-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J1skjWAu7GIVLaX1jvz3cm1c2Kbxm3P3YAPyP8dtl/l0JGZNL82ZOv6eH8m70Al0 Q480xzjYROe3Qgrcv137Pw== 0000950149-98-000750.txt : 19980424 0000950149-98-000750.hdr.sgml : 19980424 ACCESSION NUMBER: 0000950149-98-000750 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980201 FILED AS OF DATE: 19980422 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIAMS SONOMA INC CENTRAL INDEX KEY: 0000719955 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 942203880 STATE OF INCORPORATION: CA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12704 FILM NUMBER: 98598336 BUSINESS ADDRESS: STREET 1: 100 N POINT ST CITY: SAN FRANCISCO STATE: CA ZIP: 94133 BUSINESS PHONE: 4156168345 MAIL ADDRESS: STREET 1: 100 NORTH POINT STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94133 10-K 1 FORM 10-K DATED 02-01-1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 1, 1998 ---------------- Commission file number 000-12704 --------- WILLIAMS-SONOMA, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) California 94-2203880 - ------------------------------- ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3250 Van Ness Avenue, San Francisco, CA 94109 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (415) 421-7900 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ As of March 27, 1998, the approximate aggregate market value of voting stock held by non-affiliates of the Registrant was $1,173,730,000 using the closing sales price on this day of $59.75. 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 27, 1998, 26,132,729 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following documents have been incorporated herein by reference: 1) Registrant's Annual Report to Shareholders for the Fiscal Year ended February 1, 1998 (the "1997 Annual Report") in Parts I and II hereof and attached hereto as Exhibit 13; 2) Registrant's Proxy Statement for the 1998 Annual Meeting (the "Proxy Statement") in Part III hereof. 1 2 WILLIAMS-SONOMA, INC. FORM 10-K ANNUAL REPORT FISCAL YEAR ENDED FEBRUARY 1, 1998 TABLE OF CONTENTS
PART I PAGE Item 1. Business 3 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security 7 Holders PART II Item 5. Market for the Registrant's Common Equity 8 and Related Stockholder Matters Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of 8 Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes in and Disagreements with Accountants 9 on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the 10 Registrant Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial 10 Owners and Management Item 13. Certain Relationships and Related Transactions 10 PART IV Item 14. Exhibits, Financial Statement Schedules 11 and Reports on Form 8-K
2 3 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 276 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 February 1, 1998 (Fiscal 1997), 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. 3 4 RETAIL STORES Three of the Company's five merchandising concepts are marketed through retail stores - Williams-Sonoma, Pottery Barn and Hold Everything. Williams-Sonoma stores offer a wide selection of culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware and table linen. In addition, these stores carry a variety of quality foods, including a line of Williams-Sonoma food products, such as gourmet coffees and pasta sauces. Pottery Barn stores feature a large assortment of items in casual home furnishings, flatware and table accessories from around the world that are designed to be combined to create a dynamic look in the home. The Hold Everything concept was developed by the Company to offer innovative solutions to household storage needs by providing efficient organization solutions for every room in the house. As of February 1, 1998 the Company operated 276 retail stores, located in 37 states and the District of Columbia. This represents 152 Williams-Sonoma, 88 - - Pottery Barn, 32 Hold Everything, and 4 outlet stores, of which 74 Williams-Sonoma and 54 Pottery Barn stores are large-format. The prototypical 1997 large-format stores range from 5,700-9,000 selling square feet for Pottery Barn stores, and 2,800-4,600 selling square feet for Williams-Sonoma stores and enable the Company to more clearly display merchandise. Large-format stores accounted for 58% of retail sales in fiscal 1997. In fiscal 1998, 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 concept. Since then, it has expanded its mail order business to include the four other concepts - - Pottery Barn, Hold Everything, Gardeners Eden and Chambers. The mail order business complements the retail business by building customer awareness of a concept and acting as an effective advertising vehicle. In addition, the Company believes that the mail order catalogs act as a cost efficient means of testing market acceptance of new products. The Company sends its catalogs to addresses from its proprietary customer list, as well as to names from lists which the Company receives in exchange or rents from other mail order merchandisers, magazines and other companies. In accordance with prevailing industry practice, the Company rents its list to other merchandisers. The Company's customer list is continually updated to include new prospects and eliminate non-responders. The Company's San Francisco call center, which primarily serviced Pottery Barn, was previously located in one of the Company's two corporate headquarters facilities. In order to support the sales growth in Pottery Barn and growth of the Company's corporate staff, management made the decision in fiscal 1997 to close this call center and to utilize the space for corporate offices. The call center was closed in January 1998, and as a result the Company recorded a fourth quarter pre-tax charge of $2,335,000 for severance and other employment-related costs associated with the closure. A new call center is scheduled to open in Oklahoma City, Oklahoma, in the third quarter of fiscal 1998. In the interim, the Company's Las Vegas call center is performing all functions previously handled by the San Francisco call center. (See Note E to the Company's Consolidated Financial Statements). 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 1997. Approximately 40% of the Company's merchandise is foreign-sourced. The primary sources for imported merchandise are located in Europe and Asia. 4 5 MANAGEMENT INFORMATION SYSTEMS In fiscal 1996, the Board of Directors approved a three-year, $25 million management information systems initiative, the purpose of which is to support the continuing growth of the Company. In fiscal 1997, the Company spent approximately $9 million on development of information systems, including merchandise planning and inventory management systems. In fiscal 1998, the Company is planning to spend approximately $10 million on information systems, including development of a new mail order entry system and implementation of merchandise planning and inventory management systems. COMPETITION AND SEASONALITY The specialty retail business is highly competitive. The Company's specialty retail stores and mail order catalogs compete with other retail stores, including specialty stores and department stores and other mail order catalogs. Certain of the Company's competitors have greater financial, distribution and marketing resources than the Company. The recent substantial sales growth in the mail order catalog industry has encouraged the entry of many new competitors and an increase in competition from established companies. The Company competes on the basis of the quality of its merchandise, service to its customers and its proprietary customer list. The Company's business is subject to substantial seasonal variations in demand. Historically, a significant portion of the Company's sales and net income have been realized during the period from October through December, and levels of net sales and net income have generally been significantly lower during the period from February through September. The Company believes this is the general pattern associated with the mail order and retail industries. In anticipation of its peak season, the Company hires a substantial number of additional employees in its retail stores and mail order processing and distribution areas, and incurs significant fixed catalog production and mailing costs. (See Quarterly Financial Information on page 48 of the 1997 Annual Report which is incorporated herein by reference). EMPLOYEES At February 1, 1998, the Company employed approximately 12,300 persons, approximately 3,300 of whom were full-time employees. During the 1997 peak season, the Company hired approximately 5,100 temporary employees in its stores and in its mail order processing and distribution areas. 5 6 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, McMahan and Robert K. Earley, former Senior Vice President of Distribution. 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). On January 2, 1996, the Company entered an agreement to lease a 35,867 square-foot build-to-suit call center in Summerlin, Nevada. The lease covers a ten-year term with three optional five-year renewals. Rent commenced in August 1996 at an annual basic rent amount of $529,000 for each of the first five years of the lease and will increase to $598,000 annually for the remaining five years. In the event that the Company should require more space to support growth, the agreement includes an option to expand into an additional 17,920 square feet. (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. 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). 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 will commence 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). 6 7 The Company's net selling area, at February 1, 1998, totaled approximately 1,016,000 square feet of leased space for 276 stores. All of the existing stores are leased by the Company with original lease terms ranging from eight to twenty-five years, expiring between 1998 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 1997 fiscal year. 7 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock is currently traded on the NASDAQ National Market System. Information contained under the caption "Common Stock" on page 48 of the 1997 Annual Report is incorporated herein by reference. The closing sales price of the Company's stock in the NASDAQ National Market System on March 27, 1998 was $59.75. SHAREHOLDERS The number of shareholders of record as of March 27, 1998 was approximately 518. 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 to the Company's Consolidated Financial Statements). STOCK SPLITS In January 1994, the Company declared a 3-for-2 stock split to shareholders of record as of January 28, 1994. The split was effected on February 18, 1994 with the issuance of 5,574,594 additional shares. In August 1994, the Company declared a 3-for-2 stock split to shareholders of record as of September 7, 1994. The split was effected on September 27, 1994 with the issuance of 8,414,056 additional shares. On March 11, 1998, the Company's Board of Directors declared a 2-for-1 stock split to be effected as a special distribution of one share of common stock for each share of the Company's common stock outstanding. The distribution will be made on May 15, 1998 to shareholders of record on May 4, 1998. (See Note L of the Company's Consolidated Financial Statements). ITEM 6. SELECTED FINANCIAL DATA Information contained under the caption "Five Year Selected Financial Data" on page 31 of the 1997 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 32 - 35 of the 1997 Annual Report is incorporated herein by reference. 8 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following documents are incorporated by reference to pages 36 through 47 of the 1997 Annual Report to Shareholders filed as Exhibit 13 to this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets as of February 1, 1998 and February 2, 1997 Consolidated Statements of Earnings for the 52-week period ended February 1, 1998, for the 53-week period ended February 2, 1997 and for the 52-week period ended January 28, 1996 Consolidated Statements of Shareholders' Equity for the 52-week period ended February 1, 1998, for the 53-week period ended February 2, 1997 and for the 52-week period ended January 28, 1996 Consolidated Statements of Cash Flows for the 52-week period ended February 1, 1998, for the 53-week period ended February 2, 1997 and for the 52-week period ended January 28, 1996 Notes to Consolidated Financial Statements The unaudited quarterly information contained under the caption "Quarterly Financial Information" on page 48 of the 1997 Annual Report is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 9 10 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 4 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 27, 1998 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 February 1, 1998, is contained under the caption "Executive Compensation" on pages 8 through 12 of the Proxy Statement and is incorporated herein by reference (except the information contained in the Compensation Committee Report and the Performance Graph). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT a) Information with respect to those persons known to the Company to be beneficial owners of more than 5% of its common stock as of March 27, 1998, 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 27, 1998, 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 the Company's Consolidated Financial Statements). 10 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Documents filed as part of the Form 10-K: See Item 8 for a list of Financial Statements incorporated herein by reference. (a)(2) Financial Statement Schedules
Description Page ----------- ---- Independent Auditors' Report on Financial Statement Schedule 12 Schedule II Valuation and Qualifying Accounts 13
Schedules other than those referred to above have been omitted because they are not required or are not applicable. (b) Reports on Form 8-K: No Form 8-K filings were made during the last quarter of the fiscal year ended February 1, 1998. (c) Exhibits: See Exhibit Index on pages 16 through 21. 11 12 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Williams-Sonoma, Inc.: We have audited the consolidated financial statements of Williams-Sonoma, Inc. and subsidiaries as of February 1, 1998 and February 2, 1997, and for each of the three fiscal years in the period ended February 1, 1998, and have issued our report thereon dated March 25, 1998; such financial statements and report are included in your 1997 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 25, 1998 12 13 SCHEDULE II WILLIAMS-SONOMA, INC. & SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - ----------- --------- -------- ---------- ------ Period Ended January 28, 1996: Allowance for Doubtful Accounts $239,000 $119,000 $120,000(A) $238,000 Period Ended February 2, 1997: Allowance for Doubtful Accounts $238,000 $ 86,000 $138,000(A) $186,000 Period Ended February 1, 1998: Allowance for Doubtful Accounts $186,000 $ 20,000 -- $206,000
(A) Consists of direct write-offs charged against the allowance account during the period. 13 14 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 21, 1998 By /s/W. Howard Lester ----------------------------- Chairman and Chief Executive Officer Director Pursuant to the requirements of Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 21, 1998 /s/W. Howard Lester ----------------------------- W. Howard Lester Chairman Chief Executive Officer Director Date: April 21, 1998 /s/Dennis A. Chantland ----------------------------- Dennis A. Chantland Executive Vice President Chief Administrative Officer Secretary Date: April 21, 1998 /s/Jerry S. B. Dratler ----------------------------- Jerry S. B. Dratler Vice President, Finance Chief Accounting Officer Date: April 21, 1998 /s/Charles E. Williams ----------------------------- Charles E. Williams Founder and Vice-Chairman Director Date: April 21, 1998 /s/Gary G. Friedman ----------------------------- Gary G. Friedman Chief Merchandising Officer President-Retail Division Director
14 15 Date: April 21, 1998 /s/Patrick J. Connolly ----------------------------- Patrick J. Connolly Executive Vice President General Manager-Catalog Director Date: April 21, 1998 /s/Adrian D.P. Bellamy ----------------------------- Adrian D.P. Bellamy Director Date: April 21, 1998 /s/James M. Berry ----------------------------- James M. Berry Director Date: April 21, 1998 /s/Nathan Bessin ----------------------------- Nathan Bessin Director Date: April 21, 1998 /s/Millard S. Drexler ----------------------------- Millard S. Drexler Director Date: April 21, 1998 /s/Janet L. Emerson ----------------------------- Janet L. Emerson Director Date: April 21, 1998 /s/James A. McMahan ----------------------------- James A. McMahan Director Date: April 21, 1998 /s/John E. Martin ----------------------------- John E. Martin Director
15 16 EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1998
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE NO. 3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-Q for the period ended October 29, 1995, as filed with the Commission on December 12, 1995) 3.2 Restated and Amended Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal year ended January 31, 1988, as filed with Commission on April 29, 1988) 10.1 1983 Incentive Stock Option Plan and Form of Agreement (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, as filed with the Commission on May 25, 1983) 10.1 A 1976 Stock Option Plan and Form of Agreement as amended (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 as filed with the Commission on May 3, 1993) 10.1 B Amended and Restated 1993 Stock Option Plan 10.2 Warehouse - distribution facility lease dated July 1, 1983 between the Lester-McMahan Partnership as lessor and the Company as lessee (incorporated by reference to Exhibit 10.28 to the Company's Report on Form 10-Q for the period ended September 30, 1983, as filed with the Commission on October 14, 1983) 10.2 A The Amendment, dated December 1, 1985, to the lease for the distribution center, dated July 1, 1983 between the Company as lessee and the Lester-McMahan Partnership as lessor (incorporated by reference to Exhibit 10.48 to the Company's Report on Form 10-K for the fiscal year ended February 3, 1985, as filed with the Commission on April 26, 1985) 10.2 B The Sublease, dated as of August 1, 1990, by and between Hewson-Memphis Partners and the Company (incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the period ended October 28, 1990, as filed with the Commission on December 12, 1990) 10.2 C Second Amendment to Lease between the Company and the Lester-McMahan Partnership, dated December 1, 1993 (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994)
16 17 10.2 D Second Amendment to Sublease between the Company and Hewson-Memphis Partners, dated September 1, 1994 (incorporated by reference to Exhibit 10.38 to the Company's Report on Form 10-Q for the period ended October 30, 1994 as filed with the Commission on December 13, 1994) 10.2 E Third Amendment to Sublease between the Company and Hewson-Memphis Partners, dated October 24, 1995 (incorporated by reference to Exhibit 10.2E to the Company's Report on Form 10-Q for the period ended October 29, 1995 as filed with the Commission on December 12, 1995) 10.3 The lease for the Company's Corporate Offices at 100 North Point Street, San Francisco, California dated January 13, 1986, between the Company as lessee and Northpoint Investors as lessor (incorporated by reference to Exhibit 10.49 to the Company's Report on Form 10-K for the year ended February 3, 1985, as filed with the Commission on April 26, 1985) 10.3 A First amendment to the lease for the Company's Corporate Offices at 100 North Point Street, San Francisco, California dated January 5, 1996, between the Company as lessee and Northpoint Investors as lessor (incorporated by reference to Exhibit 10.3 A to the Company's Report on Form 10-K for the year ended January 28, 1996, as filed with the Commission on April 26, 1996) 10.4 Joint Venture Agreement and Trade Name and Trade Mark Licensing Agreement, dated May 3, 1988 between the Company and Tokyu Department Store Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the period ended July 31, 1988, as filed with the Commission on September 15, 1988) 10.4 A Stock Purchase Agreement dated as of May 15, 1989, by and between the Company and Tokyu Department Store Co., Ltd. (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-2 filed with the Commission on June 28, 1990 as amended by amendment Number 1 on Form S-2 filed with the Commission on July 17, 1990) 10.5 Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan effective as of February 1, 1989 (incorporated by reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed February 22, 1990) 10.5 A Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan Trust Agreement, dated September 20, 1989 (incorporated by reference to Exhibit 4.2 of the Company's Form S-8 (File No. 33-33693) filed February 22, 1990)
17 18 10.5 B Amendment Number One to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated April 27, 1990 (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991, as amended by a Form 8 Amendment to Form 10-K, filed with the Commission on July 26, 1991) 10.5 C Amendment Number Two to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated December 12, 1990 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1991, as amended by a Form 8 Amendment to Form 10-K, filed with the Commission on July 26, 1991) 10.5 D Amendment Number Three to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated March 10, 1992 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 as filed with the Commission on May 3, 1993) 10.5 E Amendment Number Four to the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan, dated June 9, 1993 (incorporated by reference to Exhibit 10.24 to the Company's Report on Form 10-Q for the period ended May 2, 1993 as filed with the Commission on June 16, 1993) 10.5 F 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). 10.6 Purchase and Sale Agreement between the Company and Bancroft-Whitney, a division of Thomson Legal Publishing, Inc., dated December 14, 1993 (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.6 A Standing Loan Agreement and Deed of Trust between the Company and Bank of America, NT & SA, dated March 9, 1994 (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994) 10.6 B Indemnity Agreement by the Company in favor of Bank of America, NT & SA, dated December 1, 1993 (incorporated by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1994 as filed with the Commission on April 29, 1994)
18 19 10.7 Second Amended and Restated Credit Agreement between the Company and Bank of America, NT & SA, dated March 29, 1996 (incorporated by reference to Exhibit 10.6G to the Company's Report on Form 10-K for the period ended January 28, 1996 as filed with the Commission on April 26, 1996 ) 10.7 A Continuing Guaranty from Pottery Barn East Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 F to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.7 B Continuing Guaranty from Hold Everything, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 G to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.7 C Continuing Guaranty from Williams-Sonoma Stores, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 H to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.7 D Continuing Guaranty from Chambers Catalog Company, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 I to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.7 E Continuing Guaranty from Gardener's Eden, Inc. to Bank of America, NT & SA, dated August 7, 1995 (incorporated by reference to Exhibit 10.6 J to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.8 Note Agreement for $40,000,000 7.2% Senior Notes, dated August 1, 1995 (incorporated by reference to Exhibit 10.9 to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.8 A Guaranty Agreement for $40,000,000 Senior Notes, dated August 1, 1995 (incorporated by reference to Exhibit 10.9A to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.8 B Intercreditor Agreement for $40,000,000 Senior Notes, dated August 1, 1995 (incorporated by reference to Exhibit 10.9B to the Company's Report on Form 10-Q for the period ended July 30, 1995 as filed with the Commission on September 12, 1995) 10.9 Purchase Agreement for $40,000,000 5.25% Convertible, Subordinated Notes, dated April 10, 1996 (incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-K for the period ended January 28, 1996 as filed with the Commission on April 26, 1996)
19 20 10.9 A Indenture for $40,000,000 5.25% Convertible, Subordinated Notes, dated April 15, 1996 (incorporated by reference to Exhibit 10.10A to the Company's Report on Form 10-K for the period ended January 28, 1996 as filed with the Commission on April 26, 1996 ) 10.9 B Registration Rights Agreement relating to $40,000,000 5.25% Convertible, Subordinated Notes, dated April 15, 1996 (incorporated by reference to Exhibit 10.10B to the Company's Report on Form 10-K for the period ended January 28, 1996 as filed with the Commission on April 26, 1996 ) 10.10 Settlement Agreement and General Release between Williams-Sonoma, Inc. and Robert K. Earley dated February 14, 1997 (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended February 2, 1997 as filed with the Commission on May 1, 1997. 10.11 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). 10.12 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). 10.12 A 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). 10.12 B 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). 10.12 C 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). 10.12 D 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). 10.12 E 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).
20 21 10.12 F 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). 10.13 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). 10.13 A 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). 10.13 B 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). 10.13 C 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). 10.13 D 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). 10.13 E 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). 10.15 First Amendment and Restatement of the Williams-Sonoma, Inc. Executive Deferral Plan dated November 6, 1997 (incorporated by reference to Exhibit 10.5 to the Company's Report on Form 10-Q for the period ended November 2, 1997 as filed with the Commission on December 17, 1997). 10.16 Office lease between TJM Properties, L.L.C. and Williams-Sonoma, Inc., dated as of February 13, 1998 11 Statement re computation of per share earnings 13 Annual report to security holders 21 Subsidiaries 23 Independent Auditors' Consent 27.1 Financial Data Schedule for the fiscal year ended February 1, 1998. 27.2 Restated Financial Data Schedules for quarters 1, 2 and 3 of the fiscal year ended February 1, 1998 (fiscal 1997). 27.3 Restated Financial Data Schedules for the fiscal years ended February 2, 1997 (fiscal 1996) and January 28, 1996 (fiscal 1995). 27.4 Restated Financial Data Schedules for quarters 1, 2 and 3 of the fiscal year ended February 2, 1997 (fiscal 1996).
21 EX-10.1B 2 AMENDED & RESTATED 1993 STOCK OPTION PLAN 1 EXHIBIT 10.1B WILLIAMS-SONOMA, INC. Amended and Restated 1993 Stock Option Plan 1. Purpose. The purpose of this Amended and Restated 1993 Stock Option Plan (the "Plan") of WILLIAMS-SONOMA, INC., a California corporation (the "Company"), is to secure for the Company and its shareholders the benefits arising from stock ownership by selected key employees and directors of the Company or any of its Affiliates (as defined below). The Plan will provide a means whereby such employees and directors may purchase shares of the common stock of the Company (or any class of stock into which such common stock is converted or reclassified as provided in Section 17) (the "Common Stock") pursuant to (i) options which will qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) "non-incentive" or "nonqualified" stock options ("nonqualified stock options"). 2. Administration. The Plan shall be administered by a committee (the "Committee") appointed by the Board of Directors of the Company consisting of two or more directors of the Company, all of whom shall be (i) "non-employee directors" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and (ii) "outside directors" within the meaning of Section 162(m) of the Code. Any action of the Committee with respect to administration of the Plan shall be taken by a majority vote or unanimous written consent of its members. Subject to the provisions of the Plan, the Committee shall have the authority (i) to construe and interpret the Plan, (ii) to define the terms used herein, (iii) to prescribe, amend and rescind rules and regulations relating to the Plan, (iv) to determine the individuals to whom and the time or times at which options shall be granted, whether such options will be incentive stock options or non-qualified stock options, the number of shares to be subject to each option, the option price, the number of installments, if any, in which each option may be exercised, and the duration of each option, (v) to approve and determine the duration of leaves of absence which may be granted to participants without constituting a termination of their employment for the purposes of the Plan, (vi) to amend the terms of any outstanding option, with consent of the option holder, and (vii) to make all other determinations necessary or advisable for the administration of the Plan. All determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and their legal representatives and beneficiaries. 3. Shares Subject to the Plan. Subject to adjustment as provided in Section 17, the shares to be offered under the Plan shall consist of the Company's authorized but unissued Common Stock, and the aggregate amount of such stock which may be issued upon exercise of all options under the Plan shall not exceed Two Million Seven Hundred Fifty Thousand (2,750,000) shares; provided, however, that no officer (within the meaning of Rule 16a-1 promulgated under the Securities Exchange Act of 1934, as amended) shall be granted in any fiscal year options to purchase more than 100,000 shares of Common Stock. If any option granted under the Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject thereto shall again be available for options to be granted under the Plan. 2 4. Eligibility and Participation. All key employees and directors of the Company or any Affiliate shall be eligible for selection to participate in the Plan. An "Affiliate" shall mean any parent or subsidiary of the Company as defined in Section 424(e) and (f) of the Code. An individual who has been granted an option may, if such individual is otherwise eligible, be granted an additional option or options if the Committee shall so determine, subject to the other provisions of the Plan. No incentive stock option may be granted to any person who, at the time the incentive stock option is granted, is not an employee of the Company. Nonqualified stock options may be granted to persons who have agreed in writing to become officers or key employees of the Company or any Affiliate at the time of the grant and who become officers or key employees of the Company or any Affiliate within 120 days thereafter. Spouses to whom a nonqualified stock option is transferred pursuant to a qualified domestic relations order pursuant to Section 11 shall also be eligible to participate in the Plan with regard to such option, but only to the extent the original option holder would have been able to participate had such original option holder continued to hold the option, and to the extent permitted by the Committee or by the terms of the option agreement. The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options (whenever granted) are exercisable for the first time by an option holder during any calendar year (under all incentive stock option plans of the Company and its Affiliates) shall not exceed $100,000. All incentive stock options granted under the Plan shall be granted within ten years from the original date of adoption of this Plan. 5. Awards to Directors. Any person who is or becomes a director and who is not an employee of the Company is referred to herein as an "Eligible Director." During the term of the Plan, each Eligible Director who becomes for the first time a director of the Company on or after the 1993 Annual Meeting of Shareholders shall automatically be granted, on the date he or she first becomes a director, a nonqualified stock option to purchase 6,750 shares of Common Stock. During the term of the Plan, each Eligible Director shall also be granted a nonqualified stock option to purchase 5,250 shares of Common Stock on the date of each annual meeting of the Company's shareholders at which such Eligible Director is re-elected to continue to serve on the Company's Board of Directors. The purchase price under each nonqualified stock option granted to Eligible Directors shall be equal to the fair market value of the stock subject to the option on the date the option is granted. Options initially granted to Eligible Directors upon their joining the Board of Directors shall vest and become exercisable in three equal installments on each anniversary of the grant date. Options granted annually to Eligible Directors upon their re-election to the Board of Directors shall vest and become exercisable in one installment six months after the date of grant. All options granted to Eligible Directors shall expire ten (10) years from the date of grant. The Committee may at any time amend or revise the provisions of this Section 5 but not more than once every six months unless required to comply with changes in the Code or the Employee Retirement Income Security Act ("ERISA"), or the rules promulgated under the Code or ERISA. 3 6. Duration of Options. Subject to Sections 5 and 16, each option and all rights associated therewith shall expire on such date as the Committee may determine, and shall be subject to earlier termination as provided herein; provided, however, that all stock options shall expire within ten (10) years from the date on which such options are granted. 7. Purchase Price. Subject to Sections 5 and 16, the purchase price of the stock covered by each option shall be determined by the Committee but shall not be less than one hundred percent (100%) of the fair market value of such stock (as determined under Section 9) on the date of grant. The purchase price of the shares upon exercise of an option shall be paid in full at the time of exercise (i) in cash or by check payable to the order of the Company, (ii) by delivery of shares of Common Stock of the Company already owned by, and in the possession of the option holder, or (iii) if authorized by the Committee or if specified in the option being exercised, (x) by a promissory note made by option holder in favor of the Company, upon the terms and conditions determined by the Committee including, to the extent the Committee determines appropriate, a security interest in the shares issuable upon exercise or other property, or (y) through a "cashless exercise," in either case complying with applicable law (including, without limitation, state and federal margin requirements), or any combination thereof. Shares of Common Stock used to satisfy the exercise price of an option shall be valued at their fair market value determined (in accordance with Section 9) on the date of exercise (or if such date is not a business day, as of the close of the business day immediately preceding such date). 8. Exercise of Options. In no event shall any option be exercisable earlier than six months after the date of grant except in the case of the death or disability of the option holder, in which case such option may be exercisable in accordance with Section 14. Subject to Section 5, each option granted under this Plan may be exercisable in full upon the expiration of such six month period or in such installments during the period prior to its expiration date as the Committee shall determine. Furthermore, unless otherwise determined by the Committee, if the option holder shall not in any given installment period purchase all of the shares which the option holder is entitled to purchase in such installment period, then the option holder's right to purchase any shares not purchased in such installment period shall continue until the expiration date or sooner termination of the option holder's option. No option may be exercised for a fraction of a share and no partial exercise of any option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise, if less than one hundred (100) shares. 9. Fair Market Value of Common Stock. The fair market value of a share of Common Stock of the Company shall be determined for purposes of the Plan by reference to the closing price on the principal stock exchange on which such shares are then listed or, if such shares are not then listed on a stock exchange, by reference to the closing price (if approved for quotation on the NASDAQ National Market System) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers, Inc. through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the business day immediately preceding the date on which the option is granted (which, for all purposes, shall be the date on which the Committee makes the determination granting the option) or exercised (or, if for any 4 reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 10. Withholding Tax. Upon (i) the disposition by an employee or other person of shares of Common Stock acquired pursuant to the exercise of an incentive stock option granted pursuant to the Plan within two years of the granting of the incentive stock option or within one year after exercise of the incentive stock option or (ii) the exercise of non-qualified stock options, the Company shall have the right to require such employee or such other person to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such shares. 11. Nontransferability. An incentive stock option granted under the Plan shall, by its terms, be non-transferable by the option holder, either voluntarily or by operation of law, otherwise than by will or the laws of descent and distribution, and shall be exercisable during the option holder's lifetime only by the option holder, regardless of any community property interest therein of the spouse of the option holder, or such spouses's successors in interest. If the spouse of the option holder shall have acquired a community property interest in such option, the option holder, or the option holder's permitted successors in interest, may exercise the option on behalf of the spouse of the option holder or such spouse's successors in interest. A non-qualified stock option granted under the Plan shall, by its terms, be non-transferable by the option holder, either voluntarily or by operation of law, otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA, or the rules thereunder, and shall be exercisable during the option holder's lifetime only by the option holder or, to the extent permitted by the Committee or by the terms of the option agreement, the spouse of the option holder who obtained the option pursuant to such a qualified domestic relations order described herein or pursuant to Section 14. 12. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. At the discretion of the Committee, any option may provide that the option holder (and any transferee), by accepting such option, represents and agrees that none of the shares purchased upon exercise of the option will be acquired with a view to any sale, transfer or distribution of said shares in violation of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, or any applicable state "blue sky" laws, and the person entitled to exercise the same shall furnish evidence satisfactory to the Company (including a written and signed representation) to that effect in form and substance satisfactory to the Company, including an indemnification of the Company in the event of any violation of the Securities Act or state blue sky laws by such person. The Company shall use its reasonable efforts to take all necessary and appropriate action to assure that the shares issuable upon the exercise of any option shall be issued in full compliance with the Securities Act, state blue sky laws and all applicable licensing requirements of any principal securities exchange on which shares of the same class are listed. 13. Termination of Employment. 5 If a holder of an incentive stock option ceases to be employed by the Company or any of its Affiliates for any reason other than the option holder's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the option holder's incentive stock option shall be exercisable for a period of three (3) months after the date the option holder ceases to be an employee of the Company or such Affiliate (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this Section 13, but no option may be exercised during any such leave of absence, except during the first three (3) months thereof. Termination of employment or other relationship with the Company by the holder of a nonqualified stock option will have the effect specified in the individual option agreement, as determined by the Committee. Any option transferred pursuant to a qualified domestic relations order pursuant to Section 11 shall continue to be subject to the provisions governing the grant to the original grantee, including without limitation, the provisions governing exercisability, vesting and termination (which shall be determined by reference to the employment status of the original grantee), unless the option agreement or the Committee provides otherwise. 14. Death or Permanent Disability of Option Holder. If the holder of an incentive stock option dies or becomes permanently disabled (within the meaning of Section 22(e)(3) of the Code) while the option holder is employed by the Company or any of its Affiliates, the option holder's option shall be exercisable for a period of one (1) year after the date of such death or permanent disability (unless by its terms it sooner expires) to the extent exercisable on the date of death or permanent disability and shall thereafter expire and be void and of no further force or effect. During such period after death, such incentive stock option may, to the extent that it remained unexercised (but exercisable by the option holder according to such option's terms) on the date of such death, be exercised by the person or persons to whom the option holder's rights under the option shall pass by the option holder's will or by the laws of descent and distribution. The death or disability of a holder of a nonqualified stock option will have the effect specified in the individual option agreement, as determined by the Committee. 15. Privileges of Stock Ownership. No person entitled to exercise any option granted under the Plan shall have any of the rights or privileges of a shareholder of the Company in respect of any shares of stock issuable upon exercise of such option until certificates representing such shares shall have been issued and delivered. No shares shall be issued and delivered upon the exercise of any option unless and until there shall have been full compliance with all applicable requirements of the Securities Act (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of any national securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. 16. Special Terms Applicable to Large Shareholders. Notwithstanding any other provision of this Plan, each incentive stock option granted to a person possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company (or an Affiliate, as applicable) (a "Large Shareholder") shall (i) have an exercise price of not less than one hundred and ten percent (110%) of the fair market value of the stock covered by the option (as determined under Section 9) on the date of grant and (ii) expire not later than five (5) years from the date of grant. 6 17. Adjustments. If the outstanding shares of the Common Stock of the Company (or any other class of shares or securities which shall have become eligible for grant under the Plan pursuant to this sentence) are increased or decreased or changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which options may be granted under this Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised options or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in the outstanding options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the option but with a corresponding adjustment in the price for each share or other unit of any security covered by the option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all the property or more than eighty percent (80%) of the then outstanding stock of the Company to another corporation, the Plan shall terminate, and all options theretofore granted hereunder shall terminate; provided, however, that notwithstanding the foregoing, the Committee shall provide in writing in connection with such transaction for any or all of the following alternatives (separately or in combinations): (i) for the options theretofore granted to become immediately exercisable notwithstanding the provisions of Section 8; (ii) for the assumption by the successor corporation of the options theretofore granted or the substitution by such corporation for such options and rights of new options and rights covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (iii) for the continuance of the Plan by such successor corporation in which event the Plan and the options theretofore granted shall continue in the manner and under the terms so provided; or (iv) for the payment in cash or stock in lieu of and in complete satisfaction of such options. Adjustments under this Section 17 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 18. Amendment and Termination of Plan. The Committee may at any time suspend or terminate the Plan. The Committee may also at any time amend or revise the terms of the Plan, provided that no such amendment or revision shall, unless appropriate shareholder approval of such amendment or revision is obtained, increase the maximum number of shares in the aggregate which may be sold pursuant to options granted under the Plan, except as permitted under the provisions of Section 17, or change the minimum purchase price of incentive stock options set forth in Sections 7 and 16, or increase the maximum term of incentive stock options provided for in Sections 6 and 16, or permit the granting of options to anyone other than as provided in Sections 4 or 5, or otherwise materially increase the benefits accruing to employees under the Plan. Notwithstanding the foregoing, no amendment, suspension or termination of the Plan shall, without specific action of the Committee and the consent of the option holder, in any way modify, 7 amend, alter or impair any rights or obligations under any option theretofore granted under the Plan. 19. Effective Date of Plan. The Plan, as hereby amended, shall be submitted for approval by the holders of the outstanding voting stock of the Company within twelve (12) months from the date the amendments are adopted by the Board of Directors. EX-10.16 3 WILLIAMS SONOMA OFFICE LEASE WITH TJM 1 Exhibit 10.16 WILLIAMS-SONOMA BUILDING [NAME OF BUILDING] OFFICE LEASE BETWEEN TJM PROPERTIES, L.L.C. ("LANDLORD") AND WILLIAMS-SONOMA, INC. ("TENANT") 2 TABLE OF CONTENTS Page ---- 1. Premises................................................. 1 2. Term..................................................... 2 3.A Construction............................................. 3 3. Preparation for Occupancy................................ 6 4. Rent..................................................... 7 5. Maintenance and Repairs.................................. 7 6. Services................................................. 11 7. Alterations and Improvements............................. 11 8. Inspection............................................... 12 9. Casualty................................................. 12 10. Insurance and Indemnity.................................. 14 11. Condemnation............................................. 17 12. Default.................................................. 18 13. Holdover................................................. 20 14. Assignment and Subletting................................ 20 15. Quiet Enjoyment.......................................... 21 16. Subordination............................................ 21 17. Rules and Regulations.................................... 21 18. Estoppel Certificate..................................... 21 19. Signage; Change of Name.................................. 22 20. Mechanics' Liens......................................... 22 21. Extension................................................ 22 22. Notices.................................................. 23 23. Miscellaneous............................................ 24 24. Brokers.................................................. 27 25. Attachments.............................................. 27 26. Arbitration.............................................. 27 RIDER 1....................................................... 30 RIDER 2....................................................... 35 EXHIBIT A..................................................... 41 EXHIBIT B..................................................... 43 EXHIBIT C..................................................... 47 EXHIBIT D..................................................... 48 EXHIBIT E..................................................... 50 3 LEASE THIS LEASE, made as of the thirteenth day of February, 1998, between TJM PROPERTIES, L.L.C. and/or its assigns, an Oklahoma limited liability company, having its principal office at 3232 West Britton Road, Suite 250, Oklahoma City, OK 73120 ("Landlord"), and WILLIAMS-SONOMA, INC., a California corporation having its principal office at 3250 Van Ness Avenue, San Francisco, CA 94109 ("Tenant"). 1. Premises (a) Landlord hereby leases to Tenant and Tenant hereby leases from Landlord all of the space shown on the attached Exhibit A (the "Premises") consisting of approximately 35,862 square feet of rentable area in a building to be commonly known as "The Williams-Sonoma Building" (The "Building") situated on real property located in Commerce Park at Block 9, Lot 1 of Silver Springs Addition to Oklahoma City, in Oklahoma City, Oklahoma, said property being more fully described in Exhibit B (the "Land"), together with the use of the hallways, corridors, lobbies, lavatories, stairways, entrances, exits, sidewalks, driveways, the parking areas provided for in Section 6 (a) (vi) and all other areas and facilities of the Building and Land appurtenant thereto as they may exist from time to time (the "Appurtenances"). Collectively, the Building, the Land, and the Appurtenances are sometimes referred to in this Lease as the "Property". The ratio by which the rentable area of the Premises bears to the rentable area of the Building is referred to herein as the Tenant's proportionate share ("Proportionate Share") and is one hundred percent (100%). (b) Subject to the provisions of Paragraph 1(c) below, Landlord warrants that it and no other person or entity has the right to lease the Premises to Tenant; Landlord further warrants that the Land and the Building, and the permitted uses thereof by Tenant, will, at the time possession of the Premises is delivered to Tenant, comply with all laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments, departments, commissions, boards and officers, and all orders, rules and regulations of the national Board of Fire Underwriters, the local Board of Fire Underwriters or any other body or 1 4 bodies exercising similar functions, which may be applicable to the Property, including the curbs and vaults adjoining the Land (collectively "Applicable Laws"). (c) Landlord represents and warrants that it has the right to acquire the Property pursuant to a written agreement between Landlord and Express Development II, L.L.C. Landlord acknowledges that, in entering into this Lease, Tenant has relied on Landlord's representations and warranties of its intent to acquire the Property in a timely manner. Accordingly, the parties agree that Tenant's obligations under this lease shall be conditioned on the satisfaction of each and every one of the conditions set forth below on or before March 2, 1998: (i) the closing of the purchase of the Property by Landlord; (ii) the delivery to Tenant of evidence of financing sufficient to construct the improvements to be constructed by Landlord pursuant to this Lease; (iii) the recordation of a "Memorandum of Lease" and the issuance of leasehold title insurance to Tenant in form and substance acceptable to Tenant and sufficient to insure the priority of Tenant's interest in this Lease, subject to no monetary encumbrances other than Landlord's acquisition/construction loan; (iv) the delivery to Tenant of a fully executed Subordination, Non-Disturbance and Attornment Agreement, in substantially the form of the agreement attached hereto as Exhibit "E"; and (v) evidence that Landlord is duly organized and in good standing in the State of Oklahoma. None of the foregoing conditions may be waived, either expressly or by implication, except by a written waiver signed by Tenant. Neither party shall have any further obligations under this Lease in the event Tenant terminates by reason of the failure of a condition set forth above. (d) The Premises shall be used for any lawful use consistent with the other uses in the Park and not in conflict with other uses in place at the time of sublease in the event Tenant subleases Premises. 2. Term (a) The term of this Lease is ten (10) years (plus a partial month, if any, immediately following the Commencement Date if the Commencement Date is other than the first of the month) and shall commence on the later of August 15, 1998, or such date as the Premises shall be ready for occupancy (as the case may be, the "Commencement Date"), and end on the later of August 31, 2008, or that date which is the last day of the one hundred twentieth (120th) full calendar month after the Commencement Date (as the case may be, the "Expiration Date"), both dates inclusive constitute the "Original Term", unless the Original Term is extended as provided 2 5 in Section 21. The Premises shall be deemed ready for occupancy upon the earlier of (i) the date an occupancy permit is issued for the Premises, including all leasehold improvements or (ii) the date Tenant shall commence operations of its call center business in the Premises. Tenant's preparation of the Premises for occupancy, installation of telephone equipment and personal property, and stocking of supplies as provided in Sections 3(b), (c), (d), and (e) below shall not be deemed a commencing of operations. A "Lease Year" shall be a 12 month period, the first day of which shall commence on the Commencement Date if it is the first day of a month, otherwise, on the first day of the next month following the Commencement Date and each subsequent Lease Year shall begin on successive anniversaries of the commencement of the first Lease Year. A "Lease Month" shall be a calendar month, the first of which shall commence on the Commencement Date if it is the first day of a month, otherwise, on the first day of the month next following the Commencement Date, and each subsequent Lease Month shall begin on the first day of a month and shall end on the last day of such month. "Term", as used in this Lease, shall be deemed to include the Original Term and any extensions thereof (such extensions, or any of them, being sometimes referred to as the "Extended Term"). (b) At any time after the Commencement Date, at the request of either party, both parties shall execute a supplemental agreement to this Lease stating the commencement Date and the Expiration Date. 3A. Construction (a) Within twenty (20) days after execution of this Lease, Landlord shall submit to Tenant the revised plans and specifications (the "Plans and Specifications") for the Building and Appurtenances (the "Improvements") and the construction schedule (collectively, the "Construction Documents"). The Plans and Specifications shall be revised from the plans Tenant has provided Landlord reflecting a 35,862 square foot building in Las Vegas, Nevada, currently occupied by Tenant. The Plans and Specifications shall reflect the requirements needed to comply with all Applicable Laws, including, without limitation the applicable building codes for the State of Oklahoma and the City of Oklahoma City, and shall include the following: (i) architectural; (ii) structural; (iii) mechanical; (iv) plumbing; (v) electrical; (vi) fire/life/safety, including fire sprinklers; and (vii) landscaping plans and specifications. Tenant shall have two (2) business days following receipt of the Construction Documents to approve or disapprove them. Failure by Tenant to respond within said two (2) business days period shall be deemed 3 6 approval of the Construction Documents. If the Construction Documents are disapproved, Tenant shall inform Landlord of the reasons for such disapproval after which Landlord shall have five (5) business days to submit revised Construction Documents. Landlord shall not unreasonably refuse to satisfy any objections of Tenant to the Construction Documents. If Tenant and Landlord are unable to agree upon the Construction Documents by February 23, 1998, Tenant shall have the right to terminate this Lease agreement, and thereafter, neither party shall have any obligation to the other. (b) The Building shall be constructed strictly in accordance with the Plans and Specifications and no change shall be made in the Construction Documents without the approval of Tenant, which approval shall not unreasonably be withheld, delayed or conditioned. Any request made by Landlord to Tenant to approve a change in the Construction Documents to which no objection is made within five (5) business days of receipt of the change requested by Tenant and Tenant's architect (if Tenant has provided its name and address to Landlord) shall be deemed approved. (c) Landlord's architect shall be Richard R. Brown, Associates (Attention: Rick Brown), 2800 W. Country Club Drive, Suite 220, Oklahoma City, OK 73116, phone number 405/843-0522 and fax number 405/843-0523. Landlord's general contractor shall be Van Hoose Construction Co. (Attention: Jeff Van Hoose), 920 N.W. 60th Street, Oklahoma City, OK 73118, phone number 405-848-0415 and fax number 405/848-3911. (d) Landlord shall apply for and thereafter diligently pursue the issuance of a building permit for the Improvements as soon as reasonably practicable after the approval of Construction Documents. Landlord shall commence construction of the Improvements in accordance with the Plans and Specifications and all Applicable Laws by that date which shall be ten (10) days following the availability of a building permit for the Improvements. Landlord shall pursue construction of the Improvements without interruption, subject to Force Majeure Events, in a good and workmanlike manner diligently to completion. The Improvements shall be deemed substantially completed in accordance with the Plans and Specifications upon the satisfaction of all of the following conditions: (i) Issuance of a certificate of occupancy for the Improvements which will permit legal occupancy of the entire Improvements and full use of the Premises by Tenant; 4 7 (ii) Delivery of a certification by Landlord, Landlord's architect and general contractor: that the Improvements have been completed with the exception of punch list items, in accordance with the Plans and Specifications and stating those respects in which the Improvements remain incomplete; that all utilities and like services have been connected and are in operation; and that the Improvements are ready for occupancy and full use of the Premises by Tenant; (iii) Completion of an inspection of the Improvements by Tenant or Tenant's architect which confirms completion, with the exception of punch list items, of the Improvements in accordance with the Plans and Specifications; provided, however, Tenant shall complete said inspection within fifteen (15) days of notice by Landlord to Tenant that the Improvements are ready for inspection. In the event Tenant fails to inspect within said fifteen-day (15-day) period, then the right of inspection shall be deemed waived. (e) Landlord shall obtain from each governmental authority having jurisdiction over the Improvements the Permits necessary to construct, operate and lawfully occupy the Improvements. (f) Within sixty (60) days after to the Commencement Date, Landlord shall discharge or bond over or escrow funds sufficient to satisfy any liens filed by a contractor, subcontractor, materialman or laborer on the Building or Premises. (g) Landlord shall permit Tenant and its duly authorized agents free access to the Land and Improvements, provided that Tenant shall not interfere with the construction of the Improvements, and such access shall be at Tenant's sole risk and expense. Landlord shall promptly respond to any inquiry from Tenant for information with respect to the construction of the Improvements. (h) If Tenant shall give Landlord notice of a defect in the Improvements or of a departure from the Construction Documents not approved by Tenant, in accordance with Section 3A Landlord shall, within thirty (30) days of receipt of such notice, take all necessary steps to cure such defect or departure; provided, however, in the event such defect or default cannot be cured within such thirty-day (30-day) period, then the requirements of this paragraph shall be satisfied if Landlord is diligently and continuously pursuing the cure of said defect or departure. Further, in the event Landlord should disagree as to such characterization of such 5 8 defect or departure, then said dispute shall be resolved under Section 26, Arbitration, of this Lease. (i) Landlord shall deliver to Tenant within thirty (30) days after the Commencement Date the following: (a) two sets of final as-built plans and specifications; and (b) a current as-built survey prepared by a surveyor licensed to practice in the State of Oklahoma to the standard of the "Minimum Standard Detail Requirements For Land Title Surveys" jointly established and adopted by ALTA and ACSM in 1962, and with certifications satisfactory to Tenant, showing the completed Improvements and all easements or other conditions serving or affecting the Building, Land or Appurtenances. 3. Preparation for Occupancy (a) On the Commencement Date, Landlord shall deliver possession of the Premises to Tenant completed in accordance with Tenant's Construction Documents (as defined and more particularly described in Exhibit C), except for minor punchlist items which do not interfere with Tenant's use of the Premises, if any. Tenant shall within thirty (30) days after the date Tenant takes occupancy, deliver to Landlord a punchlist of any reasonably discoverable items that are incomplete or defective in the Premises that were required to be installed or constructed by Landlord, and Landlord shall diligently proceed to repair, replace or correct all of said items within thirty (30) days after receipt of the punchlist (except that if any item cannot be repaired, replaced or corrected within said thirty (30) day period, this period shall be extended for a reasonable additional time, provided that Landlord commences to repair, replace or correct such item within said thirty (30) day period and proceeds diligently thereafter to effect such repair, replacement or correction). (b) Landlord shall, without charge, permit Tenant access to the Premises not less than thirty (30) days prior to the Commencement Date for Tenant's activities related to preparation of the Premises for occupancy including the installation of furniture systems and other personal property of Tenant. Such access shall be at Tenant's sole risk and expense and shall not interfere with Landlord's construction. (c) Landlord shall, without charge, permit telephone company employees access to Tenant's telephone equipment room. 6 9 (d) Landlord shall make available to the Premises at least thirty (30) days prior to the Commencement Date all electricity and other utilities necessary to prepare the Premises for occupancy. Tenant shall pay Landlord for the actual costs of such electricity and of such other utilities based on Landlord's reasonable estimate within thirty (30) days of the receipt by Tenant of an invoice therefor. (e) Tenant shall coordinate the access to the Premises with Landlord's project manager, Gary Brooks, Beffort-Brooks-Malherbe Property Company, Corporate Tower, 101 North Robinson, Suite 700, Oklahoma City, OK 73102, phone 405/236-2122, and fax 405/235-1328. 4. Rent (a) Tenant shall pay an annual Fixed Rent, in equal monthly installments in advance on the first day of each calendar month during the Term, in accordance with the following schedule:
Lease Annual Fixed Monthly Annual Rental Period Rent Installment Rate - ----------- ------------ ----------- -------------- Years 1-5 $505,654.20 $42,137.85 $14.10 Years 6-10 $550,481.70 $45,873.48 $15.35
(b) All rent and other charges not paid within ten (10) days of the date(s) when due shall bear interest at the rate of one and one-half percent (1.5%) (the "Default Interest Rate") per month from and after the first (1st) day following the date(s) said rent and charges become due and the same shall be regarded as additional rent hereunder. Additionally, in the event any rent is not paid on or before the tenth (10th) day after the same shall be due and if Landlord elects to accept such Rent, in addition to the Rent and the interest set forth herein, Tenant shall pay to Landlord late charges for such late payment in the amount of $1,000.00 for each payment so delinquent more than ten (10) days after written notice. 5. Maintenance and Repairs (a) Landlord covenants that the Premises, Building and Appurtenances (including plumbing, electrical lines and equipment, lighting, heating, ventilating and air conditioning systems) shall be in first-class operating condition on the Commencement Date. 7 10 (b) Tenant shall conduct its operations in such a manner as to keep the Premises in good order, condition and repair, (ordinary wear and tear excepted) and to keep the Premises in a clean, sanitary and safe condition in accordance with all Applicable Laws governing the use of the Premises by Tenant. Tenant shall not knowingly permit any waste or nuisance upon or damage or injury to the Premises or utilities supplied thereto. Tenant agrees that Tenant shall commit no act which will cause either Tenant or Landlord to be in violation of any pertinent laws of the State of Oklahoma the County of Oklahoma or any ordinances of the City of Oklahoma City. Landlord at its expense, subject to the provisions of Rider 1, shall perform such maintenance, repairs and replacements, structural or otherwise, as are necessary to keep in good order and repair the Appurtenances and the exterior of the Building, including the roof and all Landlord's equipment, and shall also make any repairs or replacements to Tenant's trade fixtures, installations or other property occasioned by negligent act or omission of Landlord, its agents, employees or contractors. Subject to the provisions of Sections 9 and 10 hereof, with the exception of Tenant's right to terminate the Lease or abate rent, Landlord, at Tenant's expense, shall make any repairs or replacements to the Building and Appurtenances occasioned by the negligent act or omission of Tenant, its agents, employees or contractors. Landlord's maintenance and repairs shall keep the Premises, the Appurtenances and Building in at least its original condition, reasonable wear and tear excepted, and all replacement installations shall be at least equal in quality to the originals. In performing such maintenance, repairs and replacements Landlord shall use reasonable efforts to minimize any disruption of or interference with Tenant's business or access to the Premises. (c) (i)Landlord shall comply with all lawful rules, regulations, orders, laws, ordinances and legal requirements (including the Occupational Safety and Health Act, as amended and the Americans With Disabilities Act) and standards issued thereunder by any governmental authority or fire rating organization which affect the Premises, Appurtenances, Land, Building, equipment and improvements or that require repairs, alterations, changes or additions thereto, including structural repairs, alterations, changes or additions. All boilers and other pressure vessel equipment, if any, shall be constructed and maintained by Landlord in accordance with current ASME Standards and Code. Landlord shall use best efforts to minimize routine inspections, repairs and maintenance during "Holiday Season." 8 11 (ii) (A) Landlord represents and warrants to the best of its knowledge, that there is no Hazardous Material on or under the property as of the Commencement Date of this Lease. "Hazardous Material" shall mean: (1) asbestos or asbestos containing material, (2) polychlorinated biphenyls in concentrations greater than 50 parts per million and (3) any other material, waste or substance, whether solid, gaseous or liquid, which may pose a hazard to human health or the environment (a) hazardous substance, waste identified in accordance with Section 3001 of the Federal Resource Conservation and Recovery Act of 1976, as amended, and (b) any hazardous substance, waste, or material identified by statute or regulation of any governmental authority regulating environmental or health matters but excluding those materials or substances which are ordinarily and customarily used in business such as toner and cleaning supplies to the extent they are lawfully and actually used in quantities consistent with such custom. (B) Landlord further warrants and covenants that during construction of the Building such procedures as are legally required to prevent the installation or use of any Hazardous Material in or on the Property were instituted and maintained and Landlord shall maintain such procedures throughout the Term. If any Hazardous Material is discovered in or on the Building during the Term, which was defined by any governmental authority regulating environmental or health matters as a Hazardous Material as of the Commencement Date, Landlord shall, at its sole cost and expense, completely remove all of such Hazardous Material strictly in accordance with and as required by all Applicable Laws within thirty (30) days after Landlord is notified of such discovery at no cost to Tenant unless such Hazardous Materials are brought onto the Property by Tenant, in which case Tenant shall be responsible for their removal. If applicable laws do not require the removal of a Hazardous Material, then Landlord shall institute a maintenance and operation plan implementing procedures necessary to protect the health, safety and well being of Tenant's employees, guests and invitees and such other procedures as are required by Applicable Laws. If the removal of such Hazardous Material cannot be completed within said thirty (30) day period, this period shall be extended for a reasonable additional time, provided the removal has been commenced within thirty (30) days after notice of discovery and proceeds diligently thereafter to effect such removal; provided however, that if either the presence or removal of any Hazardous Material will prevent Tenant from carrying on its normal business operations for a period of more than sixty (60) days, then 9 12 Tenant may terminate this Lease upon sixty (60) days notice to Landlord. If a Hazardous Material is discovered in or on the Building, Premises or Appurtenances during the Term but such Hazardous Material was not defined as hazardous material by the Commencement Date, then Landlord shall not be obligated to remove such Hazardous Material at the time of discovery if removal is not required by the laws but shall be obligated to handle (including maintain, use, store, repair, preserve and including removal, if removal is required by the Applicable Laws at a later date) such Hazardous Material all in accordance with all Applicable Laws. The Rent shall abate equitably based on the practical nonavailability of any portion of the Premises for the purposes permitted by this Lease due to the presence or removal of the Hazardous Material. Upon discovery of Hazardous Material in the Building, Premises or Appurtenances, Landlord shall promptly deliver notice of the same to Tenant together with a statement prepared by a reputable environmental consultant or engineer setting forth the status of the Hazardous Material, the plan and procedure for handling the same, including removal if required and the time frame for such plans and procedures. (C) Landlord shall indemnify, defend Tenant and hold it harmless against any claims, damages, losses or liabilities (including reasonable attorneys' fees) incurred by Tenant and arising from any breach of the foregoing representation and warranty and from the installation, presence or removal of the Hazardous Material; provided however, the foregoing indemnity shall not apply to Hazardous Material so determined after installation in or on the Property, except insofar as any claims, damages, losses or liabilities (including reasonable attorneys' fees) arise from the actions in connection with the removal or remediation thereof. (D) Tenant agrees that it will not place, hold or dispose of any Hazardous Materials on, under or at the Premises, the Building or the Land and that it will not knowingly use the Premises or any other portion of the Building or the Land as a treatment, storage or disposal site (whether permanent or temporary) for any Hazardous Materials. Tenant further agrees that it will not cause or allow any asbestos or other Hazardous Materials to be incorporated into any improvements or alterations which it makes to the Premises. Tenant shall indemnify, defend Landlord and hold it harmless against any claims, damages, losses or liabilities (including reasonable attorneys' fees) incurred by Landlord and arising from any breach of the foregoing agreement, representation and warranty; provided however, the foregoing indemnity shall not apply to Hazardous Material so determined after the Commencement Date or 10 13 after installation in or on the Property, except insofar as any claims, damages, losses or liabilities (including reasonable attorneys' fees) arise from the actions in connection with the removal or remediation thereof. 6. Services Landlord shall furnish to Tenant the following services and facilities: (i) Access to the Premises 24 hours a day, 7 days a week, with entry to the Building after normal business hours. (ii) Removal of ice, snow and debris from all exterior Appurtenances as may be reasonable under the circumstances. (iii) On-Site parking properly marked and illuminated to accommodate at least seven (7) parking spaces for each 1,000 rentable square feet in the Premises for Tenant's use on an unreserved basis at no cost to Tenant. Landlord shall provide an additional parking area available for the non-exclusive use of Tenant immediately adjacent to Tenant's exclusive parking area as shown on the attached site plan marked "Overflow Parking," at no cost to Tenant. The Overflow Parking area and Tenant's exclusive parking area combined shall provide a minimum of thirteen (13) parking spaces per 1,000 square feet of building. 7. Alterations and Improvements (a) Tenant at its own expense may, without Landlord's prior written consent, redecorate the Premises (including repainting, adding, replacing or removing wallcovering, and refinishing millwork) and may, with Landlord's consent and subject to Landlord's reasonable conditions, make from time to time such nonstructural and nonpermanent alterations including floorcovering, additions and improvements in and to the Premises as it may deem necessary or desirable. Landlord shall cooperate with Tenant in securing any necessary building and other permits, the cost thereof being borne by Tenant. Notwithstanding the foregoing, Landlord may choose to make such structural alterations, improvements or additions as Tenant may request and, upon completion of the work, (which shall include a reasonable construction management fee), Tenant shall pay Landlord within thirty (30) days of demand the cost therefor; provided, however, that Landlord shall, prior to commencing such work, submit a bid to Tenant for such work and, if so requested by Tenant, two (2) additional bids from other reputable contractors selected by Landlord. Landlord and Tenant shall then mutually select the contractor. In addition to the foregoing, Landlord may elect to use its contractors for electrical, mechanical, plumbing 11 14 and sprinkler work, provided, however, that the cost to Tenant for such work shall not exceed the lowest bid submitted by a qualified and responsible bidder, which shall include a reasonable construction management fee. (b) Tenant may, at is option, remove from the Premises any furniture, furnishings, trade fixtures, business equipment or other personal property which are not permanently affixed in the Premises and were installed by Tenant at its expense. Tenant at its expense shall repair any damage caused by such removal to the reasonable satisfaction of Landlord. (c) Landlord's consent to such alterations, additions, or improvements, or Landlord's approval of the plans, specifications, and working drawings for such alterations, additions, or improvements shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all Applicable Laws. Tenant shall bear the cost of compliance with the Americans with Disabilities Act of 1990 and all regulations issued thereunder or revisions or amendments caused by and arising out of Tenant's alterations, additions, or improvements, made after the Commencement Date. 8. Inspection Landlord shall, upon forty-eight (48) hours advance notice to Tenant (except in an emergency), have the right at all reasonable times to inspect the Premises and show the same to prospective mortgagees, purchasers and government employees in their official capacity and at all times to make repairs or replacements as required by this Lease; provided, however, that Landlord shall use reasonable efforts not to disturb Tenant's use and occupancy of the Premises. 9. Casualty (a) If the Building or the Premises are damaged by fire or any other casualty, Landlord shall deliver to Tenant notice of, together with a statement prepared by a reputable contractor setting forth the contractor's estimate of, the time required to repair the damage (the "Repair Period") within sixty (60) days after the date of the damage. For purposes of determining the Repair Period, it shall be deemed to commence on the date of the damage. If the reasonably estimated cost to repair such damage exceeds fifty (50%) percent of the replacement cost of the Building, Landlord may terminate this Lease by giving notice to Tenant. If the Repair Period is determined to be longer than one hundred eighty (180) days or if Landlord fails to deliver such statement within sixty (60) days, after the date of the damage, and Tenant determines in its 12 15 reasonable business judgment that such damage will prevent Tenant from carrying on its normal business operations for a period of one hundred eighty (180) days or more, Tenant may elect to terminate this Lease by giving notice to Landlord. Upon such termination, Tenants shall be afforded a reasonable amount of time and reasonable opportunity to remove its personality from the Premises, and Tenant's obligations hereunder, including the obligation to pay the Rent, shall cease as of the date of termination, provided however, that the Rent shall abate equitably from the date of the damage. If Tenant is unable to use the Premises due to the acts or omission of Landlord, then rent shall abate. (b) If Tenant shall not terminate this Lease: (i) the Rent shall abate for the period the Premises are untenantable, and thereafter, Tenant shall pay the Rent for only such portion of the Premises which Tenant in its reasonable business judgment determines it may occupy; and (ii) all repairs necessary to restore the Building, the Premises, and the Appurtenances to their original condition shall be: (A) commenced within sixty (60) days after the occurrence of such damage; (B) performed in a diligent and workmanlike manner within the time period estimated by Landlord's contractor with material of at least similar or equivalent quality as that originally utilized in the construction of the Building, the Premises, and the Appurtenances; (C) completed by Landlord at its expense using reasonable efforts to minimize any interference with Tenant's normal business operations. (c) If Landlord undertakes but fails to repair and restore the Building, the Premises, and the Appurtenances as required by this Section 9 within the time period estimated by Landlord's contractor (which time period shall be extended one day for each day of delay due to Tenant), Tenant may terminate this Lease upon thirty (30) days notice to Landlord, provided further, however, that if Landlord is prevented from completing the repair and restoration within said period due to causes beyond Landlord's control, including labor disputes, civil commotion, hostilities, sabotage, weather delays, governmental regulations or controls (collectively, "Force Majeure Events"), Landlord shall have an additional period of sixty (60) days to repair or restore. Anything in the foregoing which may be to the contrary notwithstanding, Force Majeure Events shall not include shortage of funds (whether due to the insufficiency of insurance proceeds or otherwise), nor inability to obtain financing nor inability to obtain materials, labor or services due to Landlord's failure to provide for such matters in a timely manner. Upon such termination, Tenant's obligations hereunder, including the obligation to pay the Rent, shall cease as of the 13 16 expiration of such notice period. Rent shall be apportioned as of the date of the damage and all prepaid Rent shall be repaid to Tenant. (d) Anything in the foregoing to the contrary notwithstanding, if the damage by fire or other casualty occurs within the last year of the Term (as may be extended by the provisions of this Lease), then if the Repair Period is such that the balance of the Term after such Repair Period is less than one hundred eighty (180) days, then either Landlord or Tenant may elect to terminate this Lease by giving notice to the other, except that Tenant may nullify Landlord's election by exercising an available option to extend the term of this Lease within thirty (30) days of Landlord's notice to terminate. Upon such termination, Tenant shall be afforded a reasonable amount of time and reasonable opportunity to remove its personality from the Premises, and Tenant's obligations hereunder, including the obligation to pay the Rent, shall cease as of the date of termination, provided however, that the Rent shall abate equitably from the date of the damage. 10. Insurance and Indemnity (a) Landlord shall, from and after the date hereof, maintain insurance policies covering the Building, (including Rental Interruption coverage) the Appurtenances and anything that is, or by operation of this Lease becomes Landlord's property against loss, damage, or destruction caused by boiler explosion or machinery breakdown, fire and the perils specified in the standard extended coverage endorsement, by vandalism and malicious mischief, and by sprinkler, gas, water, steam, glass breakage and sewer leakage, and shall also maintain when appropriate builder's risk insurance. Fire and extended coverage shall equal full replacement cost (valued at the full replacement cost without deduction for depreciation) of the Building, the Appurtenances and Landlord's property, exclusive of architectural and engineering fees, excavation, footings and foundations, but in any event sufficient to prevent application of any coinsurance provision, and shall include an inflation guard endorsement. Such policies shall provide for a deductible not greater than $25,000.00 from any loss and providing Tenant thirty (30) days notice of cancellation. Landlord shall provide Tenant with certificates evidencing all insurance required hereunder upon request. (b) Landlord shall, from and after the date hereof, maintain commercial general liability insurance policies covering Landlord's liability for all claims or losses resulting from any injury 14 17 on the Land or Building to property or persons or related thereto in a single limit of not less than $1,000,000. (c) At all times during the Term, Tenant will carry and maintain, at Tenant's expense, the following insurance, in the amounts specified below, with insurance companies reasonably satisfactory to Landlord: (i) commercial general liability insurance and personal injury liability insurance, with a combined single occurrence limit of not less than $3,000,000. (ii) insurance covering all of Tenant's equipment, trade fixtures, appliances, furniture, furnishings, and other personal property from time to time in, on or upon the Premises, in an amount not less than the full replacement cost without deduction for depreciation from time to time during the Term, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended peril (all risk), boiler, flood, and sprinkler leakage. (iii) Business interruption insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or assumed by Tenant pursuant to this Lease. (iv) automobile insurance covering owned, non-owned and hired vehicles in an amount not less than $1,000,000.00 combined single limit. (d) All policies of insurance which Tenant is obligated to maintain according to this Lease (other than any policy of workman's compensation insurance) will name Landlord and Landlord's lenders of which Landlord shall notify Tenant from time to time, as additional insureds, but only as their interest may appear. Certificates of Insurance which evidence Tenant's insurance and evidence of the payment of all premiums of such policies will be delivered to Landlord prior to Tenant's occupancy of the Premises and from time to time at Landlord's request made not more often than once per Lease Year. All such policies maintained by Tenant will provide that they may not be terminated or amended except after 30 day's prior notice to Landlord. All commercial general liability, and personal property maintained by Tenant will be written as primary policies, not contributing with and supplemental to the coverage that Landlord may carry. Insurance required to be maintained by Tenant under subsections (c) (i) hereof may be subject to a deductible of up to $100,000.00. 15 18 (e) Landlord and Tenant each waive any and all rights to recover against the other, or against the officers, directors, shareholders, members, partners, joint venturers, employees, agents, for any loss or damage to such waiving party arising from perils covered by property insurance and required to be carried by such party to the extent of the limits of such policy. Landlord and Tenant shall cause their respective insurers to issue appropriate waivers of subrogation rights endorsements to all such property policies of insurance. Tenant agrees to cause all other occupants of the Premises by, under or through Tenant to execute and deliver to Landlord such a waiver of subrogation rights endorsement. (f) Tenant shall not do anything in or about the Premises which would cause an increase in the insurance rates above the rate in effect for Tenant's lawful use of the Premises as general office use for any policies of insurance carried by Landlord covering the Building or the Premises. If, as the result of any failure by Tenant to comply with the terms of this Section 10(f), the insurance rates applicable to any policy of insurance carried by Landlord covering the Building or the Premises shall be increased, Tenant agrees to pay Landlord, as additional rent, within 30 days after Landlord's demand therefor, the increment in cost of the premiums for such insurance above the cost which Landlord would have paid absent Tenant's actions due solely to Tenant's actions. This additional rent shall be computed exclusive of the computation in Rider 1, and the liability hereunder, shall accrue notwithstanding Rider 1. A schedule or rule book issued by the Insurance Services Office, Inc. or any other comparable insurance rating organization, or the rating procedures or rules of Landlord's insurance companies shall be evidence of any items and charges which make up the insurance rates and premiums for the Premises and the Building. Landlord agrees that Tenant's use of the Premises for the uses set forth in this Lease shall not subject Tenant to any obligation for payment of increased insurance rates pursuant to this Section. (g) Tenant indemnifies and agrees to defend and hold harmless Landlord and its agents, licensees, employees and contractors from all claims or losses (other than those for which liability is waived by express provision in this Lease) resulting from any injury in or upon the Land or Building to property or persons due to any negligence or intentional or willful acts or omissions of Tenant, its agents, licensees, employees or contractors, including, without limitation, reasonable attorneys' fees and costs. Landlord indemnifies and agrees to defend and hold harmless Tenant and its agents, licensees, employees and contractors from all claims and 16 19 losses (other than those for which liability is waived by express provision in this Lease) resulting from any injury in or upon the Land or the Building to property or persons due to any negligence intentional or willful acts or omissions of Landlord, its agents, licensees, employees or contractors, including, without limitation, reasonable attorneys' fees and costs. Neither party's indemnification of the other party as provided in this Section 10 shall be applicable with respect to claims resulting in whole or in part from the willful acts or omissions or the breach of this Lease by the other party, or acts or omissions for which a party is strictly liable, nor shall either party in any event be liable to the other for indirect or consequential damages. 11. Condemnation (a) If all of the Land, the Building, the Premises or the, Parking Area, Appurtenances shall be condemned for public use, whether such use be temporary or otherwise, or damaged by any public use, including damage resulting from the alteration of the location or grade of any street or public way, or voluntarily transferred to a public or quasi-public body in lieu of condemnation (any of which occurrences is hereafter referred to as a "taking"), this Lease shall terminate as of the date of taking and the Rent shall be adjusted to the date of termination. If a portion of the Building, the Premises or the Appurtenances shall be taken, and if Tenant determines, in its reasonable business judgment, that the taking will prevent Tenant from carrying on its normal business operations for a period of ninety (90) days or more, Tenant may elect to terminate this Lease by giving notice to Landlord. Upon such termination, Tenant's obligations hereunder, including the obligation to pay the Rent, shall cease as of the date of taking. (b) If Tenant shall not terminate this Lease: (i) the Rent shall abate for the period the Premises are untenantable, and, thereafter, Tenant shall pay the Rent for only such portion of the Premises which Tenant, in its reasonable business judgment, determines it may occupy; and, (ii) all repairs necessary to restore the Building, the Premises and the Appurtenances as nearly as possible to their original condition shall be : (A) commenced within sixty (60) days after the actual taking; (B) performed in a reasonably diligent and workmanlike manner with material of at least similar or equivalent quality as that originally utilized in the construction of the Building, the Premises and the Appurtenances; and, (C) completed by Landlord at its expense using reasonable efforts to minimize any interference with Tenant's normal business operations. 17 20 (c) If Landlord undertakes but fails to repair and restore the Building, the Premises, and the Appurtenances as required by this Section 11 within one hundred eighty (180) days from the date of the taking (which 180-day period shall be extended one day for each day of delay due to Tenant), and if Tenant determines, in its reasonable business judgment, that such failure will prevent Tenant from carrying on its normal business operations for a period of one hundred eighty (180) days or more from the date of the taking, then Tenant may terminate this Lease upon thirty (30) days notice to Landlord. Upon such termination, Tenant's obligations hereunder, including the obligation to pay the Rent, shall cease as of the expiration of such notice period. Rent shall be apportioned as of the date of the taking and all prepaid Rent shall be repaid to Tenant. (d) Tenant shall not be entitled to any portion of Landlord's award or settlement resulting from the taking of its fee interest, provided that nothing contained herein shall be construed in any way to restrict or limit Tenant from asserting a claim for any damages resulting from the taking of its leasehold or any moving expenses, or otherwise permitted by law. 12. Default (a) If Tenant shall default in the payment of the Rent and additional rent and such default shall continue for ten (10) days after notice therefor from Landlord or if Tenant shall default in the performance of any of its other obligations under this Lease and such default shall continue for thirty (30) days after notice from Landlord specifying Tenant's default (except that if such default cannot be cured within said thirty (30) day period, this period shall be extended for a reasonable additional time, provided that Tenant commences to cure such default within the thirty-day (30 day) period and proceeds diligently thereafter to effect such cure) or if Tenant shall be adjudged bankrupt or shall make an assignment for the benefit of creditors, or if a receiver of any property of Tenant in or upon the Premises shall be appointed in any action, suit or proceeding by or against Tenant and is not removed within thirty (30) days after appointment, then, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving Tenant notice of such election to terminate. In the event that Landlord shall elect to so terminate this Lease, then Landlord may recover from Tenant: (i) The worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus 18 21 (ii) The worth at the time of 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 (iii) 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 (iv) At Landlord's election, such other amounts in addition to or in lieu of the foregoing necessary to compensate Landlord for all detriment caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, costs to repair, remodel, and relet Premises. (Such as brokerage fees, legal fees, etc.) Landlord shall use reasonable efforts to mitigate its damages in the event of Tenant's default. As used in subparagraphs (i) and (ii) above, the "worth at the time of award" is computed by allowing interest at the Default Interest Rate. As used in subparagraph (iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of Kansas City at the time of award plus one percent (1%) (the "Discount Rate"). (b) If Landlord shall default in the performance of any of its obligations, agreements or covenants under this Lease, and such default shall continue for thirty (30) days after written notice from Tenant specifying Landlord's default (except that if such default cannot be cured within said thirty (30) day period, this period shall be extended for a reasonable additional time, provided that Landlord commences to cure such default within the thirty (30) day period and proceeds diligently thereafter to effect such cure), then, in addition to other remedies available to Tenant at law or in equity, Tenant may, without prejudice to any of its other rights under this Lease or without waiving any claim for damages for such breach: (1) withhold payment of the Rent due and to accrue hereunder (to the extent necessary to cover the costs reasonably estimated by Tenant to cure such default) so long as Landlord remains in default, subject to the arbitration provisions in Section 26 if Landlord disputes such default or the cost to cure such default; (2) proceed judicially or otherwise, either at law or in equity, to enforce any rights and remedies which Tenant may have under this Lease or at law; or (3) to cure such default for the account of Landlord and any amount paid or any contractual liability incurred by Tenant in so doing may 19 22 be, subject to the arbitration provisions of Section 26 if Landlord disputes such default or the cost to cure such default, deducted by Tenant from the next or any succeeding payment of the Rent due hereunder. Tenant shall act reasonably in curing such default and in incurring costs to effect such cure. Tenant may correct such default prior to the expiration of the thirty (30) day period upon giving notice to Landlord that the curing of such default prior to the expiration of such will materially interfere with Tenant's operations in the Building. 13. Holdover Any holding over after the expiration of the Term or extensions thereof, shall be deemed and construed to be a tenancy from month to month and shall not be construed to be a renewal and extension of the Lease, and shall otherwise be on the terms and conditions herein specified so far as applicable. The Fixed Rent payable during the holding over shall be equal to one hundred fifty (150%) of the Fixed Rent paid for the last full month of the Term. In addition, the Tenant shall hold the Landlord harmless from any and all actual damages to new tenant resulting from Tenant's holdover. 14. Assignment and Subletting Tenant may assign this Lease or sublet the Premises in whole or in part at any time during the Term with the prior written consent of Landlord given in accordance with Section 22, Notices, of this Lease which consent shall not be unreasonably withheld or delayed. In such event, Tenant shall notify Landlord thereof and shall remain primarily liable for the faithful performance of all of the covenants, terms and conditions hereof on Tenant's part to be performed. Landlord agrees that if Tenant assigns this Lease and the assignee defaults and fails to cure such default within the applicable grace period, Tenant shall have the right to recover possession of the Premises by curing the assignee's default within a reasonable time. Notwithstanding the foregoing, Tenant may, without Landlord's consent, assign or sublet the Premises to any company controlled by, in control of, or under common control with Tenant or to a transferree by reason of the merger, consolidation or sale of substantially all the assets of Tenant. In such event, Tenant shall notify Landlord thereof and shall remain responsible for the faithful performance of all of the covenants, terms and conditions hereof on Tenant's part to be performed. In the event Tenant assigns or sublets the Premises with Landlord's consent to other than a company controlled by, in control of, or under common control with Tenant, Tenant shall pay to Landlord fifty percent (50%) of any rent or additional rent received by Tenant in excess of the Fixed Rent, additional 20 23 rent, costs of subletting or assigning this Lease (amortized with interest at the Prime Rate as published from time to time in the Wall Street Journal) or any other sum payable under this Lease (the "Excess Rent"). 15. Quiet Enjoyment So long as Tenant is not in default beyond the applicable grace periods in the payment of the Rent or in the performance of any other covenant or agreement herein contained, Landlord covenants that Tenant may peaceably and quietly have, hold, occupy and enjoy the Premises. 16. Subordination Tenant agrees that this Lease and its interest in the Premises may, at Landlord's option, be made subordinate to any mortgages or underlying leases now or hereafter covering the Premises, provided, however, that such subordination shall be contingent upon Tenant's receipt of a non-disturbance agreement in form reasonably acceptable to it, providing that so long as Tenant shall not be in default under the Lease beyond the applicable grace periods, Tenant shall not be disturbed in its occupancy of the Premises and this Lease shall continue in full force and effect. The form of the Non-Disturbance Agreement shall be substantially the same as the attached Exhibit E. 17. Rules and Regulations Tenant shall abide by and observe the rules and regulations attached hereto as Exhibit D, as well as such other reasonable rules and regulations as may be promulgated from time to time by Landlord, provided the same are not inconsistent with the provisions of this Lease, and apply uniformly to all tenants and occupants of the Building, and provided further that a copy thereof is received by Tenant. 18. Estoppel Certificate Tenant shall, at any time and from time to time, upon not less than fifteen (15) business days prior notice from Landlord, deliver to Landlord a statement in writing (a) certifying that this Lease is unmodified and to Tenant's knowledge, in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications); (b) stating the dates to which the Rent has been paid by Tenant; (c) stating whether or not Tenant has knowledge that Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease, and, if Tenant has knowledge of such a default, specifying each such default; (d) stating the address to which notices to Tenant shall be 21 24 sent and (e) such other statements of facts as shall be reasonably required concerning this Lease or Tenant's tenancy hereunder, which statement shall be to the best of Tenant's knowledge. Landlord shall, at any time and from time to time upon not less than fifteen (15) business days prior notice from Tenant, deliver to Tenant an estoppel certificate, in substance and form similar to that described above, relative to the status of this Lease and any ground lease, underlying lease or mortgage encumbering the Building or Land. 19. Signage; Change of Name Tenant shall not place or cause to be placed on the outside of the Building, inside the common areas of the Building, or on the Land, any signs, notices or other media of advertising, unless approved by Landlord. 20. Mechanics' Liens Tenant shall discharge by payment, bond or otherwise, mechanics' liens filed against the Building for work, labor, services or materials claimed to have been performed at or furnished to the Premises for or on behalf of Tenant, except when the mechanics' liens are filed by a contractor, subcontractor, materialman or laborer of Landlord, in which event Landlord shall discharge the liens by payment, bond or otherwise. If, however, Tenant notifies Landlord in writing that Tenant refuses to pay any such claim and desires to contest the same, unless required by notice to Tenant from the holder of a first mortgage on the Building, Tenant shall not be required to discharge such lien but shall diligently prosecute the contest thereof to final judgment and decision, and shall pay any judgment that may be rendered on account thereof, and shall cause said property to be freed and discharged from any lien or charge adjudged against the same; provided, however, in no event shall the time to discharge settlement extend beyond the Term or extensions as provided herein. 21. Extension (a) Provided that Tenant is not in default of any of the terms and conditions of this Lease beyond any applicable grace period, Tenant may extend the Original "Term for up to two (2) periods of five (5) years each upon the same terms and conditions contained herein, except for the Fixed Rent specified below, by giving notice to Landlord of its intention to extend at least six (6) months prior to the Expiration Date, and thereupon the Term and the Expiration Date shall be so extended without any further action by either party. The Fixed Rent for Option Period One (1) shall be Sixteen and 60/100 dollars ($16.60) per rentable square foot per annum; for 22 25 Option Period Two (2) shall be Seventeen and 85/100 dollars ($17.85) per rentable square foot per annum. 22. Notices All notices, demands or other communications (notices) permitted or required to be given hereunder shall be in writing and, shall be deemed given on the date of actual receipt. Notices shall be given by certified mail, return receipt requested or through a national delivery service. Notices shall be addressed as follows: (a) if to Landlord, to: TJM PROPERTIES, L.L.C. 3232 West Britton Road Suite 250 Oklahoma City, OK 73120 Attention: F. Barry Tapp Telephone:(405) 752-7522 Facsimile: (405) 749-9924 with a copy to: Virgil L. Holden Attorney at Law P. O. Box 1594 Norman, OK 73070 2321 Westpark Drive Norman, OK 73069 Telephone: (405) 364-329-9603 Facsimile: (405) 364-2414 and to: Beffort Brooks Malherbe Property Company Corporate Tower 101 North Robinson Suite 700 Oklahoma City, OK 73102 Attention: Gary Brooks Telephone: (405) 236-2122 Facsimile: (405) 235-1328 23 26 and (b) if to Tenant, to: WILLIAMS-SONOMA, INC. 3250 Van Ness Avenue San Francisco, CA 94109 Attention: Susi Browne Director, Facilities 3250 Van Ness Avenue San Francisco, CA 94109 Telephone: 415/616-8659 Facsimile: 415/439-8673 with a copy to: IRELL MANELLA Attention: Sandra G. Kanengiser, Esq. 1800 Avenue of the Stars, Suite 900 Los Angeles, CA 90057-4276 with a copy sent to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate such other place or places for the receipt of future notices. The inability to deliver because of a changed address of which no notice was given or rejection or other refusal to accept any notice shall be deemed to be the receipt of the notice as of the date of such inability to deliver or rejection or refusal to accept. Notices may also be given by facsimile ("Business Hours"); provided, however, the original of a facsimile notice must be sent by overnight courier to the receiving party on the same day that the facsimile is sent and will not be deemed received on the date of the facsimile transmission unless the original notice is received by the other party on the first business day following the facsimile transmission, and the party sending a facsimile notice shall use its best efforts to notify the receiving party by telephone during Business Hours on such date that a facsimile notice has been sent. 23. Miscellaneous (a) The language of this Lease shall be construed according to its normal and usual meaning and not strictly for or against either Landlord or Tenant. 24 27 (b) No remedy or election given by any provision in this Lease shall be deemed exclusive unless so indicated, but each shall, wherever possible, be cumulative in addition to all other remedies in law or equity which either party may have arising out of the default of the other party and failure to cure such default within the applicable grace period. (c) Failure of either party to cure a default of the other under this Lease shall not render such non-defaulting party in any way liable therefor, or relieve the defaulting party from any of its obligations hereunder. (d) The acceptance of possession of the Premises by Tenant shall not be deemed a waiver of any of the obligations under this Lease to be performed by Landlord under Section 3. (e) Subject to Landlord's approval, not to be unreasonably withheld, Tenant may deal with any person, firm or corporation for services, supplies, materials, labor, equipment, transportation, tools, machinery and any other similar or dissimilar services or items in connect ion with the alteration, improvements or maintenance of the Premises. (f) "Rentable" area, "usable" area and "storage" area when used in this Lease shall mean an area measured in accordance with ANSI 765.1-1980 as published by BOMA International. (g) Upon any termination or expiration of this Lease, Tenant shall surrender the Premises in the same condition as existed at the Commencement Date and free of excess debris, except for normal wear and tear and damage caused by the elements, any casualty required to be insured under Section 9(a), or any cause beyond Tenant's control. Any of Tenant's personal property not removed the day following the Expiration Date shall be deemed abandoned. Except a otherwise provided in this Lease, all improvements, alterations, additions and fixtures, other than Tenant's personalty, which have been made or installed by either Landlord or Tenant upon the Premises shall become Landlord's property upon the installation thereof and shall remain as Landlord's property and shall be surrendered with the Premises or as a part thereof. (h) If any clause or provision of this Lease is or becomes illegal, invalid, or unenforceable because of present or future laws or any rule or regulation of any governmental body or entity, effective during the Term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby. (i) As used in this Lease, any list of one (1) or more items preceded by the word "including" shall not be deemed limited to the stated items but shall be deemed without limitation. 25 28 (j) This Lease shall be binding upon and inure to the benefit of the parties hereto and their respective executors, distributees, heirs, representatives, successors and assigns. (k) This Lease contains the entire agreement of the parties and may not be modified except by an agreement in writing signed by both parties. (l) The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provision hereof. (m) This Lease has been executed in several counterparts, all of which constitute one and the same instrument. (n) Landlord and Tenant shall not unreasonably withhold, delay or condition any consent or approval which this Lease requires. (o) The use of the neuter singular pronoun to refer to either party shall be deemed a proper reference even though it may be an individual, partnership, corporation or a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural number where there is more than one Landlord or Tenant and to either corporations, associations, partnerships or individuals, males or females, shall in all instances be assumed as though in each carefully expressed. (q) In any action or proceeding which Landlord or Tenant may be required to prosecute to enforce its respective rights hereunder, the unsuccessful party agrees to pay all costs incurred by the prevailing party therein, including reasonable attorneys' fees. (r) If Landlord should sell or otherwise transfer Landlord's interest in the Land or Building, or if the same should be sold or transferred by operation of law or otherwise, Tenant agrees that provided that the transferee shall have assumed the Landlord's obligation under the Lease Landlord shall thereafter have no liability to Tenant under this Lease, except for such liability as may have accrued prior to the date of such sale or transfer. (s) Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent, or of partnership, or of joint venture between the parties hereof, the sole relationship being that of landlord and tenant. (t) Tenant's personal property and trade fixtures, if any, shall be separately listed for assessment purposes and/or for taxation purposes. Tenant shall promptly pay all taxes levied thereon. 26 29 (u) Nothing in this Lease (express or implied) is intended to or shall be construed to confer upon or give any person or entity, other than the parties hereto, any right or remedy under or by reason or this Lease or the representations or agreements contained herein. (v) The laws of the State of Oklahoma shall govern the validity, performance and enforcement of this Lease. (w) Any assent or waiver, expressed or implied by the Landlord to any breach by Tenant of any covenant or condition herein contained, shall operate as assent or waiver only in the specific instance and shall not be construed as an assent or waiver of any such consent or condition generally or of any subsequent breach of the covenants and conditions thereof. 24. Brokers Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except Mr. John Yandle, C. B. Commercial, San Jose, California, and Beffort Brooks Malherbe Property Company. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorney's fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. Landlord is solely responsible for commission per Letter of Intent. 25. Attachments Rider 1, Rider 2, Exhibits A, B, C, D, and E are attached to this Lease and made a part hereof. 26. Arbitration Except as specifically provided for herein, if a dispute arises between Landlord and Tenant relating to this Lease, then the dispute shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association as provided in Section (a) below prior to either party pursuing other available remedies. (a) (i) Within ten (10) business days after notice from one party to the other that a dispute has arisen, Landlord and Tenant shall each appoint a person as arbitrator from a list of arbitrators provided by the American Arbitration Association. The arbitrators appointed shall 27 30 jointly appoint a third person and such three arbitrators shall as promptly as possible resolve the dispute, provided, however, that (A) if one party fails to appoint an arbitrator within the ten (10) business day period as aforesaid, the arbitrator appointed by the other party shall proceed to resolve the dispute and shall render his or her decision and award in writing within thirty (30) days after the expiration of said 10 business day period; and (B) if the two arbitrators are appointed by the parties and shall be unable to agree, within ten (10) days after the appointment of the second of them, upon the appointment of a third arbitrator, they shall give written notice to the parties of such failure to agree, and, if the parties fail to agree upon the selection of such third arbitrator within ten (10) business days after the arbitrators appointed by the parties give notice as aforesaid, then within five (5) business days thereafter either of the parties upon notice to the other party may request such appointment by the American Arbitration Association (or any successor organization), or in its absence, refusal, failure or inability to act, may apply to a court having competent jurisdiction for a court appointment of such arbitrator. (ii) Each arbitrator shall be a qualified person who shall have had at least ten (10) years experience in the County of Oklahoma in a calling connected with the matter of the dispute. In addition to meeting the foregoing requirements, the third arbitrator shall be impartial. (iii) The arbitration shall be conducted in Oklahoma City in accordance with the then prevailing rules of the American Arbitration Association (or any successor organization) applicable to the subject matter of the particular dispute. The arbitrators, if more than one, shall render their decision and award in writing, upon the concurrence of at least two of their number, within 30 days after the appointment of the third arbitrator. Such decision and award or the decision and award of the single arbitrator as provided above, shall be final and conclusive on the parties and counterpart copies thereof shall be delivered to each of the parties. In rendering such decision and award, the arbitrators shall not add to, subtract from or otherwise modify the provisions of this Lease. Judgment may be had on the decision and award of the arbitrators so rendered in any court of competent jurisdiction. (iv) Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by or for such party and the fees and expenses of the third arbitrator and all 28 31 other expenses of the arbitration (other than the fees and disbursements of attorneys or witnesses for each party) shall be borne by the parties equally. IN WITNESS WHEREOF, the parties have executed or caused to be executed this Lease. TJM PROPERTIES, L.L.C. (LANDLORD) By /s/ F. BARRY TAPP ----------------------------------------- F. Barry Tapp ------------------------------------------- (Print Name) Member Manager ------------------------------------------- (Title) WILLIAMS-SONOMA, INC. (TENANT) By /s/ PAT CONNOLLY ----------------------------------------- Pat Connolly ------------------------------------------- (Print Name) Executive V.P and General Manager Catalogue ------------------------------------------- (Title) 29 32 RIDER 1 Attached To And Made Part Of Lease Dated As Of February 13, 1998. Made Between TMJ PROPERTIES, L.L.C. (Landlord) and WILLIAMS-SONOMA, INC. (Tenant) Expense Contribution The Fixed Rent does not anticipate increases in taxes on the Building, the Land or any improvements situated thereon (together hereinafter referred to as the "Property") and increases in the cost of managing, maintaining, operating and repairing the same. Therefore, in order that the Rent payable throughout the Term shall reflect any such increases, the parties agree as hereinafter in this Rider set forth. (a) During the Term, Tenant shall pay Landlord as additional rent any amount equal to Tenant's proportionate share of the sum of (i) the total real estate taxes (as hereinafter defined) and (ii) the total operating expenses actually and reasonably incurred by Landlord during each calendar year during the Term, in excess of $2.00 times the Rentable area of the Building (such excess hereinafter referred to as the "Excess Expenses"). (b) Tenant shall, at its expense, be responsible, throughout the Original Term, and any extensions thereof, for the following: (i) The costs and expenses for cleaning and janitor service to the common areas of the Building and the Premises of Tenant, including janitor equipment and supplies and rubbish removal, in general accordance with the specifications set forth in this Lease. (ii) The costs of utilities serving the Premises, Building, Land, and Appurtenances thereto, and including electricity for interior and exterior lighting, plugs, outlets, and heating, ventilating and air-conditioning systems serving the Building, water and sewer charges, and fuel oil, natural gas, and steam charges, if any, used by the heating, ventilating and air-conditioning systems serving the Building. (iii) The costs and expenses of repairing and maintaining the restrooms, lobbies, hallways and other interior areas of the Premises, the mechanical, electrical, heating, ventilating 30 33 and air conditioning equipment and plumbing systems servicing the Building, and the Appurtenances. (c) Landlord's "Operating expenses" are defined as those direct expenses actually incurred on an accrual basis to manage, maintain, operate and repair the Building and the Appurtenances in a manner deemed reasonable and appropriate and for the best interests of Tenant, including the following: (i) The costs and expenses of repairing, and maintaining the non-structural elements of the roof and building exterior. (ii) The costs and expenses of removing snow, ice and debris from the exterior appurtenances, the non-capital repairs made to paving, curbing, walkways, landscaping (including replanting and replacing flowers and other plantings), and maintaining exterior lighting systems. (iii) Reasonable management fees not to exceed three and one-half percent (3 -1/2%) of the base rental income of the Building, and labor costs for maintenance staff under the grade of building manager, including wages, salaries, fringe benefits, worker's compensation, disability benefits, social security, insurance, payroll taxes, unemployment taxes and contributions and health and welfare benefits. (iv) Property, casualty and liability insurance, including Rent Interruption Insurance, required to be carried by Landlord pursuant to the provisions of this Lease. (v) Any other reasonable costs necessary to and customarily incurred in the operation of a Class A office building in the general vicinity of the Building, including the cost of rental equipment used intermittently for the repair and maintenance of the Building and the Appurtenances, personal property, sales and excise taxes, and license and permit fees. (vi) Upon completion of Building "B" in the Commerce Park Development, the common area expenses associated with the maintenance of the Overflow Parking Area and the Expansion Overflow Parking Area shall be shared equitably with the Commerce Park Development. Operating expenses shall not include expenses for any capital improvements or capital items or the replacement of a capital item or of a major component of a capital item or major repairs to a capital item in lieu of replacement; the cost of rental equipment used regularly for the repair and maintenance of the Building that is customarily owned by landlords of Class A office 31 34 buildings (which, when purchased, would be a capital equipment item); depreciation; expenses for which Landlord is entitled to be reimbursed or indemnified (either by an insurer, condemnor, tenant, contractor who is obligated under any warranty or guaranty, or otherwise); expenses incurred in leasing or procuring tenants (including lease commissions, advertising expenses and expenses of renovating space for tenants); legal expenses arising out of the construction, operation, use, leasing, occupation or maintenance of the Building or Land or the enforcement of the provisions of any agreements affecting the Land or the Building; interest or amortization payments on any mortgage or mortgages, and rental under any ground or underlying lease or leases; wages, salaries or other compensation paid to any executive employees above the grade of building manager; wages, salaries or other compensation paid for clerks or attendants in concessions or newsstands operated by Landlord; expenses in connection with maintaining and operating any parking facility operated by Landlord that generates parking fee income; the cost of any work or service performed for or facilities furnished to a tenant at the tenant's cost; the cost of correcting defects (latent or otherwise) in the construction of the Building or in the building equipment, except that conditions (not occasioned by construction defects) resulting from ordinary wear and tear shall not be deemed defects; the cost of installing, operating and maintaining a specialty improvement (unless such specialty improvements results in a cost savings to the Building and Appurtenances, in which case the cost may be including in operating expenses but only to the extent of the cost savings) including an observatory or broadcasting, cafeteria or dining facility or club, or athletic or recreational club (unless such athletic or recreational club is provided without charge to all tenants of the Building); and any cost or expense representing an amount paid to a related or affiliated person or entity which is in excess of the amount which would reasonably have been paid in the absence of such relationship, costs of environmental testing, remediation not caused by Tenant; and reserves. (d) "Real estate taxes" are defined as all real estate taxes and assessments (except as hereinafter provided) that are levied or assessed against the Property or any taxes which shall be levied on the rentals of the Building in lieu of or in addition to any such real estate taxes. The tax during any calendar year in respect to which Tenant is obligated to pay its proportionate share of an increase in real estate taxes shall be subject to adjustment to take into account the final determination in the event that real estate taxes are contested. In no event shall Tenant be obligated to pay any interest or penalties imposed upon Landlord for late payment or otherwise. 32 35 (e) Following the end of the calendar year in which the Commencement Date occurs and each calendar year thereafter during the Term, Landlord shall cause its actual Excess Expenses for the Building and Land to be certified by an officer of Landlord, who shall prepare an itemized statement of the operating expenses for the previous calendar year, together with, following the end of the calendar year after which the Commencement Date occurs, a computation of the Excess Expenses and additional rent due, if any, and who shall certify that the statement fairly and accurately presents the Operating Expenses for such calendar year, determined in accordance with generally accepted accounting principles, consistently applied. No later than one hundred twenty (120) days after the end of each calendar year during the Term (the "Statement Due Date"), Tenant shall be furnished a copy of the statement, and, within thirty (30) days after its receipt (except as provided below) Tenant shall pay Landlord the additional rent specified in the statement. If Tenant has not received a statement by the end of the calendar year in which the statement is due from Landlord, it shall be conclusively presumed that Landlord has waived its claim against Tenant for Tenant's proportionate share of Excess Expenses that would have been set forth in such statement. (f) In order to provide for reasonably current payments on account of the Excess Expenses, Tenant shall pay as additional rent, Landlord's reasonable estimate of its Proportionate Share of the Excess Expenses in twelve (12) monthly equal installments, commencing on the first day of the month following the month in which Tenant receives the notice of such estimate. No new estimate of the Excess Expenses shall be effective until one year after Tenant's receipt of the preceding estimate, and Tenant shall pay as additional rent any estimated increase in such cost commencing on the first day of the month following the month in which Tenant receives such estimate. Notwithstanding the foregoing, if Tenant has not received the statement of actual operating expenses by the end of the calendar year in which the statement is due from Landlord, then Tenant shall not be obligated to pay any additional rent based on Landlord's estimate of Excess Expenses until such statement is received. If Tenant's Proportionate Share of the Excess Expenses for the previous calendar year exceeds the aggregate of the monthly payments made by Tenant for such year, if any, Tenant shall within thirty (30) days after the receipt of the statement, tender to Landlord an amount equal to such excess as additional rent. If such aggregate of the estimated monthly payments exceeds the Tenant's Proportionate Share of the Excess Expenses for such calendar year, then Landlord shall, together with the statement, tender 33 36 to Tenant an amount equal to such difference or such difference shall be a credit against the next and each successive payment of Rent becoming due until such credit is exhausted. The obligations of Tenant and Landlord to make payments or credits required by this Rider shall survive the Expiration Date. (g) Landlord shall, at Tenant's request, forward copies of all records reasonably necessary for Tenant to verify the accuracy of the statement of Excess Expenses. Further, Landlord shall, at Tenant's request, make available to Tenant for inspection and examination, all the books and records that relate to such statement of Excess Expenses. However, if the books and records are not made available at Landlord's offices upon reasonable request by Tenant during Landlord's business hours, then the additional rent due in that year shall, in no event, be due and payable earlier than 20 days after Tenant's request is honored. Tenant shall have the right to cause and Landlord shall permit audits to be made of the statement and such books and records by Tenant's auditors or by independent auditors or accountants of Tenant's choosing. Any statement period used as a base year for the purpose of calculating Excess Expenses may be audited at any time; an audit of any statement must begin no more than six (6) months after Tenant's receipt of such statement from Landlord. Landlord shall cooperate with such auditors and accountants and shall promptly (but in no event later than ten business days after request) make such additional records of Landlord as they shall reasonably request available for examination at the Landlord's offices. If the results of such audit indicate the statement for any calendar year overstated Operating Expenses for such calendar year by five percent (5%) or more, Landlord shall pay Tenant the reasonable cost of such audit in addition to any overpayment made by Tenant within 10 days of demand therefor. A report of the findings of the auditors or accountants shall be provided to both Landlord and Tenant and shall be binding and conclusive upon Landlord and Tenant. (h) Landlord shall use best efforts to operate the Building and the Appurtenances at costs comparable for similar types of Class A office buildings in Oklahoma City, and at the same time keep operating expenses at a reasonable minimum. Without limiting the generality of the foregoing, Landlord and Tenant acknowledge that during the Term costs necessary to provide the same general level of services provided during the first calendar year may thereafter increase. 34 37 RIDER 2 Attached To And Made Part Of Lease Dated As Of February 13, 1998. Made Between TMJ PROPERTIES, L.L.C. (Landlord) and WILLIAMS-SONOMA, INC. (Tenant) Expansion Premises. Tenant shall have the option (Expansion Option") to cause Landlord to expand the Premises to accommodate an additional 15,000 rentable square feet of improved space, together with Overflow Parking (minimum of thirteen (13) parking spaces per 1,000 square feet of building), in the location depicted on Exhibit "B" attached hereto and described in Exhibit "A" attached hereto (the "Expansion Premises"). The Expansion Option shall not, at Landlord's election, be exercisable if Tenant is in default under Paragraph 12 of this Lease at the time Tenant attempts to exercise the Expansion Option. In order to exercise the Expansion Option, Tenant must deliver written notice ("Expansion Notice") thereof to Landlord prior to the expiration of the third (3rd) Lease Year. Upon Tenant's timely exercise of the Expansion Option, Landlord shall cause the construction of the Expansion Premises in accordance with the terms of this Lease. Subject to Applicable Laws, the improvements provided by Landlord for the Expansion Premises shall be substantially the same as the Base Improvements provided by Landlord for the original Improvements. The estimated Commencement Date for the Expansion Premises will be twelve (12) months following the date of Landlord's receipt of the Expansion Notice; provided, however, that upon request from Tenant, Landlord shall use commercially reasonable efforts to accelerate construction of improvements in the Expansion Premises. The actual Commencement Date for Tenant's lease of the Expansion Premises will be the date upon which the Expansion Premises has been substantially completed as that term is defined in this Lease. The Term of Tenant's lease of the Expansion Premises shall be co-terminous with the Term of Tenant's lease of the original Premises. Effective upon the Commencement Date for the Expansion Premises, (I) the Expansion Premises shall become a portion of the Premises for all purposes under this Lease, and (ii) annual Fixed Rent shall be increased by an amount equal to the product of the then-current Annual Fixed Rent (on a rentable square foot basis) multiplied by the rentable square footage 35 38 contained in the improvements constructed for the Expansion Premises. The then-current Annual Fixed Rent shall be adjusted for construction cost increases from January 1, 1998 to the date that Tenant notifies Landlord of its intention to exercise the Expansion Option under this Section. The index used to determine the construction cost increases shall be the United States Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers (Revised Series). The CPI for a specific date shall be deemed to mean the CPI published on that date or, if not published on that date, the most recent publication of the CPI prior to such date. If publication of the CPI shall be discontinued, "CPI" shall be such other source as is most nearly comparable to the CPI as defined above. Fixed Rent for the Expansion Space may also be adjusted based on increases and/or decreases in the prime rate charged by NationsBank, N.A. from the date this lease was executed to the date Tenant notifies Landlord of its intention to exercise this Expansion Option. Delay in Delivery. The term "Outside Date" shall mean August 15, 1998; provided, however, that such August 15, 1998 date shall be extended on a day-for-day basis to the extent that Landlord is delayed in substantially completing the Improvements as a result of Tenant not executing the Lease by February 9, 1998, any Tenant delays, and/or Force Majeure. In the event that the Commencement Date does not occur on or before the Outside Date (as so extended), then (i) Tenant's obligation to pay Monthly Fixed Rent shall not commence until the commencement Date, (ii) for each week after the Outside Date (as so extended) in which the Commencement Date has not occurred, (a) Tenant's first obligations to pay Monthly Fixed Rent shall be reduced by the sum of $20,000 and (b) the date of expiration of the initial Term shall be extended for two (2) weeks. The term "Outside Training Date" shall mean September 1, 1998; provided, however, that such September 1, 1998 date shall be extended on a day-for-day basis to the extent that Landlord is delayed in substantially completing the Improvements as a result of Tenant not executing the Lease by February 9, 1998, any Tenant delays, and/or Force Majeure. In the event that the Commencement Date does not occur on or before the Outside Training Date (as so extended), then in addition to Tenant's rights under preceding paragraph, (I) Landlord shall reimburse Tenant, within thirty (30) days after Landlord's receipt of a reasonably particularized invoice and other evidence of payment reasonably requested by Landlord, for the excess ("Training Excess") of any actual, out-of-pocket costs incurred by Tenant in order to train 36 39 Tenant's employees who will be working from the premises as of the Commencement Date over and above the amount of actual, out-of-pocket expenses Tenant would have incurred in order to train such employees had the Commencement Date occurred on or before the Outside Training Date (as so extended), and (ii) the date of expiration of the Initial Term shall be extended (in addition to the extension described in the preceding paragraph) for a sufficient number of days so that the monthly Fixed Rent paid by Tenant for the Premises during such extension shall be equivalent to the amount of the Training Excess so paid by Landlord. Notwithstanding the foregoing, in the event the portion of the Building designed for training (including adequate restroom facilities) in the Tenant's floor plans is made available prior to September 1, 1998, then in that event Landlord shall not be required to reimburse Tenant for the Training Excess of any actual, out-of-pocket cost incurred by Tenant. 37 40 EXHIBIT A [MAP OF SITE PLAN] 36 41 [COON ENGINEERING, INC. LETTERHEAD] EXHIBIT "B" LEGAL DESCRIPTION FOR WILLIAMS-SONOMA AND OVERFLOW PARKING PHASE II AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA A part of Lots Two (2) and Three (3), Block Nine (9), and a part of Lot One (1), Block Four (4), Silver Springs Crossing Section 2, an addition to the City of Oklahoma City, Oklahoma County, Oklahoma as recorded on Page 60 and 69 in Book 53 of Plats and being more particularly described as follows: Commencing at the Northeast corner of said Lot Three (3), thence along the north line of said Lot 3, said line also being the south right of way line of Northwest Eighty-Eighth (88th) Street, North 78 degrees 31' 47" West a distance of 198.72 feet and thence South 11 degrees 28' 13" West a distance of 148.59 feet to the Point of Beginning; thence from said Point of Beginning South 00 degrees 00' 39" East a distance of 448.47 feet; thence South 40 degrees 37' 23" West a distance of 183.25 feet; thence north 11 degrees 28' 13" East a distance of 599.53 feet to the Point of Beginning containing 26,572 square feet or 0.61 acres more or less. 37 42 [MAP OF WILLIAMS-SONOMA & OVERFLOW PARKING PHASE II AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA] 38 43 [MAP OF OVERFLOW PARKING PHASE II AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA] 39 44 [MAP OF OVERFLOW PARKING PHASE II AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA] 40 45 [COON ENGINEERING, INC. LETTERHEAD] EXHIBIT "B" LEGAL DESCRIPTION FOR WILLIAMS-SONOMA CATALOG STORE AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA A part of Lots One (1), Two (2) and Three (3), Block Nine (9), and a part of Lot One (1), Block Four (4), Silver Springs Crossing Section 2, an addition to the City of Oklahoma City, Oklahoma County, Oklahoma as recorded on Page 60 and 69 in Book 53 of Plats and being more particularly described as follows: Commencing at the Northeast corner of said Lot Three (3), thence along the north line of said Lot 3, said line also being the south right of way line of Northwest Eighty-Eighth (88th) Street, North 78 degrees 31'47" West a distance of 198.72 feet and thence South 11 degrees 28'13" West a distance of 318.07 feet to the Point of Beginning; thence from said Point of Beginning South 11 degrees 28'13" West a distance of 430.04 feet; thence South 89 degrees 59'21" West a distance of 383.17 feet; thence North 00 degrees 00'39" West a distance of 421.44 feet; thence North 89 degrees 59'21" East a distance of 468.76 feet to the Point of Beginning containing 179,467 square feet or 4.12 acres more or less. 41 46 [Map of Williams Sonoma Catalog Store at Silver Springs Crossing Oklahoma City, Oklahoma] 42 47 [CEI LOGO] EXHIBIT "B" LEGAL DESCRIPTION FOR OVERFLOW PARKING AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA A part of Lots One (1), Two (2) and Three (3), Block Nine (9), Silver Springs Crossing Section 2, an addition to the City of Oklahoma City, Oklahoma County, Oklahoma as recorded on Page 60 in Book 53 of Plats and being more particularly described as follows: Commencing at the Northeast corner of said Lot Three (3), thence along the north line of said Lot 3, said line also being the south right of way line of Northwest Eighty-Eighth (88th) Street, North 78 degrees 31' 47" West a distance of 198.72 feet to the Point of Beginning on the south right of way line of Northwest Eighty-Eighth (88th); thence from said Point of Beginning South 11 degrees 28' 13" West a distance of 318.07 feet; thence South 89 degrees 59' 21" West a distance of 468.76 feet; thence North 00 degrees 00' 39" West a distance of 82.93 feet to a point on the south right of way line of Northwest Eighty-Eighth (88th) Street, continuing along said right-of-way line the following five calls; thence round a non-tangent curve to the left having a central angle of 29 degrees 20' 54", a radius of 351.15 feet, an arc distance of 179.87 feet, a chord bearing of North 53 degrees 11' 14" Each with a distance of 177.90 feet; thence North 38 degrees 30' 47" East a distance of 96.03 feet; thence around a non-tangent curve to the right having a central angle of 22 degrees 33' 41", a radius of 204.98 feet, an arc distance of 80.72 feet, a chord bearing of North 49 degrees 47' 38" East with a distance of 80.20 feet; thence around a non-tangent curve to the left having a central angle of 25 degrees 11' 18", a radius of 146.00 feet, an arc distance of 64.18 feet, a chord bearing of North 70 degrees 00' 32" East with a distance of 63.67 feet; thence around a non-tangent curve to the right having a central angle of 22 degrees 31' 37" a radius of 204.98 feet, an arc distance of 80.59 feet, a chord bearing of South 89 degrees 47' 36" East with a distance of 80.08 feet; thence South 78 degrees 31' 47" East a distance of 131.27 feet to the Point of Beginning containing 128,066 square feet or 2.94 acres more or less. 43 48 [MAP FOR OVERFLOW PARKING AT SILVER SPRINGS CROSSING OKLAHOMA CITY, OKLAHOMA] 44 49 INSERT EXHIBIT "C" HERE (TENANT'S CONSTRUCTION DOCUMENTS) 47 50 EXHIBIT D Attached To And Made part Of Lease Dated As Of February 13, 1998. Made Between TJM PROPERTIES, L.L.C. (Landlord) and WILLIAMS-SONOMA, INC. (Tenant) RULES & REGULATIONS Tenant shall abide by and observe the following rules and regulations as well as other reasonable rules and regulations as may be promulgated from time to time by Landlord for the operation, safety, security and maintenance of the Building. A copy of any new rules and regulations shall be provided by Landlord to Tenant. 1. Nothing shall be placed in the Premises which may be visible from the exterior of the Building (including window treatments) without the prior written consent of Landlord. 2. No additional or replacement locks shall be placed on any door of the Premises and Tenant shall not permit duplicate keys to be made. Additional keys shall be procured by Landlord for Tenant at Tenant's expense. Tenant shall be solely responsible for the security of keys to the Premises. All keys furnished to Tenant shall be surrendered to Landlord at the termination of the term. 3. Tenant shall not install or operate any steam or internal combustion engine, boiler, machinery, or air conditioning apparatus in or about the Premises or carry on any mechanical business therein. Landlord shall provide vending machines. 4. The rest room fixtures shall not be used for purposes other than those for which they were constructed. 5. Tenant shall not make noises, cause disturbances or vibrations or use any electrical or electronic devices or other devices that emit sound or other waves or disturbances or create odors, and shall not place or install any musical instrument or equipment or any similar 48 51 device outside the Building without the prior approval of Landlord. The use thereof, if permitted, shall be subject to the control of the Landlord to the end that others shall not be disturbed or annoyed. 6. No animals (except animal assistants to the disabled), birds, bicycles or other vehicles shall be allowed in any part of the Building without the prior consent of Landlord. 7. Tenant shall not accumulate or store on the Premises any waste paper, discarded records, books, paper files, sweepings, rags, rubbish or other combustible matter. 8. Tenant shall not exhibit, sell or offer to sell, use, rent or exchange any item or service in or from the Premises unless within the permitted use of the Premises as set forth in the Lease. 9. Landlord reserves the right to exclude from the Building all disorderly persons, persons under the influence of alcohol or a controlled substance, idlers and peddlers, solicitors, and persons entering in crowds or in such unusual numbers as to cause inconvenience to the tenants of the Building. 10. Any parking spaces included in the Lease shall be used only for the personal automobiles of Tenant and its employees and guests (including pickup trucks and vans but excluding trucks, motor homes and the like). Landlord reserves the right to designate locations for one or more of such parking spaces. Upon Landlord's request, Tenant shall promptly furnish Landlord the names, vehicle descriptions and vehicle license numbers of each authorized user of Tenant's parking spaces. Landlord reserves the right to tow illegally parked vehicles at the expense of the vehicle owner. 11. Tenant shall comply with all terms, conditions and covenants of the Lease in connection with its use and occupancy of the Premises. 12. All deliveries to the Premises shall be made during business hours. 13. The Tenant shall not do or permit anything to be done in the Lease Premises or bring or keep anything therein which will in any way increase the rate of fire insurance on the Building or on property kept therein or obstruct or interfere with the laws relating to fire or with any regulations of the fire department or with the insurance policy upon the Building or any part thereof or conflict with any of the rules or ordinances of the Board of Health of Oklahoma City. 49 52 EXHIBIT "E" SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (CHOOSE FROM BOLDED LANGUAGE IN BRACKETS) This Subordination, Non-Disturbance and Attornment Agreement (this "Agreement") dated February 23, 1998, is made among Williams-Sonoma, Inc. ("Tenant"), TJM Properties, L.L.C. ("Landlord"), and Local Federal Bank, F.S.B., ("Mortgagee"). WHEREAS, Mortgagee is the owner of a promissory note (herein, as it may have been or may be from time to time renewed, extended, amended or supplemented, called the "Note") dated February 23, 1998, executed by TJM Properties, L.L.C. payable to the order of Local Federal Bank, F.S.B., in the principal amount of $3,590,000, bearing interest and payable as therein provided, secured by, among other things, a Deed of Trust (herein, as it may have been or may be from time to time renewed, extended, amended or supplemented, called the "Mortgage"), recorded in Volume 7252, Page 148, real property records of Oklahoma County, OK, covering, among other property, the land (the "Land") described in Exhibit "A" which is attached hereto and incorporated herein by reference, and the improvements ("Improvements") thereon (such Land and Improvements being herein together called the "Property"); WHEREAS, Tenant is the tenant under a lease which, including all amendments and supplements thereto, is described as follows: Williams-Sonoma Building - ------------------------------------------------------------------------------ (herein, as it may from time to time be renewed, extended, amended or supplemented, called the "Lease"), covering a portion of the Property (said portion being herein referred to as the "Premises"); and WHEREAS, the term "Landlord" as used herein means the present landlord under the Lease or, if the landlord's interest is transferred in any manner, the successor(s) or assign(s) occupying the position of landlord under the Lease at the time in question: THEREFORE, in consideration of the mutual agreements herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Subordination. Tenant agrees and covenants that the Lease and the rights of Tenant thereunder, all of Tenant's right, title and interest in and to the property covered by the Lease, and any lease thereafter executed by Tenant covering any part of the Property, are and shall be subordinate and inferior to (a) the Mortgage and the rights of Mortgagee thereunder, and all right, title and interest of Mortgagee in the Property, and (b) all other security documents now or hereafter securing payment of any indebtedness of the Landlord (or any prior landlord) to Mortgagee which cover or affect the Property (the "Security Documents"). This Agreement is not intended and shall not be construed to subordinate the Lease to any mortgage, deed of trust or other security document other than those referred to in the preceding sentence, securing the indebtedness to Mortgagee. Without limitation of any other provision hereof, Mortgagee may, at its option and without joinder or further consent of Tenant, Landlord, or anyone else, at any time after the date hereof subordinate the lien of the Mortgage (or any other lien or security interest held by Mortgagee which covers or affects the Property) to the Lease by executing an instrument which is intended for that purpose and which specifies such subordination; and, in the event of any such election by Mortgagee to subordinate, Tenant will execute any documents required to evidence such subordination; provided however, notwithstanding that the Lease may by unilateral subordination by Mortgagee hereafter be made superior to the lien of the Mortgage, the provisions of the Mortgage relative to the rights of Mortgagee with respect to proceeds arising from an eminent domain taking (including a voluntary conveyance by Landlord) and/or insurance payable by reason of damage to or destruction of the Premises shall be prior and superior to and shall control over any contrary provisions in the Lease. 2. Non-Disturbance. Mortgagee agrees that so long as the Tenant is not in default in the payment of rent, additional rent, or other payments or in the performance of any of the other terms, covenants or conditions of the Lease on Tenant's part to be performed (beyond the period, if any, specified in the Lease within which Tenant may cure such default), (a) Tenant's possession of the Premises under the Lease shall not be disturbed or interfered with by Mortgagee in the exercise of any of its rights under the Mortgage, including any foreclosure or conveyance in lieu of foreclosure, and (b) Mortgagee will not join Tenant as a party defendant for the purpose of terminating Tenant's interest and estate under the Lease in any proceeding for foreclosure of the Mortgage. 50 53 3. Attornment. (a) Tenant covenants and agrees that in the event of foreclosure of the Mortgage, whether by power of sale or by court action, or upon a transfer of the Property by conveyance in lieu of foreclosure (the purchaser at foreclosure or the transferee in lieu of foreclosure, including Mortgagee if it is such purchaser or transferee, being herein called "New Owner:"), Tenant shall attorn to the New Owner as Tenant's new landlord, and agrees that the Lease shall continue in full force and effect as a direct lease between Tenant and New Owner upon all of the terms, covenants, conditions and agreements set forth in the Lease and this Agreement, except for provisions which are impossible for Mortgagee to perform; provided, however, that in no event shall the New Owner be: (i) liable for any act, omission, default, misrepresentation, or breach of warranty, of any previous landlord (including Landlord) or obligations accruing prior to New Owner's actual ownership of the property; (ii) subject to any offset, defense, claim or counterclaim which Tenant might be entitled to assert against any previous landlord (including Landlord); (iii) bound by any payment of rent, additional rent or other payments, made by Tenant to any previous landlord (including Landlord) for more than one (1) month in advance; (iv) bound by any amendment, or modification of the Lease hereafter made, (including Landlord) under the Lease to any assignment or sublease hereafter granted, without the written consent of Mortgagee; or (v) liable for any deposit that Tenant may have given to any previous landlord (including Landlord) which has not, as such, been transferred to New Owner. (b) The provisions of this Agreement regarding attornment by Tenant shall be self-operative and effective without the necessity of execution of any new lease or other document on the part of any party hereto or the respective heirs, legal representatives, successors or assigns of any such party. Tenant agrees, however, to execute and deliver at any time and from time to time, upon the request of Landlord or of any holder(s) of any of the indebtedness or other obligations secured by the Mortgage, any instrument or certificate reasonably may be necessary to appropriate in any such foreclosure proceeding or otherwise to evidence such attornment, including, if requested, a new lease of the Premises on the same terms and conditions as the Lease for the then unexpired term of the Lease. 4. Estoppel Certificate. Tenant agrees to execute and deliver from time to time, upon the request of Landlord or of any holder(s) of any of the indebtedness or other obligations secured by the Mortgage, a certificate regarding the status of the Lease, consisting of statements, if true (or it not, specifying why not), (a) that the Lease is in full force and effect, (b) the date through which rentals have been paid, (c) the date of the commencement of the term of the Lease, (d) the nature of any amendments or modifications of the Lease (e) that to Tenant's knowledge no default, or state of facts which with the passage of time or notice (or both) would constitute a default, exists under the Lease, and (f) such other matters as may be reasonably requested. 5. Acknowledgement and Agreement by Tenant. Tenant acknowledges and agrees as follows: (a) Tenant acknowledges that Landlord will execute and deliver to Mortgagee in connection with the financing of the Property [AN ASSIGNMENT OF LEASES AND RENTS ASSIGNING ABSOLUTELY THE RENT AND ALL OTHER SUMS DUE UNDER THE LEASE] [A COLLATERAL ASSIGNMENT OF LEASES AND RENTS, AND ALL OTHER SUMS DUE UNDER THE LEASE TO MORTGAGEE AS ADDITIONAL SECURITY]. Tenant hereby expressly consents to such (absolute assignment) (collateral assignment) and agrees that such assignment shall, in all respects, be superior to any interest Tenant has in the Lease or the Property, subject to the provisions of this Agreement. Tenant shall not prepay any rents or other sums due under the lease for more than one (1) month in advance of the due date therefor. Tenant acknowledges that Mortgagee will rely upon this instrument in connection with such financing. (b) Mortgagee, in making any disbursements to landlord, is under no obligation or duty to oversee or direct the application of the Proceeds of such disbursements, and such proceeds may be used by Landlord for purposes other than improvement of the Property. (c) From and after the date hereof, in the event of any act or omission by Landlord which would give Tenant the right, either immediately or after the lapse of time, to terminate the Lease or to claim a partial or total eviction, Tenant will not exercise any such right (I) until it has given written notice of such act or omission to the Mortgagee; and (ii) until the same period of time as is given to Landlord under the Lease to cure such act or omission shall have elapsed following such giving of notice to Mortgagee and following the time when Mortgagee shall have 51 54 become entitled under the Mortgage to remedy the same, but in any event 30 days after receipt of such notice during which period of time Mortgagee shall be permitted to cure or remedy such default, act, or omission; provided, however, that Mortgagee shall have no duty or obligation to cure or remedy and breach or default. It is specifically agreed that Tenant shall not, as to Mortgagee, require cure of any such default which is personal to Landlord and therefore not susceptible to cure by Mortgagee. (d) In the event that Mortgagee notifies Tenant of a default under the Mortgage, Note, or Security Documents and demands that Tenant pay its rent and all other sums due under the Lease directly to Mortgagee, Tenant shall honor such demand and pay the full amount of its rent and all other sums due under the Lease directly to Mortgagee or as otherwise required pursuant to such notice beginning with the payment next due after such notice of default, without inquiry as to whether a default actually exists under the Mortgage, Security documents or otherwise in connection with the Note, and notwithstanding any contrary instructions of or demands from Landlord, and without any liability to Landlord for making such payment to Mortgagee. (e) Tenant shall send a copy of any notice or statement of Landlord's default under the Lease to Mortgagee at the same time such notice or statement is sent to Landlord. (f) Tenant has no right or option of any nature whatsoever, whether pursuant to the Lease or otherwise, to purchase the Premises or the Property, or any portion thereof or any interest therein, and to the extent that Tenant has had, or hereafter acquires, any such right or option, same is hereby acknowledged to be subject and subordinate to the Mortgage and is hereby waived and released as against Mortgagee. (g) This Agreement satisfies any condition or requirement in the Lease relating to the granting of a non-disturbance agreement with respect to the subject Mortgage only and Tenant waives any requirement to the contrary in the Lease. (h) Mortgagee and any New Owner shall have no obligation nor incur any liability with respect to the erection or completion of the improvements in which the Premises are located or for completion of the Premises or any improvements for Tenant's use and occupancy, either at the commencement of the term of the Lease or upon any renewal or extension thereof or upon the addition of additional space, pursuant to any expansion rights contained in the Lease. (i) Mortgagee and any New owner shall have no obligation nor incur any liability with respect to any warranties of any nature whatsoever, whether pursuant to the Lease or otherwise, including, without limitation, any warranties respecting use, compliance with zoning, Landlord's title, landlord's authority, habitability, fitness for purpose or possession. (j) In the event that Mortgagee or any New Owner shall acquire title to the Premises or the Property, Mortgagee or such New Owner shall have no obligation, nor incur any liability, beyond Mortgagee's or New Owner's then equity interest, if any, in the Property or the Premises, and Tenant shall look exclusively to such equity interest of Mortgagee or New Owner, if any, for the payment and discharge of any obligations imposed upon Mortgagee or New Owner hereunder or under the Lease or for recovery of any judgment from Mortgagee, or New Owner, and in no event shall Mortgagee, New Owner, nor any of their respective officers, directors, shareholders, agents, representatives, servants, employees or partners ever be personally liable for such judgement. (k) Nothing herein contained is intended, nor shall it be construed, to abridge or adversely affect any right or remedy of Landlord under the Lease in the event of any default by Tenant in the payment of rent and/or any other sums due under the Lease or in the performance of any of the other terms, covenants or conditions of the Lease on Tenant's part to be performed. (l) Landlord has not agreed to any abatement of rent or other sums or period of "free rent" for the Premises unless same is specifically provided in the Lease, and Tenant agrees that in the event Mortgagee, or any New Owner becomes the owner of the Property, no agreement for abatement of rent or any other sum not specifically provided in the Lease will be binding on Mortgagee or New Owner. 6. Acknowledgement and Agreement by Landlord. Landlord, as landlord under the Lease and grantor under the Mortgage, acknowledges and agrees for itself and its heirs, representatives, successors and assigns, that: (a) this Agreement does not constitute a waiver by Mortgagee of any of its rights under the Mortgage, Note, or Security Documents, or in any way release landlord from its obligations to comply with the terms, provisions, conditions, covenants, agreements and clauses of the Mortgage, Note, and Security Documents; (b) the provisions of the Mortgage, Note, or Security Documents remain in full force and effect and must be complied with by Landlord; and (c) Tenant is hereby authorized to pay its rent and all other sums due under the Lease directly to Mortgagee upon receipt of a notice as set forth in paragraph 5(d) above from Mortgagee and that 52 55 Tenant is not obligated to inquire as to whether a default actually exists under the Mortgage, Security Documents or otherwise in connection with the Note. Landlord hereby releases and discharges Tenant of and from any liability to Landlord resulting from Tenant's payment to Mortgagee in accordance with this Agreement. Landlord represents and warrants to Mortgagee that a true and complete copy of the Lease has been delivered by landlord to Mortgagee. 7. Lease Status. Landlord and Tenant certify to Mortgagee that neither Landlord nor Tenant has knowledge of any default on the part of the other under the Lease, that the Lease is bonafide and contains all of the agreements of the parties thereto with respect to the letting of the Premises and that all of the agreements and provisions therein contained are in full force and effect. 8. Notices. All notices, requests, consents, demands and other communications required or which any party desires to give hereunder shall be in writing and shall be deemed sufficiently given or furnished if delivered by personal delivery, by telegram, telex, or facsimile, by expedited delivery service with proof of delivery, or by registered or certified United States mail, postage prepaid, at the addresses specified at the end of this Agreement (unless changed by similar notice in writing given by the particular party whose address is to be changed). Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date first attempted delivery at the address and in the manner provided herein, or, in the case of telegram, telex or facsimile, upon receipt. Notwithstanding the foregoing, no notice of change of address shall be effective except upon receipt. This Paragraph 8 shall not be construed in any way to affect or impair any waiver of notice or demand provided in this Agreement or in the lease or in any document evidencing, securing or pertaining to the loan evidenced by the Note or to require giving of notice or demand to or upon any person in any situation or for any reason. 9. Miscellaneous. (a) This Agreement supersedes any inconsistence provision of the Lease. (b) Nothing contained in this Agreement shall be construed to derogate from or in any way impair or affect the lien, security interest or provisions of the Mortgage, Note, or Security documents. (c) This Agreement shall inure to the benefit of the parties hereto, their respective successors and permitted assigns, and any New Owner, and its heirs personal representatives, successors and assigns; provided however, that in the event of the assignment or transfer of the interest of Mortgagee, all obligations and liabilities of the assigning Mortgagee under this Agreement shall terminate, and thereupon all such obligations and liabilities shall be the responsibility of the party to whom mortgagee's interest is assigned or transferred. (d) THIS AGREEMENT AND ITS VALIDITY, ENFORCEMENT AND INTERPRETATION SHALL BE GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA AND APPLICABLE UNITED STATES FEDERAL LAW EXCEPT ONLY TO THE EXTENT, IF ANY, THAT THE LAWS OF THE STATE IN WHICH THE PROEPRTY IS LOCATED NECESSARILY CONTROL. (e) The words "herein", "hereof", "hereunder" and other similar compounds of the word "here" as used in this Agreement refer to this entire Agreement and not to any particular section or provision. (f) This Agreement may not be modified orally or in any manner other than by an agreement in writing signed by the parties hereto or their respective successors in interest. (g) If any provision of the Agreement shall be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not apply to or affect any other provision hereof, but this Agreement shall be construed as if such invalidity, illegality, or unenforceability did not exist. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ADDRESS OF MORTGAGEE: MORTGAGEE: - --------------------- ---------- LOCAL FEDERAL BANK, F.S.B. LOCAL FEDERAL BANK, F.S.B. - -------------------------------- ------------------------------------- 3601 N.W. 63rd St. By: /s/ Paul Lienhard - -------------------------------- ------------------------------------- Okla. City, Okla. 73116 Name: Paul Lienhard - -------------------------------- ----------------------------------- Attention: Paul Lienhard Title: Senior Vice President ----------------------- ---------------------------------- 53 56 ADDRESS OF TENANT: TENANT: - ------------------ ------- 3250 Van Ness Avenue - -------------------------------- ------------------------------------- San Francisco, CA 94109 By: /s/ PAT CONNOLLY - -------------------------------- ------------------------------------- Name: Pat Connolly - -------------------------------- ----------------------------------- Attention: Susi Browne Title: Executive V.P. General Manager ----------------------- ---------------------------------- Catalogue ---------------------------------- ADDRESS OF LANDLORD: LANDLORD: - -------------------- --------- 3232 W. Britton Rd TJM Properties L.L.C. - -------------------------------- ------------------------------------- Suite 250 By: /s/ F. BARRY TAPP - -------------------------------- ------------------------------------- Oklahoma, OK 73120 Name: F. Barry Tapp - -------------------------------- ----------------------------------- Attention: F. Barry Tapp Title: Manager Member ----------------------- ---------------------------------- 54 EX-11 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
Net Weighted Average Per-Share Earnings Shares Amount ----------- ----------- ----------- Fiscal year ended February 1, 1998: Basic $41,347,000 25,648,000 $ 1.61 =========== Effect of assumed conversion of Convertible Notes 1,239,000 1,533,000 Effect of dilutive stock options -- 1,152,000 ----------- ----------- Diluted $42,586,000 28,333,000 $ 1.50 =========== =========== =========== Fiscal year ended February 2, 1997: Basic $22,742,000 25,463,000 $ 0.89 =========== Effect of assumed conversion of Convertible Notes 981,000 1,215,000 Effect of dilutive stock options -- 823,000 ----------- ----------- Diluted $23,723,000 27,501,000 $ 0.86 =========== =========== =========== Fiscal year ended January 28, 1996: Basic $ 2,536,000 25,362,000 $ 0.10 Effect of dilutive stock options -- 776,000 ----------- ----------- Diluted $ 2,536,000 26,138,000 $ 0.10 =========== =========== ===========
EX-13 5 1997 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 WILLIAMS-SONOMA, INC. FIVE-YEAR SELECTED FINANCIAL DATA
Dollars and amounts in thousands except percentages, per-share amounts and retail stores data Feb. 1, 1998 Feb. 2, 1997(2) Jan. 28, 1996 Jan. 29, 1995 Jan. 30, 1994 ------------ --------------- ------------- ------------- ------------- Results of Operations Net sales $ 933,257 $ 811,758 $ 644,653 $ 528,543 $ 410,056 Earnings before income taxes 70,022 39,197 4,373 33,435 19,398 Net earnings 41,347 22,742 2,536 19,572 11,221 Basic earnings per-share(1) 1.61 .89 .10 .78 .45 Diluted earnings per-share(1) 1.50 .86 .10 .75 .44 Financial position Working capital 134,524 96,568 39,076 49,506 40,405 Long-term debt and other liabilities 89,789 89,319 46,757 6,781 587 Total assets 477,229 404,417 319,096 217,878 167,604 Shareholders' equity per-share (book value)(1) $ 7.48 $ 5.72 $ 4.78 $ 4.70 $ 3.80 Debt-to-equity ratio 46.5% 61.2% 38.4% 5.7% .6% Retail stores Store count Williams-Sonoma 152 145 139 120 113 Classic 78 89 97 105 113 Grande Cuisine 74 56 42 15 -- Pottery Barn 88 76 67 57 57 Classic 34 43 47 53 57 Design Studio 54 33 20 4 -- Hold Everything 32 32 32 35 37 Outlets 4 3 2 2 2 Number of stores at year-end 276 256 240 214 209 Comparable store sales growth 2.8% 4.6% 3.4% 16.5% 13.8% Store selling area at year-end (sq. ft.) 1,015,778 839,112 690,256 537,969 487,883 Gross leasable area at year-end (sq. ft.) 1,553,137 1,264,531 1,023,003 746,683 690,635 Catalog sales Catalogs mailed in year 154,475 136,489 131,800 126,833 99,807 Catalog sales growth 11.2% 19.1% 16.2% 55.0% 23.9% Catalog sales as percent of total sales 35.5% 36.7% 38.8% 40.8% 33.9% Pro forma earnings per-share adjusted to reflect declared stock split (Note L): Basic earnings per-share $ .81 $ .45 $ .05 $ .39 $ .22 Diluted earnings per-share $ .75 $ .43 $ .05 $ .37 $ .22
(1) Per-share amounts have been restated to reflect the adoption of SFAS NO. 128 in fiscal 1997 and the 3-for-2 stock splits in February 1994 and September 1994. (2) The year ended February 2, 1997, includes 53 weeks. 2 WILLIAMS-SONOMA, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS NET SALES Net sales consist of the following components:
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended Dollars in thousands Feb. 1, 1998 % Total Feb. 2, 1997 % Total Jan. 28, 1996 % Total ------------ ------- ------------ ------- ------------- ------- Retail sales $601,738 64.5% $513,592 63.3% $394,281 61.2% Catalog sales 331,519 35.5% 298,166 36.7% 250,372 38.8% Total net sales $933,257 100.0% $811,758 100.0% $644,653 100.0%
Net sales for Williams-Sonoma, Inc. and subsidiaries (the company) for the 52 weeks ended February 1, 1998 (fiscal 1997) were $933,257,000 - an increase of $121,499,000 or 15% over net sales for the 53 weeks ended February 2, 1997 (fiscal 1996). Net sales for fiscal 1996 increased 26% over net sales for the 52 weeks ended January 28, 1996 (fiscal 1995). RETAIL SALES
Year Ended Dollars in thousands Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Retail sales $601,738 $513,592 $394,281 Retail growth percentage 17.2% 30.3% 28.3% Comparable store sales growth 2.8% 4.6% 3.4% Number of stores - beginning of year 256 240 214 Number of new stores 44 30 43 Number of closed stores 24 14 17 Number of stores at year-end 276 256 240 Store selling area at year-end (sq. ft.) 1,015,778 839,112 690,256
Retail sales for fiscal 1997 increased 17% over retail sales for fiscal 1996 primarily due to new store openings. During fiscal 1997, the company opened 44 stores (18 large-format Williams-Sonoma, 21 large-format Pottery Barn, 3 Hold Everything and 2 outlets), and closed 24 smaller stores (11 Williams-Sonoma, 9 Pottery Barn, 3 Hold Everything and 1 outlet). Pottery Barn, with 32% of the store locations at the end of fiscal 1997, accounted for 72% and 61% of retail sales growth in fiscal 1997 and fiscal 1996, respectively. Retail sales in fiscal 1996 increased 30% over retail sales in fiscal 1995, principally due to a net increase of 16 stores. Comparable store sales are defined as sales from stores whose gross square feet did not change by more than 20% in the previous 12 months and which have been open for at least 12 months. Comparable store sales are compared monthly for purposes of this analysis. In any given period, the set of stores comprising comparable stores may be different than the comparable stores in the previous period, depending on store opening and closing activity. Comparable store sales grew 2.8% in fiscal 1997 and 4.6% in fiscal 1996. The prototypical 1997 large-format stores range from 5,700 - 9,000 selling square feet (7,700 - 16,400 leased square feet) for Pottery Barn stores and 2,800 - 4,600 selling square feet (4,200 - 6,200 leased square feet) for Williams-Sonoma, and are intended to enable the company to display merchandise more effectively. As of the end of fiscal 1997, 128 stores (74 Williams-Sonoma and 54 Pottery Barn) were in the large format, comprising 64.6% of the company's total selling square footage. Large-format stores accounted for 58% of retail sales in fiscal 1997, as compared to 34% in fiscal 1995. Large-format stores accounted for 50% of comparable store sales in fiscal 1997, as compared to 30% in fiscal 1996 and 5% in fiscal 1995. In 1998, the company plans to increase leased square footage by approximately 21%. 3 WILLIAMS-SONOMA, INC. CATALOG SALES Catalog sales in fiscal 1997 and fiscal 1996 increased 11.2% and 19.1%, respectively, over those of the prior year. The total number of catalogs mailed in these periods increased 13.2% in fiscal 1997, and 3.6% in fiscal 1996. The majority of the increased circulation in fiscal 1997 and fiscal 1996 was 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:
Year Ended Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Williams-Sonoma 13.0% 13.4% 5.8% Pottery Barn 18.1% 27.6% 40.0% Hold Everything 11.7% 12.3% 14.1% Gardeners Eden (5.3%) 8.7% (4.0%) Chambers (7.8%) 22.7% 1.2% Total catalog 11.2% 19.1% 16.2%
Combined sales for Williams-Sonoma and Pottery Barn, the company's primary concepts, were 70.2% of total catalog sales in fiscal 1997. Pottery Barn, which represented 43.4% of total catalog sales in fiscal 1997, accounted for 66.1% of total catalog sales growth in fiscal 1997 and 55.2% in fiscal 1996. This reflects the company's development of the Pottery Barn assortment over the last several years and the enhanced consumer brand recognition achieved through the Pottery Barn catalog and Design Studio stores. Other factors contributing to catalog sales growth were an improved in-stock position and a reduction in Pottery Barn merchandise returns. In 1997, the company continued to explore changes to the merchandise content and mailing strategies for its Gardeners Eden and Chambers catalogs. COST OF GOODS SOLD AND OCCUPANCY Cost of goods sold and occupancy expenses expressed as a percent of net sales in fiscal 1997 declined 1.1 percentage points to 59.7% from 60.8% in fiscal 1996. Merchandise margin improved 1.1 percentage points, principally due to lower cost of merchandise. Occupancy expenses expressed as a percentage of net sales remained flat. The Las Vegas call center opened in the third quarter of fiscal 1996. Increases in the occupancy expense rate in the Las Vegas call center were offset by improvements in the corporate and Memphis distribution-center occupancy-expense rates as a result of increased sales volume. In fiscal 1996, cost of goods sold and occupancy expenses expressed as a percent of net sales decreased 2.9 percentage points from the prior year. Merchandise margin improved 3.0 percentage points, as compared to fiscal 1995, primarily as a result of markdowns taken in the fourth quarter of fiscal 1995 to reduce overstocks and slow-moving items. Occupancy expense as a percent of net sales remained relatively flat as compared to fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses expressed as a percent of net sales declined 1.4 percentage points in fiscal 1997 to 32.4% from 33.8% in fiscal 1996. Almost half of the improvement is due to lower advertising expense rates in the catalog and retail divisions. The remainder of the decrease is primarily attributable to lower employment rates and lower shipping expense rates for the catalog division and lower corporate employment rates as a result of increased sales volume. In fiscal 1996, selling, general and administrative expenses as a percent of net sales decreased 1.2 percentage points to 33.8% from 35.0% in fiscal 1995. The majority of the improvement was attributable to lower advertising expense rates. The company's San Francisco call center, which primarily serviced Pottery Barn, was previously located in one of the company's two corporate headquarters facilities. In order to support the sales growth in Pottery Barn and growth of the company's corporate staff, management made the decision in fiscal 1997 to close this call center and to utilize the space for corporate offices. The call center was closed in January of 1998, and as a result the company recorded a fourth quarter pre-tax charge of $2,335,000 for severance and other employment-related costs associated with the closure. A new call center is scheduled to open in Oklahoma City, Oklahoma, in the third quarter of 1998. 4 WILLIAMS-SONOMA, INC. 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 computer systems to identify those areas that could be affected by the Year 2000 issue and is developing an implementation strategy. In addition, the company is in the process of communicating with those with whom it does significant business, to determine their Year 2000 readiness and the extent to which the company is vulnerable to any third-party Year 2000 issues. However, 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 will utilize both internal and external resources to reprogram or replace, and test all of its systems for Year 2000 compliance. The company expects to complete the project by mid-1999. The estimated cost for the remediation and testing of computer applications could range as high as $4.5 million over the two year period from 1998 to 1999. The company presently believes, with modification to existing software and converting to new software, the Year 2000 problem will not pose significant operational risk. 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. INTEREST EXPENSE Net interest expense decreased $1,175,000, from $4,965,000 in fiscal 1996 to $3,790,000 in fiscal 1997, primarily as a result of increased interest income. The increase in investment income is principally due to the $78,802,000 of cash and equivalents with which the company started fiscal 1997. Such cash enabled the company to fund substantially all of its operating and investing requirements with a minimum of short-term debt. As a result, the average short-term investment balance in fiscal 1997 was approximately $35,290,000, as compared to average short-term borrowings of $12,186,000 in fiscal 1996. Net interest expense in fiscal 1996 increased $438,000 over net interest expense in fiscal 1995. INCOME TAXES The company's effective tax rate was 41.0% for fiscal 1997, as compared to 42% in fiscal 1996 and fiscal 1995. These rates reflect the effect of aggregate state tax rates based on the mix of retail sales and catalog sales in the various states in which the company has sales or conducts business. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities in fiscal 1997 was $75,873,000, a decrease of $34,869,000 from the $110,742,000 of cash generated by operating activities in fiscal 1996. The majority of the change is due to the change in inventory levels. The company's inventory levels at the beginning of fiscal 1996 were in excess of the company's requirements based on planned sales growth. As a result, in the first two quarters of 1996 the company was liquidating inventories to reduce overstocks and slow-moving items. At the start of fiscal 1997, due to improved merchandise planning and control, the company was in the more typical position of building inventories in response to growth and seasonal requirements. Merchandise levels in fiscal 1998 are expected to remain at the current ratio of inventory to forecasted sales, and inventory on hand will continue to increase in response to higher sales and new stores. 5 WILLIAMS-SONOMA, INC. Net cash used in investing activities for fiscal 1997 was $59,146,000. Approximately $46,684,000 was spent on new stores, and approximately $8,948,000 was used for information systems. The company is planning approximately $70,000,000 to $75,000,000 of gross capital expenditures in fiscal 1998, including $10,000,000 for information systems. Cash provided by financing activities in fiscal 1997 was $1,685,000, most of which was provided through exercises of stock options. Cash provided by financing activities for fiscal 1996 was $9,906,000, and included the replacement of certain short-term borrowings with long-term debt. On April 15, 1996, the company sold $40,000,000 of 5.25% convertible, subordinated notes due 2003 ("Convertible Notes"). The Convertible Notes are convertible into shares of the company's common stock at a conversion price of $26.10 per share (or 38.3 shares per $1,000 principal amount). Proceeds from the notes were used primarily to reduce bank borrowings. The company has notified the holders of the Convertible Notes of its intention to redeem the Convertible Notes in April 1998, and the company anticipates that substantially all of the Convertible Notes will be converted into common stock at that time. The company has a 364-day syndicated line-of-credit facility expiring on May 29, 1998, which provides for $60,000,000 to $90,000,000 in cash advances, depending on seasonal requirements. The agreement contains certain restrictive loan covenants, including minimum tangible net worth, a minimum out-of-debt period, and a prohibition on payment of cash dividends. Additionally, the company has a $35,000,000 letter-of-credit agreement with its lead bank. The company is currently in negotiations with its banks, and expects to replace this facility with a new agreement having similar terms prior to the May 29, 1998, expiration date. IMPACT OF INFLATION The impact of inflation on results of operations has not been significant. SEASONALITY The company's business is subject to substantial seasonal variations in demand. Historically, a significant portion of the company's sales and net income have been realized during the period from October through December, and levels of net sales and net income have generally been significantly lower during the period from February through September. 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; a limited operating history for the company's new large-format stores; the potential for changes in consumer spending patterns, consumer preferences and overall economic conditions; the company's dependence on foreign suppliers; and increasing competition in the specialty retail business. Other factors that could cause actual results to differ materially from those set forth in such forward-looking statements include the risks and uncertainties detailed in the company's most recent annual report on Form 10-K and its other filings with the Securities and Exchange Commission. 6 WILLIAMS-SONOMA, INC. CONSOLIDATED STATEMENTS OF EARNINGS
Dollars and shares in thousands, Year Ended except per-share amounts Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Net sales $933,257 $811,758 $644,653 Costs and expenses Cost of goods sold and occupancy 556,776 493,179 410,335 Selling, general and administrative 302,669 274,417 225,418 Interest expense - net 3,790 4,965 4,527 Earnings before income taxes 70,022 39,197 4,373 Income taxes 28,675 16,455 1,837 Net earnings 41,347 22,742 2,536 Basic earnings per-share 1.61 .89 .10 Diluted earnings per-share 1.50 .86 .10 Average number of common shares outstanding Basic 25,648 25,463 25,362 Diluted 28,333 27,501 26,138 Pro forma earnings per-share adjusted to reflect declared stock split (Note L): Basic earnings per-share .81 .45 .05 Diluted earnings per-share $ .75 $ .43 $ .05 Average number of common shares outstanding Basic 51,297 50,927 50,724 Diluted 56,666 55,001 52,276
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Retained Dollars and shares in thousands Shares Amount Earnings Total ------ ------ -------- ----- Balance at January 29, 1995 25,342 $ 47,416 $ 70,800 $118,216 Issuance pursuant to stock option plans and tax benefit from sale of optioned stock by employees 85 901 -- 901 Net earnings -- -- 2,536 2,536 Balance at January 28, 1996 25,427 48,317 73,336 121,653 Issuance pursuant to stock option plans and tax benefit from sale of optioned stock by employees 117 1,643 -- 1,643 Net earnings -- -- 22,742 22,742 Balance at February 2, 1997 25,544 49,960 96,078 146,038 Issuance pursuant to stock option plans and tax benefit from sale of optioned stock by employees 296 5,813 -- 5,813 Net earnings -- -- 41,347 41,347 Balance at February 1, 1998 25,840 $ 55,773 $137,425 $193,198
7 WILLIAMS-SONOMA, INC. CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share amounts Feb. 1, 1998 Feb. 2, 1997 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 97,214 $ 78,802 Accounts receivable (less allowance for doubtful accounts of $206 and $186) 15,238 11,918 Merchandise inventories 132,451 110,702 Prepaid expenses and other assets 7,991 8,674 Prepaid catalog expenses 13,596 11,925 Deferred income taxes 3,680 4,028 Total current assets 270,170 226,049 Property and equipment - net 201,020 172,093 Investments and other assets (less accumulated amortization of $1,448 and $1,076) 6,039 5,824 Deferred income taxes -- 451 Total assets $477,229 $404,417 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 58,496 $ 64,409 Accrued expenses 15,619 12,514 Accrued salaries and benefits 15,863 16,116 Customer deposits 19,617 13,801 Income taxes payable 17,216 15,715 Current portion of long-term obligations 125 125 Other liabilities 8,710 6,801 Total current liabilities 135,646 129,481 Deferred lease credits 56,157 39,579 Long-term debt and other liabilities 89,789 89,319 Deferred tax liability 2,439 -- Shareholders' equity Preferred stock, $.01 par value, authorized 7,500,000 shares, none issued -- -- Common Stock, $.01 par value, authorized 126,562,500 shares, issued and outstanding, 25,840,359 and 25,543,887 shares, respectively 55,773 49,960 Retained earnings 137,425 96,078 Total shareholders' equity 193,198 146,038 Total liabilities and shareholders' equity $477,229 $404,417
See Notes to Consolidated Financial Statements 8 WILLIAMS-SONOMA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Dollars in thousands Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Cash flows from operating activities: Net earnings $ 41,347 $ 22,742 $ 2,536 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 28,871 24,332 16,476 Loss (gain) on disposal of assets and store closing reserve (132) 1,826 740 Amortization of deferred lease incentives (4,853) (3,462) (1,950) Change in deferred income taxes 3,238 (300) 101 Tax benefit from sale of optioned stock by employees 3,507 619 343 Reserve for closure of San Francisco call center 2,335 -- -- Other 687 -- -- Change in: Accounts receivable (3,320) 1,239 (7,614) Merchandise inventories (21,749) 10,901 (33,654) Prepaid catalog expenses (1,671) 3,688 (4,408) Prepaid expenses and other assets 683 (2,168) (657) Accounts payable (5,913) 6,114 8,938 Accrued expenses and other liabilities 9,911 16,980 11,783 Deferred lease incentives 21,431 14,463 16,650 Income taxes payable 1,501 13,768 (6,382) Net cash provided by operating activities 75,873 110,742 2,902 Cash flows from investing activities: Purchase of property and equipment (59,299) (47,627) (86,513) Other 153 1,615 739 Net cash used in investing activities (59,146) (46,012) (85,774) Cash flows from financing activities: Borrowings under line-of-credit 41,000 192,480 226,600 Repayments under line-of-credit (41,000) (222,080) (197,000) Proceeds from issuance of long-term debt -- 40,000 40,000 Debt issuance costs -- (1,393) (460) Repayments of long-term debt (621) (125) (141) Proceeds from exercise of stock options 2,306 1,024 558 Net cash provided by financing activities 1,685 9,906 69,557 Net increase (decrease) in cash and cash equivalents 18,412 74,636 (13,315) Cash and cash equivalents at beginning of year 78,802 4,166 17,481 Cash and cash equivalents at end of year $ 97,214 $ 78,802 $ 4,166
See Notes to Consolidated Financial Statements 9 WILLIAMS-SONOMA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company and its subsidiaries are specialty retailers of products for the home, which are merchandised through five direct-mail catalogs and three retail businesses: Williams-Sonoma, Pottery Barn, Hold Everything, Chambers (catalog only) and Gardeners Eden (catalog only). Based on net sales, retail accounts for 64.5% of the business and catalog accounts for 35.5%. 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 276 stores in 37 states and Washington D.C. These consolidated financial statements include Williams-Sonoma, Inc. and its subsidiaries. Significant intercompany transactions and accounts have been eliminated. The company's fiscal year ends on the Sunday closest to January 31, based on a 52/53-week year. Fiscal years 1997, 1996 and 1995 ended on February 1, 1998, February 2, 1997, and January 28, 1996, respectively. The years ended February 1, 1998, February 2, 1997, and January 28, 1996, include 52 weeks, 53 weeks and 52 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 (moving weighted-average method) or market. Approximately 40% of the company's merchandise is foreign-sourced, primarily from Europe and Asia. Prepaid catalog expenses consist of the cost to produce, print and distribute catalogs. Such costs are amortized over the expected sales volume of each catalog. Typically, over 90% of the cost of a catalog is amortized in the first four months. At February 1, 1998, and February 2, 1997, $13,596,000 and $11,925,000, respectively, of prepaid advertising was reported as current assets. Catalog advertising expenses amounted to $94,169,000, $87,699,000 and $78,131,000 in fiscal 1997, 1996 and 1995, respectively. Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated remaining useful lives of the assets ranging from 3 to 49 years. Amortization of improvements to leased properties is based upon the shorter of the remaining term of the applicable lease or the estimated useful lives of such assets. In 1996, the company adopted the provisions of Statement of Financial Accounting Standards NO. 121 (SFAS NO. 121), "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." SFAS NO. 121 establishes recognition and measurement criteria for impairment losses when a company no longer expects to recover the carrying value of a long-lived asset. Based on management's evaluation, as of February 1, 1998, there is no impairment of long-lived assets. Investments and other assets include long-term deposits, lease rights and interests, which are being amortized over the life of the respective leases (5 to 49 years), and debt-issuance costs which are amortized over the life of the debt. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the initial lease term. For leases which contain fixed escalations of the minimum-annual-lease payment during the original term of the lease, the company recognizes rental expense on a straight-line basis, and records the difference between rent expense and the amount currently payable as deferred lease incentives. The company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) NO. 25, Accounting for Stock Issued to Employees. Impact of new accounting standards: In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards NO. 130 "Reporting Comprehensive Income", which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and NO. 131 "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997. 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. 10 WILLIAMS-SONOMA, INC. Reclassifications: Certain items in the prior years' consolidated financial statements have been reclassified to conform to the fiscal 1997 presentation. NOTE B: PROPERTY AND EQUIPMENT Property and equipment consist of the following:
Dollars in thousands Feb. 1, 1998 Feb. 2, 1997 ------------ ------------ Land and buildings $ 11,046 $ 11,046 Leasehold improvements 169,280 138,465 Fixtures and equipment 116,033 99,518 Construction in progress 9,910 6,988 306,269 256,017 Less accumulated depreciation and amortization 105,249 83,924 Total property and equipment - net $201,020 $172,093
NOTE C: BORROWING ARRANGEMENTS Long-term debt consists of the following:
Dollars in thousands Feb. 1, 1998 Feb. 2, 1997 ------------ ------------ Convertible notes $40,000 $ 40,000 Senior notes 40,000 40,000 Mortgage 6,530 6,654 Obligations under capital leases and other liabilities 3,384 2,790 89,914 89,444 Less current maturities 125 125 Total long-term debt $89,789 $ 89,319
On April 15, 1996, the company issued $40,000,000 principal amount of 5.25% convertible, subordinated notes due April 15, 2003 (Convertible Notes). Net proceeds from the transaction amounted to $38,607,000 and were used to provide the company with a long-term source of working capital. Interest is payable semi-annually and began October 1996. The Convertible Notes are convertible into shares of common stock at a conversion price of $26.10 per share (equivalent to a conversion rate of 38.3 shares per $1,000 principal amount). The conversion price is subject to adjustment in certain events, including stock splits and stock dividends. Except as discussed below, the Convertible Notes are redeemable at the option of the company in the form of cash or common stock, on or after April 15, 1998, in whole or in part, at redemption prices (expressed as a percentage of principal amount) ranging from 103.75% to 100% in the last year. For the period April 15, 1998, through April 14, 2000, redemption may not occur unless the ratio of the stock price to the conversion price has achieved a minimum as defined in the agreement. In the event of a change in control, holders of the Convertible Notes may, at their option, require the company to repurchase all or any portion of the principal amount. The agreement does not restrict the company from incurring additional indebtedness. The company has notified the holders of the Convertible Notes of its intentions to redeem the Convertible Notes in April 1998, and the company anticipates that substantially all of the Convertible Notes will be converted into common stock at that time. 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. 11 WILLIAMS-SONOMA, INC. 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. The company has a 364-day syndicated line-of-credit facility expiring on May 29, 1998, which provides for $60,000,000 to $90,000,000 in cash advances, depending on seasonal requirements. The agreement contains certain restrictive loan covenants, including minimum tangible net worth, a minimum out-of-debt period and a prohibition on payment of cash dividends. Additionally, the company has a $35,000,000 letter-of-credit agreement with its lead bank. The company is currently in negotiations with its banks and expects to replace this facility with a new agreement having similar terms prior to the May 29, 1998 expiration date. At February 1, 1998, $60,000,000 and $35,000,000 were available in line-of-credit and letter-of-credit facilities, respectively, of which $0 and $24,370,000 were outstanding, respectively. Interest expense was $5,705,000, $5,795,000 and $4,703,000 for fiscal 1997, 1996 and 1995, respectively, excluding capitalized interest of $348,000 in fiscal 1997, $695,000 in fiscal 1996 and $663,000 in fiscal 1995. Interest paid was $5,828,000, $5,404,000 and $3,805,000 for the same periods. Accounts payable at February 1, 1998, and February 2, 1997, includes cash overdrafts of $16,640,000 and $15,465,000, respectively, for checks issued and not presented to the bank for payment. As of February 1, 1998, the company's debt, including the Convertible Notes and assuming they are not converted, is scheduled to mature as follows: $125,000 in fiscal year 1998, $6,906,000 in fiscal 1999, $6,243,000 in fiscal 2000, $12,054,000 in fiscal 2001, $5,878,000 in fiscal 2002 and $58,708,000 thereafter. NOTE D: INCOME TAXES The provision for income taxes consists of the following:
Year Ended Dollars in thousands Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Current payable Federal $20,261 $ 12,020 $ 1,338 State 5,176 4,735 397 Total current 25,437 16,755 1,735 Deferred Federal 2,609 146 193 State 629 (446) (91) Total deferred 3,238 (300) 102 Total provision $28,675 $ 16,455 $ 1,837
Income taxes paid were $20,702,000, $3,510,000 and $10,453,000 in fiscal 1997, 1996 and 1995, respectively. A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:
Year Ended Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Federal income taxes at the statutory rate 35.0% 35.0% 35.0% State income tax rate, less federal benefit 5.5% 6.5% 6.5% Other .5% .5% .5% 41.0% 42.0% 42.0%
12 WILLIAMS-SONOMA, INC. Significant components of the company's deferred tax accounts are as follows:
Feb. 1, 1998 Feb. 2, 1997 Dollars in thousands Deferred Deferred Deferred Deferred Tax Assets Tax Liabilities Tax Assets Tax Liabilities ---------- --------------- ---------- --------------- Current: Compensation $ 3,607 -- $ 2,116 -- Inventory 3,026 -- 2,719 -- Accrued liabilities 2,738 $ 185 4,204 $ 62 Deferred catalog costs -- 5,506 -- 4,949 Total current 9,371 5,691 9,039 5,011 Non-current: Depreciation 160 -- 2,352 -- Deferred rent 752 -- 741 -- Deferred lease incentives -- 3,351 -- 2,642 Capital loss 5,160 -- 5,160 -- Valuation allowance (5,160) -- (5,160) -- Total non-current 912 3,351 3,093 2,642 Total $ 10,283 $ 9,042 $ 12,132 $ 7,653
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The company has a valuation allowance as of February 1, 1998, and February 2, 1997, due to the uncertainty of realizing future tax benefits from its capital loss carryforwards. NOTE E: LEASES The company leases store locations, its warehouses, call centers and certain equipment under operating and capital leases for original terms ranging from 3 to 25 years extending through 2018, except for one store lease with a 49-year term extending through 2040. Most store leases require the payment of minimum rentals against percentage rentals based on store sales. Certain leases contain renewal options for periods of up to 20 years. On January 2, 1996, the company entered into an agreement to lease a 35,867-square-foot build-to-suit call center in Summerlin, Nevada. The lease covers a ten-year term with three optional five-year renewals. Rent commenced in August 1996 at an annual basic rent amount of $529,000 for each of the first five years of the lease and will increase to $598,000 annually for the remaining five years. In the event that the company should require more space to support growth, the agreement includes an option to expand into an additional 17,920 square feet. In July 1996, the company secured an additional 400,232-square-foot warehouse in Memphis, Tennessee, to more efficiently process non-conveyable merchandise. The lease for the warehouse covers a nine-year term with termination rights available after the third and sixth years, subject to penalty fees. Rent commenced in July 1996 at a rate of $60,000 a month for the first ten months of the lease and 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 will commence 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. These minimum rental payments have been included in the following table. 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. 13 WILLIAMS-SONOMA, INC. Total rental expense for all operating leases was as follows:
Year Ended Dollars in thousands Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Minimum rent expense, stores $39,011 $ 33,133 $ 27,462 Equipment rent 6,767 6,065 5,957 Contingent rent expense 2,004 3,932 2,261 Total rent expense $47,782 $ 43,130 $ 35,680
The aggregate minimum annual rental payments under noncancelable operating leases in effect at February 1, 1998, were as follow:
Dollars in thousands Fiscal 1998 $ 46,870 Fiscal 1999 43,953 Fiscal 2000 41,641 Fiscal 2001 39,676 Fiscal 2002 37,740 Later years 200,192 Total minimum lease commitment $410,072
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, McMahan and Robert K. Earley, former Senior Vice President of Distribution. The partnership financed the construction of the distribution center through the sale of $10,550,000, 10.36% principal amount of industrial development bonds due August 2015. In September 1994, this lease was amended to include an approximately 306,000-square-foot expansion of the facility. The expansion was completed in October 1995. The lessor financed the construction of the expansion through a $500,000 capital contribution from its partners and the sale of $9,825,000, 9.01% principal amount of industrial development bonds due in August 2015. The amended lease has an initial, noncancelable term of 15 years beginning in August 1991 and ending in July 2006, with three optional five-year renewals. Rentals (including interest on the bonds, sinking fund payments and fees) for the primary term are payable at an average rate of $711,000 per quarter plus applicable taxes, insurance and maintenance expenses. 14 WILLIAMS-SONOMA, INC. Both facilities (including the 1994 expansion) are constructed to the company's specifications. After the option periods, the company is obligated to renew each lease annually so long as the bonds which financed the specific projects remain outstanding. The facility leases qualify as operating leases for accounting purposes. The company believes that the facility leases are on terms no less favorable than the company could have obtained from third parties in arm's-length transactions. NOTE G: EARNINGS PER-SHARE In 1997, the company adopted the provisions of Statement of Financial Accounting Standards NO. 128 (SFAS 128), "Earnings per-share". SFAS 128 requires dual presentation of two earnings per-share (EPS) amounts, basic EPS and diluted EPS, on the face of all income statements instead of primary and fully diluted EPS. 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 SFAS 128. The following is a reconciliation of net income (numerator) and the number of shares (denominator) used in the basic and diluted EPS computations:
Dollars and amounts in thousands Weighted except per-share amounts Net Average Per-Share Earnings Shares Amount -------- ------ ------ 1997: Basic $41,347 25,648 $ 1.61 Effect of assumed conversion of Convertible Notes 1,239 1,533 Effect of dilutive stock options -- 1,152 Diluted 42,586 28,333 1.50 1996: Basic 22,742 25,463 0.89 Effect of assumed conversion of Convertible Notes 981 1,215 Effect of dilutive stock options -- 823 Diluted 23,723 27,501 0.86 1995: Basic 2,536 25,362 0.10 Effect of dilutive stock options -- 776 Diluted $ 2,536 26,138 $ 0.10
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:
Year Ended Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Options to purchase shares of common stock 7,500 11,500 591,865 Exercise prices $ 42.75 - $ 49.00 $ 33.38 - $ 36.38 $ 18.00 - $ 22.17 Expiration dates June 2007 - Jan. 2008 Nov. 2006 - Dec. 2006 Mar. 2004 - Oct. 2005
15 WILLIAMS-SONOMA, INC. 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 2,250,000 shares, was approved and adopted in 1993 and amended for an additional 500,000 shares in 1997. The 1993 Plan replaces the 1976 non-qualified plan which was terminated and the 1983 Incentive Stock Option Plan, which expired on March 27, 1993. Options granted under the 1976 and 1983 Plans remain in force until they are exercised or expire. All incentive stock option grants made under the 1993 Plan have a maximum term of ten years, except those issued to 10% shareholders which have a term of five years. The exercise price of all incentive stock options shall be 100% of the fair market value of the stock at the option grant date or 110% for a 10% shareholder. The exercise price for non-qualified options shall not be less than 75% of the fair market value of the stock at the option grant date. The following table reflects the aggregate activity under the company's stock option plans:
Weighted Average Options Exercise Price ------- -------------- Balance at January 29, 1995 1,494,004 $10.14 Granted (weighted average fair value of $9.83) 414,150 18.92 Exercised 84,791 6.58 Canceled 132,275 17.66 Balance at January 28, 1996 1,691,088 11.88 Granted (weighted average fair value of $11.18) 514,450 21.48 Exercised 117,177 9.32 Canceled 108,202 17.19 Balance at February 2, 1997 1,980,159 14.24 Granted (weighted average fair value of $19.40) 682,350 30.02 Exercised 296,691 7.54 Canceled 77,763 19.39 Balance at February 1, 1998 2,288,055 19.64 Exercisable, year-end 1995 722,573 8.32 Exercisable, year-end 1996 884,218 10.25 Exercisable, year-end 1997 969,799 $13.42
Options to purchase 589,824 shares were available for grant at year-end 1997. The company continues to account for its stock-based awards using the intrinsic value method in accordance with APB NO. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards NO. 123, "Accounting for Stock-Based Compensation" (SFAS NO. 123), requires the disclosure of 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. The company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. However, the impact of outstanding unvested stock options granted prior to 1995 has been excluded from the pro forma calculation, accordingly, the 1995, 1996 and 1997 pro forma adjustments are not indicative of future period 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 on the following page: 16 WILLIAMS-SONOMA, INC.
Year Ended Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Net earnings As reported $41,347 $22,742 $2,536 Pro forma - basic 38,639 21,647 2,091 Pro forma - diluted 39,878 22,627 2,091 Basic earnings per-share As reported 1.61 .89 .10 Pro forma 1.51 .85 .08 Diluted earnings per-share As reported 1.50 .86 .10 Pro forma $ 1.42 $ .83 $ .08
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:
Year Ended Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996 ------------ ------------ ------------- Dividend yield - - - Volatility 61.0% 50.0% 50.0% Risk-free interest 6.49% 6.26% 6.33% Expected term (years) 6.0 5.0 5.0
The following table summarizes information about fixed stock options outstanding at February 1, 1998:
Options Outstanding Options Exercisable Weighted Weighted Weighted Number Average Average Number Average Outstanding Contractual Exercise Exercisable at Exercise Range of exercise prices Feb. 1, 1998 Life (Years) Price Feb. 1, 1998 Price ------------ ------------ ----- ------------ ----- $ 3.85 - $ 5.28 251,991 2.96 $ 4.64 225,466 $ 4.57 $ 5.89 - $14.75 475,535 5.50 10.68 381,748 10.61 $18.00 - $18.81 448,510 7.70 18.33 158,410 18.45 $20.13 - $26.88 420,565 7.63 22.95 173,325 22.57 $28.13 - $49.00 691,454 9.15 30.05 30,850 35.69 $ 3.85 - $49.00 2,288,055 7.15 $19.64 969,799 $13.42
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 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 contributions from 50% to 100% of the first 6% of a participant's pay which the participant elects to contribute as salary deferral contributions. The company announced that it no longer intends to make 17 WILLIAMS-SONOMA, INC. profit-sharing contributions to the plan. In fiscal 1996, the company accrued a profit-sharing contribution of $720,000. In fiscal 1997, in conjunction with amendments to the plan, the company elected not to make a profit-sharing contribution. There was no profit-sharing contribution in fiscal 1995. 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. NOTE J: ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards NO. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the estimated fair value of financial instruments. The carrying value of cash and cash equivalents, accounts receivable, investments, accounts payable and debt approximates their estimated fair values at February 1, 1998, and February 2, 1997. NOTE K: 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. NOTE L: SUBSEQUENT EVENT - STOCK SPLIT On March 11, 1998, the company's board of directors declared a two-for-one stock split to be effected as a special distribution of one share of common stock for each share of the company's common stock outstanding. The distribution will be made to stockholders of record on May 4, 1998. Pro forma earnings per-share amounts giving effect to this split have been presented in the accompanying consolidated statements of earnings. INDEPENDENT AUDITORS REPORT TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF WILLIAMS-SONOMA, INC.: We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the company) as of February 1, 1998 and February 2, 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three fiscal years in the period ending February 1, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Williams-Sonoma, Inc. and subsidiaries as of February 1, 1998, and February 2, 1997, and the results of its operations and its cash flows for each of the three fiscal years in the period ending February 1, 1998, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP San Francisco, California March 25, 1998 18 WILLIAMS-SONOMA, INC. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal 1997 Dollars in thousands, Quarter Ended except per-share amounts May 4 August 3 November 2 February 1 ----- -------- ---------- ---------- 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(2) 1,388 2,417 3,245 34,296 Basic earnings per-share(1) .05 .09 .13 1.33 Diluted earnings per-share(1) $ .05 $ .09 $ .12 $ 1.21
Fiscal 1996 Dollars in thousands, Quarter Ended except per-share amounts April 28 July 28 October 27 February 2 -------- ------- ---------- ---------- Net sales $157,396 $155,499 $171,154 $327,708 Gross profit 54,621 53,855 62,632 147,472 Earnings (loss) before income taxes (4,100) (1,072) 398 43,971 Net earnings (loss) (2,378) (622) 231 25,512 Basic earnings (loss) per-share(1) (.09) (.02) .01 1.00 Diluted earnings (loss) per-share(1) $ (.09) $ (.02) $ .01 $ .92
(1) The sum of the quarterly basic earnings per-share does not agree to the year-to-date amount due to rounding differences. 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 fourth quarter and year-to-date. Per-share amounts have been restated to reflect the adoption of SFAS NO. 128 in fiscal 1997. (2) The fourth quarter ended February 1, 1998, includes an after-tax change to net earnings of $1,378,000 ($.05 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 Over-The-Counter Market under the NASDAQ symbol wsgc. The following table sets forth the high and low closing prices in the NASDAQ National Market System for the periods indicated. On March 13, 1998, there were 517 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).
Fiscal 1997 High Low ---- --- 1st Quarter 33 25 3/16 2nd Quarter 45 1/2 30 1/16 3rd Quarter 49 3/4 36 1/2 4th Quarter 46 1/16 36 1/2
Fiscal 1996 High Low ---- --- 1st Quarter 23 3/16 13 3/4 2nd Quarter 29 1/4 18 3/16 3rd Quarter 31 18 1/4 4th Quarter 36 1/2 26 7/8
EX-21 6 SUBSIDIARIES OF WILLIAMS-SONOMA AS OF 02-01-98 1 EXHIBIT 21 SUBSIDIARIES OF WILLIAMS-SONOMA, INC. AS OF FISCAL YEAR END FEBRUARY 1, 1998
Subsidiary Name State/Date of Incorporation - --------------- --------------------------- Williams-Sonoma Stores, Inc. California, October 29, 1984 Gardener's Eden, Inc. California, October 29, 1984 The Pottery Barn East, Inc. California, August 18, 1986 Hold Everything, Inc. California, September 30, 1986 Chambers Catalog Company, Inc. California, February 1, 1995
EX-23 7 INDEPENDENT AUDITORS CONSENT 1 EXHIBIT 23 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-89801, No. 33-28490, No. 33-33693, No. 33-60787, No. 33-65656, No. 333-48247 and No. 333-39811 on Form S-8, and No. 333-07851 on Form S-3 of Williams-Sonoma, Inc. of our reports dated March 25, 1998, appearing in and incorporated by reference in the Annual Report on Form 10-K of Williams-Sonoma, Inc. for the fiscal year ended February 1, 1998. /s/Deloitte & Touche LLP San Francisco, California April 17, 1998 EX-27.1 8 FINAN. DATA SCHEDULE FOR YEAR ENDED 02-01-98
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED FEBRUARY 1, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000719955 WILLIAMS-SONOMA, INC. 1,000 YEAR FEB-01-1998 FEB-03-1997 FEB-01-1998 97,214 0 15,238 0 132,451 270,170 306,269 105,249 477,229 135,646 89,789 0 0 11,466 181,732 477,229 933,257 933,257 556,776 859,445 0 0 3,790 70,022 28,675 41,347 0 0 0 41,347 1.61 1.50 For purposes of this exhibit, primary means basic.
EX-27.2 9 FIN. DATA SCHED. QUART. 1,2 & 3 FISC. YEAR 1997
5 THIS SCHEDULE CONTAINS RESTATED QUARTERLY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR QUARTERS 1, 2 & 3 OF FISCAL YEAR 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS 3-MOS FEB-01-1998 FEB-01-1998 FEB-01-1998 FEB-03-1997 MAY-05-1997 AUG-04-1997 MAY-04-1997 AUG-03-1997 NOV-02-1997 26,664 27,266 3,624 0 0 0 14,625 15,273 25,768 0 0 0 128,935 125,709 169,792 193,046 189,591 229,405 263,734 280,215 295,265 89,742 94,959 100,531 373,591 381,458 430,827 94,704 94,299 129,715 86,498 86,467 86,436 0 0 0 0 0 0 11,466 11,466 11,466 136,263 139,841 143,678 373,591 381,458 430,827 176,535 182,427 203,863 176,535 182,427 203,863 110,027 116,667 126,525 173,369 177,329 196,983 0 0 0 0 0 0 774 929 1,285 2,392 4,169 5,595 1,004 1,752 2,350 1,388 2,417 3,245 0 0 0 0 0 0 0 0 0 1,388 2,417 3,245 .05 .09 .13 .05 .09 .12 For purposes of this exhibit, primary means basic.
EX-27.3 10 FIN. DATA SCHED. YEARS ENDED 02-02-97 & 01-28-96
5 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEARS ENDED FEBRUARY 2, 1997 AND JANUARY 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000719955 WILLIAMS-SONOMA, INC. 1000
YEAR YEAR FEB-02-1997 JAN-28-1996 JAN-29-1996 JAN-30-1995 FEB-02-1997 JAN-28-1996 78,802 4,166 0 0 11,918 13,157 0 0 110,702 121,603 226,049 161,184 256,017 211,033 83,924 63,731 404,417 319,096 129,481 122,108 89,319 46,757 0 0 0 0 11,466 11,466 134,572 110,187 404,417 319,096 811,758 644,653 811,758 644,653 493,179 410,335 767,596 225,418 0 0 0 0 4,965 4,527 39,197 4,373 16,455 1,837 22,742 2,536 0 0 0 0 0 0 22,742 2,536 .89 .10 .86 .10 FOR PURPOSES OF THIS EXHIBIT PRIMARY MEANS BASIC.
EX-27.4 11 FIN. DATA SCHED. FOR QUART. 1,2 & 3 FIS. YEAR 1996
5 THIS SCHEDULE CONTAINS RESTATED QUARTERLY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR QUARTERS 1, 2 & 3 OF FISCAL YEAR 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000719955 WILLIAMS-SONOMA, INC. 1000 3-MOS 3-MOS 3-MOS FEB-02-1997 FEB-02-1997 FEB-02-1997 JAN-29-1996 APR-29-1996 JUL-29-1996 APR-28-1996 JUL-28-1996 OCT-27-1996 2,930 6,176 2,882 0 0 0 13,824 9,737 17,038 0 0 0 113,440 101,284 119,016 152,782 141,635 166,989 222,392 236,330 247,228 68,014 72,877 78,561 318,717 316,995 347,214 81,979 77,720 100,302 40,000 86,854 86,884 0 0 0 0 0 0 48,393 11,466 11,466 70,959 107,742 108,234 318,717 316,995 347,214 157,396 155,499 171,154 157,396 155,499 171,154 102,775 101,644 108,522 159,955 155,095 169,439 0 0 0 0 0 0 1,541 1,476 1,317 (4,100) (1,072) 398 (1,722) (450) 167 (2,378) (622) 231 0 0 0 0 0 0 0 0 0 (2,378) (622) 231 (.09) (.02) .01 (.09) (.02) .01 For purposes of this exhibit, primary means basic.
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