 107,308 $ 97,214 $ 78,802
Non-cash financing transaction (see Note C):
Conversion of convertible notes to common stock $ 39,004 $ -- $ --
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Williams-Sonoma, Inc. and its subsidiaries (the Company) 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 65.2% of the business and catalog accounts for
34.8%. 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 298 stores in 39
states and Washington, D.C. 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 1998, 1997 and 1996 ended on January 31, 1999,
February 1, 1998 and February 2, 1997, respectively. The years ended January 31,
1999, February 1, 1998 and February 2, 1997, include 52 weeks, 52 weeks and 53
weeks, respectively.
Cash equivalents consist of short-term investments with original maturities
of 90 days or less.
Merchandise inventories are stated at the lower of cost (weighted-average
method) or market. Approximately 42% of the Company's payments for merchandise
are to foreign vendors, most of which are located in 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 January 31, 1999, and February 1, 1998, $13,154,000 and
$13,596,000, respectively, of prepaid advertising was reported as current
assets. Catalog advertising expenses amounted to $108,425,000, $94,169,000 and
$87,699,000 in fiscal 1998, 1997 and 1996, 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. Depreciation 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. Whenever events or changes
in circumstances have indicated that the carrying amount of assets might not be
recoverable, the Company, using its best estimates based on reasonable and
supportable assumptions and projections, has reviewed the carrying value of its
long-lived assets for impairment.
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 carrying value of cash and cash equivalents, accounts receivable,
investments, accounts payable and debt approximates their estimated fair values.
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.
Basic net earnings per share (EPS) is computed as net income divided by the
weighted average number of common shares outstanding for the period. Diluted net
earnings per share is 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 2-for-1 stock split in May 1998.
<PAGE> 11
In 1998, the Company implemented Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Comprehensive income consists of net
income or loss for the current period and other comprehensive income (income,
expenses, gains and losses that currently bypass the income statement and are
reported directly as a separate component of equity). The Company's
comprehensive income equals net income for all periods presented. In June 1998,
the FASB issued Statement of Financial Account Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets for liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for years beginning after June 15, 1999 and is not applied
retroactively to financial statements for prior periods. The Company believes
that this statement will not have a material effect on its financial statements.
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 1998 presentation.
NOTE B: PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998
------------- -------------
<S> <C> <C>
Land and buildings $ 12,689 $ 11,046
Leasehold improvements 201,170 169,280
Fixtures and equipment 122,861 100,959
Software 23,625 15,074
Work in progress 11,242 9,910
371,587 306,269
Less accumulated depreciation and amortization 128,468 105,249
Total property and equipment - net $243,119 $201,020
</TABLE>
NOTE C: BORROWING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998
------------- ------------
<S> <C> <C>
Convertible notes -- $40,000
Senior notes $40,000 40,000
Mortgage 6,404 6,530
Obligations under capital leases and
other liabilities 4,613 3,384
51,017 89,914
Less current maturities 6,368 125
Total long-term debt $44,649 $89,789
</TABLE>
<PAGE> 12
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 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 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. The Company is currently in negotiations with its lead bank
and expects to replace the letter of credit facility prior to its expiration
with a new agreement having similar terms.
At January 31, 1999, the Company had $33,849,000 of outstanding letters of
credit and no borrowings outstanding under the line of credit facility.
Interest expense was $4,093,000, $5,705,000 and 5,795,000 for fiscal 1998,
1997 and 1996, respectively, excluding capitalized interest of $0 in fiscal
1998, $348,000 in fiscal 1997 and $695,000 in fiscal 1996. Interest paid was
$4,568,000, $5,828,000 and $5,404,000 for the same periods.
Accounts payable at January 31, 1999, and February 1, 1998, includes cash
overdrafts of $17,109,000 and $16,640,000, respectively, for checks issued and
not presented to the bank for payment.
As of January 31, 1999, the Company's debt is scheduled to mature as
follows: $6,368,000 in fiscal year 1999, $6,244,000 in fiscal year 2000,
$12,054,000 in fiscal year 2001, $5,878,000 in fiscal year 2002, $5,811,000 in
fiscal year 2003 and $14,662,000 thereafter.
NOTE D: INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Current payable
Federal $29,182 $20,261 $ 12,020
State 6,163 5,176 4,735
Total current 35,345 25,437 16,755
Deferred
Federal 336 2,609 146
State 167 629 (446)
Total deferred 503 3,238 (300)
Total provision $35,848 $28,675 $ 16,455
</TABLE>
<PAGE> 13
Income taxes paid were $26,371,000, $20,702,000 and $3,510,000 for fiscal 1998,
1997 and 1996, respectively. A reconciliation of income taxes at the federal
statutory corporate rate to the effective rate is as follows:
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Federal income taxes at the statutory rate 35.0% 35.0% 35.0%
State income tax rate, less federal benefit 4.5% 5.5% 6.5%
Other 0.0% 0.5% .5%
39.5% 41.0% 42.0%
</TABLE>
Significant components of the Company's deferred tax accounts are as follows:
<TABLE>
<CAPTION>
Jan. 31, 1999 Feb. 1, 1998
-------------------------------- ------------------------------
Deferred Deferred Deferred Deferred
Dollars in thousands Tax Assets Tax Liabilities Tax Assets Tax Liabilities
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Current:
Compensation $ 3,437 -- $ 3,607 --
Inventory 4,284 -- 3,026 --
Accrued liabilities 1,773 $ 182 2,738 $ 185
Deferred catalog costs -- 5,235 -- 5,506
Total current 9,494 5,417 9,371 5,691
Non-current:
Depreciation -- 1,648 160 --
Deferred rent 773 -- 752 --
Deferred lease incentives -- 2,464 -- 3,351
Capital loss 5,160 -- 5,160 --
Valuation allowance (5,160) -- (5,160) --
Total non-current 773 4,112 912 3,351
Total $ 10,267 $9,529 $ 10,283 $9,042
</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 January 31, 1999 and February 1, 1998, due to the
uncertainty of realizing future tax benefits from its capital loss
carryforwards.
<PAGE> 14
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 23 years extending through 2022, except for one store lease with a 49 year
term extending though 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. At this point, the Company has no intention of exercising its right to
terminate. Rent commenced in July 1996 at a rate of $60,000 a month for the
first ten months of the lease and increased 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.
On February 13, 1998, the Company entered into an agreement to lease a
35,862 square-foot build-to-suit call center in Oklahoma City, Oklahoma. The
lease covers a ten-year term with three optional five-year renewals. Rent
commenced in August 1998 at an annual basic rent of $506,000 for each of the
first five years of the lease, and will increase to $550,000 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
15,000 square feet.
In December, 1998 the Company entered into an agreement to lease a 750,000
square-foot retail distribution facility located in Olive Branch, Mississippi.
The lease covers a 22.5 year term with two optional five-year renewals. Rent
will commence upon completion of the facility, currently anticipated to be
approximately July 1, 1999. Rental payments for the primary term are estimated
to average $3.1 million annually. These estimated rental payments are subject to
adjustment upon completion of construction and finalization of costs. The rental
payments have been included in the lease commitment table below.
Total rental expense for all operating leases was as follows:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
Dollars in thousands Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Minimum rent expense $43,320 $35,431 $30,363
Equipment rent 8,056 6,767 6,065
Contingent rent expense 6,138 5,584 6,702
Total rent expense $57,514 $47,782 $43,130
</TABLE>
The aggregate minimum annual rental payments under noncancelable operating
leases in effect at January 31, 1999 were as follows:
Dollars in thousands
<TABLE>
<S> <C>
Fiscal 1999 $ 64,407
Fiscal 2000 62,190
Fiscal 2001 58,677
Fiscal 2002 56,067
Fiscal 2003 53,461
Later years 314,673
Total minimum lease commitment $609,475
</TABLE>
<PAGE> 15
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 and Audit
Committees. 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
and McMahan. 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. 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, non-cancelable 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 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 arms-length transactions.
<PAGE> 16
NOTE G: EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if options to issue common
stock were exercised or the Convertible Notes were converted into common stock.
EPS for all periods presented has been restated to reflect the adoption of
SFAS128.
The following is a reconciliation of net earnings (numerator) and the number of
shares (denominator) used in the basic and diluted EPS computations:
<TABLE>
<CAPTION>
Dollars and shares in thousands Net Weighted Per-Share
except per share amounts Earnings Average Shares Amount
-------- -------------- ----------
<S> <C> <C> <C>
1998
Basic $54,897 54,267 $1.01
Effect of assumed conversion of Convertible Notes 212 1,021
Effect of dilutive stock options -- 2,367
Diluted 55,109 57,655 .96
1997
Basic 41,347 51,297 .81
Effect of assumed conversion of Convertible Notes 1,239 3,065
Effect of dilutive stock options -- 2,304
Diluted 42,586 56,666 .75
1996
Basic 22,742 50,927 .45
Effect of assumed conversion of Convertible Notes 981 2,429
Effect of dilutive stock options -- 1,645
Diluted $23,723 55,001 $ .43
</TABLE>
Options for which the exercise price was greater than the average market price
of common shares for the period were not included in the computation of diluted
earnings per share. These options to purchase shares were as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ----------------- ------------------
<S> <C> <C> <C>
Options to purchase shares of common stock 9,500 15,000 23,000
Exercise prices $32.50-$40.31 $21.38-$24.50 $16.69- $18.19
Expiration dates Jan 2009 Jun 2007-Jan 2008 Nov 2006-Dec 2006
</TABLE>
<PAGE> 17
NOTE H: 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 4,500,000
shares, was approved and adopted in 1993 and amended to authorize the grant of
an additional 1,000,000 shares in 1997 and 3,000,000 shares in 1998. 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.
In October of 1998, the Board of Directors adopted a resolution to reprice
all outstanding stock options with an exercise price greater than $19.31, the
market price at the time of the resolution. Accordingly, approximately 1,225,000
options, granted between June 1997 and October 1998, were repriced to $19.31.
The following table reflects the aggregate activity under the Company's stock
option plans, including the repricing:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
--------- ---------------
<S> <C> <C>
Balance at January 28, 1996 3,382,176 $ 5.94
Granted (weighted average fair value of $5.59) 1,028,900 10.74
Exercised 234,354 4.66
Canceled 216,404 8.60
Balance at February 2, 1997 3,960,318 7.12
Granted (weighted average fair value of $9.70) 1,364,700 15.01
Exercised 593,382 3.77
Canceled 155,526 9.70
Balance at February 1, 1998 4,576,110 9.82
Granted (weighted average fair value of $13.53) 2,558,350 22.57
Exercised 1,028,630 29.29
Canceled 1,558,848 23.06
Balance at January 31, 1999 4,546,982 $13.00
Exercisable, year-end 1996 1,768,436 $ 5.13
Exercisable, year-end 1997 1,939,598 6.71
Exercisable, year-end 1998 1,752,638 $ 8.22
</TABLE>
Options to purchase 3,181,088 shares were available for grant at year-end 1998.
The Company accounts 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 pro forma 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.
<PAGE> 18
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 fiscal 1995 has been excluded from the
pro forma calculation, accordingly, the fiscal 1996, 1997 and 1998 pro forma
adjustments are not indicative of future periods pro forma 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 Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------- ------------
<S> <C> <C> <C>
Net earnings
As reported $54,897 $41,347 $22,742
Pro Forma - Basic 50,058 38,639 21,647
Pro Forma - Diluted 50,270 39,878 22,627
Basic Earnings Per Share
As Reported 1.01 .81 .45
Pro forma .92 .76 .43
Diluted Earnings Per Share
As Reported .96 .75 .43
Pro Forma $ .88 $ .71 $ .42
</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
-------------------------------------------------
Jan. 31, 1999 Feb. 1, 1998 Feb. 2, 1997
------------- ------------ ------------
<S> <C> <C> <C>
Dividend yield -- -- --
Volatility 60.0% 61.0% 50.0%
Risk-free interest 5.63% 6.49% 6.26%
Expected term (years) 5.7 6.0 5.0
</TABLE>
The following table summarizes information about fixed stock options outstanding
at Jan. 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Contractual Exercise Exercisable at Exercise
Jan. 31, 1999 Life (Years) Price Jan. 31, 1999 Price
------------- ------------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Range of exercise prices
$ 2.56- $ 7.06 989,432 4.27 $ 4.89 989,432 $ 4.89
$ 7.38- $11.63 1,015,960 6.50 10.00 489,440 10.24
$12.38- $14.06 934,740 8.08 14.01 114,020 14.04
$14.34- $19.25 253,750 8.26 17.48 84,648 17.87
$19.31- $40.31 1,353,100 9.31 19.65 75,098 19.31
$ 2.56- $40.31 4,546,982 7.28 $13.00 1,752,638 $ 8.22
</TABLE>
<PAGE> 19
NOTE I: ASSOCIATE STOCK-INCENTIVE PLAN
In fiscal 1989, the Company established a defined contribution retirement plan
for eligible employees, which is intended to be qualified under Internal Revenue
Code Sections 401(a) and 401(k). The plan permits employees to make salary
deferral contributions in accordance with Internal Revenue Code Section 401(k).
Each participant may choose to have his/her salary deferral contributions and
earnings thereon invested in one or more of a money market reserve fund, a
balanced mutual fund, or a fund investing in stock of the Company. All amounts
contributed by the Company are invested in stock of the Company. In fiscal 1997,
the Company amended the plan in the following respects:
The Company changed the name of the plan from the "Williams Sonoma, Inc.
Employee Profit Sharing and Stock Incentive Plan" to the "Williams Sonoma,
Inc. Associate Stock Incentive Plan."
The Company amended the plan's eligibility rules so that all associates
other than "limited employees" will be eligible to participate after 30 days
of service and reaching the age of 21 years. "Limited Employees" will still
need to complete 1,000 hours of service in a year and reach the age of 21
years.
The Company increased its matching contribution from 50% to 100% of the
first 6% of a participant's pay which the participant elects to contribute
as salary deferral contributions and to have invested in the Company stock
fund. The Company announced that it no longer intends to make profit sharing
contributions to the plan.
The Company amended the plan's vesting schedule so that the Company's
contributions vest over a five year period rather than a six year period.
In fiscal 1998, the Company amended the plan to increase the amount of
salary deferred contributions a participant may elect to make from 10% of
the participant's compensation to 15% of the participant's compensation,
subject to certain limitations of the Internal Revenue Code.
NOTE J: COMMITMENTS AND CONTINGENCIES
The Company is party to various legal proceedings arising from normal business
activities. Management believes that the resolution of these matters will not
have an adverse material effect on the Company's financial condition.
<PAGE> 20
NOTE K: SEGMENT REPORTING
Williams-Sonoma, Inc. has two reportable segments: retail and catalog. The
retail segment sells products for the home through its three retail concepts:
Williams-Sonoma, Pottery Barn and Hold Everything. The catalog segment sells
similar products through its five direct-mail catalogs: Williams-Sonoma, Pottery
Barn, Hold Everything, Chambers and Gardeners Eden.
These reportable segments are strategic business units that offer similar
home-centered products. They are managed separately because each business unit
utilizes a distinct distribution and marketing strategy.
The accounting policies of the segments, where applicable, are the same as
those described in the summary of significant accounting policies.
Williams-Sonoma uses earnings before unallocated corporate overhead, interest
and taxes to evaluate segment profitability. Unallocated assets include
corporate cash and equivalents, the net book value of corporate facilities and
related information systems, deferred tax amounts and other corporate long-lived
assets.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
Dollars in thousands Retail Catalog Unallocated Total
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
1998
Revenues $720,320 $383,634 -- $1,103,954
Depreciation and amortization expense 24,054 3,954 $ 5,013 33,021
Earnings before income taxes 88,670 58,045 (55,970) 90,745
Assets 335,882 91,585 148,778 576,245
Expenditures for assets 65,374 8,930 4,630 78,934
1997
Revenues 601,738 331,519 -- 933,257
Depreciation and amortization expense 20,146 3,489 5,236 28,871
Earnings before income taxes 77,151 41,916 (49,045) 70,022
Assets 272,610 73,742 130,877 477,229
Expenditures for assets 50,077 3,468 5,754 59,299
1996
Revenues 513,592 298,166 -- 811,758
Depreciation and amortization expense 16,534 1,988 5,810 24,332
Earnings before income taxes 60,754 25,088 (46,645) 39,197
Assets 214,783 73,272 116,362 404,417
Expenditures for assets $ 33,737 $ 13,051 $ 839 $ 47,627
</TABLE>
<PAGE> 21
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 January 31, 1999 and
February 1, 1998, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the three fiscal years in the
period ending January 31, 1999. 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 January 31, 1999, and February 1, 1998, and the results of
its operations and its cash flows for each of the three fiscal years in the
period ending January 31, 1999, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Francisco, California
March 24, 1999
<PAGE> 22
QUARTERLY FINANCIAL INFORMATION
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
Fiscal 1998 --------------------------------------------------------
Dollars in thousands, except per share amounts May 3 August 2 November 1 January 31
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $206,210 $215,262 $241,298 $441,184
Gross profit 78,286 80,014 94,804 199,907
Earnings before income taxes 3,639 6,515 8,470 72,121
Net earnings 2,147 3,844 4,998 43,908
Basic earnings per share(1) $ .04 $ .07 $ .09 $ .79
Diluted earnings per share(2) $ .04 $ .07 $ .09 $ .75
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
Fiscal 1997 --------------------------------------------------------
Dollars in thousands, except per share amounts May 4 August 3 November 2 February 1
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $176,535 $182,427 $203,863 $370,432
Gross profit 66,508 65,760 77,338 166,875
Earnings before income taxes 2,392 4,169 5,595 57,865
Net earnings(3) 1,388 2,417 3,245 34,296
Basic earnings per share(1) $ .03 $ .05 $ .06 $ .66
Diluted earnings per share $ .03 $ .05 $ .06 $ .61
</TABLE>
(1) The sum of the quarterly basic earnings per share does not agree to the
year-to-date amount due to rounding differences.
(2) The sum of the quarterly 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 year-to-date calculation.
(3) The fourth quarter ended February 1, 1998, includes an after-tax charge to
net earnings of $1,378,000 ($.02 per share) related to the reserve for the
closure of the San Francisco call center.
COMMON STOCK
Williams-Sonoma's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol WSM. The following table sets forth the high and low closing
prices on the NYSE for the periods indicated.
On March 15, 1999, there were 546 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 1998 High Low
------- ---------
<S> <C> <C>
1st Quarter 31 1/2 20 3/8
2nd Quarter 36 1/2 25 7/8
3rd Quarter 31 7/8 17 9/16
4th Quarter 40 5/16 27 9/16
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997(1) High Low
------- ---------
<S> <C> <C>
1st Quarter 16 1/2 12 19/32
2nd Quarter 22 3/4 15 1/32
3rd Quarter 24 7/8 18 1/4
4th Quarter 23 1/32 18 1/4
</TABLE>
(1) These amounts have been restated to reflect the 2-for-1 stock split in May
1998.
<PAGE> 23
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
Adrian Bellamy
Director, Chairman, Airport
Group International Holdings, L.L.C.
and Gucci Group N.V.
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 of the Company
and Secretary to the Board
Patrick J. Connolly
Director, Executive Vice President
of the Company,
General Manager, Catalog
Janet Emerson
Director, President and Chief Executive
Officer, Learningsmith
Gary Friedman
Director, Chief Merchandising Officer
of the Company and President,
Retail Division
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, Chairman of the
Compensation Committee of
the Board of the Company
John S. Bronson
Senior Vice President of the Company,
Human Resources
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,
50 Fremont Street
San Francisco, CA 94105
Trademarks
A Catalog for Cooks, Chambers,
Gardeners Eden, Hold Everything and
Pottery Barn are trademarks
of Williams-Sonoma, Inc.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF WILLIAMS-SONOMA, INC. AS OF
FISCAL YEAR ENDED JANUARY 31, 1999
<PAGE> 2
EXHIBIT 21: SUBSIDIARIES OF WILLIAMS-SONOMA, INC.
AS OF FISCAL YEAR END JANUARY 31, 1999
<TABLE>
<CAPTION>
Subsidiary Name State/Date of Incorporation
- --------------- ---------------------------
<S> <C>
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
Pottery Barn Kids, Inc. California, June 23, 1998
Williams-Sonoma Stores LLC Delaware, August 3, 1998
Williams-Sonoma Retail
Distribution Center, Inc. California, January 27, 1999
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 107,308
<SECURITIES> 0
<RECEIVABLES> 20,082
<ALLOWANCES> 0
<INVENTORY> 173,160
<CURRENT-ASSETS> 326,766
<PP&E> 371,587
<DEPRECIATION> 128,468
<TOTAL-ASSETS> 576,245
<CURRENT-LIABILITIES> 153,900
<BONDS> 41,415
0
0
<COMMON> 11,466
<OTHER-SE> 290,564
<TOTAL-LIABILITY-AND-EQUITY> 576,245
<SALES> 1,103,954
<TOTAL-REVENUES> 1,103,954
<CGS> 650,942
<TOTAL-COSTS> 1,011,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,363
<INCOME-PRETAX> 90,745
<INCOME-TAX> 35,848
<INCOME-CONTINUING> 54,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,897
<EPS-PRIMARY> 1.01<F1>
<EPS-DILUTED> 0.96
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
