Pottery Barn 2005 Annual Report Download

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ANNUAL REPORT
2005
May 23, 2006

Table of contents

  • Page 1
    2 0 0 5 ANNUAL REPORT May 23, 2006

  • Page 2

  • Page 3
    , Shareholders Letter LETTER TO SHAREHOLDERS WILLIAMS-SONOMA, INC. 2005 ANNUAL REPORT

  • Page 4
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  • Page 5
    ...our West Elm merchandise assortment, the opening of our first three Williams-Sonoma Home retail stores, and the decision to transition the key merchandising strategies of our Hold Everything brand into our other existing brands by the end of 2006. Our Fiscal 2005 Financial Results Revenues increased...

  • Page 6
    ... growth in our Williams-Sonoma and Pottery Barn brands. We will also increase catalog circulation to an estimated 390 million catalogs, expand our electronic direct-marketing programs, and enhance customer access to the brands by implementing new e-commerce functionality - including gift card sales...

  • Page 7
    ... to find new ways to exceed the expectations of our customers. In closing, we would like to thank our loyal customers, employees, vendor partners, and shareholders for their continued support. While 2005 was a year of record financial performance, we look forward to building on our successes and...

  • Page 8
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  • Page 9
    Form 10-K FORM 10-K WILLIAMS-SONOMA, INC. 2005 ANNUAL REPORT

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  • Page 11
    ...-14077 Form 10-K WILLIAMS-SONOMA, INC. (Exact name of registrant as specified in its charter) California (State or other jurisdiction of incorporation or organization) 94-2203880 (I.R.S. Employer Identification No.) 3250 Van Ness Avenue, San Francisco, CA (Address of principal executive offices...

  • Page 12
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  • Page 13
    ... related to our plans to open new retail stores, statements related to launching new websites and implementing new e-commerce functionality, statements related to future comparable store sales, statements related to our fiscal 2006 income tax provision and effective tax rate, statements related to...

  • Page 14
    ...-SONOMA, INC. ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED JANUARY 29, 2006 TABLE OF CONTENTS PAGE Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. PART I Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders...

  • Page 15
    ... registry. Additionally, in 2001, we opened five new retail stores (two Williams-Sonoma, two Pottery Barn and one Pottery Barn Kids) in Toronto, Canada, our first stores operated by us outside of the U.S. In 2002, we launched our West Elm catalog. The brand targets design conscious consumers looking...

  • Page 16
    ... Financial Statements. DIRECT-TO-CUSTOMER OPERATIONS The direct-to-customer segment has seven merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, Hold Everything, West Elm and Williams-Sonoma Home) and sells products through our eight direct-mail catalogs (Williams...

  • Page 17
    ...retail business by building brand awareness and acting as an effective advertising vehicle. In addition, we believe that the mail order catalogs and the Internet act as a cost efficient means of testing market acceptance of new products and new brands. Detailed financial information about the direct...

  • Page 18
    ... business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly. We must successfully anticipate changing consumer preferences and buying trends, and manage our inventory commensurate with customer...

  • Page 19
    ... managing our supply chain and distribution strategies in order to provide our products to our consumers on a timely basis. In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased competition could harm our sales, operating results and business...

  • Page 20
    ... customer goodwill and favorable brand recognition, which could negatively affect our business and operating results. The growth of our sales and profits depends, in large part, on our ability to successfully open new stores. In each of the past three fiscal years, the majority of our net revenues...

  • Page 21
    ... that the information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, changes in demographics, in the types of merchandise that we sell and in the pricing of our products may reduce the number of suitable store locations. Further, time frames...

  • Page 22
    ... store sales expectations of investors and security analysts in one or more future periods could significantly reduce the market price of our common stock. Our failure to successfully manage the costs and performance of our catalog mailings might have a negative impact on our business. Postal rate...

  • Page 23
    ... merchandise returns that exceeds our reserves could harm our business and operating results. We must successfully manage the complexities associated with a multi-channel and multi-brand business. During the past few years, with the launch and expansion of our Internet business, new brands and brand...

  • Page 24
    ...-union distribution facilities, stores and direct-to-customer operations. Union organizing activity may result in work slowdowns or stoppages and higher labor costs. In addition, there appears to be a growing number of wage-and-hour lawsuits against retail companies, especially in California. We are...

  • Page 25
    ... finance growth opportunities, new product development initiatives, unanticipated capital expenditures or to fund our operations. Our Board of Directors may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. The stock repurchase...

  • Page 26
    ... Commission or the New York Stock Exchange. Any such action could negatively impact the perception of us in the financial market and our business. In addition, our internal controls may not prevent or detect all errors and fraud. A control system, no matter how well designed and operated, is based...

  • Page 27
    ... whose partners include a Director and a Director Emeritus, both of whom are significant shareholders. Both partnerships were consolidated by us as of February 1, 2004. See Note F to our Consolidated Financial Statements for more information. Our Cranbury, New Jersey distribution center agreement...

  • Page 28
    ...to accommodate the expansion of our operations. We also lease office, design studio, photo studio, warehouse and data center space in the following locations: Location Brisbane, California San Francisco, California New York City, New York Rocklin, California ITEM 3. LEGAL PROCEEDINGS We are involved...

  • Page 29
    PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol WSM. The following table sets forth the high and low closing prices...

  • Page 30
    ... as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. The stock repurchase program does not have an expiration date and...

  • Page 31
    ...Pottery Barn: Design Studio Classic Pottery Barn Kids Hold Everything West Elm Williams-Sonoma Home Outlets Number of stores at year-end Store selling area at fiscal year-end (sq. ft.) Store leased area at fiscal year-end (sq. ft.) Direct-to-Customer Revenues Direct-to-customer revenue growth Direct...

  • Page 32
    ... revenues increase. In our direct-to-customer channel, net revenues increased 13.6% during fiscal 2005 versus fiscal 2004. This yearover-year increase was primarily driven by net revenues generated in the Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma brands due to increased catalog...

  • Page 33
    ... 2005. To increase our pre-tax operating margin, we plan to improve the supply chain cost structure in the areas of customer returns, replacements, and damages, transportation costs in the furniture delivery network, and backroom and offsite storage management in our retail stores. We also plan...

  • Page 34
    ...in customer service and improve the overall operational efficiency of the furniture supply chain process. In addition, in fiscal 2006, we will issue our first ever quarterly cash dividend. The quarterly dividend will be initiated at $0.10 per common share, payable on May 24, 2006, to shareholders of...

  • Page 35
    ... 2005 store closing numbers include 2 Williams-Sonoma, 2 Pottery Barn and 1 Pottery Barn Kids temporary store closures in the New Orleans area due to Hurricane Katrina. One Williams-Sonoma store subsequently reopened before fiscal year-end and one Williams-Sonoma, one Pottery Barn, and one Pottery...

  • Page 36
    ...of 8 stores during fiscal 2005. Net revenues generated in the Pottery Barn, Williams-Sonoma, West Elm and Pottery Barn Kids brands were the primary contributors to the year-over-year revenue increase. Pottery Barn and Pottery Barn Kids accounted for 50.0% of the growth in retail revenues from fiscal...

  • Page 37
    ..., Pottery Barn Kids and West Elm brands. All of our brands in the direct-to-customer channel delivered positive growth during the fiscal year with the exception of the Chambers brand, which was retired in the second quarter of 2004 in anticipation of the launch of the Williams-Sonoma Home brand in...

  • Page 38
    ...-price selling in the Pottery Barn and Williams-Sonoma brands, partially offset by the write-down of impaired merchandise inventories associated with transitioning the merchandising strategies of our Hold Everything brand into our other existing brands and increased costs associated with the 2005...

  • Page 39
    ..., customer care centers, supply chain operations (buying, receiving and inspection), and corporate administrative functions. These costs include employment, advertising, third party credit card processing, and other general expenses. Due to their distinct distribution and marketing strategies...

  • Page 40
    ... costs. The increase in the employment rate was due in part to the up front investment required in the emerging brands prior to the opening of our new store locations. In the direct-to-customer channel, selling, general and administrative expenses as a percentage of direct-to-customer net revenues...

  • Page 41
    ... development bonds associated with the Mississippi Debt Transaction. See Note C to our Consolidated Financial Statements. Stock Repurchase Program In May 2005, our Board of Directors authorized a stock repurchase program to acquire up to 2,000,000 additional shares of our outstanding common stock...

  • Page 42
    ..." section and Note E to our Consolidated Financial Statements. 3Projected payments include only those amounts that are fixed and determinable as of the reporting date. 4Represents estimated commitments at year-end to purchase inventory and other goods and services in the normal course of business to...

  • Page 43
    ... leases with a term of 60 months. The in-store computer equipment leases include an early purchase option at 54 months for $2,496,000, which is approximately 25% of the acquisition cost. We have an end of lease purchase option to acquire the equipment at the greater of fair market value or 15...

  • Page 44
    ... 6, 2007. OFF BALANCE SHEET ARRANGEMENTS Operating Leases We lease store locations, warehouses, corporate facilities, call centers and certain equipment under operating and capital leases for original terms ranging generally from 3 to 22 years. Certain leases contain renewal options for periods up...

  • Page 45
    ... 2 industrial development bonds. During fiscal 2005, we made annual rental payments of approximately $2,600,000, plus applicable taxes, insurance and maintenance expenses. This operating lease has an original term of 15 years expiring in August 2006, with three optional five-year renewal periods...

  • Page 46
    ... execution against loss prevention initiatives in our stores, off-site storage locations, and our third party transportation providers. Prepaid Catalog Expenses Prepaid catalog expenses consist of third party incremental direct costs, including creative design, paper, printing, postage and mailing...

  • Page 47
    ...with taxing authorities may affect the ultimate settlement of these issues. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings. Stock-Based Compensation We account for stock options and awards granted to employees using...

  • Page 48
    ...for stock options, as we grant all stock options with an exercise price equal to the market price of our common stock at the date of grant, however, stock compensation expense is recognized in the consolidated financial statements for restricted stock unit awards. SFAS No. 123, "Accounting for Stock...

  • Page 49
    ... to market risks, which include changes in U.S. interest rates and foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes. Interest Rate Risk The interest payable on our credit facility, industrial development bond and the bond-related debt associated...

  • Page 50
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Williams-Sonoma, Inc. Consolidated Statements of Earnings Fiscal Year Ended Dollars and shares in thousands, except per share amounts Net revenues Cost of goods sold Gross margin Selling, general and administrative expenses Interest income ...

  • Page 51
    ... amortization of $679 and $2,066) Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable Accrued salaries, benefits and other Customer deposits Income taxes payable Current portion of long-term debt Other liabilities Total current liabilities Deferred rent and lease...

  • Page 52
    ... of stock options and related tax effect Repurchase and retirement of common stock Comprehensive income Balance at January 30, 2005 Net earnings Foreign currency translation adjustment Exercise of stock options and related tax effect Repurchase and retirement of common stock Stock-based compensation...

  • Page 53
    ... Deferred income taxes Tax benefit from exercise of stock options Stock-based compensation expense Other Changes in: Accounts receivable Merchandise inventories Prepaid catalog expenses Prepaid expenses and other assets Accounts payable Accrued salaries, benefits and other Customer deposits Deferred...

  • Page 54
    ... West Elm and Williams-Sonoma Home). The direct-to-customer segment of our business sells similar products through our eight direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, PBteen, Hold Everything, West Elm and Williams-Sonoma Home) and six e-commerce...

  • Page 55
    ...lease term (generally 4 - 5 years) Internally developed software costs are capitalized in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Interest costs related...

  • Page 56
    ... store profitability and economic conditions. The future estimates of store profitability and economic conditions require estimating such factors as sales growth, employment rates, lease escalations, inflation on operating expenses and the overall economics of the retail industry for up to 20 years...

  • Page 57
    ... store and for home-delivered merchandise and direct-to-customer sales when the merchandise is delivered to the customer. Discounts provided to customers are accounted for as a reduction of sales. We record a reserve for estimated product returns in each reporting period. Shipping and handling fees...

  • Page 58
    ... selling, general and administrative expenses in each reporting period. We did not enter into any new foreign currency contracts during fiscal 2005 or fiscal 2004. Any gain or loss associated with these types of contracts in prior years was not material to us. Income Taxes Income taxes are accounted...

  • Page 59
    ... Year Ended Dollars in thousands, except per share amounts Net earnings, as reported Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effect Deduct: Total stock-based employee compensation expense determined under fair value method for all awards...

  • Page 60
    ...systems projects in progress is primarily comprised of a new merchandising, inventory management and order management system currently under development. 2Construction in progress is primarily comprised of leasehold improvements and furniture and fixtures related to new, unopened retail stores. 48

  • Page 61
    ... an effort to utilize tax incentives offered to us by the state of Mississippi, we entered into an agreement whereby the Mississippi Business Finance Corporation issued $15,000,000 in long-term variable rate industrial development bonds, the proceeds, net of debt issuance costs, of which were loaned...

  • Page 62
    ...Facility As of January 29, 2006, we have a credit facility that provides for a $300,000,000 unsecured revolving line of credit that may be used for loans or letters of credit and contains certain financial covenants, including a maximum leverage ratio (funded debt adjusted for lease and rent expense...

  • Page 63
    ... that might be payable if these foreign earnings were repatriated. A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows: Fiscal Year Ended Federal income taxes at the statutory rate State income tax rate, less federal benefit Total Jan. 29...

  • Page 64
    ... Total Note E: Accounting for Leases Operating Leases We lease store locations, warehouses, corporate facilities, call centers and certain equipment under operating and capital leases for original terms ranging generally from 3 to 22 years. Certain leases contain renewal options for periods up...

  • Page 65
    ... term of four years, with one optional three-year and nine-month renewal. During fiscal 2005, we made annual rental payments of approximately $913,000, plus applicable taxes, insurance and maintenance expenses. Total rental expense for all operating leases was as follows: Fiscal Year Ended Dollars...

  • Page 66
    ... 2 industrial development bonds. During fiscal 2005, we made annual rental payments of approximately $2,600,000, plus applicable taxes, insurance and maintenance expenses. This operating lease has an original term of 15 years expiring in August 2006, with three optional five-year renewal periods...

  • Page 67
    ...Stock options may be granted under the 1993 Plan to key employees and Board members of the company and any parent or subsidiary. Annual grants are limited to options to purchase 200,000 shares on a per person basis under this plan. All stock option grants made under the 1993 Plan have a maximum term...

  • Page 68
    ... the date of the annual meeting of shareholders (so long as they continue to serve as a non-employee Board member). The following table reflects the aggregate activity under our stock option plans: Shares Balance at February 2, 2003 Granted (weighted average fair value of $15.56) Exercised Canceled...

  • Page 69
    ... Benefits We have a defined contribution retirement plan, the "Williams-Sonoma, Inc. Associate Stock Incentive Plan" (the "Plan"), for eligible employees, which is intended to be qualified under Internal Revenue Code Sections 401(a), 401(k) and 401(m). The Plan permits eligible employees to make...

  • Page 70
    ... reportable segment, retail. The direct-to-customer segment has seven merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, Hold Everything, West Elm and Williams-Sonoma Home) and sells similar products through our eight direct-mail catalogs (WilliamsSonoma, Pottery Barn...

  • Page 71
    ...2005, 2004 and 2003, respectively, related to our foreign operations. 2Includes $11.4 million, $2.0 million, and $0.1 million in the retail, direct-to-customer, and corporate unallocated segments, respectively, related to the transitioning of the merchandising strategies of our Hold Everything brand...

  • Page 72
    ... internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management, and other personnel to provide...

  • Page 73
    ... internal control over financial reporting as of January 29, 2006, based on the criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/ DELOITTE & TOUCHE LLP San Francisco, California April 6, 2006 Form...

  • Page 74
    ... the annual net earnings per share as each quarter is calculated independently. 2Stock price represents our common stock price at the close of business on the Friday before our fiscal quarter-end. 3Includes a pre-tax charge of $4,500,000 in cost of goods sold and $9,000,000 in selling, general and...

  • Page 75
    ... statements included in this Annual Report on Form 10-K and has issued an attestation report on management's assessment of the company's internal control over financial reporting. This report appears on pages 60 through 61 of this annual report on Form 10-K. Form 10-K ITEM 9B. OTHER INFORMATION...

  • Page 76
    ... Committee Report," "Committee Reports-Audit and Finance Committee Report," "Corporate Governance Guidelines and Corporate Code of Conduct" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is...

  • Page 77
    ... (a)(1) Financial Statements: The following consolidated financial statements of Williams-Sonoma, Inc. and subsidiaries and the related notes are filed as part of this report pursuant to Item 8: Consolidated Statements of Earnings for the fiscal years ended January 29, 2006, January 30, 2005 and...

  • Page 78
    ... on its behalf by the undersigned, thereunto duly authorized. WILLIAMS-SONOMA, INC. Date: April 7, 2006 By /s/ EDWARD A. MUELLER Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the...

  • Page 79
    ... 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2001 as filed with the Commission on April 26, 2001, File No. 001-14077) 3.2 3.3 Form 10-K 3.4 3.5 FINANCING AGREEMENTS 10.1 Third Amended and Restated Credit Agreement, dated February 22, 2005, between the...

  • Page 80
    ...Executive Deferral Plan, dated November 23, 1998 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1999 as filed with the Commission on April 30, 1999, File No. 001-14077) Williams-Sonoma, Inc. Associate Stock Incentive Plan...

  • Page 81
    ... the Distribution Facility at 4600 and 4650 Sonoma Cove, Memphis, Tennessee, dated as of August 1, 1990 between the Company and Hewson-Memphis Partners (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2001 as filed with the...

  • Page 82
    ... between Williams-Sonoma Retail Services, Inc. as lessee and SPI WS II, LLC (the successor-in-interest to Hewson/Desoto Partners, L.L.C.) as lessor, dated November 15, 1999 (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January...

  • Page 83
    ... 10.40 to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2004 as filed with the Commission on April 15, 2004, File No. 001-14077) Services Agreement, dated September 30, 2004, by and between the Company and International Business Machines Corporation (incorporated by...

  • Page 84
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  • Page 85
    2006 ANNUAL NOTICE MEETING OF OF SHAREHOLDERS PROXY STATEMENT Proxy WILLIAMS-SONOMA, INC. 2005 ANNUAL REPORT

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  • Page 87
    .... ITEMS OF BUSINESS: 3) 4) WHO CAN VOTE: DATE OF MAILING: You may vote if you were a shareholder of record as of March 24, 2006. This notice, the Proxy Statement and the Annual Report are first being mailed to shareholders on or about April 14, 2006. By Order of the Board of Directors Seth...

  • Page 88
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  • Page 89
    ... corporate headquarters located at 3250 Van Ness Avenue, San Francisco, California 94109. Our Annual Report to Shareholders for the fiscal year ended January 29, 2006, or fiscal 2005, including our financial statements for fiscal 2005, is also enclosed. These proxy materials are first being mailed...

  • Page 90
    ... election of the directors named in this Proxy Statement, "FOR" the described amendment and restatement of our 2001 Long-Term Incentive Plan and "FOR" the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 28...

  • Page 91
    ... Annual Report and Proxy Statement. A shareholder may notify us that the shareholder would like a separate Annual Report and Proxy Statement by phone at 415-421-7900 or at the following mailing address: 3250 Van Ness Avenue, San Francisco, California 94109, Attention: Annual Report Administrator...

  • Page 92
    ... proxies? We pay all of the expenses incurred in preparing, assembling and mailing this Proxy Statement and the materials enclosed. We have retained Skinner & Company to assist in the solicitation of proxies at an estimated cost to us of $6,000. Some of our officers or employees may solicit proxies...

  • Page 93
    ... the non-employee director's initial election to our Board. We also grant to each non-employee director on the date of the Annual Meeting an option to purchase 12,500 shares of the company's common stock (so long as the non-employee director has been serving on our Board for at least three months...

  • Page 94
    ... Compensation Committee and the Nominations and Corporate Governance Committee an option to purchase 1,000 shares of our common stock. The exercise price of these options is equal to the fair market value of our common stock on the date of the option grant. These options granted to our non-employee...

  • Page 95
    ...Eaton Corporation (diversified industrial manufacturing), 1997 - 2001 • Member of the Audit and Finance Committee and Compensation Committee • Founding Partner, MSP Capital (strategy and investment services) since 2002 • President and Chief Executive Officer, Walmart.com (on-line retail), 2000...

  • Page 96
    ... Exchange Commission rules require to be included in our annual proxy statement; and • Oversees the financial impact of selected strategic initiatives and reviews selected financing, dividend and stock repurchase policies and plans. • Reviews and determines our executive officers' compensation...

  • Page 97
    ... and Corporate Governance Committee Report" and "Shareholder Proposals" sections of this Proxy Statement. Are there any disclosures relating to Compensation Committee interlocks and insider participation? During fiscal 2005, none of our executive officers served as a member of the board of directors...

  • Page 98
    ... years from the date our Board adopted the amendment and restatement, unless the plan is terminated earlier by the Board. The amended and restated plan will also increase the number of authorized shares of our common stock available for grant by 6,000,000 shares to 14,500,000 shares and will provide...

  • Page 99
    Finally, the amended and restated plan provides that the performance goals that the administrative committee may apply to an award may apply to either the company, one of our business units, a product line or specific markets. The administrative committee's evaluation of performance goals shall be ...

  • Page 100
    ... the plan, each new non-employee director will receive an option to purchase a number of shares of our common stock determined by the committee, or such other awards as the committee determines, upon his or her election to the Board and annually thereafter on the date of our Annual Meeting provided...

  • Page 101
    ... to a restricted stock award that is granted with a purchase or exercise price of less than 100% of fair market value after the date of this amendment and restatement, and if such an award is forfeited, canceled or otherwise terminated without vesting, the reserve of shares available for future...

  • Page 102
    ... stock unit award that is granted with a purchase or exercise price of less than 100% of fair market value after the date of this amendment and restatement, and if such an award is forfeited, canceled or otherwise terminated without vesting, the reserve of shares available for future awards...

  • Page 103
    ...are performance goals? We have designed the plan so that it permits us to pay compensation that qualifies as performance-based under Section 162(m) of the Internal Revenue Code. This allows the committee to make performance goals applicable to a participant with respect to an award. At the committee...

  • Page 104
    ...or loss. As a result of Section 409A of the Internal Revenue Code ("Section 409A"), however, nonstatutory stock options granted with an exercise price below the fair market value of the underlying stock may be taxable to participants before exercise of an award. As of the date of this proxy, the IRS...

  • Page 105
    ... difference between the fair market value of the shares at the time of receipt and the amount, if any, paid for the shares. However, a participant will be subject to employment taxes (FICA and, where applicable, state disability insurance taxes) at the time a deferred stock award vests, even if the...

  • Page 106
    ...markets in which we compete. Such awards also are crucial to our ability to motivate employees to achieve our goals. We will benefit from increased stock ownership by selected executives, other employees and non-employee directors. The increase in the reserve of common stock available under the plan...

  • Page 107
    ... provide in fiscal 2005? Deloitte's services for fiscal 2005 included: the issuance of an opinion on (i) our annual consolidated financial statements, (ii) management's assessment of our internal control, (iii) the effectiveness of our internal control and (iv) our associate stock incentive plan...

  • Page 108
    ...of our Board, subject to rights, if any, under employment contracts. Name Position with the Company and Business Experience W. Howard Lester ...Age 70 Edward A. Mueller ...Age 58 Laura J. Alber ...Age 37 * * • President, Pottery Barn Brands since 2002 • Executive Vice President, Pottery Barn...

  • Page 109
    ... Name and Principal Position Year(1) Salary Bonus Other Annual Compensation Restricted Stock Awards Securities Underlying Options(3) All Other Compensation W. Howard Lester ...Chairman Edward A. Mueller ...Director and Chief Executive Officer Laura J. Alber ...President, Pottery Barn Brands Sharon...

  • Page 110
    ... This table sets forth certain information regarding all stock option grants made to the named executive officers during fiscal 2005. Number of Securities Underlying Options Granted Individual Grants Percentage of Total Options Granted to Exercise or Employees in Base Price Fiscal Year(1) Per Share...

  • Page 111
    ... salary at the time of termination for up to one year, and (ii) outplacement services at a level commensurate with her position at no cost to her. In addition, we will pay the premiums for health coverage under COBRA for Ms. Alber and her dependents until Ms. Alber either commences new employment...

  • Page 112
    ... in light of those goals and objectives, and review and approve the level of compensation, including base salary, bonus, equity compensation, and any other benefits or perquisites to be provided to the Chief Executive Officer based on this evaluation; • Review, make recommendations to the Board...

  • Page 113
    ... compensation awards, are structured to encourage our executive team to work toward long-term sustained growth and success from the perspective of owners in the company and to reward executives and other key employees for maximizing long-term shareholder value. How many times did the Compensation...

  • Page 114
    ...management. These criteria change from year to year. For fiscal 2005, the Compensation Committee determined that no portion of the total target bonus amount under the 2001 Incentive Bonus Plan would be payable unless a prescribed company goal relating to company profitability (the "Company Objective...

  • Page 115
    ...the fair market value of the stock (based on the price of the company's common stock on the date of the award). Equity awards granted pursuant to the company's equity compensation plans generally vest in five equal annual installments. It is the company's policy not to reprice stock options or stock...

  • Page 116
    ... equity awards to our associates and members of the Board. We actively consider the potential impact of the changes in the financial accounting treatment of equity compensation arrangements on the company's reported earnings. Do we provide perquisites to our executive officers? We provide certain...

  • Page 117
    ... address Internal Revenue Code Section 162(m)? Under Section 162(m) of the Internal Revenue Code of 1986, as amended, and regulations adopted under it by the Internal Revenue Service, publicly held companies may be precluded from deducting certain compensation paid to certain executive officers...

  • Page 118
    ... for election to the Board shall direct the recommendation in writing to Williams-Sonoma, Inc., Attention: Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. The recommendation must include: (i) the candidate's name, home and business contact information; (ii) detailed biographical...

  • Page 119
    ...company management applicable changes in corporate governance requirements under federal and state securities laws and the NYSE listing standards, as well as the company's compliance with such requirements; • Evaluated potential candidates to serve as new independent members of the company's Board...

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    ... and internal control over financial reporting; • Retain independent legal, accounting or other advisors when necessary and appropriate; and • Review the financial impact on the company of selected strategic initiatives and selected financing plans and develop and recommend policies related...

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    .... Did we review the company's audited financial statements for fiscal 2005? Yes. We reviewed and discussed the company's audited financial statements for fiscal 2005, and we recommended to the Board that the company's audited financial statements be included in the company's Annual Report on Form 10...

  • Page 122
    ... on our website at www.williams-sonomainc.com. Each is also available in print to any shareholder who requests it. To date, there have been no waivers that apply to our Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions under our Corporate Code of...

  • Page 123
    ... our directors, executive officers and holders of more than 10% of our common stock to file reports regarding their ownership and changes in ownership of our stock with the SEC. We believe that during fiscal 2005, our directors, officers and more than 10% shareholders complied with all Section 16...

  • Page 124
    ... address of each shareholder noted in the following table is c/o Williams-Sonoma, Inc., 3250 Van Ness Avenue, San Francisco, California 94109. Information regarding our non-management 5% holders is derived from the most recently available 13G filings. The options to purchase our stock listed below...

  • Page 125
    ... number was calculated by dividing the amount owned in the Williams-Sonoma, Inc. Stock Fund by $42.20, the closing price of Williams-Sonoma, Inc. common stock on March 24, 2006. (3) The information above and in this footnote is based on information taken from the Schedule 13G of Prudential Financial...

  • Page 126
    ... Stock Option Plan In July 2000, our Compensation Committee approved the 2000 Nonqualified Stock Option Plan, or the 2000 Plan. The 2000 Plan provides for the grant of nonqualified stock options to employees who are not officers or members of our Board, and persons who have accepted employment...

  • Page 127
    ... timely, but only with respect to nominees for any new positions created by such increase, if it is delivered no later than the close of business on the 10th day following the day on which we first make such public announcement. Does a shareholder proposal require specific information? With...

  • Page 128
    ... Williams-Sonoma, Inc. NYSE Stock Market NASDAQ Retail Trade Notes: A. B. C. D. The lines represent monthly index levels derived from compounded daily returns that include all dividends. The indices are re-weighted daily, using the market capitalization on the previous trading day. If the monthly...

  • Page 129
    ... the financial statements for fiscal 2005 as filed with the SEC, is available at our website at www.williams-sonomainc.com and upon written request and without charge to any shareholder by writing to: Annual Report Administrator, Williams-Sonoma, Inc., 3250 Van Ness Avenue, San Francisco, California...

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    ... Option or give rise to a compensation expense for financial accounting purposes. (c) Definitions. The following terms are defined as set forth below: "Administrator" means the Committee described in Section 2. "Annual Revenue" means the Company's or a business unit's net sales for the Fiscal Year...

  • Page 132
    ...2006 annual shareholders meeting. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value" means, as of any date, the closing sales price for a share of Stock (or the closing bid, if no sales are reported) as quoted on the New York Stock Exchange on...

  • Page 133
    ... items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial conditions and results of operations appearing in the Company's annual report to shareholders for the applicable year, or (ii) the effect of any changes in accounting...

  • Page 134
    ... New York Stock Exchange (or other market on which the Stock then trades) for qualification as an "independent director." (b) Delegation by the Administrator. The Administrator, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority...

  • Page 135
    ... the Plan under any Award shall not be returned to the Plan and shall not become available for future distribution under the Plan; provided, however, that if Shares of Restricted Stock, Restricted Stock Units or Deferred Stock Awards are repurchased by the Company at their original purchase price or...

  • Page 136
    ... of the employing corporation. The Administrator may direct that the substitute Awards be granted with such terms and conditions as the Administrator considers appropriate in the circumstances. SECTION 4. ELIGIBILITY Those persons eligible to participate in the Plan shall be officers, employees and...

  • Page 137
    ... to the Company cash or a check payable and acceptable to the Company to pay the purchase price; provided that the payment method described in this Section 6(a)(iv)(C) shall not be available to an optionee who is subject to the reporting and other provisions of Section 16 of the Exchange Act unless...

  • Page 138
    ...with the provisions of the Stock Option) by the Company of the full purchase price for such shares and fulfilling any other requirements contained in the Stock Option or Applicable Laws. (b) Annual Limit on Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined as of...

  • Page 139
    ... such payment, all as determined by the Administrator in its discretion and in compliance with Applicable Law. Conditions may be based on continuing employment (or service as a Non-employee Director) and/or achievement of pre-established performance goals and objectives. The terms and conditions of...

  • Page 140
    ...-established performance goals, objectives and other conditions on which the Company's right of repurchase or forfeiture shall lapse, provided, however, that any Awards of Restricted Stock that vest solely on the basis of continuing employment (or service as a Non-employee Director) shall be subject...

  • Page 141
    ... vesting solely based on continuing as an Employee or Non-employee Director, the shares of Stock subject to such Award will vest in full no earlier (except if accelerated pursuant to Section 17 hereof) than the three (3) year anniversary of the grant date; provided, further, that if vesting is not...

  • Page 142
    ... under a U.S. Securities & Exchange Commission Form S-8 registration statement, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Award Agreement. (c) No Repricing. The exercise price for the Stock to be...

  • Page 143
    ... a Participant may elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that...

  • Page 144
    ... price of all such outstanding Stock Options and SARs. In the event of a Transaction that qualifies as a change in the ownership or effective control of the Company under Code Section 409A or the proposed or final Treasury Regulations thereunder, as applicable, any outstanding Deferred Stock Awards...

  • Page 145
    SECTION 19. GOVERNING LAW This Plan and all Awards and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the State of California, applied without regard to conflict of law principles. Exhibits A-15

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  • Page 147
    ..., and directors; (ii) administer the Company's incentive compensation and other equity-based plans (the "Plans") and make grants under them; (iii) oversee the Company's compensation policies, plans, and benefits programs generally, and (iv) in the case of the Williams-Sonoma, Inc. Associate Stock...

  • Page 148
    ... review and make recommendations to the Board of Directors with respect to changes in the number of shares reserved for issuance under those Plans. • Preparing a compensation committee report on executive compensation as required by the SEC to be included in the Company's annual proxy statement...

  • Page 149
    ... fees, if any, for their service as committee members as may be determined by the Board of Directors in its sole discretion. Fees may be paid in such form of consideration as is determined by the Board of Directors. DELEGATION OF AUTHORITY The Compensation Committee may form and delegate authority...

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  • Page 151
    ... in accordance with the Committee's Shareholder Recommendations Policy. • Annually evaluate the performance of the Company's Chief Executive Officer, annually oversee evaluation of the performance of the Board and the Company's management and provide a report with respect to this performance to...

  • Page 152
    ... of the Board. REPORTS The Committee will report to the Board on a periodic basis and make such recommendations with respect to any of the above matters as the Committee deems necessary or appropriate. COMPENSATION Members of the Committee shall receive such fees, if any, for their service as...

  • Page 153
    ... report that the Securities and Exchange Commission (the "SEC") rules require to be included in the Company's annual proxy statement; and • Oversee the financial impact of selected strategic initiatives of the Company and review selected financing, dividend and stock repurchase policies and plans...

  • Page 154
    ... auditor the annual audited financial statements and quarterly financial statements, including disclosures made in "Management's Discussion and Analysis of Financial Condition and Results of Operations," prior to filing the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10...

  • Page 155
    ... the planning and staffing of the audit. Oversight of the Company's Internal Audit Function Exhibits • Review the appointment and replacement of the senior internal auditing executive. • Review the significant reports to management prepared by the internal auditing department and management...

  • Page 156
    ... executive and the Company's Chief Financial Officer at least once each year the sufficiency of company systems to support effective internal controls and any recommended changes in the information technology department's priorities and projects planned for improving such systems. • Review reports...

  • Page 157
    ... frequently than four times per year. • The Committee shall meet at least annually with management, the internal auditors, and the independent auditors in separate executive sessions. The Committee may request any officer or employee of the Company or the Company's outside counsel or independent...

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  • Page 159
    ... Trademarks Pottery Barn, pottery barn kids, PBteen, west elm, Williams-Sonoma and Williams-Sonoma Home are trademarks of Williams-Sonoma, Inc. Stock Exchange Listing New York Stock Exchange Symbol: WSM Corporate Website www.williams-sonomainc.com Shareholder/Investor Information www.williams...

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