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Indicate by check mark 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 o

Indicate by check mark 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

As of August 4, 2002, the approximate aggregate market value of voting stock held by non-affiliates of the registrant was $1,892,878,584 using the closing sales price on the previous business day of $20.45. It is assumed for purposes of this computation an affiliate includes all persons listed as executive officers and directors with the Securities and Exchange Commission, as well as the registrant’s Associate Stock Incentive Plan.

As of March 31, 2003, 115,116,133 shares of the registrant’s Common Stock were outstanding.

Portions of the registrant’s Proxy Statement for the 2003 Annual Meeting (the “Proxy Statement”) have been incorporated in Part III hereof.

This document contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the business and results of operations of Williams-Sonoma, Inc. (“we”, “us” or “our”) to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, without limitation, any projections of earnings, revenues or financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new products or retail concepts, any statements regarding future economic conditions or performance, any statements relating to our plans to increase retail leased square footage, any statements relating to our plans to open new retail stores, any statements relating to our projected capital expenditures, any statements relating to our plans to open additional Canadian stores, and statements of belief and any statements of assumptions underlying the foregoing.

The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed under the heading “Risk Factors” in Item 7 hereto and the risks discussed from time to time in our other public filings. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

We have not undertaken, nor is it required, to publicly update or revise any of our forward-looking statements, even if experience or future events make it clear that the results set forth in such statements will not be realized.

We are a specialty retailer of products for the home. The retail segment of our business sells our products through our four retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The direct-to-customer segment of our business sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com). Based on net revenues in fiscal 2002, retail accounted for 60.3% of our business and direct-to-customer accounted for 39.7%. Based on their contribution to our net revenues in fiscal 2002, the principal concepts in both retail and direct-to-customer are: Williams-Sonoma, which sells cookware essentials; Pottery Barn, which sells contemporary tableware and home furnishings; and Pottery Barn Kids, which sells stylish children’s furnishings.

We were founded in 1956 with the opening of our first store in Sonoma, California by Charles E. Williams, currently Vice Chairman and a Director. Today, the Williams-Sonoma stores offer a wide selection of culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware, table linens, specialty foods and cooking ingredients. Our direct-to-customer business began in 1972 when we introduced our flagship catalog, “A Catalog for Cooks,” which marketed the Williams-Sonoma brand.

In 1983, we internally developed the Hold Everything catalog to offer innovative solutions for household storage needs by providing efficient organization solutions for every room in the house. The first Hold Everything store opened in 1985.

In 1986, we acquired Pottery Barn, a retailer and direct-to-customer merchandiser featuring a large assortment of items in casual home furnishings, flatware and table accessories that we design internally and source from around the world, to create a dynamic look in the home.

In 1989, we developed Chambers, a mail order merchandiser of high quality linens, towels, robes, soaps and accessories for the bed and bath.

In 1999, we launched both our Williams-Sonoma Internet wedding and gift registry website and our Williams-Sonoma e-commerce site. In addition, we launched the Pottery Barn Kids catalog, which offers stylish children’s furnishings.

In 2000, we opened our first Pottery Barn Kids stores across the United States. In addition, we also introduced our Pottery Barn website and created Pottery Barn Bed + Bath, a catalog dedicated to bed and bath products.

In 2001, we launched our Pottery Barn Kids website, Pottery Barn online gift and bridal registry, and Pottery Barn Kids online gift registry. Additionally, in 2001, we opened five new retail stores (two Williams-Sonoma, two Pottery Barn and one Pottery Barn Kids retail stores) in Toronto, Canada, our first stores outside the United States.

During fiscal 2001 and 2002, the Hold Everything brand developed and implemented a brand repositioning strategy in both the retail and direct-to-customer channels. As part of this repositioning strategy, sales expectations for the brand were modified to reflect reduced catalog pages and circulation, lowered store counts, and a change in merchandise mix. As of the end of fiscal 2002, we finalized our repositioning strategy and will be launching the new Hold Everything brand in fiscal 2003.

In 2002, we launched our new West Elm catalog. The new brand targets young, design conscious consumers looking to furnish and accessorize their apartments, lofts or first homes with quality products at accessible price points. West Elm product categories include furniture, decorative accessories, tabletop items and an extensive textile collection.

In April 2003, we will launch our newest catalog, PBteen, which will be the first home retail concept to focus exclusively on the teenage market. PBteen will offer exclusively designed lifestyle collections for bedrooms, study, and lounge areas that include products in five key merchandise categories: furniture, rugs, lighting,

bedding, and accessories. The products in PBteen are designed to reflect teen personalities, styles and interests and are intended to speak to teenagers with the voice of a teen magazine.

The retail segment has four merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). As of February 2, 2003, we operated 478 retail stores, located in 42 states, Washington, D.C. and Toronto, Canada. This represents 236 Williams-Sonoma, 159 Pottery Barn, 56 Pottery Barn Kids, 13 Hold Everything, and 14 Outlet stores (our Outlet stores carry merchandise from all merchandising concepts). In fiscal 2003, we plan to increase retail leased square footage by approximately 9% to 11%. The average leased square footage for new and expanded stores in fiscal 2003 will be approximately 10,500 leased square feet for Pottery Barn, 7,700 leased square feet for Pottery Barn Kids and 7,300 leased square feet (including two flagship stores) for Williams-Sonoma.

The direct-to-customer segment has six merchandising concepts and sells products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com). Of these six merchandising concepts, the Pottery Barn brand and its extensions have been the major source of sales growth in the direct-to-customer segment for the last several years. We believe that the success of the Pottery Barn brand and its extensions reflect our continuing investment in product design and quality and the consumer recognition achieved through our Pottery Barn and Pottery Barn Kids catalogs, websites and stores.

The shift in percent of total revenue between the retail and direct-to-customer channels over the past several years is largely attributable to the introduction of the e-commerce websites and the Pottery Barn Kids brand. Launched as a catalog-only vehicle in fiscal 1999, it added significant volume to the direct-to-customer channel during its first two years. Launched in store format in late fiscal 2000, the brand has also generated significant new volume to the retail channel during the past two years.

Although the amount of e-commerce sales that are incremental to our direct-to-customer channel cannot be identified precisely, we estimate that approximately 40% to 50% of aggregate non-bridal e-commerce sales are incremental to the direct-to-customer channels and approximately 50% to 60% are from catalog customers who would have potentially placed an order via the catalog call center.

We send our catalogs to addresses from our proprietary customer list, as well as to names from lists from other mail order merchandisers, magazines and companies which we receive in exchange for either payment or new addresses, consistent with our published privacy policies. In accordance with prevailing industry practice, we rent our list to select merchandisers. Our customer list is continually updated to include new prospects and eliminate non-responders.

The direct-to-customer business complements the retail business by building customer awareness of a brand 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.

We purchase our merchandise from numerous foreign and domestic manufacturers and importers, the largest of which individually accounted for approximately 4% of purchases during fiscal 2002. Approximately 58% of our merchandise purchases in fiscal 2002 were foreign sourced, primarily from Asia and Europe. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars.

The specialty retail business is highly competitive. Our specialty retail stores, mail order catalogs and Internet websites compete with other retail stores, including large department stores, discount stores, other specialty

retailers offering home centered assortments, other mail order catalogs and other e-commerce websites. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors and an increase in competition from established companies. We compete on the basis of the quality of our merchandise, service to our customers and our proprietary customer list, as well as location and appearance of our stores.

Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through December, and levels of net revenues and net earnings have generally been significantly lower during the period from January through September. We believe this is the general pattern associated with the direct-to-customer and retail industries. In anticipation of our peak season, we hire a substantial number of additional employees in our retail stores and direct-to-customer processing and distribution areas, and incur significant fixed catalog production and mailing costs.

We own and/or have applied to register over one hundred trademarks and service marks in the United States, Canada and in approximately 35 additional countries throughout the world. Exclusive rights to the trademarks and service marks are held by Williams-Sonoma, Inc. and are used by our subsidiaries under license. These marks include brand names for products as well as house marks for the subsidiaries and their signature publications and web sites. The house marks in particular, including “Williams-Sonoma,” the Williams-Sonoma Grande Cuisine logo, “Pottery Barn,” “Hold Everything,” “Chambers,” “Pottery Barn Kids,” and “west elm,” are of material importance to us. Trademarks are generally valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Trademark registrations can generally be renewed indefinitely so long as the marks are in use. We own numerous copyrights and trade dress rights for our products, product packaging, catalogs, books, house publications and web site designs, among other things, which are also used by our subsidiaries under license. We hold patents on certain product functions and product designs. In addition, we have registered and maintain numerous Internet domain names, including “wsweddings.com,” “williams-sonoma.com,” “potterybarn.com,” and “potterybarnkids.com.” Collectively, the copyrights, trade dress rights, patents and domain names that we hold are of material importance to us.

As of February 2, 2003, we employed approximately 32,000 persons, approximately 6,000 of whom were full-time employees. During the fiscal 2002 peak season, we hired approximately 15,000 temporary employees in our stores and in our direct-to-customer processing and distribution centers.

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The public may read and copy these materials at the Securities and Exchange Commission’s (“SEC”) Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding Williams-Sonoma, Inc. and other companies that file materials with the SEC electronically. You may also obtain copies of our Forms 10-K and Forms 10-Q filed with the SEC, free of charge, on our website at www.williams-sonomainc.com.

Our gross leased store space, as of February 2, 2003, totaled approximately 3,725,000 square feet for 478 stores compared to approximately 3,179,000 square feet for 415 stores at February 3, 2002. All of the existing stores are leased by us with original terms ranging generally from 3 to 23 years. Certain leases contain renewal

options for periods of up to 20 years. Store leases typically provide for minimum rental payments and additional rent based upon a percentage of store sales if a specified store sales target is exceeded. Such contingent rental expense is accrued each reporting period if achievement of a store sales target is considered probable. (See Note E to our Consolidated Financial Statements.)

Two of our distribution facilities in Memphis, Tennessee are leased from two partnerships whose partners include two of our directors, one of which is also an officer, both of whom are significant shareholders of ours. (See Note F to our Consolidated Financial Statements.)

Our corporate facilities are located in San Francisco, California. Our primary headquarters, consisting of 122,000 square feet, was purchased in 1993. In February 2000, we purchased a 204,000 square foot facility in San Francisco, California for the purpose of consolidating certain headquarters staff and to provide for future growth.

We also lease office, warehouse, design/photo studio and data center space in the following locations:

During fiscal 2002, we leased to a third party approximately 33,000 square feet of our owned properties through April 2002 and we subleased to a third party approximately 38,000 square feet of our San Francisco leased properties through May 2002. As of February 2, 2003, we are occupying all of this 71,000 square feet of previously leased and subleased space.

As of the date hereof, there are no material legal proceedings pending against us. From time to time, we may become a party to and subject to claims incident to the ordinary course of our business. Although the results of the proceedings and claims cannot be predicted with certainty, we believe that the ultimate resolution of such matters will not have a material adverse effect on our business, results of operations or financial condition.

There were no matters submitted to a vote of security holders during the fourth quarter of the 2002 fiscal year.

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol WSM. The following table sets forth the high and low closing prices on the NYSE for the periods indicated as adjusted for our two-for-one stock split on May 9, 2002.

The closing sales price of our common stock on the NYSE on March 31, 2003 was $21.80.

The number of shareholders of record as of March 31, 2003 was approximately 525. This number excludes shareholders whose stock is held in nominee or street name by brokers.

We have never declared nor paid, and do not currently intend to pay, a cash dividend on our common stock.

On April 15, 2002, our Board of Directors declared a two-for-one stock split of our common stock. The stock split was effected by issuing one additional share of common stock for each outstanding share of common stock. The additional shares were distributed on May 9, 2002 to shareholders of record on April 29, 2002. All share and per share amounts have been restated to give effect to this stock split.

The information set forth above is not necessarily indicative of future operations, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto in this Annual Report on Form 10-K.


¹	The fiscal year ended February 3, 2002 included 53 weeks.
²	Per share amounts have been restated to reflect the 2-for-1 stock splits in May 1998 and May 2002.
³	Operating margin is defined as earnings before interest and income taxes (and before gain on sale of Gardeners Eden in fiscal 1999).
⁴	Pre-tax operating margin is defined as earnings before income taxes.

Net revenues consist of retail sales, direct-to-customer sales and shipping fees. Retail sales include sales of merchandise to customers at our retail stores, direct-to-customer sales include sales of merchandise to customers through catalogs and the Internet, and shipping fees consist of revenue received from customers for delivery of merchandise.

The following table summarizes our net revenues for the 52 weeks ended February 2, 2003 (“fiscal 2002”), the 53 weeks ended February 3, 2002 (“fiscal 2001”) and the 52 weeks ended January 28, 2001 (“fiscal 2000”).

Net revenues for fiscal 2002 increased by $274,168,000 or 13.1% over fiscal 2001 and net revenues for fiscal 2001 increased by $257,179,000 or 14.1% over fiscal 2000. The increase in both years was primarily due to the opening of 63 net new stores in fiscal 2002 and 33 net new stores in fiscal 2001 and the growth of the Williams-Sonoma, Pottery Barn and Pottery Barn Kids concepts.

During August 2002, we launched a private label credit card program in the Pottery Barn and Pottery Barn Kids brands. A third party credit provider administers the program and we bear no credit risk. The program launch included a 10% first-purchase discount and a loyalty rewards program to incentivize our customers to accept the card. As of February 2, 2003 (24 weeks after the initial launch of the program), approximately 319,000 cards had been issued with charges totaling over $164,000,000 in fiscal 2002. The promotional expense associated with the first-purchase discount and loyalty rewards program is accounted for as a reduction to revenue and totaled $15,700,000 in fiscal 2002.

Retail revenues for fiscal 2002 increased by $187,182,000 or 15.1% over fiscal 2001 primarily due to a net increase of 63 stores and a 2.7% increase in comparable store sales. As of February 2, 2003, we operated 478 stores in 42 states, Washington, D.C. and Toronto, Canada. During fiscal 2002, we opened 78 stores (30 Williams-Sonoma, 18 Pottery Barn, 29 Pottery Barn Kids and 1 Outlet) and closed 15 stores (8 Williams-Sonoma, 4 Pottery Barn, 2 Hold Everything and 1 Outlet). Pottery Barn and Pottery Barn Kids accounted for 71.4% of the growth in retail revenues from fiscal 2001 to fiscal 2002.

As part of the Hold Everything brand repositioning strategy, eleven Hold Everything stores were closed during fiscal 2001 and two stores were closed in fiscal 2002. Most of these closures were smaller stores in non-strategic locations at or near their lease termination date.

In fiscal 2001, we opened our first stores outside the United States. A total of five stores were opened in the Toronto, Canada market — two Williams-Sonoma stores, two Pottery Barn stores, and one Pottery Barn Kids store. In fiscal 2002, we opened an additional three retail stores in Toronto — one in each brand. We anticipate opening three more Canadian stores in fiscal 2003 — one Pottery Barn store and one Williams-Sonoma store in Toronto, Ontario and one Pottery Barn store in Vancouver, B.C.

Retail revenues in fiscal 2001 increased by $191,214,000 or 18.3% over fiscal 2000, principally due to a net increase of 33 stores and a 1.7% increase in comparable store sales. Pottery Barn and Pottery Barn Kids accounted for 62.7% of the growth in retail revenues from fiscal 2000 to fiscal 2001.

Comparable stores are defined as those 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 consecutive fiscal months without closure for seven or more consecutive days. Comparable store sales are computed based on aggregate sales of comparable stores for the reporting period. By measuring the year-over-year sales of merchandise in the stores that have a

Comparable store sales in the Pottery Barn Kids concept have fluctuated and are expected to continue to fluctuate in fiscal 2002 and fiscal 2001. This fluctuation is primarily due to (1) the rapid growth of the retail store base; (2) the initial impact of new store openings on existing comparable stores; (3) strong first year sales in new stores due to grand opening events; and (4) inventory management challenges that resulted from aggressive store opening calendars and better than expected merchandise successes in this recently launched retail concept. Based upon these factors and our experience during the early years of the Pottery Barn rollout of its Design Studio stores in the mid-1990’s, we expect continued volatility in the Pottery Barn Kids comparable store sales results during fiscal 2003. In fiscal 2002, Pottery Barn Kids operated 56 retail stores versus 27 stores in fiscal 2001. For the comparable store sales base calculation, 27 stores were included in fiscal 2002 and only 8 stores were included in fiscal 2001.

Our current business plan for fiscal 2003 is to increase retail leased square footage by approximately 9% to 11% or a net increase of approximately 34 new retail stores consisting of 20 Pottery Barn Kids stores, 11 net Pottery Barn stores, and 6 net Williams-Sonoma stores, less the closing of 3 Hold Everything stores in the terminal year of their leases.

Direct-to-customer revenues in fiscal 2002 increased by $86,986,000 or 10.2% over fiscal 2001. This increase was primarily due to increased catalog circulation, expanded use of e-commerce partnerships, and improved productivity of electronic direct marketing techniques in the Pottery Barn, Pottery Barn Kids and Williams-Sonoma brands. Additionally, the launch of the West Elm concept in April 2002 provided incremental sales to the direct-to-customer channel. Hold Everything sales declined during fiscal 2002 as a result of our brand repositioning activities, which include fewer pages per catalog, lower product density per page, and fewer catalog mailings.

In fiscal 2001, we unveiled our Pottery Barn Kids e-commerce website, launched our Pottery Barn online gift and bridal registry, and introduced our Pottery Barn Kids online gift registry. In fiscal 2000, we launched our Pottery Barn e-commerce website. Combined revenues (includes shipping fees) from the four websites were $235,956,000 in fiscal 2002, an increase of $82,067,000 or 53.3% from $153,889,000 in fiscal 2001. Although the amount of e-commerce sales that are incremental to our direct-to-customer channel cannot be identified

precisely, we estimate that approximately 40% to 50% of non-bridal e-commerce sales are incremental to the direct-to-customer channels and approximately 50% to 60% are from mail order customers who would have potentially placed an order via the catalog call center.

Direct-to-customer revenues in fiscal 2001 increased by $65,965,000 or 8.4% over fiscal 2000 primarily due to strong growth in the Pottery Barn, Pottery Barn Kids and Williams-Sonoma concepts which was partially offset by lower sales in Hold Everything due to a planned reduction in catalog circulation during the development and implementation of our repositioning strategy for Hold Everything.

Cost of goods and occupancy expenses increased by $113,583,000 in fiscal 2002 over fiscal 2001. Cost of goods and occupancy expenses expressed as a percentage of net revenues for fiscal 2002 decreased 170 basis points from fiscal 2001. The percentage decrease was primarily driven by several operational improvements including (1) an increase in shipping fees for merchandise delivered to customers; (2) a decrease in cost of merchandise due to improved sourcing efforts; (3) an increase in full-price merchandise sales and fewer markdowns; (4) a decrease in customer returns and associated costs; (5) a decrease in inventory shrinkage due to reduced inventory levels and improved accountability through the supply chain; and (6) lower freight costs from the distribution center to the stores.

Cost of goods and occupancy expenses increased by $141,349,000 in fiscal 2001 over fiscal 2000. Cost of goods and occupancy expenses expressed as a percentage of net revenues for fiscal 2001 decreased 10 basis points from fiscal 2000, principally due to fewer promotional markdowns, aggressive inventory management, increased initial markups and lower freight costs in the retail channels, partially offset by increased occupancy costs. The increase in occupancy costs was driven primarily by increased depreciation, an increase in the percentage mix of net revenues generated through the retail channel, and increased rent and utility costs.

Shipping costs consist of third-party delivery services and shipping materials. Shipping costs increased in fiscal 2002 and fiscal 2001 due to more shipments of products to customers as direct-to-customer sales increased, and a higher mix of furniture sales. As a percentage of shipping fees, shipping costs have continued to decline from 104.0% in fiscal 2000 to 102.9% in fiscal 2001, and to 87.4% in fiscal 2002 due to the negotiation of improved shipping rates that reduced costs per shipment. In addition, shipping fees increased due to an increase in rates that we charge our customers for shipping and handling.

Selling, general and administrative expenses increased by $83,284,000 to $749,299,000 in fiscal 2002 from $666,015,000 in fiscal 2001, and as a percent of net revenues, decreased by 20 basis points to 31.7% in fiscal 2002 from 31.9% in fiscal 2001. This percentage decrease was primarily due to a reduction in other general expenses and lower catalog advertising costs, partially offset by higher employment costs. The reduced catalog advertising costs as a percentage of net revenues was primarily due to an overall reduction in the percentage of total net revenues being generated by the direct-to-customer channel, higher catalog productivity and lower catalog production costs. The employment cost increase as a percentage of net revenues was primarily due to increased incentive compensation based on the achievement of corporate profitability targets, an approximate $4,000,000 expense associated with the departure of our former Chief Executive Officer due in large part to the acceleration of vesting on stock options and restricted stock grants, and higher employment costs to support information technology initiatives.

Selling, general and administrative expenses increased by $71,903,000 to $666,015,000 in fiscal 2001 from $594,112,000 in fiscal 2000, and as a percent of net revenues, decreased 60 basis points to 31.9% in fiscal 2001 from 32.5% in fiscal 2000. This percentage decrease was primarily due to reduced catalog advertising costs as a percentage of net revenues due to stronger consumer demand and higher catalog productivity, as well as an improvement in other general expenses, partially offset by higher employment costs. The fiscal 2001 employment cost increase, as a percentage of net revenues, was substantially driven by fiscal 2001 performance bonuses and non-cash stock-based compensation charges. In fiscal 2000, no performance bonuses or non-cash stock-based compensation charges were incurred.

Net interest expense decreased by $5,848,000 to $20,000 in fiscal 2002, primarily due to the absence of any borrowings under our revolving line of credit facility in fiscal 2002 and an increase in short-term investment income. Net interest expense in fiscal 2001 decreased by $1,319,000 from $7,187,000 in fiscal 2000 to $5,868,000 in fiscal 2001, principally due to the decreased balance under our line of credit facility due to continued asset management initiatives (including aggressive inventory management programs) as well as lower interest rates on our borrowings, offset by a decrease in capitalized interest costs for projects under construction.

In fiscal 2002, net cash provided by operating activities increased by $105,154,000 to $310,160,000 from $205,006,000 in fiscal 2001. This increase in operating cash is primarily attributable to higher net earnings and a significant increase in accounts payable and accrued liabilities primarily related to growth in merchandise inventories and higher freight payables. This increase was partially offset by increased merchandise inventory. Merchandise inventory growth of approximately 28.9% during fiscal 2002 is primarily a result of a 17.1% increase in selling square footage and a management initiative to improve order fulfillment and customer satisfaction.

For fiscal 2001, net cash provided by operating activities increased by $23,697,000 to $205,006,000 from $181,309,000 in fiscal 2000. The fiscal 2001 increase in operating cash was primarily attributable to higher net earnings, reductions in merchandise inventories and improved cash flow from accounts receivable offset by cash used to reduce accounts payable. The decrease in accounts payable was primarily due to substantially lower inventories and lower deferred catalog expenses. The decrease in merchandise inventories was primarily due to aggressive inventory management and improved inventory turns.

Net cash used in investing activities was $155,450,000 for fiscal 2002 as compared to $155,314,000 in fiscal 2001. Fiscal 2002 purchases of property and equipment were $156,181,000, which includes $107,214,000 for stores, $44,677,000 for systems development projects (including the Internet), and $4,290,000 for distribution and facility infrastructure projects.

Net cash used in investing activities decreased $78,046,000 in fiscal 2001 to $155,314,000 from $233,360,000 in fiscal 2000. Fiscal 2001 purchases of property and equipment were $155,987,000, which included $91,636,000 for stores, $47,440,000 for systems development projects (including the Internet), and $16,911,000 for distribution and facility infrastructure projects.

For fiscal 2002, cash used in financing activities was $36,737,000, comprised primarily of $48,361,000 for the repurchase of common stock and $7,378,000 for the repayment of long-term obligations, including capital leases and long-term debt, partially offset by $19,551,000 proceeds from the exercise of stock options.

For fiscal 2001, cash provided by financing activities was $6,182,000, comprised of $18,689,000 in proceeds from the exercise of stock options, partially offset by the repayment of long-term obligations of $12,507,000 including the repayment of a mortgage obligation and certain long-term debt obligations.

The following table provides summary information concerning our future contractual obligations as of February 2, 2003.

Long-term debt consists of unsecured senior notes which are due in August 2005 with interest payable semi-annually at 7.2% per annum. Annual principal payments are $5,714,000. The senior notes are senior to any of our other unsecured debt and contain certain restrictive loan covenants, including minimum net worth requirements, fixed-charge coverage ratios and limitations on current and funded debt.

Our $8,346,000 of capital lease obligations consist primarily of in-store equipment leases with a term of 60 months. The in-store 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% of the acquisition cost.

The following table provides summary information concerning our outstanding commercial commitments as of February 2, 2003.

We have a line of credit facility that provides for $200,000,000 of unsecured revolving credit and contains certain restrictive loan covenants, including minimum tangible net worth, maximum leverage ratio (funded debt adjusted for lease and rent expense to EBITDAR), minimum fixed charge coverage ratio, and maximum annual capital expenditures. The line of credit facility was renewed by an amended and restated agreement dated October 22, 2002. The amended agreement expires on October 22, 2005. Through April 22, 2005, we may, upon notice to the lenders, request an increase in the facility up to $250,000,000. We may elect interest rates calculated by reference to the agent’s internal reference rate or LIBOR plus a margin based on our leverage ratio. As of February 2, 2003, we had no borrowings outstanding under the line of credit facility.

outstanding under the letter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which we had not taken legal title as of February 2, 2003.

As of February 2, 2003, we had issued and outstanding standby letters of credit under the line of credit facility in an aggregate amount of $9,964,000. The standby letters of credit were issued to replace surety bonds required to secure the liabilities associated with workers’ compensation and other insurance programs.

We lease store locations, warehouses, corporate facilities, call centers and certain equipment for original terms ranging generally from 3 to 23 years. Certain leases contain renewal options for periods up to 20 years. Store leases typically provide for minimum rental payments and additional rent based upon a percentage of store sales if a specified store sales target is exceeded. Such contingent rental expense is accrued each reporting period if achievement of a store sales target is considered probable.

We have an operating lease for a 1,002,000 square foot retail distribution facility located in Olive Branch, Mississippi. The lease has an initial term of 22.5 years, expiring January 2022, with two optional five-year renewals. The lessor, an unrelated party, is a limited liability company with operations separate from the leasing of this distribution facility. The lessor financed the construction of the distribution facility and expansion through the sale of $39,200,000 Taxable Industrial Development Revenue Bonds, Series 1998 and 1999, issued by the Mississippi Business Finance Corporation. The bonds are collateralized by the distribution facility. As of February 2, 2003, approximately $33,811,000 was outstanding on the bonds. We are required to make annual rental payments of approximately $3,719,000, plus applicable taxes, insurance and maintenance expenses.

We have an operating lease for an additional 1,103,000 square foot retail distribution facility located in Olive Branch, Mississippi. The lease has an initial term of 22.5 years, expiring January 2023, with two optional five-year renewals. The lessor, an unrelated party, is a limited liability company. The lessor financed the construction of the distribution facility through the sale of $42,500,000 Taxable Industrial Development Revenue Bonds, Series 1999, issued by the Mississippi Business Finance Corporation. The bonds are collateralized by the distribution facility. As of February 2, 2003, approximately $36,703,000 was outstanding on the bonds. We are required to make annual rental payments of approximately $4,179,000, plus applicable taxes, insurance and maintenance expenses.

Our operating leases include an operating lease entered into in July 1983 for a distribution facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 1”) comprised of W. Howard Lester, Chairman of the Board of Directors and a significant shareholder of ours, and James A. McMahan, a Director and significant shareholder of ours. Partnership 1 does not have operations separate from leasing of this distribution facility to us and does not have lease agreements with any unrelated third parties.

Partnership 1 financed the construction of this distribution facility through the sale of a total of $9,200,000 of Industrial Development Bonds in 1983 and 1985. Annual principal payments and monthly interest payments are required through maturity in December 2010. The Partnership 1 Industrial Development Bonds are collateralized by the distribution facility and the individual partners guarantee the bond repayments. As of February 2, 2003, $3,214,000 was outstanding under the Partnership 1 Industrial Development Bonds.

The operating lease for this distribution facility requires us to pay annual rent of $618,000 plus interest on the bonds calculated at a variable rate determined monthly (2.5% in February 2003), applicable taxes, insurance and maintenance expenses. Although the current term of the lease expires in August 2004, we are obligated to renew the operating lease until these bonds are fully repaid.

of W. Howard Lester, James A. McMahan and two unrelated parties. Partnership 2 does not have operations separate from leasing this distribution facility to us and does not have lease agreements with any unrelated third parties.

Partnership 2 financed the construction of this distribution facility and related addition through the sale of a total of $24,000,000 of Industrial Development Bonds in 1990 and 1994. Quarterly interest and annual principal payments are required through maturity in August 2015. The Partnership 2 Industrial Development Bonds are collateralized by the distribution facility and require us to maintain certain financial covenants. As of February 2, 2003, $16,157,000 was outstanding under the Partnership 2 Industrial Development Bonds.

The operating lease for this distribution facility requires us to pay annual rent of approximately $2,700,000, plus applicable taxes, insurance and maintenance expenses. This operating lease has a term of 15 years expiring in August 2006, with three optional five-year renewal periods. We are, however, obligated to renew the lease until the bonds are fully repaid.

On March 4, 2002, our Board of Directors authorized management to obtain information, conduct negotiations, and enter into appropriate agreements with the intent to pursue potential acquisitions of the distribution facilities currently leased from Partnerships 1 and 2 prior to the end of fiscal 2002. In January 2003, management concluded that the acquisition of such distribution facilities would not be beneficial to us from both an operational and financial standpoint. Therefore, the distribution facilities were not acquired.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN No. 46 applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.

Management determined that the partnerships (Partnerships 1 and 2) from which we leased our Memphis distribution facilities, qualify as a “variable interest entity” under FIN No. 46 due to their related party relationship with us. Therefore, we will be required to consolidate Partnerships 1 and 2 as of August 4, 2003, the beginning of the third quarter of fiscal 2003. We currently estimate that the consolidation will result in increases of approximately $16,000,000 in assets (primarily buildings) and $18,000,000 in liabilities (primarily long-term debt) to our consolidated balance sheet and a cumulative effect charge of approximately $2,000,000 after taxes to our statement of earnings as of August 4, 2003. The bonds issued in connection with Partnerships 1 and 2 have no recourse to us, and we do not anticipate incurring any loss from our obligations under these leases.

From time to time, we have repurchased our common stock on the open market and retired those shares we purchased. In January 2003, the Board of Directors authorized a stock repurchase program to acquire up to four million shares of our common stock in the open market. During the fourth quarter of fiscal 2002, we repurchased and retired two million shares of our common stock at a total cost of approximately $48,361,000, a weighted average cost of $24.18 per share. As of February 2, 2003, the remaining authorized amount of stock eligible for repurchase is two million shares. The total value of common stock we can repurchase is limited by the debt covenant associated with our credit facilities. Future purchases under this program will be made through open market transactions at times and amounts that management deems appropriate. The timing and actual number of shares to be purchased in the future will depend on a variety of factors such as price,

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.

We recognize sales and the related cost of products at the time the products are received by customers in accordance with the provisions of the SEC’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” Revenue is recognized for retail sales (excluding home-delivered merchandise) at the point of sale in the store and for home-delivered merchandise and direct-to-customer sales when the merchandise is delivered to the customer. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are received by the customer.

Our customers may return purchased items for an exchange or refund. We record a reserve for estimated product returns based on historical return trends together with current product sales performance. If actual returns are different than those projected by management, the estimated sales return reserve will be adjusted accordingly.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. See Note A to the Consolidated Financial Statements for additional information regarding property and equipment.

We account for stock options granted to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized in the consolidated financial statements for stock options. Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” however, requires the disclosure of pro forma net earnings and earnings per share as if we had adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models. These models require subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. Our calculations are based on a single option valuation approach and forfeitures are recognized as they occur.

During fiscal 2001, we entered into employment agreements with certain executive officers under which we recognized stock-based compensation expense ratably over the vesting period.

Merchandise inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost (weighted-average method) or market. We estimate a provision for damaged, obsolete, excess and slow-moving inventory based on specific identification and inventory aging reports. If actual impairment is different than what our estimated provision was based on, we will adjust our provision accordingly.

Prepaid catalog expenses consist of third party incremental direct costs including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over their expected period of future benefit. Such amortization is based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual catalog basis. Prepaid catalog expenses are evaluated for realizability at each reporting period by comparing the carrying amount associated with each catalog to the estimated probable remaining future net revenues (net sales less merchandise cost of goods sold, selling expenses and catalog completion costs) associated with that catalog. If the carrying amount is in excess of the estimated probable remaining future net revenue, the excess is expensed in the reporting period.

We are primarily self-insured for workers’ compensation, employee health benefits and product and general liability insurance. We record self-insurance liabilities based on claims filed and an estimate of claims incurred but not yet reported. Should a different amount of claims occur compared to what was estimated or costs of the claims increase or decrease beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods.

The following information describes certain significant risks inherent in our business. You should carefully consider such risks, together with the other information contained in this Annual Report on Form 10-K and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other disclosed risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which, in turn, 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 demand.

Our success depends upon our ability to anticipate and respond to changing merchandise trends and customer demands in a timely manner. Consumer preferences cannot be predicted with certainty and may change between sales seasons. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our sales may decline significantly and we may be required to mark down certain products to sell the resulting excess inventory or sell such inventory through our outlet stores at prices which are significantly lower than our retail prices, each of which would harm our business and operating results.

In addition, we must manage our inventory effectively and commensurate with customer demand. Much of our inventory is sourced from vendors located outside the United States. Thus, we usually must order merchandise, and enter into contracts for the purchase and manufacture of such merchandise, well in advance of the applicable selling season and frequently before trends are known. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing trends. In addition, the seasonal nature of the specialty home products business requires us to carry a significant amount of inventory prior to peak selling season. As a result, we are vulnerable to demand and pricing shifts and to misjudgments in the selection and timing of merchandise purchases. If we do not accurately predict our customers’ preferences and acceptance levels of our products, our inventory levels will not be appropriate and our business and operating results may be negatively impacted.

Our business depends, in part, on factors affecting consumer spending that are out of our control.

Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, disposable consumer

income, recession and fears of recession, war and fears of war, inclement weather, consumer debt, interest rates, sales tax rates and rate increases, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security generally. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, thus reducing our sales and harming 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, our retail stores have generated approximately 60% of our net revenues. We plan a net increase of approximately 34 new retail stores in fiscal 2003 as part of our growth strategy. There is no assurance that this strategy will be successful. Our ability to open additional stores successfully will depend upon a number of factors, including:


•	our identification and availability of suitable store locations;

•	our success in negotiating leases on acceptable terms;

•	our ability to secure required governmental permits and approvals;

•	our hiring and training of skilled store operating personnel, especially management;

•	our timely development of new stores, including the availability of construction materials and labor and the absence of significant construction and other delays in store openings;

•	the availability of financing on acceptable terms (if at all); and

•	general economic conditions.

Many of these factors are beyond our control. For example, for the purpose of identifying suitable store locations, we rely, in part, on demographics surveys regarding location of consumers in our target market segments. While we believe that the surveys and other relevant information are helpful indicators of suitable store locations, we recognize that the information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, time frames for lease negotiations and store development vary from location to location and can be subject to unforeseen delays. Construction and other delays in store openings could have a negative impact on our business and operating results. There can be no assurance that we will be able to open new stores or that, if opened, those stores will be operated profitably.

We face intense competition from companies with brands or products similar to ours.

The specialty retail and direct-to-customer business is highly competitive. Our specialty retail stores, mail order catalogs and Internet websites compete with other retail stores, other mail order catalogs and other e-commerce websites that market lines of merchandise similar to ours. We compete with national, regional and local businesses utilizing a similar retail store strategy, as well as traditional furniture stores, department stores and specialty stores. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors and an increase in competition from established companies.


•	anticipating and quickly responding to changing consumer demands better than our competitors;

•	maintaining favorable brand recognition and achieving customer perception of value;

•	effectively marketing and competitively pricing our products to consumers in several diverse market segments; and

•	developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups and tastes, and in ways that favorably distinguish us from our competitors.

In light of the many competitive challenges facing us, there can be no assurance that we will be able to compete successfully. Increased competition could adversely affect our sales, operating results and business.

We depend on key domestic and foreign vendors for timely and effective sourcing of our merchandise, and we are subject to various risks and uncertainties that might affect our vendors’ ability to produce quality merchandise.

Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. We purchase our merchandise from numerous foreign and domestic manufacturers and importers. We have no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to us at any time. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Any inability to acquire suitable merchandise or the loss of one or more key vendors could have a negative effect on our business and operating results because we would be missing products that we felt were important to our assortment, unless and until alternative supply arrangements are secured. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those we currently purchase.

In addition, we are subject to certain risks, including availability of raw materials, labor disputes, union organizing activity, inclement weather, natural disasters, and general economic and political conditions, that might limit our vendors’ ability to provide us with quality merchandise on a timely basis. For these or other reasons, one or more of our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise ships to our stores or customers. Our vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage our reputation and brands, and could lead to an increase in customer litigation against us and attendant increase in our routine litigation costs.

Our dependence on foreign vendors subjects us to a variety of risks and uncertainties.

We source our products from manufacturers in over 34 countries. Specifically, in fiscal 2002, approximately 58% of our merchandise purchases were foreign sourced, primarily from Asia and Europe.

Our dependence on foreign vendors means, in part, that we may be affected by declines in the relative value of the U.S. dollar to other foreign currencies. Although substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars, declines in foreign currencies and currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign vendors. This, in turn, might cause such foreign vendors to demand higher prices for merchandise, hold up merchandise shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.

We are also subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, work stoppages, economic uncertainties (including inflation), foreign government regulations, wars and fears of war, political unrest and trade restrictions. We cannot predict whether any of the countries in which our products are currently manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, against home-centered items could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition and operating results. Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds and/or other trade disruptions.

In addition, although we are in the process of developing and implementing an enhanced global compliance program, there remains a risk that one or more of our foreign vendors will not adhere to our global compliance standards (including, e.g., fair labor standards and the prohibition on child labor). If this happens, we could lose customer goodwill and favorable brand recognition, which could negatively affect our business and operating results.

We must timely and effectively deliver merchandise to our stores and customers.

We cannot control all of the various factors that might affect our fulfillment rates in direct-to-customer sales and/or timely and effective merchandise delivery to our stores. We rely upon third party carriers for our merchandise shipments, including shipments to our customers and to and from all of our stores. Accordingly, we are subject to the risks, including labor disputes (e.g., west coast port strike of 2002), union organizing activity, inclement weather, natural disasters, and possible acts of terrorism associated with such carriers’ ability to provide delivery services to meet our shipping needs. Failure to deliver merchandise in a timely and effective manner could damage our reputation and brands. In addition, we are seeing fuel costs increase substantially and airline companies struggle to operate profitably, which could lead to increased fulfillment expenses and negatively affect our business and operating results by increasing costs and negatively affecting the efficiency of our shipments.

Our failure to successfully manage our order-taking and fulfillment operations might have a negative impact on our business.

The operation of our direct-to-customer business depends on our ability to maintain the efficient and uninterrupted operation of our order-taking and fulfillment operations and our e-commerce websites. Disruptions or slowdowns in these areas could result from disruptions in telephone service or power outages, inadequate system capacity, human error, natural disasters or adverse weather conditions. These problems could result in a reduction in sales as well as increased selling, general and administrative expenses.

In addition, we face the risk that we cannot hire enough qualified employees, especially during our peak season, to support our direct-to-customer operations, due to war or other circumstances that reduce the relevant workforce. The need to operate with fewer employees could negatively impact our customer service levels and our operations.

Our success depends, in part, upon our ability to increase sales at our existing stores. Various factors affect comparable store sales, including the number of stores we open, close and expand in any period, the general retail sales environment, changes in sales mix between distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition, current economic conditions, the timing of release of new merchandise and promotional events, the success of marketing programs, and cannibalization of existing store sales by new stores. Among other things, weather conditions can affect comparable store sales, because inclement weather can require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors may cause our comparable store sales results to differ materially from prior periods and from earnings guidance we have provided. Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable store sales will continue to fluctuate in the future. Our comparable store sales increases for fiscal years 2002, 2001 and 2000 were 2.7%, 1.7% and 5.5%, respectively. Past comparable store sales are no indication of future results, and there can be no assurance that our comparable store sales will not decrease in the future. Our ability to maintain and improve our comparable store sales results depends in large part on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using more effective pricing strategies. Any failure to meet the comparable 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 increases and paper and printing costs affect the cost of our catalog mailings. We rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. Our cost of paper has fluctuated significantly during the past three fiscal years, and our paper costs may

increase in the future. Although we have entered into long-term contracts for catalog paper and catalog printing, these contracts offer no assurance that our catalog production costs will not substantially increase following expiration of the contracts. Future increases in postal rates or paper or printing costs would have a negative impact on our operating results to the extent that we are unable to pass such increases on directly to customers or offset such increases by raising selling prices or by implementing more efficient printing, mailing, delivery and order fulfillment systems.

We have historically experienced fluctuations in customer response to our catalogs. Customer response to our catalogs is substantially dependent on merchandise assortment, merchandise availability and creative presentation, as well as the sizing and timing of delivery of the catalogs. The failure to effectively produce or distribute the catalogs could affect the timing of catalog delivery, which could cause customers to forego or defer purchases.

The success of our e-commerce business depends, in part, on factors over which we have limited control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to certain additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, changes in applicable federal and state regulation, security breaches, and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales through our e-commerce business, as well as damage our reputation and brands.

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 e-commerce business, new brands and brand expansions, our overall business has become substantially more complex. The changes in our business have forced us to develop new expertise and face new challenges, risks and uncertainties. For example, we face the risk that our e-commerce business might cannibalize a significant portion of our retail and catalog businesses. While we recognize that our e-commerce sales cannot be entirely incremental to sales through our retail and catalog channels, we seek to attract as many new customers as possible to our websites. We continually analyze the business results of our three channels and the relationships among the channels, in an effort to find opportunities to build incremental sales. However, we cannot ensure that, as our e-commerce business grows, it will not cannibalize a portion of our retail and catalog businesses.

We have recently introduced a new brand, West Elm, and may introduce additional new brands and brand extensions in the future. Our introduction of new brands and brand extensions poses another set of risks. If we devote time and resources to new brands and brand extensions, and those businesses are not as successful as we planned, then we risk damaging our overall business results. Alternatively, if our new brands and brand extensions prove to be very successful, we risk hurting our existing brands through the migration of customers to the new businesses. There can be no assurance that we can and will introduce new brands and brand extensions that improve our overall business and operating results.

Our inability to obtain commercial insurance at acceptable prices might have a negative impact on our business.

During fiscal 2002, there was a substantial increase in the costs of insurance, partly in response to the terrorist attacks of September 11, 2001, and financial irregularities and other fraud at publicly-traded companies. We believe that extensive commercial insurance coverage is prudent for risk management and anticipate that our insurance costs will increase substantially. In addition, for certain types or levels of risk (e.g., risks associated with earthquakes or terrorist attacks), we might determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we might choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our business and operating results.

Our inability or failure to protect our intellectual property would have a negative impact on our business.

Our trademarks, service marks, copyrights, patents, trade dress rights, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our sales. There can be no assurance that we will be able to adequately protect our intellectual property or that the costs of defending our intellectual property will not adversely affect our operating results.

We have been sued and may be named in additional lawsuits in a growing number of industry-wide patent litigation cases relating to the Internet.

There appears to be a growing number of patent infringement lawsuits instituted against companies such as ours that have an e-commerce business. The plaintiff in each case claims to hold a patent that covers web technology, which is allegedly infringed by the operation of the defendants’ websites. We are currently a defendant in certain such patent infringement cases and anticipate being named in others in the future, as part of an industry-wide trend. Even in cases where a plaintiff’s claim lacks merit, the defense costs in a patent infringement case are very high. There can be no assurance that additional patent infringement claims will not be brought against us, or that the cost of defending such claims or the ultimate resolution of such claims will not negatively impact our business and operating results.

We are planning certain systems changes that might disrupt our supply chain operations.

Our success depends on our ability to source merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems supporting the product pipeline, including design, sourcing, merchandise planning, forecasting and purchase order, inventory, distribution, transportation and price management. Modifications will involve updating or replacing legacy systems with successor systems during the course of several years. There are inherent risks associated with replacing our core systems, including supply chain disruptions that affect our ability to get products into our stores and delivered to customers. There can be no assurance that we will successfully launch these new systems or that the launch will occur without supply chain disruptions. Any resulting supply chain disruptions could have a material adverse effect on our business and operating results.

To be successful, we need to manage our operating costs while we continue to look for opportunities to reduce costs. We recognize that we may need to increase the number of our employees, especially in peak sales seasons, and incur other expenses to support new brands and brand extensions, as well as the opening of new stores and direct-to-customer growth of our existing brands. In addition, although we strive to secure long-term contracts with our service providers and other vendors and otherwise limit our financial commitment to them, there can be no assurance that we will avoid unexpected operating cost increases in the future. Lower than expected sales, coupled with higher than expected costs, would negatively impact our business and operating results.

We regularly review and evaluate our liquidity and capital needs. We currently believe that our available cash, cash equivalents, cash flow from operations and cash available under our existing credit facilities will be sufficient to finance our operations and expected capital requirements for at least the next twelve months. However, as we continue to grow, we might experience peak periods for our cash needs during the course of our fiscal year, and we might need additional external funding to support our operations. Although we believe we would have access to additional debt and/or capital market funding if needed, there can be no assurance that such funds will be available to us on acceptable terms. If the cost of such funds is greater than expected, it could adversely affect our expenses and our operating results.

Our operating and financial performance in any given period might not meet the extensive guidance that we have provided to the public.

We provide extensive public guidance on our expected operating and financial results for future periods. Although we believe that this guidance fosters confidence among investors and analysts, and is useful to our shareholders and potential shareholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. We cannot ensure that our guidance will always be accurate. If in the future our operating or financial results for a particular period do not meet our guidance or the expectations of investment analysts, the market price of our common stock could decline.

Our quarterly results of operations might fluctuate due to a variety of factors including seasonality.

Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including, but not limited to shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Halloween, Thanksgiving and Christmas, and the strategic importance of fourth quarter results. A significant portion of our revenues and net earnings have been realized during the period from October through December. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. If, for any reason, we were to realize significantly lower-than-expected revenues or net earnings during the October through December selling season, our business and results of operations would be materially adversely affected.

Our failure to successfully anticipate merchandise returns might have a negative impact on our business.

We record a reserve for merchandise returns based on historical return trends together with current product sales performance in each reporting period. If actual returns are greater than those projected by management, additional sales returns might be recorded in the future. There can be no assurance that actual merchandise returns will not exceed our reserves. In addition, there can be no assurance that the introduction of new merchandise, changes in merchandise mix, changes in consumer confidence, or other competitive and general economic conditions will not cause actual returns to exceed merchandise return reserves. Any significant increase in merchandise returns that exceed our reserves could materially affect our business and results of operations.

We are exposed 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.

The interest payable on our bank line of credit and on two of our operating leases is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on existing variable rate debt and operating leases rose 23 basis points (an approximately 10% increase in the associated variable rates as of February 2, 2003), our results from operations and cash flows would not be materially affected.

For one of the operating leases with a variable interest rate, we have an interest rate cap contract at 5.88% with a notional amount of $13,083,000 which extends through February 2005. The contract has not been designated as a hedge and is accounted for by adjusting the carrying amount of the contract to market. A loss of approximately $93,000 and $30,000 was recorded in selling, general and administrative expenses in fiscal 2002 and fiscal 2001, respectively.

In addition, we have fixed and variable income investments consisting of cash equivalents and short-term investments, which are also affected by changes in market interest rates. An increase in interest rates of 10% would have an immaterial effect on the value of these investments. Declines in interest rates would, however, decrease the income derived from these investments.

We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are primarily U.S. dollar transactions. A small percentage of our international purchase transactions are in currencies other than the U.S. dollar. Any currency risks related to these transactions are immaterial to the company. A decline in the relative value of the U.S. dollar to other foreign currencies could, however, lead to increased purchasing costs.

As of February 2, 2003, we have eight retail stores in Toronto, Canada and expect to open three additional Canadian stores in fiscal 2003, which expose us to market risk associated with foreign currency exchange rate fluctuations. Due to our operations in Canada and the volatility of the Canadian dollar, we entered into 30-day forward contracts in order to limit the currency exposure associated with intercompany asset and liability accounts of our Canadian subsidiary. We recorded a loss of approximately $137,000 and $61,000 in selling, general and administrative expenses in fiscal 2002 and fiscal 2001, respectively.

Williams-Sonoma, Inc. and its subsidiaries (“we”, “us” or “our”) are specialty retailers of products for the home. The retail segment sells our products through our four retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The direct-to-customer segment sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com). The catalogs reach customers throughout the United States, while the four retail businesses currently operate 478 stores in 42 states, Washington, D.C. and Toronto, Canada. Significant intercompany transactions and accounts have been eliminated.

Fiscal Year Our fiscal year ends on the Sunday closest to January 31, based on a 52/53-week year. Fiscal years 2002, 2001 and 2000 ended on February 2, 2003 (52 weeks), February 3, 2002 (53 weeks) and January 28, 2001 (52 weeks), respectively.

Cash Equivalents Cash equivalents include highly liquid investments with an original maturity of three months or less. Our policy is to invest in high-quality, short-term instruments to achieve maximum yield while maintaining a level of liquidity consistent with our needs.

Allowance for Doubtful Accounts A summary of activity in the allowance for doubtful accounts is as follows:

Merchandise Inventories Merchandise inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost (weighted-average method) or market. We estimate a provision for damaged, obsolete, excess and slow-moving inventory based on specific identification and inventory aging reports. Approximately 58%, 55% and 52% of our merchandise purchases in fiscal 2002, fiscal 2001 and fiscal 2000, respectively, were foreign sourced, primarily from Asia and Europe.

Prepaid Catalog Expenses Prepaid catalog expenses consist of third party incremental direct costs including creative design, paper, printing, postage and mailing costs for all of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over their expected period of future benefit. Such amortization is based upon the ratio of actual revenues to the total of actual and estimated future revenues on an individual catalog basis. Each catalog is generally fully amortized between six to nine months. Prepaid catalog expenses are evaluated for realizability at each reporting period by comparing the carrying amount associated with each catalog to the estimated probable remaining future net revenues (net sales less merchandise cost of goods sold, selling expenses and catalog completion costs) associated with that catalog. If the carrying amount is in excess of the estimated probable remaining future net revenue, the excess is expensed in the reporting period. Catalog advertising expenses were $205,792,000, $191,080,000 and $180,659,000 in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.

Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Internally developed software costs are capitalized in accordance with 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 to assets under construction and software projects are capitalized during the construction or development period.

Whenever events or changes in circumstances indicate that the carrying amount of our assets might not be recoverable, we, using our best estimates based on reasonable and supportable assumptions and projections, review for impairment the carrying value of long-lived assets.

Self-Insured Liabilities We are primarily self-insured for workers’ compensation, employee health benefits and product and general liability insurance. We record self-insurance liabilities based on claims filed and an estimate of claims incurred but not yet reported.

Deferred Rent and Lease Incentives For leases which contain fixed escalations of the minimum annual lease payment during the original term of the lease, we recognize rental expense on a straight-line basis and record the difference between rent expense and the amount currently payable as deferred rent. Deferred lease incentives include construction allowances received from landlords, which are amortized on a straight-line basis over the lease term.

Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, investments, interest rate cap contracts, accounts payable and debt approximates their estimated fair values.

Revenue Recognition We recognize sales and the related cost of products at the time the products are received by customers in accordance with the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101. Revenue is recognized for retail sales (excluding home-delivered merchandise) at the point of sale in the store and for home-delivered merchandise and direct-to-customer sales when the merchandise is delivered to the customer. We record a reserve for estimated product returns in each reporting period. Shipping and handling fees charged to the customer are recognized at the time the products are received by the customer and are included in net revenues. Shipping costs are included in cost of goods sold.

Foreign Currency Translation The functional currency of our Canadian subsidiary is the Canadian dollar. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive earnings within shareholders’ equity. Gains and losses resulting from foreign currency transactions have not been significant and are included in selling, general and administrative expenses.

Financial Instruments We utilized 30-day foreign currency contracts to minimize any currency re-measurement risk associated with intercompany assets and liabilities of our Canadian subsidiary. These contracts are accounted for by adjusting the carrying amount of the contract to market and recognizing any gain or loss in selling, general and administrative expenses in each reporting period. We recorded a loss of approximately $137,000 and $61,000 in fiscal 2002 and fiscal 2001, respectively.

We have an interest rate cap contract at 5.88% with a notional amount of $13,083,000 which extends through February 2005 related to an operating lease. The contract has not been designated as a hedge and is accounted for by adjusting the carrying amount of the contract to market. A loss of approximately $93,000 and $30,000 was recorded in selling, general and administrative expenses in fiscal 2002 and fiscal 2001, respectively.

Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.

Earnings Per Share Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted net earnings per share is computed based on the weighted average number of common shares outstanding for the period, plus common stock equivalents consisting of shares subject to stock options.

Stock-Based Compensation We account for stock options granted to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized in the consolidated financial statements for stock options.

In fiscal 2001, we entered into an employment agreement (the “Agreement”), effective April 2, 2001, with Dale Hilpert to serve as our Chief Executive Officer and as a Director. Under the Agreement, we had issued Mr. Hilpert 500,000 restricted shares of our common stock. Such restricted shares would vest on March 31, 2004 based upon Mr. Hilpert’s continued employment through such date and total compensation expense (based upon the fair market value of $15.45 on the issue date) of $7,725,000 was being recognized ratably through March 31, 2004.

In January 2003, Mr. Hilpert left the company. Under the terms of his separation agreement, the 500,000 shares of restricted stock became fully vested. In fiscal 2002, we recognized a total of $5,405,000 of compensation expense related to these restricted shares, including $3,283,000 under the separation agreement.

We entered into other employment agreements with certain executive officers during fiscal 2001. In fiscal 2002, we have recognized $1,886,000 of stock-based compensation expense related to these other employment agreements, including $674,000 of stock-based compensation expense related to stock options granted to Mr. Hilpert that became fully vested under his separation agreement. At February 2, 2003, $250,000 of deferred compensation related to these agreements was included in shareholders’ equity.

The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” to all of our stock-based compensation arrangements. Under SFAS No. 123, the fair value of stock option 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 differ significantly from our stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values. Our calculations are based on a single option valuation approach and forfeitures are recognized as they occur. See Note I, Stock Options for the weighted-average assumptions used in the Black-

Scholes option pricing model. Had compensation cost been determined consistent with SFAS No. 123, our net earnings and earnings per share would have been changed to the pro forma amounts indicated below:

New Accounting Pronouncements In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144. We are required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 31, 2002. Management has determined that the adoption of SFAS No. 146 did not have a material impact on our consolidated financial position or results of operations.

FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” See Note E, Leases.

FIN No. 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” See Note F, Related Party Lease Transactions.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications Certain items in the fiscal 2001 and fiscal 2000 consolidated financial statements have been reclassified to conform to the fiscal 2002 presentation.


¹	Construction in progress is primarily comprised of leasehold improvements, furniture and fixtures related to new, unopened retail stores and other infrastructure projects.

The unsecured senior notes are due in August 2005 with interest payable semi-annually at 7.2% per annum. Annual principal payments are $5,714,000. The senior notes are senior to any of our other unsecured debt and contain certain restrictive loan covenants, including minimum net worth requirements, fixed-charge coverage ratios and limitations on current and funded debt.

annual capital expenditures. The line of credit facility was renewed by an amended and restated agreement dated October 22, 2002. The amended agreement expires on October 22, 2005. Through April 22, 2005, we may, upon notice to the lenders, request an increase in the facility up to $250,000,000. We may elect interest rates calculated by reference to the agent’s internal reference rate or LIBOR plus a margin based on our leverage ratio. As of February 2, 2003, we had no borrowings outstanding under the line of credit facility.

In July 2002, we entered into three new unsecured commercial letter of credit reimbursement agreements for an aggregate of $100,000,000. These agreements expire on July 2, 2003. The latest expiration for the letters of credit issued under the agreements is November 29, 2003. As of February 2, 2003, $67,199,000 was outstanding under the letter of credit agreements. Such letters of credit represent only a future commitment to fund inventory purchases to which we had not taken legal title as of February 2, 2003.

Interest expense was $1,441,000 (net of capitalized interest of $1,269,000), $6,199,000 (net of capitalized interest of $691,000), and $8,254,000 (net of capitalized interest of $2,335,000) for fiscal 2002, fiscal 2001 and fiscal 2000, respectively.

Accounts payable at February 2, 2003 and February 3, 2002, includes cash overdrafts of $23,076,000 and $18,499,000, respectively, for checks issued and not yet presented to the bank for payment.

A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows:

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 23 years. Certain leases contain renewal options for periods up to 20 years. Store leases typically provide for minimum rental payments and additional rent based upon a percentage of store sales if a specified store sales target is exceeded. Such contingent rental expense is accrued each reporting period if achievement of a store sales target is considered probable.

In November 2002, the FASB issued FIN No. 45, which requires certain guarantees to be recorded at fair value. The interpretation also requires a guarantor to make new disclosures, even when the likelihood of making any payments under the guarantee is remote. In general, the interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed

party. The interpretation’s disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We lease an aircraft for a term of 60 months ending January 2005. At the end of the lease term, we may either purchase the aircraft for $11,500,000 or sell it. If the proceeds of such sale are in excess of $11,500,000, then we are entitled to retain the excess. If the proceeds are less than $11,500,000, we will be required to pay the lessor the difference up to $9,080,000. We estimate that the fair value of the aircraft at February 2, 2003 exceeded $11,500,000 and therefore no liability has been recorded for the residual value.

Total rental expense for all operating leases (including the related party leases described in Note F) was as follows:

The aggregate minimum annual rental payments under noncancelable operating leases in effect at February 2, 2003 were as follows:

We have an operating lease entered into in August 1990 for another distribution facility that is adjoined to the Partnership 1 facility in Memphis, Tennessee. The lessor is a general partnership (“Partnership 2”) comprised of W. Howard Lester, James A. McMahan and two unrelated parties. Partnership 2 does not have operations

In January 2003, the FASB issued FIN No. 46, which explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN No. 46 applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:

Options with an exercise price greater than the average market price of common shares for the period were 1,414,000 in fiscal 2002, 1,408,000 in fiscal 2001 and 2,589,000 in fiscal 2000 and were not included in the computation of diluted earnings per share.

In January 2003, the Board of Directors authorized a stock repurchase program to acquire up to four million shares of our outstanding common stock in the open market. During the fourth quarter of fiscal 2002, we repurchased and retired two million shares of our common stock under the program for an aggregate purchase price of approximately $48,361,000, a weighted average cost of $24.18 per share. As of February 2, 2003, the remaining authorized amount for stock eligible for repurchase is two million shares. The total value of common stock we can repurchase is limited by the debt covenant associated with our credit facilities.

In fiscal 2000 and 1999, we repurchased a total of 1,982,400 shares of our common stock for a cost of $23,273,000. During fiscal 2002, we retired these shares.

Our 1993 Stock Option Plan (the “1993 Plan”), as amended, provides for grants of incentive and non-qualified stock options up to an aggregate of 17,000,000 shares. 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 these options is not less than 100% of the fair market value of our stock on the date of the option grant or not less than 110% of such fair market value for an incentive stock option granted to a shareholder with greater than 10% of the voting power of all of our stock. Options granted to employees generally vest over five years. Options granted to Board members generally vest in one year.

Our 2000 Stock Option Plan (the “2000 Plan”), provides for grants of non-qualified stock options up to an aggregate of 3,000,000 shares. All non-qualified stock option grants under the 2000 Plan have a maximum term of ten years with an exercise price of 100% of the fair value of the stock at the option grant date. Options granted to employees generally vest over five years.

Our 2001 Stock Option Plan (the “2001 Plan”), provides for grants of incentive and non-qualified stock options up to an aggregate of 5,000,000 shares. All incentive stock option grants made under the 2001 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 these stock options is not less than 100% of the fair market value of our stock on the date of the option grant or not less than 110% of such fair market value for an incentive stock option granted to a shareholder with greater than 10% of the voting power of all of our stock. Options granted to employees generally vest over five years. Options granted to Board members generally vest in one year.

The following table reflects the aggregate activity under our stock option plans:

Options to purchase 2,449,529 shares were available for grant at February 2, 2003.

The following table summarizes information about stock options outstanding at February 2, 2003:

See Note A, Summary of Significant Accounting Policies for the effect on net earnings and earnings per share as if we applied the fair value recognition provisions of SFAS No. 123. The fair value of each option grant was

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) and 401(k). The Plan permits eligible employees to make salary deferral contributions in accordance with Internal Revenue Code Section 401(k). Employees designate the funds in which their contributions are invested. Each participant may choose to have his/her salary deferral contributions and earnings thereon invested in one or more investment funds, including investing in our company stock fund. All amounts contributed by the company are invested in our common stock. Our matching contribution is 100% of the first 6% of a participant’s pay (4% for higher paid individuals), which the participant elects to contribute to our company stock fund through salary deferral contributions. Matching contributions generally vest at the rate of 20% per year from the start date. Our contributions were $4,433,000 in fiscal 2002, $3,893,000 in fiscal 2001 and $3,392,000 in fiscal 2000.

We have a nonqualified executive deferred compensation plan, which provides supplemental retirement income benefits for a select group of management, and other certain highly compensated employees. This plan permits eligible employees to make salary and bonus deferrals which are 100% vested. We have an unsecured obligation to pay in the future the value of the deferred compensation adjusted to reflect the performance, whether positive or negative, of selected investment measurement options, chosen by each participant, during the deferral period. At February 2, 2003, $5,146,000 is included in other long-term obligations. We have purchased life insurance policies on certain participants. The cash surrender value of these policies is $3,999,000 at February 2, 2003 and is included in other assets.

As of February 2, 2003, there are no material legal proceedings pending against us. From time to time, we may become a party to and subject to claims incident to the ordinary course of our business. Although the results of the proceedings and claims cannot be predicted with certainty, we believe that the ultimate resolution of such matters will not have a material adverse effect on our business, results of operations or financial condition.

We have two reportable segments, retail and direct-to-customer. The retail segment sells products for the home through our four retail concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids and Hold Everything). The four retail concepts are operating segments, which have been aggregated into one reportable segment, retail. The direct-to-customer segment sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, Hold Everything, West Elm and Chambers) and four e-commerce websites (wsweddings.com, williams-sonoma.com, potterybarn.com and potterybarnkids.com).

These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize two distinct distribution and marketing strategies. Management’s expectation is that the overall economics of each of our major concepts within each reportable segment will be similar over time.

The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting policies. We use earnings before unallocated corporate overhead, interest and taxes to evaluate segment profitability. Unallocated assets include corporate cash and equivalents, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.

We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the Company) as of February 2, 2003 and February 3, 2002, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the three fiscal years in the period ended February 2, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Williams-Sonoma, Inc. and subsidiaries as of February 2, 2003 and February 3, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2003, in conformity with accounting principles generally accepted in the United States of America.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Other information required by this Item is incorporated by reference herein to our definitive Proxy Statement, which was filed with the Securities and Exchange Commission on April 15, 2003.

Information with respect to the Executive Officers and key employees of the registrant, as of March 31, 2003 is set forth below:

Edward A. Mueller, age 55, has served as Chief Executive Officer since January 2003 and was chairman of the Audit Committee and a member of the Nominations and Corporate Governance Committee until January 2003. Mr. Mueller has been a director since 1999. Mr. Mueller previously served as President and Chief Executive Officer of Ameritech from 2000 to 2002, as President of SBC International Operations from 1999 to 2000, as President and Chief Executive Officer of Pacific Bell from 1997 to 1999 and as President and Chief Executive Officer of Southwestern Bell from 1994 to 1997.

W. Howard Lester, age 67, has served as Chairman since 1986. Mr. Lester previously served as Chief Executive Officer from 1979 to 2001. He also serves as a director of Harold’s Department Stores, Inc.

Charles E. Williams, age 87, is the founder and has served as Vice Chairman since 1986.

Laura J. Alber, age 34, has served as President, Pottery Barn Brands since 2002. Ms. Alber previously served as Executive Vice President, Pottery Barn Brand from 2000 to 2002, as Senior Vice President, Pottery Barn Catalog and Pottery Barn Kids Retail from 1999 to 2000, as Divisional Vice President, Pottery Barn Catalog from 1997 to 1999 and as Director, Pottery Barn Catalog from 1996 to 1997.

James E. Boike, age 56, has served as Executive Vice President and Chief Operating Officer since 2001. Mr. Boike previously served as Executive Vice President, Premium Brands from 2000 to 2001, as Executive Vice President, Stores and Operations from 1997 to 2000, as Senior Vice President, Stores from 1995 to 1997, as Vice President, Stores from 1994 to 1995 and as Vice President, Merchandise Operations from 1993 to 1994.

Patrick J. Connolly, age 56, has served as Executive Vice President and Chief Marketing Officer since 2000. Mr. Connolly previously served as Executive Vice President, General Manager, Catalog from 1995 to 2000, as Senior Vice President, Mail Order from 1991 to 1995 and as Vice President, Mail Order from 1979 to 1990.

Patrick Cowell, age 53, has served as President, Williams-Sonoma Brand since 2002. Mr. Cowell has served as President of Cowell Development since 1999. He previously served as President and Chief Executive Officer of Airport Group International from 1996 to 1999 and as President, Americas and Caribbean, Sun International Hotels and Resorts from 1994 to 1996. He also worked at Hyatt Hotels Corporation from 1972 to 1994 and served as Divisional Vice President of the Western Division for Hyatt Hotels Corporation from 1993 to 1994.

Donna H. Isralsky, age 47, has served as Senior Vice President, Product Supply Chain and International Operations since 1999. Ms. Isralsky previously served as Vice President, Product Supply Chain from 1996 to 1999. She also served as Vice President, Operations, Production and Sourcing of Reebok International Ltd. from 1994 to 1996.

Ronald M. Loeb, age 70, has served as Senior Vice President, General Counsel since 1999. Mr. Loeb previously served as Senior Partner of Irell & Manella from 1972 to 1997. He also served as interim Chief Executive Officer of Mattel, Inc. in 2000 and currently serves as a director of Mattel, Inc.

Sharon L. McCollam, age 40, has served as Senior Vice President, Chief Financial Officer since 2000. Ms. McCollam previously served as Vice President of Finance in 2000. She also served as Chief Financial Officer of Dole Fresh Vegetables, Inc. from 1996 to 2000.

Dean A. Miller, age 40, has served as Senior Vice President, Global Logistics since 2001. Mr. Miller previously served as Vice President, Retail Distribution in 2001. He also served as Vice President, Global Logistics of United Parcel Services from 1996 to 2001.

Information required by this Item is incorporated by reference herein to our definitive Proxy Statement, which was filed with the Securities and Exchange Commission on April 15, 2003.

As of February 2, 2003, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and the Senior Vice President, Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of February 2, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to February 2, 2003.

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 February 2, 2003, February 3, 2002 and January 28, 2001

	Consolidated Balance Sheets as of February 2, 2003 and February 3, 2002

	Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 2, 2003, February 3, 2002 and January 28, 2001

	Consolidated Statements of Cash Flows for the fiscal years ended February 2, 2003, February 3, 2002 and January 28, 2001

	Notes to Consolidated Financial Statements

	Independent Auditors’ Report

	Quarterly Financial Information


	Schedules have been omitted because they are not required or are not applicable.

(b) Reports on Form 8-K: No Form 8-K filings were made during the last quarter of the fiscal year ended February 2, 2003.

(d) Financial Statement Schedules: Schedules have been omitted because they are not required or are not applicable.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 15, 2003


	By	/s/ EDWARD A. MUELLER


	_______________________________________ Chief Executive Officer
	Director

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 registrant and in the capacities and on the dates indicated.


1.	I have reviewed this annual report on Form 10-K of Williams-Sonoma, Inc.;

2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;


	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and


	c.	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


6.	The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Sharon L. McCollam, Senior Vice President and Chief Financial Officer, certify that:


1.	I have reviewed this annual report on Form 10-K of Williams-Sonoma, Inc.;

2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;


	b.	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and


	c.	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


6.	The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	By:	/s/ SHARON L. MCCOLLAM


	______________________________________ Sharon L. McCollam
	Senior Vice President
	Chief Financial Officer

54 EX-10.13 3 f87217kexv10w13.txt EXHIBIT 10.13 EXHIBIT 10.13 FIRST AMENDMENT AND RESTATEMENT OF THE WILLIAMS-SONOMA, INC. ASSOCIATE STOCK INCENTIVE PLAN (Effective January 1, 1997) TABLE OF CONTENTS

- i -

- ii -

- iii -

- iv - FIRST AMENDMENT AND RESTATEMENT OF THE WILLIAMS-SONOMA, INC. ASSOCIATE STOCK INCENTIVE PLAN (effective January 1, 1997) Effective as of February 1, 1989, Williams-Sonoma, Inc., a California corporation (the "Company"), adopted the Williams-Sonoma, Inc. Employee Profit Sharing and Stock Incentive Plan (the "Plan"), a profit sharing plan intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), which includes a cash or deferred arrangement intended to satisfy the requirements of Section 401(k) of the Code. Thereafter, the Plan was amended 10 times and the name of the Plan was changed to the Williams-Sonoma, Inc. Associate Stock Incentive Plan. The Plan is being amended and restated in its entirety (a) to incorporate the 10 amendments to the Plan adopted since February 1, 1989, and (b) to comply with the Internal Revenue Service Restructuring and Reform Act of 1998, the Taxpayer Relief Act of 1997, the Uniformed Services Employment and Reemployment Rights Act of 1994, the Uruguay Round Agreements Act, the Internal Revenue Restructuring and Reform Act of 1998, the Small Business Job Protection Act of 1996, and the Community Renewal Tax Relief Act of 2000 (collectively referred to as ("GUST"), and with certain rules and regulations promulgated under GUST and otherwise. The Plan is hereby amended and restated in its entirety effective as of January 1, 1997, except as otherwise provided herein, as follows: ARTICLE I GENERAL DEFINITIONS When used herein, the following words shall have the following meanings: 1.1 "Act" shall mean the Employee Retirement Income Security Act of 1974 (Public Law 93-406), all amendments thereto, and all regulations issued thereunder. 1.2 "Affiliate" shall mean the Company and (a) any corporation that is a member of a controlled group of corporations (as defined in Section 414(b) of the Code), which includes the Company; (b) any trade or business (whether or not incorporated), that is under common control (as defined in Section 414(c) of the Code) with the Company; (c) any organization (whether or not incorporated) that is a member of an affiliated service group (as defined in Section 414(m) of the Code), which includes the Company; or (d) any other entity required to be aggregated with the Company pursuant to regulations promulgated under Section 414(o) of the Code. The term Affiliate shall be modified by Section 415(h) of the Code whenever applicable. 1.3 "Anniversary Date" shall mean December 31. 1.4 "Beneficiary" means a person designated to receive a Participant's interest upon his death under Section 7.17.5 of Article VII. 1.5 "Board of Directors" shall mean the Board of Directors of Williams-Sonoma, Inc. 1.6 "Code" shall mean the Internal Revenue Code of 1986, all amendments thereto, and all regulations issued thereunder. 1.7 "Committee" means the Administration Committee provided for in Article II. 1.8 "Company" shall mean Williams-Sonoma, Inc. or any successor corporation. 1.9 "Company Stock" means common stock that is readily tradable on an established securities market issued by the Company or by a corporation that is a member of the same controlled group (within the meaning of Sections 409(l)(4) and 1563(a) of the Code) as the Company. 1.10 "Company Stock Fund" means a fund invested primarily in shares of Company Stock, but that also holds cash to provide enough liquidity to permit disbursements before the settlement of trades of shares of Company Stock. For purposes of recordkeeping, the Company Stock Fund shall be divided into units, and each unit shall have a specific unit value at any given time. 1.11 "Compensation" means as follows: (a) For purposes of Article IV and Section 5.1 of Article V, "Compensation" means only base salary, overtime pay, and commissions. (b) For all other purposes of this Plan, "Compensation" means wages within the meaning of Section 3401(a) of the Code and all other payments of compensation to an Employee by an Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement (Form W-2) under Sections 6041(d), 6051(a)(3), and 6052 of the Code. Compensation must be determined without regard to any rules under Section 3401(a) of the Code that limit the renumeration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code), except that (effective January 1, 1998 for purposes of Section 5.3 of Article V and effective January 1, 1997 for other purposes of this Plan) such Compensation shall include any compensation that is not currently includable in a Participant's income by reason of the application of Sections 402(g)(3), 125, or 457 of the Code. Effective January 1, 2001, Compensation also shall include any compensation that is not currently includable in a Participant's income by reason of the application of Section 132(f)(4) of the Code. (c) Compensation for any Plan Year or Limitation Year (as defined in Section 5.3 of Article V) shall mean the Compensation actually paid or made available during such Plan Year or Limitation Year, as the case may be, except that, for purposes of Article IV and Section 5.1 of Article V, (i) in the case of an Employee who becomes a Participant during the Plan Year, Compensation paid or made available to such Participant during the portion of the Plan Year before he became a Participant shall be disregarded, and (ii) Compensation paid or made available to a Participant after the date of termination of the Employment of such Participant by reason of death, Total Disability, retirement, or otherwise, shall be disregarded. (d) The annual Compensation of each Participant taken into account in determining all benefits provided under this Plan for any Plan Year shall not exceed One - 2 - Hundred Sixty Thousand Dollars ($160,000.00), as adjusted for changes in the cost of living after 1997 in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any Determination Period, as defined below, beginning in such calendar year. If a Determination Period consists of fewer than twelve (12) months, the annual compensation limit is an amount equal to the otherwise-applicable annual Compensation limit multiplied by a fraction, the numerator of which is the number of months in the short Determination Period, and the denominator of which is the number twelve (12). The "Determination Period" shall be the Plan Year. (e) For Plan Years beginning on or after January 1, 1989, and before January 1, 1994, the annual Compensation taken into account in determining a Participant's benefits for any Plan Year shall not exceed Two Hundred Thousand Dollars ($200,000.00). This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year shall be effective for Plan Years beginning in such calendar year and the first adjustment to the Two Hundred Thousand Dollar ($200,000.00) limitation shall be effective January 1, 1990. (f) If Compensation for any prior Determination Period is taken into account in determining a Participant's benefits for the current Plan Year, the Compensation for such prior Determination Period is subject to the applicable annual Compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual Compensation limit in effect for Determination Periods beginning before January 1, 1989 is Two Hundred Thousand Dollars ($200,000.00). In addition, in determining benefits in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for Determination Periods beginning before January 1, 1994 is One Hundred Fifty Thousand Dollars ($150,000.00). (g) For Plan Years beginning prior to January 1, 1997, in determining the annual Compensation limit, the rules of Section 414(q)(6) of the Code shall apply, except that, in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendents of the Participant who have not attained the age of nineteen (19) years before the close of the Plan Year. If, as a result of the application of such rules, the adjusted annual Compensation limit is exceeded, such limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section 1.11 before the application of such limitation. 1.12 "Effective Date" of this Plan is February 1, 1989. The Effective Date of this Amendment and Restatement is January 1, 1997, except as otherwise stated herein. 1.13 "Employee" means any person now or hereafter in the employ of an entity constituting the Employer. The term "Employee" shall also include any leased employee within the meaning of Section 414(n)(2) of the Code, as amended. Notwithstanding the foregoing, if such leased employees constitute less than twenty percent (20%) of the Employer's Non-Highly Compensated Employees within the meaning of Section 414(n)(1)(C)(ii) of the Code, the term "Employee" shall not include those leased employees covered by a plan described in Section 414(n)(5) of the Code. No self-employed individual shall be an Employee under this Plan by virtue of his self-employment. - 3 - 1.14 "Employer" means Williams-Sonoma, Inc., any Affiliate (unless such Affiliate, with the written consent of the Board of Directors, declines to permit its Employees to participate in the Plan), and any other person, firm, or corporation that adopts this Plan with the approval of Williams-Sonoma, Inc., and any successor in interest to Williams-Sonoma, Inc. resulting from merger, consolidation, or transfer of substantially all of the assets of Williams-Sonoma, Inc. that expressly agrees in writing to continue this Plan. 1.15 "Entry Date" shall mean (a) before May 1, 1997, January 1 and July 1 of each year, and (b) effective May 1, 1997, the day after the day on which an Employee satisfies the requirements for participation under Section 3.1. 1.16 "Fiduciary" shall include all of the following, to the extent they are deemed to be such under the Act: (a) Any administrator, officer, trustee, or custodian of the Plan; (b) Any person exercising any discretionary authority or discretionary control respecting management of the Plan; (c) Any person exercising authority or control respecting management or disposition of Plan assets; (d) Any person rendering investment advice for a fee or other compensation with respect to Plan assets, or with the authority or responsibility to do so, except as provided otherwise in the Act; (e) Any person who possesses any discretionary authority or responsibility in the administration of the Plan; and (f) Any person designated under or to whom fiduciary duties are delegated pursuant to Section 405(c)(1)(B) of the Act or Section 2.7 of Article II. 1.17 "Highly Compensated Employee" means any Employee who is a Highly Compensated Employee under Section 414(q) of the Code and the regulations promulgated thereunder. Under Section 414(q) of the Code and the regulations thereunder, a "Highly Compensated Employee" includes an Employee who: (a) Was a Five Percent Owner, as defined in Section 6.1.4(c), during the Plan Year or the preceding Plan Year, or (b) During the preceding Plan Year, received Compensation from the Employer in excess of Eighty Thousand Dollars ($80,000.00) Dollar amounts set forth in this Section 1.17 shall be increased to reflect the most recent adjustment for increases in the cost of living after 1997 published by the Secretary of the Treasury pursuant to Section 415(d) of the Code, except that the base period shall be the calendar quarter ending September 30, 1996. In determining whether an Employee is a Highly Compensated Employee for Plan Years beginning in 1997, this Section 1.17 shall apply as having been in effect for the Plan Year beginning in 1996. - 4 - 1.18 "Hour of Service" shall include: (a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer for the performance of duties during the applicable computation period. Such hours shall be credited to the Employee for the computation period or periods in which the duties were performed. (b) Each hour for which back pay is awarded to the Employee or agreed to by the Employer. Such hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains and shall be calculated irrespective of mitigation of damages, but no Hour of Service shall be counted both under this paragraph and under the first paragraph of this Section 1.18. (c) Any hour of service required to be credited to the Employee under any law of the United States or any rule or regulation issued thereunder; provided, however, that no hour shall be credited to the Employee both under this paragraph (c) and under any of the other paragraphs of this Section 1.18. (d) Each hour (i) for which the Employee is directly or indirectly paid, or entitled to payment, by reasons (such as vacation, sickness, or disability) other than the performance of duties during the applicable computation period as required by paragraphs (b) and (c) of Labor Reg. Section 2530. 200b-2, such hours being credited in the computation period in which such hours were accrued irrespective of whether payments are made or become due with respect to such hours in other computation periods, and (ii) during a temporary layoff (even if of indefinite duration) or an Employer-approved leave of absence. Notwithstanding the preceding provisions of this paragraph (d), the following rules shall apply with respect to such hours: (1) An Employee shall not be credited with more than five hundred one (501) Hours of Service under this paragraph (d) on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single Plan Year); (2) An Employee shall not be credited with an Hour of Service on account of a period during which the Employee does not perform any duties if the payment the Employer makes (or the payment due) is under a plan maintained solely for the purpose of complying with the applicable worker's compensation law, unemployment compensation law or disability insurance law; and (3) An Employee shall not be credited with an Hour of Service for a payment to the Employee that merely reimburses the Employee for medical or medically related expenses incurred by the Employee. (e) If a Participant has a Maternity or Paternity Leave of Absence, such Participant shall be credited with the Hours of Service with which such Participant would otherwise normally have been credited but for such absence, or, if the Committee is unable to determine the number of Hours of Service that would normally otherwise have been credited but for such absence, such Participant shall be credited with eight (8) Hours of Service for each day of such absence. Hours shall be credited by reason of a Maternity or Paternity Leave of Absence, however, only as necessary to prevent the Participant from - 5 - incurring a One-Year Break in Service for purposes of the participation rules of Article III and the vesting rules of Sections 5.5 and 6.3.4, and in no event shall a Participant be credited with more than Five Hundred One (501) Hours of Service by reason of any Maternity or Paternity Leave of Absence. The Hours of Service with which a Participant is credited by reason of a Maternity or Paternity Leave of Absence shall be credited in the Plan Year in which such absence begins if such crediting is necessary to prevent the Participant from incurring a One-Year Break in Service in such Plan Year. In any other case, the Hours of Service with which a Participant is credited by reason of a Maternity or Paternity Leave of Absence shall be credited in the Plan Year immediately following the Plan Year in which such absence begins. (f) For periods before May 1, 1997, a salaried Employee shall be credited with forty-five (45) Hours of Service for each calendar week during which he performed at least one (1) Hour of Service. (g) Effective December 12, 1994, Hours of Service shall be credited to an Employee to comply with the provisions of the Uniformed Services Employment and Reemployment Rights Act of 1994 (P.L. 101-353, 38 U.S.C. Section 4318) and any regulations promulgated thereunder. (h) In the case of any ambiguity arising under this Section 1.18, such ambiguity shall be resolved in favor of crediting the Employee with the Hours of Service in question. 1.19 "Investment Manager" means any Fiduciary (other than the (i) Trustee, Committee or Claims Coordinator designated under Section 7.12 of Article VII, or (ii) a person who is identified as a Fiduciary pursuant to the procedure set forth in this Plan) who (a) has the power to manage, acquire, or dispose of any asset of the Plan, (b) has acknowledged in writing that he is a Fiduciary with respect to the Plan, and (c) is (i) registered as an investment adviser under the Investment Advisers Act of 1940; (ii) is a bank, as defined in that Act; or (iii) is an insurance company qualified to manage, acquire, or dispose of the assets of retirement plans under the laws of more than one State. 1.20 "Limited Associate" means any Employee whose terms of Employment provide that he will not be working a full schedule or will not be entitled to receive all of the benefits normally provided by the Employer to its Employees. 1.21 "Matching Contribution" means a contribution made under Section 4.1.2 of Article IV, and "Matching Contribution Account" shall have the meaning set forth in Section 4.11 of Article IV. 1.22 A "Maternity or Paternity Leave of Absence" means an Employee's absence from work for any period of time (a) by reason of the Employee's pregnancy, (b) by reason of the birth of the Employee's child, (c) by reason of the placement of a child with the Employee in connection with the Employee's adoption of such child, or (d) for the purpose of caring for the Employee's child immediately following the birth of such child or the placement of such child with the Employee in connection with the Employee's adoption of such child. - 6 - 1.23 "Non-Highly Compensated Employee" means any Employee who is not a Highly Compensated Employee for the Plan Year. 1.24 "Normal Retirement Date" shall mean the date on which a Participant attains the age of sixty-five (65) years. 1.25 "One-Year Break in Service" means a Plan Year in which the Employee has not completed more than five hundred (500) Hours of Service. An Employee shall be deemed to have incurred a One-Year Break in Service on the last day of said Plan Year. For purposes of Sections 5.5, 5.6, 5.7, 6.3.4, 7.6 and 7.7, however, the term "One-Year Break in Service" means a Period of Severance of twelve (12) months in length. 1.26 "Participant" means any Employee who becomes a participant in this Plan under Section 3.1 and who has acquired the right to either a forfeitable or a nonforfeitable interest in the Trust Fund that has not been distributed. 1.27 "Participant Account" shall mean the account maintained for each Participant pursuant to Section 4.11 of Article IV. 1.28 "Period of Severance" means a period beginning on the Severance Date of an Employee, and, if applicable, ending on his Reemployment Date; provided, however, that, in the case of an Employee who was absent from work due to a Maternity or Paternity Leave of Absence, the period of twelve (12) consecutive months beginning on the first anniversary of the first day of such Maternity or Paternity Leave of Absence shall not constitute a "Period of Severance." 1.29 "Plan" shall mean the Williams-Sonoma, Inc. Associate Stock Incentive Plan set forth in and by this document and the related Trust and all subsequent amendments thereto. 1.30 "Plan Year" shall mean a fiscal year of the Plan that ends on the Anniversary Date. 1.31 "Profit Sharing Contribution Account" shall have the meaning set forth in Section 4.11 of Article IV. 1.32 "Qualified Matching Contribution" means a contribution made under Section 4.1.4 of Article IV, and "Qualified Matching Contribution Account" shall have the meaning set forth in Section 4.11 of Article IV. 1.33 "Qualified Nonelective Contribution" means a contribution made under Section 4.1.5 of Article IV, and "Qualified Nonelective Contribution Account" shall have the meaning set forth in Section 4.11 of Article IV. 1.34 "Reemployment Date" means a date on which a reemployed Employee first completes one (1) Hour of Service after a Period of Severance (other than a Period of Severance which is required to be taken into account in determining whether the Employee has completed a Year of Service). - 7 - 1.35 "Salary Deferral Contribution" means a contribution made under Section 4.1.1 of Article IV, and "Salary Deferral Contribution Account" shall have the meaning set forth in Section 4.11 of Article IV. 1.36 "Service" or "Employment" means service of each Employee as an Employee of an Employer or Affiliate. Service with any Employer or Affiliate shall constitute "Service" and "Employment" for all purposes under this Plan, and all such service for any Employer or Affiliate shall be aggregated in determining whether an Employee has completed a "Year of Service" or has incurred a "One-Year Break in Service." "Service" and "Employment" shall commence on the day the Employee first completes one (1) Hour of Service with an Employer or Affiliate. In addition, the Committee is authorized, in its discretion, to determine from time to time that pre-acquisition service of any persons who were employees of any corporation, organization, or entity before such corporation, organization, or entity became an Affiliate, or who become Employees in connection with the acquisition by the Employer of some or all of the business or product lines of another person or entity that previously employed such Employees, shall constitute "Service" or "Employment" for all purposes under this Plan, and all such service for any such corporation, organization, or entity that becomes an Affiliate or for any such predecessor employer shall be aggregated in determining whether an Employee has completed a "Year of Service" or has incurred a "One-Year Break in Service." The Committee shall exercise its discretion hereunder only in a uniform and nondiscriminatory manner. 1.37 "Severance Date" means the earlier of (i) the date on which an Employee quits, retires, is discharged, or dies, or (ii) the first anniversary of the first day of a period during which such Employee is absent (with or without Compensation) from performing duties for the Employer for any reason other than quitting, retirement, discharge, or death, such as vacation, holiday, sickness, leave of absence or layoff. 1.38 "Total Disability" means total and permanent incapacity of a Participant, due to physical impairment or legally established mental incompetence, to perform the usual duties of Employment, which disability shall be determined on evidence that the Participant has become entitled to receive primary benefits as a disabled employee under the Social Security Act in effect on the date of disability; provided, however, that if such disability is due to alcohol, drugs, or other substance abuse, the Employee must be enrolled or have completed a rehabilitation program approved by the Company for such disability to constitute a Total Disability. 1.39 "Trust Agreement" means the Agreement between the Employer and the Trustee or Trustees covering the administration of the Trust Fund and includes the succession of the Trustee or Trustees. 1.40 "Trust Fund" means the assets of the Trust established pursuant to this Plan and the Trust Agreement hereinafter referred to, out of which the benefits under this Plan shall be paid. 1.41 "Trustee" means the Trustee or Trustees of the Trust Fund established pursuant to this Plan and any successor Trustee or Trustees. 1.42 "Valuation Date" shall mean each business day that the New York Stock Exchange is open for business. - 8 - 1.43 "Year of Service" shall mean a Plan Year of Service in which the Employee has completed not less than one thousand (1,000) Hours of Service. For purposes of Sections 5.5, 5.6, 5.7, 6.3.4, 7.6 and 7.7, however, the term "Year of Service" means three hundred sixty five (365) days of Service completed by an Employee, including: (i) any period of Service, whether or not continuous, and (ii) for a reemployed Employee, any Period of Severance, provided that his Reemployment Date occurs within one (1) year after his Severance Date. ARTICLE II COMMITTEE AND OTHER FIDUCIARIES 2.1 Appointment of Committee The Committee shall be appointed by the Board of Directors and shall consist of not less than three (3) nor more than five (5) members, the exact number of which shall be established by the Board of Directors from time to time. Under this authority, the Board of Directors has established that the Committee shall consist of three (3) members. Such members of the Committee shall hold office until resignation, death, or removal by the Board of Directors. 2.2 Powers and Duties of Committee The Committee shall be the "administrator" provided for in Section 3(16)(A) of the Act, and each member of the Committee shall be a "named fiduciary" as defined in Section 402(a) of the Act. The Committee shall be charged with the administration of this Plan and shall decide, in its discretion, by majority vote, subject to the terms of this Plan and the Trust Agreement, all questions arising in the administration, interpretation, and application of the Plan, including all questions of eligibility and entitlement to and amount of benefits, except such as may be expressly reserved hereunder to the Employer or its Board of Directors. The Committee shall also have the discretion and authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and to engage and discharge all advisors, counsel, recordkeepers and service providers as may be necessary or appropriate for the administration of this Plan. The decisions of the Committee shall be conclusive and binding on all parties; provided that such decisions shall be made on a uniform basis and shall not discriminate in favor of its employees who are officers, stockholders, or Highly Compensated Employees. 2.3 Direction of Trustee The Committee, from time to time, shall direct the Trustee concerning the payments to be made out of the Trust Fund pursuant to this Plan and shall have such other powers respecting the administration of the Trust Fund as may be conferred upon it hereunder or under the Trust Agreement. The Trustee shall invest and reinvest the Trust Fund, or any part thereof, in any manner that it deems advisable subject to the right hereby reserved to the Committee to direct the Trustee with respect to the investment and reinvestment of the Trust Fund. The Committee shall have the power to direct the Trustee to invest and reinvest any and all money or property of any description at any time held by it and constituting part of the Trust Fund in accordance with the following powers: - 9 - 2.3.1 The Committee, without previous application to or subsequent ratification of any court, tribunal or commission, or any federal or state governmental agency, except as hereinafter provided, may direct the Trustee to invest in bonds, notes, debentures, mortgages, commercial paper, preferred stock, or common stocks sell covered call options; or invest in other securities, rights, obligations, or property, real or personal, including shares and certificates of participation issued by investment companies or investment trusts, trust funds of the Trustee created for qualified employee benefit plans, annuity contracts, and life insurance contracts. 2.3.2 At all times, this Plan shall be an "eligible individual account plan," as defined in Section 407(d)(3) of the Act. Accordingly, the Trustee is authorized to invest and hold up to one hundred percent (100%) of the assets in the Trust Fund in Company Stock, in the Company Stock Fund, or in any other "qualifying employer securities," as that term is defined in the Act. The Trustee may purchase Company Stock or qualifying employer securities from the Employer or from any other source, and such Company Stock or qualifying employer securities purchased by the Trustee may be outstanding, newly issued, or treasury shares; provided, however, that (a) the Trustee shall not purchase any shares of Company Stock or qualifying employer securities at a price exceeding the fair market value of such shares or securities as of the time of purchase, as determined in good faith by the Committee, and (b) no commissions shall be paid on the acquisition by the Trustee of Company Stock or qualifying employer securities from any "party in interest," as defined in Section 3(14) of the Act, or any "disqualified person," as defined in Section 4975(e)(2) of the Code. The Trustee is expressly excused from the requirements of diversification and of a fair return as to the investment of the Trust Fund in Company Stock or in the Company Stock Fund. 2.3.3 The Committee may, in its discretion, direct the Trustee to invest the assets of the Trust Fund in two (2) or more investment funds, pools or vehicles, and permit each Participant to direct how the assets allocated to his Participant Account will be invested among such investment funds, pools or vehicles. In the event the Committee permits each Participant to direct how the assets in his or her Participant Account are invested, Participants shall have a reasonable opportunity to give investment instructions to the Trustee in accordance with the procedures established by the Committee. The Trustee shall invest a Participant's Participant Account in accordance with such Participant's investment directions as soon as practicable after the contribution is transferred to the Trust. At its discretion exercisable at any time, or from time to time, the Committee may add to, delete from, change, or substitute the investment funds, pools, or vehicles among which each Participant will have the option to invest the assets in his Participant Account. The Committee may, in its discretion exercisable at any time or from time to time, promulgate, amend, or repeal rules or regulations governing: (i) the manner in which, and times at which, each Participant may elect to have the assets in his Participant Account invested among the various investment funds, pools, or vehicles selected by the Committee, or change his election regarding the investment of the assets in his Participant Account, and (ii) any maximum, minimum, or incremental dollar amount or percentage of each Participant's Participant Account which may be invested in a particular investment fund, pool, or vehicle selected by the Committee. - 10 - 2.3.4 Notwithstanding the foregoing: (a) All amounts allocated to Participants' Matching Contribution Accounts, Profit Sharing Contribution Accounts, Qualified Nonelective Contribution Accounts, and Qualified Matching Contribution Accounts will always be invested in the Company Stock Fund; (b) Any portion of a Participant's Salary Deferral Contribution Account which is invested in the Company Stock Fund shall not thereafter be reinvested in any of the other investment funds, pools, or vehicles selected by the Committee; (c) A Participant's option to invest the assets in his Participant Account in shares of Company Stock or units of the Company Stock Fund shall be subject to the power of the Committee to suspend, delay, override, or disregard any investment direction of a Participant regarding shares of Company Stock or units of the Company Stock Fund if the Committee determines, in its discretion, that such suspension, delay, overriding, or disregarding is necessary or appropriate to facilitate or ensure compliance with any federal or state securities laws, including, but not limited to, securities laws regarding insider trading; and (d) The Plan shall not invest in ordinary life or term insurance contracts on the life of a Participant for the benefit of the Participant whose life is insured or his Beneficiary. 2.3.5 The Committee shall have no right or authority to authorize the Trustee to make loans or advances to a Participant except as provided in Section 2.12 or to make any distribution except as provided in Article VII. 2.4 Funding Policy The Committee from time to time shall establish a funding policy and method consistent with the objectives of the Plan, in accordance with the status of the Plan as a defined contribution plan and in conformity with the requirements of the Act. In formulating such policy and method, the Committee shall consider the short- and long-term liquidity and other financial needs of the Plan. Such policy and method shall be communicated in writing to the Trustee and any then acting Investment Manager, and thereafter none of the powers of the Committee, the trustee, or any Investment Manager set forth herein shall be exercised in any manner inconsistent with such objectives. Such policy and method shall be communicated in writing to the Trustee and any then-acting Investment Manager, and thereafter none of the powers of the Committee, the Trustee, or any Investment Manager shall be exercised in a manner inconsistent with such policy and method. 2.5 Investment Manager The Committee may, from time to time, and in writing, authorize or direct the Trustee to delegate the management of the Plan assets or any part thereof, including the right to acquire and dispose of such assets, to an Investment Manager. Such authority or direction - 11 - of the Trustee to so delegate may be revoked by the Committee at any time, and the Committee may authorize or direct the Trustee at any time to revoke any such delegation. 2.6 Organization of Committee Allocation and Delegation of Duties 2.6.1 The Committee may appoint one of its own members as Chairman and may adopt such bylaws and regulations as it deems desirable for the conduct of its affairs and appoint a secretary and one or more assistant secretary or secretaries. The Committee may, at any duly constituted meeting thereof, allocate specific fiduciary responsibilities, other than trustee responsibilities, among the members of the Committee. Any member of such Committee may also, at such a meeting, designate other persons to carry out any fiduciary duties that are the responsibility of such member, other than trustee responsibilities. Either of such actions shall be recorded in the minutes of said meeting and may be revoked at any time by action taken at another such meeting recorded in the minutes thereof and communicated to the person to whom such duties were delegated. 2.6.2 Any determination of the Committee may be made by a majority of the Committee at a meeting thereof or without a meeting by a resolution or memorandum signed by all members and, except as provided otherwise herein, shall be final and conclusive on the Employer, the Trustee, and all Participants and Beneficiaries claiming any rights hereunder, and as to all third parties dealing with the Committee or with the Trustee. All notices, directions, information, and other communications from the Committee to the Trustee shall be in writing. 2.6.3 In any matter affecting any member of the Committee in his individual capacity as a Participant hereunder, separate and apart from his status as a member of the group of Participants, such interested member shall have no authority or vote in the determination of such matter as a member of the Committee, but said Committee shall determine such matter as if said interested member were not a member of the Committee; provided, however, that this shall not be deemed to take from said interested member any of his rights hereunder as a Participant. In the event that the remaining members of the Committee should be unable to agree on any matter so affecting an interested member because of an equal division of voting, the Board of Directors shall appoint a temporary member of the Committee to create an odd number of voting members. In the event a majority of the members of the Committee shall be so interested in the same matter, then the Board of Directors shall appoint temporary members to take their place on said Committee for the purpose of determining such matter. 2.7 Duties and Relationship of Fiduciaries 2.7.1 Every Fiduciary, except as otherwise provided in the Act, shall discharge his duties with respect to the Plan: (a) Solely in the interest of the Participants and Beneficiaries; (b) For the exclusive purposes of providing benefits to Participants and Beneficiaries and defraying reasonable expenses of administration; - 12 - (c) With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims; (d) By diversifying investments of the Plan unless under the circumstances it is clearly prudent not to do so; (e) In accordance with the documents and instruments governing the Plan; and (f) By maintaining the indicia of ownership of the Plan assets within the jurisdiction of the United States District Courts, except as otherwise authorized by regulations under the Act. Notwithstanding all of the foregoing, however, each Fiduciary shall at all times discharge his duties in conformance with the provisions of the Act and as required for the administration of a qualified plan under the Code. 2.7.2 It shall be the responsibility of every Fiduciary and of every person handling funds or other property of the Plan to be bonded to the extent required by the Act. The Committee may direct the Trustee to pay the cost of all such bonds from the Trust assets, if and to the extent that the Company does not pay such costs in a timely fashion, and the Trustee shall be protected in relying on such directions. 2.7.3 Each Fiduciary, including the Board of Directors, the Committee, the Claims Coordinator designated under Section 7.12 of Article VII, and the Trustee, shall be responsible only for acts and omissions in connection with the exercise of the powers, duties, and functions specifically allocated to such Fiduciary under the terms of this Plan and the Trust Agreement. No Fiduciary shall be responsible for any acts or omissions in connection with the powers, functions, and duties allocated to any other Fiduciary under the terms of this Plan and the Trust Agreement. Except to the extent provided in the Act or the Code, no Fiduciary shall have any duty to question whether any other Fiduciary is fulfilling the responsibilities imposed on such other Fiduciary by this Plan, the Trust Agreement, or the Act. No Fiduciary shall have any liability for a breach of fiduciary responsibility of any other Fiduciary with respect to the Plan or the Trust unless such Fiduciary participates knowingly in such breach, knowingly undertakes to conceal such breach, has actual knowledge of such breach and fails to take reasonable remedial action to remedy such breach, or, through such Fiduciary's negligence in performing his own specific fiduciary responsibilities, has enabled such other Fiduciary to commit a breach of such other Fiduciary's fiduciary responsibilities. Wherever this Plan or the Trust Agreement provides that a Fiduciary has the power to appoint another person or entity with discretionary authority or control respecting the operation or administration of the Plan or the Trust Fund, the responsibility of the appointing Fiduciary with respect to such appointment shall be limited to the selection of the appointee and periodic review of the performance of the appointee in accordance with the standards of the Act. Any violation of fiduciary responsibilities by the appointee that is not a proximate result of the failure of the appointing Fiduciary properly to select or supervise the appointee, and in which breach the appointing Fiduciary did not otherwise participate, will not be considered to be a breach by the appointing Fiduciary. - 13 - 2.7.4 Any person may serve in more than one fiduciary capacity with respect to this Plan or the Trust, including, but not limited to, service both as a Trustee and as a member of the Committee. 2.8 Compensation and Expenses of Committee The members of the Committee shall serve without compensation but shall be reimbursed for any necessary expenditures incurred in the discharge of their duties as members of said Committee. The compensation of all agents, counsel, or other persons (who may be officers or members of the Employer) retained or employed by the Committee shall be fixed by the Committee, subject to the approval of the Board of Directors. Any such reimbursement or payment shall be made by the Trustee out of the Trust Fund if it is legally permissible to do so; provided, however, that all or any part of any such reimbursement or payment may be made by the Employer if it shall so determine. 2.9 Records of the Committee The Committee shall keep a record of all of its proceedings and shall keep or cause to be kept all such books of account, records, and other data as may be necessary or advisable in its judgment for the administration of this Plan and to reflect properly the affairs thereof, and to determine the amount of vested and forfeitable interests of the respective Participants in the Trust Fund and the amount of all retirement benefits or other benefits hereunder. As a part thereof, it shall maintain or cause to be maintained a separate Participant Account for each Participant, which account in each year shall reflect the interest of the Participant in this Plan, together with such additional information required by the Act or the Code. Any person dealing with the Committee may rely on and shall incur no liability in relying on a certificate or memorandum in writing signed by the secretary of the Committee or by a majority of the members of the Committee as evidence of any action taken or resolution adopted by the Committee, except that the Trustee may accept as evidence of any action or resolution adopted by the Committee only a written notice thereof signed by a majority of the members of the Committee if such action was taken or resolution adopted at a meeting of the Committee or signed by all members if such action or resolution was adopted without a meeting. 2.10 Resignation and Removal of Members Any member of the Committee may resign at any time by giving thirty (30) days' prior written notice of such resignation to the other members and to the secretary of the Company; provided, however, that the other members of the Committee may waive such thirty (30) days' prior notice. Any member who leaves the employment of the Employer shall be deemed to have resigned as a member of the Committee on the date of his termination of employment. Any member of the Committee may at any time be removed by the Board of Directors. 2.11 Appointment of Successors Upon the death, resignation, or removal of any member, the Board of Directors shall at its next regular meeting, or at a special meeting if so desired, appoint, by resolution, a successor. Notice of appointment of a successor member shall be made by the Secretary of the Company in writing to the Trustee and to the Committee. Until receipt by - 14 - the Trustee of such written notice of any change in membership of the Committee, the Trustee shall not be charged with knowledge of notice of such change. 2.12 Loans to Participants (a) Upon the application of a Participant to the Committee, the Committee may direct the Trustee to make a loan or loans to such Participant upon such terms as the Committee deems appropriate. Nothing herein contained shall require the Committee to grant any such loan, such action being purely discretionary on the part of the Committee, provided, however, that the Committee shall exercise its discretion in a uniform and nondiscriminatory manner. The Committee may, in its discretion, determine that no loans shall be made to any Participants. Loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Employees. (b) Unless the Committee determines, in its discretion, that no loans shall be made to any Participants, the Committee shall, from time to time, promulgate a Participant Loan Program in compliance with Department of Labor Regulation Section 2550.408b-1(d)(2), which shall state the manner in which the Committee will determine the amount of loans, terms of loans, and interest rate of loans, and such other rules and regulations that the Committee may adopt. (c) No loans shall be made to any Participant who is a sole proprietor of an Employer, a partner of an Employer who owns more than ten percent (10%) of the capital or profits interest in the Employer, or a shareholder who owns (or is considered as owning within the meaning of Section 318(a)(1) of the Code) more than five percent (5%) of the outstanding stock of an Employer that is an S corporation under the Code on any day during the taxable year of such Employer. All loans shall be taken out in the form of cash; no loan shall be taken out in the form of Company Stock. (d) Loan repayments will be suspended under this Plan as permitted under Section 414(u)(4) of the Code and regulations promulgated thereunder. 2.13 Indemnification The Employer hereby agrees to indemnify the Committee and any other Employee of the Employer, and the estates and heirs of such Committee member and Employee, to the full extent of any expenses, penalties, damages, or other pecuniary loss that such Employee or Committee member, his estate, or heirs may suffer as a result of his responsibilities, obligations, or duties in connection with the Plan or fiduciary activities actually performed in connection with the Plan. Such indemnification shall be paid by the Employer to the Employee, Committee member, his estate, or heirs to the extent that fiduciary liability insurance, if any, does not cover the payment of such items, but in no event shall such items be paid out of Plan assets. Notwithstanding the foregoing, this indemnification agreement shall not relieve any Employee serving in a fiduciary capacity of his fiduciary responsibilities and liabilities to the Plan for breaches of fiduciary obligations, nor shall this agreement violate any provision of Part 4 of Title I of the Act as it may be interpreted from time to time by the U.S. Department of Labor and any courts of competent jurisdiction. - 15 - 2.14 Administrative Mistake Notwithstanding anything to the contrary herein contained, if the Committee discovers that a mistake has been made in crediting Employer Contributions or earnings to the Participant Account of any Participant, the Committee may request the Employer to make a special contribution to the Participant Account of said Participant and may take any other administrative action that it deems necessary or appropriate to remedy such mistake. 2.15 Voting of Company Stock The Committee shall be direct the Trustee as to the manner in which shares of Company Stock allocated to such Participant's Participant Account or shares of Company Stock represented by units of the Company Stock Fund allocated to such Participant's Participant Account ("Allocated Shares") are to be voted. In the event a tender or exchange offer is made with respect to Company Stock, the Committee shall direct the Trustee whether or not to tender Allocated Shares. ARTICLE III PARTICIPATION OF EMPLOYEES 3.1 Who May Participate 3.1.1 Effective as of May 1, 1997, each Employee who is not a Limited Associate shall be eligible to participate in the Plan on the later of (a) the thirtieth (30th) day after such Employee's date of hire, or (b) such Employee's twenty-first (21st) birthday. Effective as of May 1, 1997, each Employee who is a Limited Associate shall be eligible to participate in the Plan on the later of (i) the thirtieth (30th) day after the date on which he has completed one thousand (1,000) Hours of Service, provided that he completes such one thousand (1,000) Hours of Service within one (1) "Eligibility Computation Period" (as defined in Section 3.1.2), or (ii) such Employee's twenty-first (21st) birthday. Before May 1, 1997, each Employee shall be eligible to participate in the Plan on later of (A) the date on which he has completed one thousand (1,000) Hours of Service, provided that he completes such one thousand (1,000) Hours of Service within one (1) "Eligibility Computation Period" (as defined in Section 3.1.2), or (ii) such Employee's twenty-first (21st) birthday. Each Employee who is eligible to participate in the Plan shall become a Participant as of the Entry Date next following the date on which he becomes eligible to participate. 3.1.2 For purposes of this Section 3.1, the term "Eligibility Computation Period" shall mean the twelve-consecutive-month period commencing on the date a person first completes one (1) Hour of Service and during which he is credited with not less than one thousand (1,000) Hours of Service and, in the event an Employee fails to complete one thousand (1,000) Hours of Service in said period, shall also mean the Plan Year including the first anniversary of the Employment commencement date for such Employee and succeeding Plan Years. Notwithstanding any other provision of this Section 3.1, however, no person who is eligible to become a Participant shall become a Participant if he has quit or been permanently discharged and as a result thereof is not employed by the Employer on the Entry Date on which he would otherwise become a Participant; provided, however, that if he is reemployed by the Employer prior to incurring a One-Year Break in Service, he shall become a Participant on the date he is rehired. For purposes of continuing participation, once an Employee has become eligible to participate in the Plan, an Eligibility Computation - 16 - Period shall mean a Plan Year in which the Employee has completed at least one thousand (1,000) Hours of Service with the Employer and such Plan Years shall be measured beginning with the Plan Year commencing before or on the date upon which the Employee becomes eligible to participate. 3.1.3 For purposes of determining the number and identity of Highly Compensated Employees or for purposes of the pension requirements of Section 414(n)(3) of the Code, the Employees of the Employer shall include individuals defined as Employees in Article I. Notwithstanding any other provision of this Plan, however, a leased employee within the meaning of Section 414(n)(2) of the Code shall not become a Participant in, and shall not accrue benefits under, this Plan based on service as a leased employee. 3.1.4 Notwithstanding the provisions of Sections 3.1.1 and 3.1.2, no Employee shall be a Participant hereunder (a) if such Employee is neither a citizen nor a resident of the United States and derives no earned income from the Employer that would constitute income from sources within the United States, (b) while a member of a collective bargaining unit and while covered by a collective bargaining agreement with respect to which retirement benefits were the subject of good-faith bargaining between the employee representatives and the Employer and that does not specifically provide for coverage of such Employee under this Plan, or (c) if such Employee is an individual whom the Employer previously classified as an independent contractor but whom the Internal Revenue Service later determines is an Employee whose compensation should be shown on Form W-2, or whom any other governmental agency later determines is a common-law employee. 3.2 Breaks in Service In the event that an Employee's Employment is terminated and the Employee later returns to Employment with an Employer, the following rules shall apply for purposes of determining eligibility: 3.2.1 In the case of an Employee who has or had a vested interest in the Trust Fund, such Employee shall become a Participant immediately upon his resumption of Employment. 3.2.2 In the case of an Employee, all of whose interest in the Trust Fund is a forfeitable interest, Years of Service before a One-Year Break in Service shall not be taken into account at any time if the number of consecutive One-Year Breaks in Service equals or exceeds the greater of five (5) or the aggregate number of Years of Service prior to such One-Year Break in Service. Such aggregate number of Years of Service before such One-Year Break in Service shall not include any Years of Service not required to be taken into account by reason of any prior One-Year Break in Service but shall include the Year of Service beginning on or before the date upon which the Employee becomes eligible to participate in the Plan. If an Employee's aggregate number of Years of Service exceeds the number of such One-Year Breaks in Service, or if the Employee does not incur five (5) or more consecutive One-Year Breaks in Service, such Employee shall become a Participant immediately upon his resumption of Employment. - 17 - 3.3 Termination of Participation Participation of a Participant shall continue until such Participant's Employment is terminated for any reason. 3.4 Leaves of Absence; Military Service An Employee's Service shall not be considered terminated for purposes of this Plan if the Employee has been on Leave of Absence with the consent of the Employer, provided that he returns to the employ of the Employer at the expiration of such Leave of Absence. A Leave of Absence shall mean a leave granted by the Employer, in accordance with rules uniformly applied to all Employees, for reasons of health or public service or for reasons determined by the Employer to be in its best interests. An Employee's Employment shall likewise not be deemed to have been terminated while the Employee is a member of the Armed Forces of the United States, provided that he returns to the service of the Employer within ninety (90) days (or such longer period as may be prescribed by law) from the date he first became entitled to his discharge. An Employee who does not return to the employ of the Employer within ninety (90) days following the end of the Leave of Absence, or within the required time in case of service with the Armed Forces, shall be deemed to have terminated his Employment as of the date when his Leave of Absence or military service ended (unless such failure to return was the result of his death, Total Disability, or retirement after the attainment of his Normal Retirement Date). An Employee's Employment shall not be deemed to be terminated by reason of a Maternity or Paternity Leave of Absence. Effective as of December 12, 1994, this Section 3.4 shall be applied in a manner that is consistent with the provisions of the Uniformed Services Employment and Reemployment Rights Act of 1994 (P.L. 101-353, 38 U.S.C. Section 4318), Section 414(u) of the Code, and any regulations promulgated thereunder, including any such provisions related to required Employer Contributions, benefits, and service credit for periods of military service. 3.5 Committee to Determine Participants Within ninety (90) days after each Entry Date, the Employer shall certify to the Committee in writing such information from the Employer's records with respect to Employees as the Committee may require to determine the identity and interests of the Participants and otherwise to perform its duties hereunder. Any such certification of information to the Committee pursuant to this Plan shall, for all purposes of the Plan, be binding on all interested parties; provided that whenever any Employee proves to the satisfaction of the Employer that his period of Employment or his Compensation as so certified is incorrect, the Employer shall correct such certification. The determination of the Committee as to the identity of the respective Participants and as to their respective interests shall be binding upon the Employer, the Trustee, the Employees, the Participants, and all Beneficiaries. ARTICLE IV CONTRIBUTIONS 4.1 Employer Contributions 4.1.1 The Employer shall reduce the cash compensation of each Participant who so elects by an amount equal to any whole percentage of such Participant's - 18 - Compensation between and including one percent (1%) and fifteen percent (15%) (ten percent (10%) for periods before January 1, 1999), as directed by such Participant, and shall contribute such amount to the Plan. Such contributions shall constitute the "Salary Deferral Contributions" for such Participant. Each Participant who desires to have Salary Deferral Contributions made on his behalf may do so by following procedures established by the Committee from time to time (provided that such procedures shall be uniform for all Participants at any given time) regarding notice, the effective date of commencement of Salary Deferral Contributions, and other pertinent matters. Each Participant may cause the Employer to cease making Salary Deferral Contributions on his behalf, or may resume or change the level of the Salary Deferral Contributions made on his behalf, by following procedures established by the Committee from time to time (provided that such procedures shall be uniform for all Participants at any given time) regarding notice, the effective date of the resumption or change in the level of Salary Deferral Contributions, and other pertinent matters. The Committee shall determine whether the amount that a Participant desires to have contributed on his behalf is at one of the levels set forth above, and whether the Participant has followed the applicable procedures. If such amount is at one of the levels set forth above and the Participant has followed the applicable procedures, the Committee shall direct the Trustee to accept such Salary Deferral Contribution and to hold it in trust for such Participant. If such amount is not at one of the levels set forth above, or if the Participant has not followed the applicable procedures, the Committee shall direct the Employer not to reduce such Participant's cash contribution and shall direct the Trustee to reject any such Salary Deferral Contribution. 4.1.2 In addition to the Salary Deferral Contributions, the Employer shall make contributions, in cash or in Company Stock valued as of the date of contribution at the election of the Employer, to the Plan as "Matching Contributions": 4.1.2.1 for each Participant whose Employment with the Employer was terminated, who later returned to Employment with the Employer, and who is entitled to have the amount of his forfeiture restored under the provisions of Section 7.7, in an amount necessary to restore any such forfeiture; and 4.1.2.2 for each Participant who makes Salary Deferral Contributions, equal to one hundred percent (100%) (fifty percent (50%) for periods before May 1, 1997) of the Salary Deferral Contributions made by such Participant, to the extent that such Salary Deferral Contributions do not exceed six percent (6%) of such Participant's Compensation; provided, however, that the percentage level of the Matching Contributions may be altered for any Plan Year by a resolution of the Board of Directors adopted before the first day of such Plan Year, and provided, further, that Salary Deferral Contributions shall not be matched to the extent that such Participant does not elect to have such Salary Deferral Contributions invested in Company Stock Fund. The Company shall make such Matching Contributions at such times as may be determined by the Committee in its discretion (provided that such times shall be substantially uniform among all Participants), but not less frequently than quarterly based on the Participants' Compensation earned and Salary Deferral Contributions made in the portion of the Plan Year ending on the last day of each calendar quarter. 4.1.3 For certain periods before 1997, the Company made Profit Sharing Contributions to the Plan. Effective January 1, 1997, the Company will not make any further Profit Sharing Contributions. - 19 - 4.1.4 In addition to the Salary Deferral Contributions and the Matching Contributions, the Employer, in its sole and absolute discretion, may elect for any Plan Year to contribute in cash "Qualified Matching Contributions" in an amount to be determined by the Employer in its discretion, which shall be allocated among the Participants who are Non-Highly Compensated Employees in the manner provided in Section 5.1.3, and which shall be fully vested and nonforfeitable at all times. 4.1.5 In addition to the Salary Deferral Contributions, the Matching Contributions, and the Qualified Matching Contributions, the Employer may also elect, in its sole and absolute discretion, to contribute in cash for a Plan Year "Qualified Nonelective Contributions," which shall be in an amount to be determined by the Employer in its discretion, allocated among Participants who are Non-Highly Compensated Employees in the manner set forth in Section 5.1.4, and fully vested and nonforfeitable at all times. 4.1.6 The total amount of Contributions under this Section 4.1 made on behalf of all Participants for a Plan Year shall not exceed fifteen percent (15%) of the total Compensation paid to all Participants during such Plan Year, plus the amount of any credit for contribution carryovers to which the Employer is entitled under Section 404(a)(3) of the Code. 4.1.7 The contribution attributable to each Participant shall be made by his Employer. If a Participant has been employed by more than one Employer during any year, each Employer shall be responsible for the portion of the contributions attributable to the Compensation earned by the Participant from such Employer. 4.1.8 Notwithstanding anything to the contrary herein contained, Employer Contributions shall be, and hereby are, made subject to the conditions that (a) the Plan and Trust qualify as a tax-exempt plan under Section 401 of the Code, (b) such contributions are deductible under Section 404 of the Code, and (c) such contributions are not made as a result of a mistake of fact. In the event that the Commissioner of Internal Revenue determines that the Plan and Trust do not so qualify, any Employer Contributions made while the Plan and Trust have not qualified shall be repaid to the Employer, in whole or in part, by the Trustee, within one (1) year after the date of the denial of qualification of the Plan and Trust. In the event that the Commissioner of Internal Revenue determines that a deduction for the Employer Contributions shall be disallowed, the excess of such contributions over the amount that would have been contributed had there not occurred a mistake in determining the deductibility of the contributions shall be repaid to the Employer, in whole or in part, by the Trustee, within one (1) year after the disallowance of the deduction. In the case of Employer Contributions that are made by reason of mistake of fact, the excess of such contributions over the amount that would have been contributed had there not occurred a mistake of fact shall be repaid to the Employer, in whole or in part, by the Trustee, within one (1) year after the payment of the contributions. With respect to contributions for which a deduction is disallowed or made by reason of mistake of fact, (1) earnings attributable to the excess contributions shall not be returned to the Employer, (2) losses attributable thereto shall reduce the amount to be repaid, and (3) if the repayment of the excess would cause the balance of a Participant's Participant Account to be reduced to less than the amount of the Participant's Participant Account had the excess contributions not been made, the amount of the repayment shall be limited to the excess of the excess contributions over the amount of the Participant's Participant Account had the excess contributions not been made. Any amounts repaid to the Employer by the Trustee pursuant to this Section 4.1.8 shall be repaid - 20 - without liability therefor on the part of the Trustee to any Participant, Beneficiary, or any other person. 4.2 Time for Payment The Employer may make payment of its contributions for any Plan Year on any date or dates it elects; provided, however, that (a) the total amount of its Matching Contributions and Qualified Matching Contributions for each taxable year shall be paid in full not later than the date prescribed by federal income tax law to entitle the Company to a deduction for the Plan Year with respect to which such contributions are made, and (b) the Salary Deferral Contributions shall be paid in full not later than such time as may be required by regulations promulgated by the Department of Labor under the Act. 4.3 Dollar Limit on Salary Deferral Contributions 4.3.1 Salary Deferral Contributions made to this Plan on behalf of any Participant during any calendar year shall not exceed Nine Thousand Five Hundred Dollars ($9,500.00), reduced by all contributions made by or on behalf of such Participant for such calendar year to: (a) any qualified cash or deferred arrangement as defined in Section 401(k) of the Code maintained by the Employer or any other employer to the extent such contribution is not includable in such Participant's gross income for such calendar year under Section 402(e)(3), (b) a simplified employee pension as defined in Section 408(k) of the Code maintained by the Employer or any other employer to the extent such contribution is not includable in the Participant's gross income for such calendar year under Section 402(h)(1)(B) of the Code, (c) an annuity contract under Section 403(b) under a salary reduction agreement within the meaning of Section 3121(a)(5)(D) to the extent such contribution is not includable in the Participant's gross income for such calendar year under Section 403(b) of the Code, (d) any eligible deferred compensation plan under Section 457 of the Code, (e) under a trust described in Section 501(c)(18) of the Code to the extent that such contribution is deductible from such Participant's income for such calendar year under Section 501(c)(18) of the Code, or (f) any Simple Individual Retirement Account Plan described under Section 408(p). Salary Deferral Contributions for any calendar year made on behalf of a Participant to this Plan in excess of the limitations set forth in the preceding sentence are hereinafter referred to as "Excess Deferrals." Excess Deferrals shall not include any deferrals properly distributed as excess Annual Additions (as defined in Section 5.3.1). The amount of Nine Thousand Five Hundred Dollars ($9,500.00) set forth in this Section 4.3.1 shall be increased to reflect the most recent adjustment for increases in the cost of living after 1997 published by the Secretary of the Treasury pursuant to Section 415(d) of the Code. Any such adjustment shall be effective as of January 1 of the calendar year. 4.3.2 If Excess Deferrals are made on behalf of a Participant for a calendar year, the Plan shall make a corrective distribution to such Participant of such Excess Deferrals (and earnings thereon) during any calendar year if the following conditions are satisfied: (a) the Participant designates the distribution as an Excess Deferral, (b) the correcting distribution is made after the date on which the Plan received the Excess Deferral, and (c) the Committee designates the distribution as a distribution of Excess Deferrals. The earnings attributable to Excess Deferrals to be distributed under this Section 4.3.2 shall be computed by multiplying the net amount of earnings, income, gains, or losses (whether or not realized) on Salary Deferral Contributions made by such Participant during such calendar year through the date of distribution by a fraction, the numerator of which is the - 21 - amount of Excess Deferrals made by such Participant during such calendar year through the date of distribution, and the denominator of which is the total Salary Deferral Contributions made by such Participant during such calendar year through the date of distribution. 4.3.3 Not later than March 1 following the close of a calendar year, a Participant may notify the Committee that Excess Deferrals were made on his behalf to this Plan during such calendar year. A Participant is deemed to notify the Committee of any Excess Deferrals that arise by taking into account only the Deferrals made to this Plan and other plans of the Employer. Not later than April 15 following the close of a calendar year in which Excess Deferrals were made on behalf of a Participant to this Plan, this Plan shall make a corrective distribution to such Participant of such Excess Deferrals and any income allocable thereto. Income allocable to Excess Deferrals to be distributed under this Section 4.3.3 shall include income allocable to the calendar year in which such Excess Deferrals were made and income allocable to the period between the end of such calendar year and the date of distribution. Income allocable to the calendar year in which Excess Deferrals were made, and between the end of such calendar year and the date of distribution, may be calculated using any method that (a) does not discriminate in favor of officers, shareholders, or Highly Compensated Employees, (b) is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and (c) is used by the Plan for allocating income to Participants' Participant Accounts. 4.3.4 The amount of Excess Deferrals that may be distributed under this Section 4.3 to a Participant for any calendar year shall be reduced by the Excess Contributions previously distributed to such Participant for the Plan Year beginning with or within such calendar year. 4.4 Actual Deferral Percentage Test 4.4.1 For each Plan Year, the Actual Deferral Percentage of the Highly Compensated Employees shall bear a relationship to the Actual Deferral Percentage of the Non-Highly Compensated Employees for the current Plan Year (or, if the Committee elects in the manner prescribed by the Secretary of the Treasury, the Plan Year) that meets either of the following two tests: 4.4.1.1 The Actual Deferral Percentage of the Highly Compensated Employees is not more than the Actual Deferral Percentage of the Non-Highly Compensated Employees multiplied by 1.25, or 4.4.1.2 The Actual Deferral Percentage of the Highly Compensated Employees is not more than the Actual Deferral Percentage of the Non-Highly Compensated Employees multiplied by two (2), and is not more than two (2) percentage points higher than the Actual Deferral Percentage of the Non-Highly Compensated Employees, or such smaller number of percentage points as the Secretary of the Treasury may prescribe. 4.4.2 For purposes of this Section 4.4, the terms "Actual Deferral Percentage," "Deferral Percentage" and "Excess Contributions" shall have the following meanings: 4.4.2.1 For each Plan Year, the "Actual Deferral Percentage" of the Highly Compensated Employees shall be the average of the Deferral Percentages of all of - 22 - the Highly Compensated Employees who are eligible to participate in this Plan, and the "Actual Deferral Percentage" of Non-Highly Compensated Employees shall be the average of the Deferral Percentages of all of the Non-Highly Compensated Employees who are eligible to participate in this Plan. 4.4.2.2 The "Deferral Percentage" for any Plan Year of an Employee who is eligible to participate in this Plan shall be (i) the sum of the Salary Deferral Contributions, Qualified Matching Contributions, and Qualified Nonelective Contributions (other than Qualified Nonelective Contributions applied, in the discretion of the Committee, in determining the Contribution Percentages of Employees under Section 4.5.2.2) made by or on behalf of such Employee for such Plan Year (including Excess Deferrals of any Highly Compensated Employee but excluding Excess Deferrals of any Non-Highly Compensated Employee that arise solely under this Plan or any other plan of the Employer), divided by (ii) such Employee's Compensation for such Plan Year. 4.4.2.3 "Excess Contributions" for any Plan Year means the Salary Deferral Contributions made to the Plan on behalf of Participants who are Highly Compensated Employees in excess of the limitations set forth in Section 4.4.1. 4.4.3 If there are any Excess Contributions for any Plan Year, such Excess Contributions and the income allocable thereto shall be distributed to the Participants who are Highly Compensated Employees on or before the Anniversary Date of the following Plan Year; provided, however, that the Committee shall use its best efforts to cause such distribution to be made within two and one-half (2 1/2) months after the Anniversary Date of such Plan Year. The amount of Excess Contributions to be distributed to each Participant who is a Highly Compensated Employee shall be determined by (a) distributing amounts to the Highly Compensated Employee on whose behalf the largest dollar amount of Salary Deferral Contributions was made for such Plan Year to the extent required to (i) enable the Plan to satisfy the limitations of Section 4.4.1, or (ii) cause such Highly Compensated Employee's dollar amount of Salary Deferral Contributions to equal the dollar amount of Salary Deferral Contributions for the Highly Compensated Employee having the next highest dollar amount of Salary Deferral Contributions for such Plan Year, and (b) such process shall be repeated until this Plan satisfies the limitation of Section 4.4.1. Income allocable to Excess Contributions to be distributed to a Participant under this Section 4.4.3 shall include income allocable to the Plan Year in which such Excess Contributions were made and income allocable to the period between the end of such Plan Year and the date of distribution. Income allocable to the Plan Year in which Excess Contributions were made, and between the end of such Plan Year and the date of distribution, may be calculated using any method that (a) does not discriminate in favor of officers, shareholders, or Highly Compensated Employees, (b) is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and (c) is used by the Plan for allocating income to Participants' Participant Accounts. 4.4.4 For purposes of this Section 4.4, the Deferral Percentage of any Highly Compensated Employee who is eligible to participate in this Plan during the Plan Year and who is eligible to make Salary Deferral Contributions, or to receive qualified matching contributions or qualified nonelective contributions allocated to his account under two or more plans described in Section 401(a) of the Code or arrangements described in Section 401(k) of the Code, which are maintained by the Employer or an Affiliate, shall be determined as if all such contributions and elective deferrals were made under a single plan. - 23 - In the event that this Plan satisfies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with this Plan, this Section 4.4 shall be applied by determining the Deferral Percentages of all Employees eligible to participate in this Plan as if all such plans were a single plan. Plans may be aggregated to satisfy Section 401(k) of the Code only if they have the same plan year. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(k) of the Code. 4.4.5 The amount of Excess Contributions to be distributed under this Section 4.4 to a Highly Compensated Employee for a Plan Year shall be reduced by any Excess Deferrals previously distributed to such Highly Compensated Employee for the calendar year ending with or within such Plan Year. 4.5 Actual Contribution Percentage Test 4.5.1 For each Plan Year, the Actual Contribution Percentage of the Highly Compensated Employees shall bear a relationship to the Actual Contribution Percentage of the Non-Highly Compensated Employees for the current Plan Year (or, if the Committee elects in the manner prescribed by the Secretary of the Treasury, the Plan Year) that meets either of the following two tests: 4.5.1.1 The Actual Contribution Percentage of the Highly Compensated Employees is not more than the Actual Contribution Percentage of the Non-Highly Compensated Employees multiplied by 1.25, or 4.5.1.2 The Actual Contribution Percentage of the Highly Compensated Employees is not more than the Actual Contribution Percentage of the Non-Highly Compensated Employees multiplied by two (2), and is not more than two (2) percentage points higher than the Actual Contribution Percentage of the Non-Highly Compensated Employees, or such smaller number of percentage points as the Secretary of the Treasury may prescribe. 4.5.2 For purposes of this Section 4.5, the terms "Actual Contribution Percentage," "Contribution Percentage," and "Excess Matching Contributions" shall have the following meanings: 4.5.2.1 For each Plan Year, the "Actual Contribution Percentage" of the Highly Compensated Employees shall be the average of the Contribution Percentages of all of the Highly Compensated Employees who are eligible to participate in this Plan, and the "Actual Contribution Percentage" of Non-Highly Compensated Employees shall be the average of the Contribution Percentages of all of the Non-Highly Compensated Employees who are eligible to participate in this Plan. 4.5.2.2 The "Contribution Percentage" for any Plan Year of an Employee who is eligible to participate in this Plan shall be (i) the sum of the Matching Contributions and Qualified Nonelective Contributions (other than Qualified Nonelective Contributions applied, in the discretion of the Committee, in determining the Deferral Percentages of Employees under Section 4.4.2.2) made by or on behalf of such Employee for such Plan Year (excluding Excess Matching Contributions of any Highly Compensated - 24 - Employee that arise solely under this Plan or any other plan of the Employer), divided by (ii) such Employee's Compensation for such Plan Year. 4.5.2.3 "Excess Matching Contributions" for any Plan Year means the Matching Contributions made to the Plan on behalf of Participants who are Highly Compensated Employees in excess of the limitations set forth in Section 4.5.1 and Section 4.6; provided, however, that Matching Contributions, which are forfeited pursuant to Section 4.7, shall not be considered to be Excess Matching Contributions. 4.5.3 If there are any Excess Matching Contributions for any Plan Year, such Excess Matching Contributions and the income allocable thereto shall be (a) forfeited to the extent not vested under Section 5.5 (provided, however, that no Matching Contributions that are so forfeited shall be allocated to the Matching Contribution Accounts of Highly Compensated Employees for whom Excess Matching Contributions are forfeited or distributed under this Section 4.5.3), or (b) distributed to the Participants who are Highly Compensated Employees on or before the Anniversary Date of the following Plan Year; provided, however, that the Committee shall use its best efforts to cause such distribution to be made within two and one-half (2 1/2) months after the Anniversary Date of such Plan Year. The amount of Excess Matching Contributions to be forfeited by or distributed to each Participant who is a Highly Compensated Employee shall be determined by (a) forfeiting amounts by or distributing amounts to the Highly Compensated Employee on whose behalf the largest dollar amount of Matching Contributions were made for such Plan Year to the extent required to (i) enable the Plan to satisfy the limitations of Sections 4.5.1 and 4.6, or (ii) cause such Highly Compensated Employee's dollar amount of Matching Contributions to equal the dollar amount of Matching Contributions for the Highly Compensated Employee having the next highest dollar amount of Matching Contributions for such Plan Year, and (b) such process shall be repeated until this Plan satisfies the limitations of Sections 4.5.1 and 4.6. Income allocable to Excess Matching Contributions to be distributed to a Participant under this Section 4.5.3 shall include income allocable to the Plan Year in which such Excess Matching Contributions were made and income allocable to the period between the end of such Plan Year and the date of distribution. Income allocable to the Plan Year in which Excess Matching Contributions were made, and between the end of such Plan Year and the date of distribution, may be calculated using any method that (a) does not discriminate in favor of officers, shareholders, or Highly Compensated Employees, (b) is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and (c) is used by the Plan for allocating income to Participants' Participant Accounts. 4.5.4 For purposes of this Section 4.5, the Contribution Percentage of any Highly Compensated Employee who is eligible to participate in this Plan during the Plan Year and who is eligible to receive matching contributions to his account under two or more plans described in Section 401(a) of the Code or arrangements described in Section 401(m) of the Code, which are maintained by the Employer or an Affiliate, shall be determined as if all such matching contributions were made under a single plan. In the event that this Plan satisfies the requirements of Sections 401(m), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of Sections 401(m), 401(a)(4), or 410(b) of the Code only if aggregated with this Plan, this Section 4.5 shall be applied by determining the Contribution Percentages of all Employees eligible to participate in this Plan as if all such plans were a single plan. Plans may be aggregated to satisfy Section 401(m) of the Code only if they have the same - 25 - plan year. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(m) of the Code. 4.6 No Multiple Use Matching Contributions made on behalf of Participants who are Highly Compensated Employees shall be deemed to constitute Excess Matching Contributions for any Plan Year in which the sum of the Actual Deferral Percentage and the Actual Contribution Percentage of Participants who are Highly Compensated Employees exceeds the greater of (a) the sum of (i) one hundred twenty-five percent (125%) of the greater of Actual Deferral Percentage of the Non-Highly Compensated Employees for the current Plan Year or the Actual Contribution Percentage of the Non-Highly Compensated Employees for the current Plan Year, and (ii) the lesser of two hundred percent (200%) or two (2) plus the lesser of such Actual Deferral Percentage of such Non-Highly Compensated Employees or such Actual Contribution Percentage of such Non-Highly Compensated Employees, or (b) the sum of (i) one hundred twenty-five percent (125%) of the lesser of such Actual Deferral Percentage of such Non-Highly Compensated Employees or such Actual Contribution Percentage of such Non-Highly Compensated Employees, and (ii) the lesser of two hundred percent (200%) or two (2) plus the greater of such Actual Deferral Percentage of such Non-Highly Compensated Employees or such Actual Contribution Percentage of such Non-Highly Compensated Employees. 4.7 Corrective Forfeiture of Matching Contributions If any Excess Contributions are distributed under Section 4.4.3 for any Plan Year to Highly Compensated Employees, Matching Contributions made on account of such Excess Contributions, plus income allocable to such Matching Contributions (determined as though such Matching Contributions were Excess Matching Contributions under Section 4.5.3), shall be forfeited by such Highly Compensated Employees. Such forfeiture shall occur even if such Matching Contributions would otherwise be vested under Section 5.5. Any Matching Contributions that are forfeited under this Section 4.7 shall be treated as a forfeiture under Sections 5.2 and 7.6 as of the last day of the month in which the distribution of the related Excess Contributions occurs. 4.8 Rollover Contributions Subject to the approval of the Committee and of the Trustee, any Participant may contribute from time to time any amount in cash that constitutes an eligible rollover contribution within the meaning of Sections 402(c), 403(a)(4), and 408(d)(3) of the Code. The Committee may, in its discretion, decide that the Plan will not accept any Rollover Contributions. Effective January 1, 1999, hardship distributions described in Section 401(k)(2)(B)(i)(IV) of the Code are not eligible rollover contributions. 4.9 No Voluntary Contributions No Participant may make any voluntary contributions to the Trust Fund. - 26 - 4.10 Transfers From Other Qualified Plans There may be transferred to the Trustee, subject to the approval of the Committee and of the Trustee, all or any of the assets held (whether by a trustee, custodian, or otherwise) on behalf of any other plan that satisfies the applicable requirements of Section 401(a) of the Code and that is maintained for the benefit of any persons who are or are about to become Participants in this Plan. The Committee is not required to approve such a transfer of assets to this Plan. In no event, however, shall any assets be transferred into this Plan from a plan that is required to satisfy the requirements of Section 417 of the Code. 4.11 Participant Accounts The Committee shall maintain a Participant Account for each Participant that shall show the dollar value of his current interest in the Trust Fund as of each Valuation Date. Such dollar value shall be his interest in the Trust Fund until the next Valuation Date. Within the Participant Account of each Participant, the Committee shall maintain separate subaccounts for Rollover Contributions made by such Participant and amounts transferred to this Plan under Section 4.10 for the benefit of such Participant and the earnings, losses, and gains thereon (the "Rollover Contribution Account"); the Salary Deferral Contributions made on behalf of such Participant and the earnings, losses, and gains thereon (the "Salary Deferral Contribution Account"); the Matching Contributions made on behalf of such Participant and the earnings, losses and gains thereon (the "Matching Contribution Account"); the Profit Sharing Contributions made on behalf of such Participant before 1997 and the earnings, losses, and gains thereon (the "Profit Sharing Contribution Account"); the Qualified Matching Contributions made on behalf of such Participant and the earnings, losses, and gains thereon (the "Qualified Matching Contribution Account"); and the Qualified Nonelective Contributions made on behalf of such Participant and the earnings, losses, and gains thereon (the "Qualified Nonelective Contribution Account"). Except for the maintaining of such subaccounts, Rollover Contributions and amounts transferred to this Plan under Section 4.10 shall be held and administered in the same manner as the Employer Contributions, and the Trustee is authorized to hold Rollover Contributions and amounts transferred to this Plan under Section 4.10 and all other contributions to the Plan in the common Trust Fund, without segregation of assets. ARTICLE V DETERMINATION AND VESTING OF EMPLOYEES' INTERESTS 5.1 Allocation to Participant Accounts The Participant Account of each Participant shall be credited with the following amounts: 5.1.1 Allocation of Salary Deferral Contributions. Salary Deferral Contributions for each Plan Year to the Trust Fund shall be allocated among the Salary Deferral Contribution Accounts of the Participants in the actual amounts contributed by or for such Participants. - 27 - 5.1.2 Allocation of Matching Contributions. Matching Contributions for each Plan Year to the Trust Fund shall be allocated among the Matching Contribution Accounts of the Participants in the actual amounts contributed for such Participants. 5.1.3 Allocation of Qualified Matching Contributions. Qualified Matching Contributions for each Plan Year to the Trust Fund shall be allocated on the Anniversary Date among the Qualified Matching Contribution Accounts of the Participants who are Non-Highly Compensated Employees in the actual amounts contributed for such Participants. 5.1.4 Allocation of Qualified Nonelective Contributions. Qualified Nonelective Contributions for each Plan Year to the Trust Fund shall be allocated on the Anniversary Date to the Qualified Nonelective Contribution Accounts of the Participants who are Non-Highly Compensated Employees in the amounts that the Committee determines are necessary for the Plan to pass the actual deferral percentage test of Section 4.4 for the Plan Year, or, in the discretion of the Committee, in the amounts that the Committee determines are necessary for the Plan to pass the actual contribution percentage test of Section 4.5 for the Plan Year; provided, however, that the Qualified Nonelective Contributions need not be allocated to all Participants who are Non-Highly Compensated Employees, or among such Participants in the ratio that their respective Compensation for such Plan Year bears to the total Compensation of all Participants for such Plan Year who were Non-Highly Compensated Employees. 5.1.5 Allocation of Earnings of Trust Fund. Earnings, losses, expenses, gains and changes in value of the Trust Fund shall be allocated to the Participant Accounts of all Participants as of each Valuation Date. The amounts of such earnings, losses, expenses, gains, and changes in value to be allocated to the Participant Account of a Participant shall bear the same ratio to the total amounts of such earnings, losses, gains and changes in value as the dollar value of such Participant's Participant Account prior to the allocation under this Section 5.1.5 and prior to the allocation of Contributions under Sections 5.1.1, 5.1.2, 5.1.3 and 5.1.4 bears to the total dollar value of all Participant Accounts prior to such allocations. Earnings, losses, gains, and changes in value allocated to the Participant Account of a particular Participant pursuant to this Section 5.1.5 shall be further allocated to such Participant's Salary Deferral Contribution Account, Matching Contribution Account, Profit Sharing Contributions Account, Qualified Matching Contribution Account, Rollover Contribution Account, and Qualified Nonelective Contribution Account in the ratio that the dollar value of each of such accounts prior to the allocations under Sections 5.1.1, 5.1.2, 5.1.3 and 5.1.4 and prior to the allocation under this Section 5.1.5 bears to the dollar value of such Participant's entire Participant Account prior to such allocations. Notwithstanding the foregoing, if the assets in a Participant's Participant Account are invested in one or more investment funds, pools, or vehicles at the direction of the Participant as described in Section 2.3.5, such Participant's Participant Account shall be increased by the amount of any earnings, gains, and increases in value, and decreased by the amount of any losses, expenses, and decreases in value, that actually resulted from the investment of the assets in his Participant Account in such investment funds, pools, or vehicles during the Plan Year. 5.2 Forfeitures All amounts representing forfeitures, as described in Section 7.6, shall be applied to reduce the Matching Contributions to be made by the Employer and, as such, - 28 - shall be allocated to the Matching Contribution Accounts of the Participants in the manner set forth in Section 5.1.2; provided, however, that no such forfeitures shall be allocated for a Plan Year to any Participants who are Highly Compensated Employees and who have Excess Matching Contributions for such Plan Year. 5.3 Overall Contribution Limitation Notwithstanding the foregoing provisions of this Article V: 5.3.1 Effective for Limitation Years beginning after January 1, 1994, the Annual Additions allocated to the Participant Accounts of any Participant, together with the Annual Additions allocated to a Participant's account in any other defined contribution plan, as defined in Section 414(i) of the Code, maintained by the Employer shall not exceed the lesser of (1) twenty-five percent (25%) of such Participant's Compensation, or (2) $30,000.00, as adjusted under Section 415(d) of the Code. Any adjustment pursuant to Section 415(d) of the Code shall be effective as of January 1 of the calendar year and shall apply with respect to the Limitation Year ending with or within such calendar year. For purposes of this Section 5.3, "Annual Additions" shall mean the sum for any Limitation Year of (1) the Employer Contributions allocated to a Participant's Participant Account, (2) the amount of such Participant's employee contributions and voluntary employee contributions to all defined contribution plans maintained by the Employer, (3) forfeitures allocated to the Participant, (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer, (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits, allocated to the separate account of a key employee, as defined in Section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in Section 419(e) of the Code, maintained by the Employer, and (6) allocations under a simplified employee pension. The percentage-of-Compensation limitation set forth in clause (1) of the first sentence of this Section 5.3.1 shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) that an Employer allocates to an account maintained for the Participant that is otherwise treated as an Annual Addition under Section 415(l)(1) or Section 419A(d)(2) of the Code. The Annual Addition for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat all employee contributions as part of such Annual Addition, but only the lesser of the amount of a Participant's employee contributions in excess of six percent (6%) of his eligible Compensation or one-half (1/2) of his employee contributions to all defined contribution plans maintained by the Employer shall be included in any such Annual Addition. The term "Annual Additions" shall not include the amount of any rollover contributions as that term is used in Section 415(c)(2) of the Code. The Plan Year shall be the "Limitation Year" under Section 415 of the Code. If a short Limitation Year is created because of an amendment to the Plan changing the Limitation Year to a different twelve (12) consecutive month period, the limitation set forth in clause (2) of the first sentence of this Section 5.3.1 will not exceed the limitation set forth in clause (2) of the first sentence of this Section 5.3.1, multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year, and the denominator of which is twelve (12). 5.3.2 For purposes of determining the Annual Addition limit under this Section 5, Employer shall have the meaning provided herein; except that the term Affiliate as defined in Section 1.3 of Article I shall be modified by Section 415(h) of the Code. - 29 - 5.3.3 Neither the Employer nor any Affiliate has ever maintained, for any Limitation Year beginning on or before December 31, 1999, a defined benefit plan in addition to this Plan. 5.3.4 In the event that corrective adjustments in any Participant's Participant Account are required pursuant to Sections 5.3.1 or 5.3.2, the Annual Addition to such accounts shall be reduced by corrective adjustments made in the following order of precedence: (1) Return to such Participant all or a portion of such Participant's employee contributions or voluntary contributions (plus attributable earnings) made to any defined contribution plan of the Employer; (2) Return to such Participant all or a portion of his elective Salary Deferral Contributions (within the meaning of Section 402(g)(3) of the Code) plus attributable earnings pursuant to any salary deferral plan under Section 401(k) of the Code; (3) If such Participant is a Participant under this Plan at the end of a Limitation Year, such excess amount shall be used to reduce Employer Contributions and forfeitures allocated to such Participant in the next Limitation Year and, if necessary, in each succeeding Limitation Year if the Participant remains a Participant in the Plan at the end of such Limitation Year; (4) If such Participant is not a Participant of the Plan at the end of a Limitation Year, such excess amount shall be held unallocated in a suspense account, which such suspense account shall be applied to reduce Employer Contributions allocated to all remaining Participants in the next Limitation Year, and, if necessary, each succeeding Limitation Year. If a suspense account is in existence at any time during a Limitation Year pursuant to this Section 5.3.4, (a) such suspense account shall not participate in the allocation of investment gains and losses, and (b) all amounts in such suspense account must be allocated and reallocated to Participants' Participant Accounts before any Employer Contribution or any employee contributions may be made to the Plan for such Limitation Year. Excess amounts may not be distributed to Participants or former Participants; (5) If a Participant's Annual Additions under this Plan and all other defined contribution plans, welfare benefit funds, or individual medical accounts maintained by the Employer would result in an excess amount for a Limitation Year, such excess amount shall be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee pension will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date; (6) If the allocation date of this Plan coincides with the allocation date of any other defined contribution plan, welfare benefit fund, or individual medical account maintained by an Employer, the excess amount attributable to this Plan shall be the product of: (a) the total excess amount allocated as of such date, multiplied by (b) the ratio of (i) the Annual Addition allocated to the Participant for such Limitation Year as of such allocation date under this Plan, to (ii) the total Annual Additions allocated to the Participant for such Limitation Year as of such allocation date under this Plan and all other defined - 30 - contribution plans, welfare benefit funds, and individual medical accounts maintained by an Employer; and (7) Corrective adjustments made pursuant to the provisions of each defined benefit plan maintained by the employer. 5.4 Certain Compensation In the event that in any year any Participant's total Compensation, including the amount of the Employer Contribution and forfeitures allocated to the Participant Account of such a Participant pursuant to this Plan (hereinafter referred to as "Total Compensation"), is found to be unreasonable in amount and results in the disallowance of a deduction to the Employer in the Plan Year in which a final determination is made with respect to the deductibility of such Total Compensation, the Employer Contribution allocated to the Participant Account of such Participant with respect to the year in question shall be reduced by an amount that is proportionate to the amount of Total Compensation for which a deduction is disallowed divided by the amount of Total Compensation for which the Employer has taken a deduction. Such excess contribution, and any earnings thereon, shall be reallocated to the remaining Participants in the same proportions provided in Sections 5.1.2 in the year of such final determination. To the extent that the excess contribution, together with amounts already contributed to the Plan, exceeds the limitation with respect to the deductibility of Employer Contributions contained in Section 404(a)(3) of the Code, such amount shall constitute a contribution carryover. 5.5 Vesting of Participants' Interests 5.5.1 A Participant's interest shall become vested to the extent of the sum of (1) the total of such Participant's Rollover Contribution Account, Salary Deferral Contribution Account, Qualified Matching Contribution Account, and Qualified Nonelective Contribution Account, and (2) the following scheduled percentages of such Participant's Matching Contribution Account and Profit Sharing Contribution Account:

provided, however, that in the case of a Participant whose Employment terminated before August 18, 1997, such Participant shall become vested in the following scheduled percentages of the such Participant's Matching Contribution Account and Profit Sharing Contribution Account: - 31 -

Notwithstanding the foregoing, when any Participant reaches his Normal Retirement Date, dies, or suffers Total Disability while an Employee of the Employer, his entire interest in his Matching Contributions Account and Profit Sharing Contributions Account shall become fully vested without regard to his Years of Service; and provided, further, that, notwithstanding the schedule set forth above, the Matching Contributions (and earnings allocable thereto) of a Participant who is a Highly Compensated Employee may be forfeited as set forth in Section 4.7. Any portion of the interest of a Participant that has not become vested, as herein provided, shall be a forfeitable interest. Any interest in the Trust Fund shall be and become payable to such Participant or his Beneficiaries only as and to the extent provided in this Plan; and a Participant or former Participant who dies having designated a Beneficiary shall cease to have any interest hereunder in the Trust Fund or in his Participant Account, and his Beneficiary shall become entitled to payment thereof as herein provided by virtue of the terms of this Plan and not as a result of any transfer of said interest or Participant Account. 5.5.2 For purposes of computing Years of Service for use in the application of Section 5.5.1, the following rules shall apply and, except as otherwise provided by said rules, all Years of Service shall be taken into account: (a) In the case of a Participant all of whose interest in the Trust Fund derived from Employer Contributions is a forfeitable interest, Years of Service before a One-Year Break in Service shall not be taken into account at any time if the number of consecutive One-Year Breaks in Service equals or exceeds the greater of five (5) or the aggregate number of Years of Service prior to such One-Year Breaks in Service. Such aggregate number of Years of Service before such One-Year Breaks in Service shall not include any Years of Service not required to be taken into account by reason of any prior One-Year Break in Service. (b) Years of Service subsequent to any Participant's incurring five (5) consecutive One-Year Breaks in Service shall not be taken into account for purposes of calculating the percentage of vesting of that portion of such Participant's Participant Account that is attributable to Employer Contributions made prior to such One-Year Breaks in Service. 5.6 Election of Former Vesting Schedule In the event the vesting schedule of this Plan is amended, any Participant who has completed at least three (3) Years of Service (five (5) Years of Service for Plan Years beginning before January 1, 1989) may elect to have his vested interest in Employer Contributions and earnings thereon determined without regard to such amendment by - 32 - notifying the Committee in writing during the election period as hereafter defined. The election period shall begin on the date such amendment is adopted and shall end no earlier than the latest of the following dates: (a) The date that is sixty (60) days after the date the amendment is adopted; (b) The date that is sixty (60) days after the day the amendment becomes effective; or (c) The date that is sixty (60) days after the day the Participant is issued written notice of the amendment by the Employer or the Committee. Such election shall be available only to an individual who is a Participant at the time such election is made and such election shall be irrevocable. 5.7 Changes in Vesting Schedule In the event that the vesting schedule of this Plan is amended, the vested interest of any person who is a Participant on the date such amendment is adopted, or on the effective date of such amendment, if later, shall not be less than the vested interest computed under the Plan without regard to such amendment. ARTICLE VI TOP-HEAVY STATUS 6.1 Definitions Relating to Top-Heavy Status For purposes of this Article VI, the following terms are defined as follows: 6.1.1 "Aggregate Account" means, with respect to a participant in a defined contribution plan, such participant's account balance as of the most recent Valuation Date occurring within the twelve (12)-month period ending on the Determination Date, adjusted as provided in Sections 6.1.1(a) and 6.1.1(b). (a) In the case of a defined contribution plan that is not subject to the minimum funding requirements of Section 412 of the Code, the Aggregate Account shall include the amount of any contribution allocated to such participant's account that is actually made after the valuation date but on or before the Determination Date; provided, however, that in the first plan year of such defined contribution plan, such Aggregate Account shall also include the amount of any contribution made after the Determination Date that is allocated to the account of such participant as of any date in such first plan year. In the case of a defined contribution plan that is subject to the minimum funding requirements of Section 412 of the Code, the Aggregate Account of a participant shall include contributions that would be allocated to such participant as of any date that is not later than the Determination Date, even though such amounts are not required to be contributed to the plan as of such date. (b) The Aggregate Account of a participant in a defined contribution plan shall include the following: - 33 - (1) Any distributions made from such defined contribution plan to such participant within the Determination Period; provided, however, that the Aggregate Account of a participant shall not include distributions made after the Valuation Date but before the Determination Date, to the extent that such distributions are already included in such participant's Aggregate Account as of the Valuation Date. Notwithstanding anything herein to the contrary, all distributions, including distributions made prior to January 1, 1984, and distributions under a terminated plan which, if it had not been terminated, would have been required to be included in the Required Aggregation Group, will be counted. Further, distributions from the Plan (including the cash value of life insurance policies) of a Participant's Participant account balance because of death shall be treated as a distribution for the purposes of this Section 6.1.1. However, amounts attributable to tax deductible qualified deductible employee contributions shall not be considered to be a part of the Participant's Aggregate Account balance. (2) All employee contributions, whether voluntary or mandatory, and all Employer contributions attributable to a salary reduction or similar arrangement. (3) All Unrelated Rollovers (as defined in Section 6.1.1(c)) accepted by such defined contribution plan on behalf of such participant before January 1, 1984, and all Related Rollovers (as defined in Section 6.1.1(c)) accepted by such defined contribution plan on behalf of such participant, irrespective of the date on which such Related Rollover is accepted. (c) For purposes of this Section 6.1.1, a "Related Rollover" means a rollover or plan-to-plan transfer not initiated by the participant or made to a plan maintained by the same employer from which such rollover or transfer is made. For purposes of this Section 6.1.1, an "Unrelated Rollover" means a rollover or a plan-to-plan transfer initiated by the participant and made from a plan maintained by one employer to a plan maintained by another employer. For purposes of Section 6.1.1(b), all Unrelated Rollovers shall be deemed to be distributions, but no Related Rollover shall be deemed to be a distribution. In determining whether a rollover or plan-to-plan transfer is made between plans maintained by different employers, all employers aggregated under Section 414(b), (c) or (m) of the Code shall be treated as being the same employer. 6.1.2 "Determination Date" means (a) the last day of the preceding plan year, or (b) in the case of the first plan year, the last day of such plan year. 6.1.3 "Determination Period" means a plan year containing a Determination Date for the plan year in question and the four (4) preceding plan years. 6.1.4 "Key Employee" means any Employee or former Employee (including any deceased Employee and Beneficiaries) who is a Key Employee under Section 416(i)(1) of the Code and the regulations promulgated thereunder. Under Section 416(i)(1) of the Code and the regulations thereunder, a "Key Employee" includes an Employee who, at any time during the Determination Period, is one or more of the following: (a) An officer of an Employer having annual Compensation from the Employer or Affiliate greater than fifty percent (50%) of the dollar limitation in effect under Section 415(c)(1)(A) of the Code; provided, however, that not - 34 - more than fifty (50) Employees (or, if less, the greater of three (3) or ten percent (10%) of the Employees) shall be treated as officers. (b) One of the ten (10) Employees who has Compensation from an Employer or Affiliate for a Plan Year that exceeds the dollar limitation in effect under Section 415(c)(1)(A) of the Code for the calendar year in which such Plan Year ends and who owns, or is considered as owning, within the meaning of Section 318 of the Code as modified by Section 416(i)(1)(B)(iii)(I) of the Code, the largest interests (but not less than one-half of one percent (1/2%)) in an Employer; provided, however, that if two (2) Employees have the same interest in an Employer, the Employee having greater annual Compensation from an Employer shall be treated as having a larger interest in such Employer. (c) A "Five Percent Owner" of an Employer. The term "Five Percent Owner" means any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than five percent (5%) of the outstanding stock of an employer, or stock possessing more than five percent (5%) of the total combined voting power of all stock in an employer, or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in such employer. (d) Any Employee who (a) receives Compensation from an Employer or Affiliate for a Plan Year of more than One Hundred Fifty Thousand Dollars ($150,000.00), and (b) owns (or is considered as owning within the meaning of Section 318 of the Code) more than one percent (1%) of the outstanding stock of an Employer, or stock possessing more than one percent (1%) of the total combined voting power of all stock of an Employer, or, in the case of an unincorporated Employer, any person who owns more than one percent (1%) of the capital or profits interest in such Employer. An Employee may be considered a Key Employee in a Plan Year under more than one subsection of this Section 6.1.4; provided that for purposes of determining whether the Plan is Top-Heavy, a Key Employee's accrued benefit shall be counted only once. For purposes of determining the number of officers taken into account under Section 6.1.4(a), the following Employees are excluded: (a) Employees who have not completed six (6) months of Service, (b) Employees who normally work less than seventeen and a half (17 1/2) hours per week, (c) Employees who normally do not work more than six (6) months during each Plan Year, (d) Employees who have not attained the age of twenty-one (21) years, and (e) Except to the extent provided in regulations, Employees who are included in a unit of Employees covered by an agreement which the - 35 - Secretary of Labor finds to be a collective bargaining agreement between Employee representatives and the Employer. 6.1.5 "Non-Key Employee" means any employee who is not a Key Employee. 6.1.6 "Permissive Aggregation Group" means all plans included in a Required Aggregation Group (as defined in Section 6.1.7), and any other plan of an Employer that is not required to be included in the Required Aggregation Group, provided that the resulting group of plans, taken as a whole, satisfies the nondiscrimination provisions of Section 401(a)(4) of the Code and the coverage provisions of Section 410 of the Code. 6.1.7 "Required Aggregation Group" means each plan (including any terminated plan) of the Employer in which a Key Employee is a participant during the Determination Period, and each other plan of the Employer that enables any plan in which a Key Employee participates to satisfy the nondiscrimination requirements of Section 401(a)(4) of the Code and the coverage requirements of Section 410 of the Code. 6.1.8 "Top-Heavy Year" means any Plan Year commencing after December 31, 1983, in which this Plan is a Top-Heavy Plan. 6.2 Determination of Top-Heavy Status In determining whether this Plan is a Top-Heavy Plan, the following provisions shall apply: 6.2.1 This Plan shall be a "Top-Heavy Plan" for any Plan Year commencing after December 31, 1983, in which, as of the Determination Date, either (a) the Aggregate Accounts of Key Employees exceed sixty percent (60%) of the Aggregate Accounts of all Employees under this Plan, or (b) this Plan is part of a Required Aggregation Group that is a Top-Heavy Group, unless this Plan is also part of a Permissive Aggregation Group that is not a Top-Heavy Group. 6.2.2 This Plan shall be a "Super Top-Heavy Plan" for any Plan Year commencing after December 31, 1983, in which, as of the Determination Date, either (a) the Aggregate Accounts of Key Employees exceed ninety percent (90%) of the Aggregate Accounts of all Employees under this Plan, or (b) this Plan is part of a Required Aggregation Group that is a Super Top-Heavy Group, unless this Plan is also part of a Permissive Aggregation Group that is not a Super Top-Heavy Group. 6.2.3 A Permissive Aggregation Group or a Required Aggregation Group constitutes a "Top-Heavy Group" if the Aggregate Accounts of Key Employees under all defined contribution plans included in such Permissive Aggregation Group or Required Aggregation Group exceed sixty percent (60%) of similar sums of all employees. 6.2.4 A Permissive Aggregation Group or a Required Aggregation Group is a "Super Top-Heavy Group" if the Aggregate Accounts of Key Employees under all defined contribution plans included in such Permissive Aggregation Group or Required Aggregation Group exceed ninety percent (90%) of similar sums of all employees. - 36 - 6.2.5 In determining the status of this Plan as a Top-Heavy Plan or Super Top-Heavy Plan, the Aggregate Account (under this Plan or any other plan that is part of a Required Aggregation Group or Permissive Aggregation Group of which this Plan is part) of an employee shall be disregarded if either (a) such employee is a Non-Key Employee in any plan year but was a Key Employee in any prior plan year, or (b) such employee has not received any compensation from the Employer (other than benefits under a plan) at any time during the Determination Period. 6.3 Consequences of Top-Heavy Status Notwithstanding any other provision of this Plan, the following provisions shall apply in any Top-Heavy Year: 6.3.1 In any Top-Heavy Year, the annual Compensation of each Participant that shall be taken into account under this Plan shall be limited to Two Hundred Thousand Dollars ($200,000.00) for any Plan Year after 1986 and before 1994, and One Hundred Fifty Thousand Dollars ($150,000.00) for any Plan Year after 1993, subject to any cost of living adjustment made by the Secretary of the Treasury. Any such adjustment shall be effective as of January 1 of the calendar year and shall apply with respect to Plan Years ending with or within such calendar year. 6.3.2 For each Top-Heavy Year, each Participant who is a Non-Key Employee and whose Employment has not been terminated as of the Anniversary Date shall receive a minimum allocation of Employer Contributions and forfeitures to his Participant Account equal to three percent (3%) of his Compensation for such Plan Year, subject to the following provisions: (a) Notwithstanding the foregoing, the ratio of the Employer Contributions and forfeitures allocated to the Participant Account of a Non-Key Employee in a Top-Heavy Year to the Compensation of such Non-Key Employee for such Top-Heavy Year shall not exceed the highest ratio of Employer Contributions and forfeitures allocated to the Participant Account of any Key Employee for such Top-Heavy Year to the Compensation of such Key Employee in such Top-Heavy Year. This Section 6.3.2(a) shall not apply if this Plan is required to be included in a Required Aggregation Group or a Permissive Aggregation Group and enables any defined benefit plan required to be included in such Required Aggregation Group or Permissive Aggregation Group to meet the requirements of Section 401(a)(4) or 410 of the Code. (b) If, in a Top-Heavy Year, a Non-Key Employee participates both in this Plan and in a defined benefit plan, and this Plan and such defined benefit plan are part of a Required Aggregation Group that is a Top-Heavy Group, the Committee shall adjust the minimum allocation provided for such Non-Key Employee under this Section 6.3.2 to prevent inappropriate omissions or required duplications of minimum benefits or allocations. Such adjustment shall be made under the comparability analysis method of Treasury Regulation Section 1.416-1 M-12. (c) In each Top-Heavy Year, the minimum allocation provided in this Section 6.3.2 shall be allocated to the Participant Account of each Participant who is a Non-Key Employee and whose Employment has not been terminated as of the Anniversary Date of such Top-Heavy Year, including Non-Key Employees who (1) - 37 - do not participate because they failed to complete one thousand (1,000) Hours of Service, (2) do not participate because they declined or failed to make, or withdraw, mandatory employee contributions under this Plan or (3) do not participate in this Plan because their compensation is less than a stated amount but are counted to satisfy the coverage requirements of Section 410 of the Code. 6.3.3 In computing the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction under Section 5.3.3, "1.0" shall be substituted for "1.25" in any Top-Heavy Year in which either: (a) This Plan is a Super Top-Heavy Plan, or (b) This Plan is not a Super Top-Heavy Plan, unless the minimum allocation allocated to the Participant Account of each Non-Key Employee for such Top-Heavy Year under Section 6.3.2 is computed by substituting "four percent (4%)" for "three percent (3%)". 6.3.4 In each Top-Heavy Year, the vested percentage of a Participant in the Employer Contributions and gains and earnings thereon allocated to him shall be at least equal to the applicable percentage set forth on the following schedule:

For purposes of this Section 6.3.4, each Participant's Years of Service shall be determined as set forth in Section 5.3.2. Notwithstanding the foregoing, if a Participant does not complete one (1) or more Hours of Service in any Top-Heavy Year, the vested portion of such Participant's interest in Employer Contributions and the earnings and gains thereon shall be determined under Section 5.5. If this Plan ceases to be a Top-Heavy Plan, vesting under the Plan shall thereafter be determined under the vesting schedule set forth in Section 5.5. Any such reversion shall be treated as an amendment to this Plan, which is subject to the provisions of Section 5.7. ARTICLE VII DISTRIBUTIONS AND WITHDRAWALS FROM THE TRUST FUND 7.1 Events Causing Distribution or Permitting Withdrawal A Participant's vested interest in the Trust Fund shall be distributed upon his death, Total Disability, retirement, or termination of Employment to such Participant, such Participant's surviving spouse, or such Participant's Beneficiary as set forth in Section 7.5. A Participant may take withdrawals from the Trust Fund before his death, Total Disability, retirement, or termination of Employment under the circumstances set forth in Sections 7.4, - 38 - 7.10 and 7.16. For purposes of this Article VII, a Participant shall be deemed to have terminated his Employment upon the disposition by the Employer of substantially all of the assets used by the Employer in a trade or business within the meaning of Section 401(k)(10)(A)(ii) of the Code, if such Participant continues employment with the corporation acquiring such assets, or upon the disposition by the Employer of the Employer's interest in a subsidiary within the meaning of Section 401(k)(10)(A)(iii) of the Code, if the Participant continues employment with such subsidiary, but only if such Participant satisfies the requirements for receiving a distribution under Section 401(k)(10) of the Code or other applicable ruling or regulation. 7.2 Transfers to Other Qualified Plans In the event that any Participant becomes, or is about to become, a participant in any other plan that satisfies the requirements of Section 401(a) of the Code, the Committee may, in its discretion, direct the Trustee to transfer all or part of the assets in such Participant's Participant Account to the trustee, custodian, or other person who holds the assets of such other plan. A Participant shall cease to be a participant in this Plan, and neither such Participant nor such Participant's Beneficiaries shall be entitled to receive any distribution from this Plan, from and after the date on which the vested portion of such Participant's Participant Account has been reduced to zero because of distributions, transfers to other plans as provided in this Section 7.2 or both. 7.3 Information to Be Furnished to Committee For the purpose of enabling the Committee to determine the portion of the Participant's interest in the Trust Fund that is vested and distributable, the Employer shall certify to the Committee in writing the following information as soon as possible following his retirement, death, Total Disability, or termination of Employment: (1) Name and address; (2) Date on which Participant retired, died, or became Totally Disabled or otherwise left the employ of the Employer; (3) Number of Years of Service; and (4) Age upon death or termination of Employment. 7.4 Withdrawals from Rollover Contribution Accounts A Participant may take a withdrawal from his Rollover Contribution Account at any time and for any reason, provided that no such withdrawal shall be in the form of an annuity. 7.5 Form of Distribution The following provisions shall apply to any distribution from the Trust Fund with respect to any Participant to the extent that the Trustee has not received for the benefit of such Participant any direct or indirect transfer of assets under Section 4.10 from any other plan that is required to comply with the requirements of Section 417 of the Code: - 39 - 7.5.1 Form of Distribution: The Committee shall distribute such Participant's interest in the Trust Fund, in one of the following forms, as elected by the Participant or his Beneficiary: (a) One lump sum payable as soon as administratively practicable after such Participant's death, Total Disability, retirement, or termination of Employment. (b) A direct rollover in accordance with Section 7.15. (c) In the event that the Participant elects benefits to be paid in the form of one lump sum or in a direct rollover in accordance with Section 7.15, the Participant may elect that the portion of the Participant's Participant Account that is invested in shares of Company Stock or in units of the Company Stock Fund shall be distributed in the form of shares of Company Stock, valued as of the date of distribution, with fractional shares being paid in cash. Unless the Participant makes the election described in the preceding sentence, the entire amount of his or her Participant Account shall be distributed in the form of cash. The portion of the Participant's Participant Account that is not invested in shares of Company Stock or in units of the Company Stock Fund shall be distributed in cash. 7.5.2 Beneficiary. Each Participant's Beneficiary shall be his surviving spouse, unless either (a) there is no surviving spouse, or (b) such Participant's spouse consents in writing to the designation of another Beneficiary, and such consent acknowledges the effect of such designation and is witnessed by a representative of the Plan or a notary public. If there is no surviving spouse, or if such Participant's spouse consents in writing to the designation of another Beneficiary and such consent acknowledges the effect of such designation and is witnessed by a notary public, such Participant's Beneficiary shall be designated in the form prescribed by the Committee. If such Participant fails to designate a Beneficiary before his death, or if no designated Beneficiary survives the Participant, the Participant shall be deemed to have designated Beneficiaries in the following order of priority, and the Committee shall direct the Trustee to pay benefits under this Plan to such Beneficiaries: (1) The Participant's surviving spouse, (2) if the Participant has no surviving spouse, then the Trustees of any then existing inter vivos (living) trust (including any amendments thereto up to the time of the Participant's death) established by the Participant for the benefit of the Participant's surviving spouse, children, or issue, (3) if there is no such surviving spouse or such inter vivos trust, then any testamentary trust established by court order in the Participant's estate, (4) if there is no such surviving spouse, inter vivos trust, or testamentary trust, then the Participant's lawful living issue (including adopted issue) who survive such Participant, with each such issue's beneficial interest to be determined by right of representation, and (5) otherwise, to the Participant's executor or administrator. If no executor or administrator has been appointed or if actual notice of such appointment has not been given to the Trustee within one hundred twenty (120) days after such Participant's death, and if such Participant's interest in the Trust Fund does not exceed Sixty Thousand Dollars ($60,000.00), the Committee may direct the Trustee to pay such Participant's interest in the Trust Fund to the person entitled thereto and the Committee may require such proof of right and identity from such person as the Committee deems necessary, all in accordance with the provisions of Section 630 of the California Probate Code. - 40 - 7.5.3 Cash Out of Benefits. Notwithstanding the foregoing provisions of this Section 7.5, the vested balance in a Participant's Participant Account shall be distributed immediately upon the retirement, Total Disability, termination of employment, or death of the Participant if such distribution can be made without the consent of the Participant or the Participant's spouse under the following provisions of this Section 7.5.3. If the value of a Participant's vested Participant Account exceeds $3,500, and such vested Participant Account is not "Immediately Distributable" (as defined below), the Participant and the Participant's spouse (or the survivor, if either has died) must consent to any distribution of such Participant Account. Such consent of the Participant and the Participant's spouse shall be obtained in writing within the 90-day period ending on the first date on which a distribution is made. The Committee shall notify the Participant and the Participant's spouse of the right to defer any distribution until the Participant's Participant Account is no longer immediately distributable. Such notification shall include a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan, and shall be provided no less than 30 days and no more than 90 days before the first date on which a distribution is made. However, distribution may commence less than 30 days after such notice is given, if the Committee clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving such notice to consider whether or not to elect a distribution (and, if applicable, a particular distribution option), and the Participant, after receiving such notice, affirmatively elects a distribution. Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy the provisions of Sections 5.3 or 7.11 of the Plan. If, upon the termination of the Plan, neither the Company nor any Affiliate maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the Participant's Participant Account will, without the Participant's consent, be distributed to the Participant. However, if the Company or any Affiliate maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the Participant's Participant Account will be transferred, without the Participant's consent, to the other plan if the Participant does not consent to an immediate distribution. For purposes of this Section 7.5.3, a Participant's Participant Account is "Immediately Distributable" if any part of the Participant Account could be distributed to the Participant (or surviving spouse) before the Participant attains, or would have attained if not deceased, the later of age 62 or his Normal Retirement Date. 7.6 Disposition of Non-Vested Interests After Termination A Participant whose Employment terminates for any reason other than retirement, death, or Total Disability while any part of his interest in the Trust Fund remains forfeitable shall have no right to receive payment of or on account of his forfeitable interest, which instead shall be forfeited upon such the earlier of (a) the date on which the Participant receives a distribution of his entire vested interest in the Trust Fund, or (b) the date on which the Participant incurs five (5) consecutive One-Year Breaks in Service. For purposes of the preceding sentence, if a Participant's vested interest in the Trust Fund is zero, the Participant will be deemed to have received a distribution of his entire vested interest in the Trust Fund on his termination of Employment. Forfeited amounts shall remain in the Trust Fund as part thereof and be applied in reduction of Matching Contributions to be made by the Employer in the manner set forth in Section 5.2. If a Participant receives a distribution of benefits before becoming one hundred percent (100%) vested and before incurring five (5) consecutive One-Year Breaks in Service, the vested portion of such Participant's Matching - 41 - Contribution Account and Profit Sharing Contribution Account at any relevant time shall be equal to an amount ("X") determined by the formula: X=P[AB+(RxD)]-(RxD). For purposes of applying the formula: P is the Participant's vested percentage in his Matching Contribution Account and Profit Sharing Contribution Account at the relevant time; AB is the balance in the Participant's Matching Contribution Account and Profit Sharing Account at the relevant time; D is the amount of the benefit distributed to the Participant from the Participant's Matching Contribution Account and Profit Sharing Contribution Account; and R is the ratio of the Participant's balance in the Participant's Matching Contribution Account and Profit Sharing Contribution Account at the relevant time to his balance the Participant's Matching Contribution Account and Profit Sharing Contribution Account immediately after the distribution of his benefit. 7.7 Restoration of Forfeited Amounts on Reemployment Any amounts which a Participant forfeits under Sections 5.2 and 7.6 shall be restored to such Participant's Participant Account (without regard to any gains or losses of the Trust Fund after such Participant's termination of Employment and before the date of such restoration) if such Participant: (a) Received a distribution from the Plan upon the termination of his Employment that was less than the total balance in his Participant Account at the time of his termination of Employment; and (b) Resumes participation under this Plan before he incurs five (5) consecutive One-Year Breaks in Service after the date of such distribution. 7.8 Spendthrift Trust Provisions Except as otherwise provided under this Plan, all distributions by the Trustee shall be paid only to the person entitled thereto, and all such payments shall be made directly into the hands of such person and not into the hands of any other person or corporation whatsoever, to the end that said payments shall not be liable or the debts, contracts, or engagements of any such designated person, or taken in execution by attachment or garnishment, or by any other legal or equitable proceedings; nor shall any such designated person have any right to alienate, anticipate, commute, pledge, encumber, or assign any such payments or the benefits, proceeds, or any interest arising out of this Plan and Trust. The preceding sentence shall not apply to rights to payment under any "qualified domestic relations order," as defined in Section 414(p) of the Code, or to rights to payment under any domestic relations order entered before January 1, 1985. The Committee shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such orders. To the extent provided under a "qualified domestic relations order," a former spouse of a Participant (a) shall be treated as the Participant's spouse or surviving spouse for all purposes of this Plan, and (b) pursuant to Section 414(p)(10) of the Code, may receive a distribution from this Plan before the retirement, death, disability, or termination of Employment of the Participant, or the date on which the Participant reaches the age of fifty-nine and one-half (59 1/2) years or suffers a hardship as described in Section 7.16. - 42 - 7.9 Limitation on Time of Distribution Notwithstanding any other provision of this Plan, no distribution of benefits to a Participant shall commence later than the sixtieth day after the close of the Plan Year in which occurs the latest of (i) the Normal Retirement Date of the Participant, (ii) the tenth anniversary of the commencement of participation by such Participant, (iii) termination of the Participant's Employment, or (iv) the date to which the Participant elects to have the commencement of distribution of benefits to him deferred. Any such election by the Participant shall be submitted to the Committee in writing, shall be signed by the Participant, and shall describe the benefit and the date upon which it is to commence. 7.10 Withdrawals After Age 59 1/2 A Participant may take a withdrawal from his vested interest in the Trust Fund at any time and for any reason after reaching the age of fifty-nine and one-half (59 1/2) years. 7.11 Required Distributions Notwithstanding any other provision of this Plan, distributions shall be made in accordance with Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Regulation Section 1.401(a)(9)-2. Accordingly, the following provisions, which are intended to comply with such requirements, shall apply notwithstanding any other provision of this Plan: 7.11.1 For purposes of this Section 7.11: (a) Effective January 1, 1998, in the case of a Participant who is not a Five Percent Owner (as defined in Section 6.1.3(c)) for the Plan Year ending with or within the calendar year in which such Participant attained the age of seventy and one-half (70 1/2) years, the term "Beginning Date" shall mean the first day of April of the calendar year following the later of (a) the calendar year in which the Participant attains the age of seventy and one-half (70 1/2) years, or (b) the calendar year in which the Participant retires. In the case of a Participant who is a Five Percent Owner (as defined in Section 6.1.3(c)) for the Plan Year ending with or within the calendar year in which such Participant attained the age of seventy and one-half (70 1/2) years, the term "Beginning Date" shall mean the first day of April of the calendar year following the calendar year in which the Participant attains the age of seventy and one-half (70 1/2) years. (b) The term "Distribution Calendar Year" shall mean a calendar year for which a minimum distribution is required pursuant to this Section 7.11. For distributions beginning before the Participant's death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year that contains the Participant's Beginning Date. For distributions beginning after the Participant's death, the first Distribution Calendar Year is the calendar year in which the distributions are required to begin pursuant to this Section 7.11. (c) Life expectancy and joint and last survivor expectancy shall be computed by the use of the expected return multiples of Tables V and VI of Regulation Section 1.72-9. Unless otherwise elected by the Participant (or by the - 43 - Participant's surviving spouse in the case of distributions described in Section 7.11.4) by the time distributions are required to begin, life expectancy shall be recalculated annually. Such election shall be irrevocable as to the Participant (or surviving spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. (d) The term "Applicable Life Expectancy" shall mean the life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or the Designated Beneficiary) as of the Participant's (or the Designated Beneficiary's) birthday in the "Applicable Calendar Year" reduced by one for each calendar year that has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the Applicable Life Expectancy shall be the life expectancy as so recalculated. The "Applicable Calendar Year" shall be the first Distribution Calendar Year, and if life expectancy is being recalculated, each succeeding calendar year. If annuity payments commence in accordance with the provisions of this Section 7.11 before the Beginning Date, the "Applicable Calendar Year" shall be the year such payments commence. If a distribution is in the form of an immediate annuity purchased after the Participant's death with the Participant's remaining interest, the "Applicable Calendar Year" is the year of purchase. (e) The term "Participant's Benefit" means the balance in the Participant's interest in the Trust Fund as of the last Valuation Date in the calendar year (the "Valuation Calendar Year") immediately preceding the Distribution Calendar Year increased by the amount of any contributions or forfeitures allocated to the Participant during the Valuation Calendar Year after such Valuation Date and decreased by distributions made in the such Valuation Calendar Year after such Valuation Date; provided, however, that if any portion of the minimum distribution for the first Distribution Calendar Year is made in the second Distribution Calendar Year on or before the Beginning Date, the amount of the minimum distribution made in the second Distribution Calendar Year shall be treated as if it had been made in the immediately preceding Distribution Calendar Year. 7.11.2 Each Participant's entire interest in the Trust Fund shall be distributed, as of the first Distribution Calendar Year, to such Participant either (a) in full, not later than such Participant's Beginning Date, or (b) in installments, beginning not later than such Participant's Beginning Date, and extending over one of the following periods: (1) the life of such Participant, (2) the lives of such Participant and his Designated Beneficiary, (3) a period not extending beyond the life expectancy of such Participant, or (4) a period not extending beyond the life expectancy of the Participant and his Designated Beneficiary. Once distributions have begun to a Five Percent Owner under this Section 7.11, they must continue to be distributed, even if a Participant ceases to be a Five Percent Owner in a subsequent year. 7.11.3 If a Participant dies after distribution of his interest in the Trust Fund has begun but before his entire interest in the Trust Fund has been distributed pursuant to Section 7.11.2, the portion of his interest in the Trust Fund that remains undistributed at his death shall be distributed at least as rapidly as it would have been distributed under the method of distribution that was in use pursuant to Section 7.11.2 on the date of his death. 7.11.4 If a Participant dies before distribution of his interest in the Trust Fund begins pursuant to Section 7.11.2, distribution of such Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth (5th) anniversary of - 44 - the Participant's death, except to the extent that an election is made to receive distributions in accordance with paragraph (a) or paragraph (b) as follows: (a) If any portion of the Participant's interest is payable to a Designated Beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of such Designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died, or (b) If the Designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with paragraph (a) above shall not be earlier than the later of (i) December 31 of the calendar year immediately following the calendar year in which the Participant died or (ii) December 31 of the calendar year in which the Participant would have attained the age of seventy and one-half (70 1/2) years. If such surviving spouse dies before such distributions begin, the provisions of this Section 7.11.4 shall be applied as if such surviving spouse were the Participant. If the Participant has not made an election pursuant to this Section 7.11.4 by the time of his death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (i) December 31 of the calendar year in which the distributions would be required to begin under this Section 7.11.4, or (ii) December 31 of the calendar year that contains the fifth (5th) anniversary of the date of the death of the Participant. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest in the Trust Fund must be completed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. 7.11.5 If a Participant's interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the Beginning Date: (a) If the Participant's Benefit is to be distributed over (i) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's Designated Beneficiary or (ii) a period not extending beyond the life expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first Distribution Calendar Year, must at least equal the quotient obtained by dividing the Participant's Benefit by the Applicable Life Expectancy. (b) For calendar years beginning before January 1, 1989, if the Participant's spouse is not the Designated Beneficiary, the method of distribution selected must assure that at least fifty percent (50%) of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (c) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first Distribution Calendar Year, shall not be less than the quotient obtained by dividing the Participant's Benefit by the lesser of (i) the Applicable Life Expectancy or (ii) if the Participant's spouse is not the Designated Beneficiary, the applicable divisor determined from the table set forth in Regulation Section 1.401(a)(9)-2 Q&A-4. Distributions after the death of the Participant - 45 - shall be distributed using the Applicable Life Expectancy set forth in paragraph (a) above as the relevant divisor without regard to Regulation Section 1.401(a)(9)-2. (d) The minimum distribution required for the Participant's first Distribution Calendar Year must be made on or before the Participant's Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for the Distribution Calendar Year in which the Participant's Beginning Date occurs, must be made on or before December 31 of such Distribution Calendar Year. 7.11.6 For purposes of this Section 7.11, any amount paid to a child of a Participant shall be treated as if such amount had been paid to such Participant's surviving spouse if such amount will become payable to such surviving spouse when such child reaches maturity. For purposes of this Section 7.11, the life expectancy of a Participant and of his surviving spouse may not be redetermined more frequently than annually. 7.11.7 For purposes of this Section 7.11, "Designated Beneficiary" means any individual designated as a Beneficiary by a Participant. 7.11.8 Notwithstanding the foregoing provisions of this Section 7, any designation properly made by a Participant before January 1, 1984, under Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 shall remain in effect. 7.11.9 With respect to distributions under the Plan made in calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the regulations under Section 401(a)(9) that were proposed in January 2001, notwithstanding any provision of the Plan to the contrary. This Section 7.11.9 shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under section 401(a)(9) of the Code or such other date specified in guidance published by the Internal Revenue Service. 7.12 Claims Procedure If a Participant or Beneficiary does not receive payment of the benefits to which such person believes he is entitled under the Plan or has any other grievance with respect to his benefits under the Plan, such person or his authorized representative (such person or his authorized representative, if any, is hereinafter referred to as the "Claimant") may make a claim in the manner herein provided. All claims under the Plan shall be administered and processed in accordance with the rules and procedures specified in this Section 7.12, which, where appropriate, shall be applied consistently with respect to similarly situated Claimants. For purposes of this Section 7.12, the pension benefit election form completed by a Participant or a Beneficiary shall not be deemed a claim, and such requesting party shall not be deemed a Claimant. A Claimant shall not be charged a fee or be liable for any costs associated with making a claim or appealing an adverse benefit determination pursuant to this Section 7.12. 7.12.1 Filing a Claim. All claims under the Plan shall be made in writing, signed by the Claimant, and submitted to the Claims Coordinator, who may be, but need not be, an Employee or a member of the Committee. The Claims Coordinator shall be designated by the Committee from time to time; provided, that, the Committee provides - 46 - reasonable notice to Participants and to Beneficiaries as to the identity and the contact information of the Claims Coordinator. The Claims Coordinator must, upon request and within a reasonable period of time, provide a Participant or a Beneficiary with a benefits claim form (the "Claim Form"). The Claim Form shall (i) specify the claim, (ii) specify the date the claim is filed, (iii) specify the date by which a decision must be rendered by the Claims Coordinator, (iv) summarize the rules regarding extensions of benefit determinations as described herein, and (v) list the records, documents, and other information (other than information available to the Committee and the Claims Coordinator from their own records) required to be submitted by the Claimant. The date the Claims Coordinator receives the Claim Form from the Claimant shall be the date the claim is filed and shall be the date specified as such on the Claim Form, without regard to whether all the information necessary to make a determination accompanies the filing (the "Filing Date"). Once a claim is filed, the Claims Coordinator shall provide written notice to the Claimant of its determination within a reasonable time but not later than 90 days from the Filing Date. The determination notice shall comply with Section 7.12.3 of the Plan. The Claims Coordinator may determine that special circumstances require an extension of time for making a determination on a claim. If the Claims Coordinator determines that an extension of time is required, the Claims Coordinator shall provide written notice, in accordance with Section 7.12.2 of the Plan, to the Claimant prior to the termination of the initial 90-day period. In no event shall an extension exceed a period of 180 days from the Filing Date. In the event the Claims Coordinator extends the determination period due to a Claimant's failure to submit information necessary to decide a claim, the period for making the determination shall be tolled from the date the notification of the extension is sent to the Claimant until the date the Claims Coordinator receives the information. 7.12.2 Notice of Extension. In a notice of extension, the Claims Coordinator shall indicate (i) the date the notice is sent to the Claimant, (ii) the special circumstances requiring an extension of time, and (iii) the date by which the Claims Coordinator expects to render the determination. If the extension notice is in connection with a Claimant's failure to submit information necessary to decide the claim, the notice shall also state that the determination period is tolled from the date the notice is sent until the date the Claims Coordinator receives the information. 7.12.3 Notice of Benefit Determination. If a claim is granted, the Claims Administrator shall provide the Claimant written notice of such determination and the appropriate distribution, adjustment, or other action shall be made or taken within a reasonable period of time. If the Claims Coordinator denies the claim in whole or in part, he shall furnish a copy of his written determination to the Claimant upon the issuance thereof, and such written determination shall set forth, in a manner calculated to be understood by the Claimant, the following information: (a) The date the Claims Coordinator made the determination and the date the notice is sent to the Claimant; (b) The specific reasons for the denial; (c) Specific references to the pertinent Plan provisions upon which the denial is based; - 47 - (d) A description of any additional information or material necessary to perfect the claim and why such material or information is necessary; (e) An explanation of the appeals procedure set forth in Section 7.12.4 and Section 7.12.5 of the Plan and the time limits applicable to such procedures; (f) A statement of the Claimant's right to bring a civil action under Section 502 of the Act following an adverse benefit determination on review; and (g) An Appeals Form addressed to the Committee that clearly specifies the date by which an appeal must be filed with respect to the adverse determination. 7.12.4 Committee Review of an Adverse Benefit Determination. If the Claims Coordinator denies a claim in whole or in part, the Claimant may appeal from such denial to the entire Committee. The Committee shall provide the Claimant an opportunity to submit written comments, documents, records, and other information relating to the claim for benefits. The Committee shall review and take into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The Claimant shall be provided upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits. A document, record, or other information shall be considered relevant for purposes of the preceding sentence if such document, record, or information was (i) relied upon by the Claims Coordinator in making the benefit determination, (ii) was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon by the Claims Coordinator in making the benefit determination, or (iii) demonstrates compliance with the administrative processes and safeguards required under Labor Regulation 2560.501-1. 7.12.5 Filing an Appeal of an Adverse Benefit Determination. A Claimant shall appeal an adverse benefit determination by filing a signed benefit determination appeals form (the "Appeals Form") with the Committee no later than 60 days from the date the notice provided under Section 7.12.3 of the Plan is sent to the Claimant. The date an appeal is filed shall be the date the Committee receives the Appeals Form from the Claimant, without regard to whether all the information necessary to make a benefit determination is filed with the Appeals Form. The Committee, or such other individual designated by the Committee from time to time, shall specify on each Appeals Form received by the Committee the date such Appeals Form was received by the Committee. The Committee shall issue its written decision on each appeal no later than the date of the regularly scheduled meeting of the Committee that immediately follows the Claimant's request for a review, unless the request for review is filed within 30 days preceding the date of such meeting, in which event the Committee shall make a determination no later than the date of the second regularly scheduled meeting following the Committee's receipt of request for review. If special circumstances (such as the need to hold a hearing or obtain additional information) require an extension of the time for processing the appeal, the Committee shall issue its decision as soon as possible but not later than the Committee's third regularly - 48 - scheduled meeting after the date on which the appeal is filed. The Committee shall provide a Claimant with written notice, in accordance with Section 7.12.2 of the Plan, of an extension prior to the commencement of the extension. In the event the Committee requires an extension of time to make its determination due to a Claimant's failure to submit information necessary to decide a claim, the period for making a benefit determination shall be tolled from the date the notification of the extension is sent to the Claimant until the date the Committee receives the information. 7.12.6 Adverse Benefit Determination on Appeal-Information Access. In the event of an adverse benefit determination by the Committee, the Plan Administrator shall provide the Claimant access to, and copies of, documents, records, and other information relating to the adverse benefit determination on appeal, whether or not such information was relied on by the Committee in reaching a determination on the claim. 7.12.7 Notice of an Adverse Benefit Determination on Appeal. If the claim is granted on review, the Committee shall provide the Claimant written notice of such determination and the appropriate distribution, adjustment, or other action shall be made or taken within a reasonable period of time. If the Committee denies the claim in whole or in part, the Committee shall provide the Claimant with written notification of its determination as soon as possible, but no later than 5 days after the adverse benefit determination is made. The written notice issued by the Committee shall set forth, in a manner calculated to be understood by the Claimant, the following: (a) The date the Committee made the adverse determination and the date the notice is sent to the Claimant; (b) The specific reasons for the adverse determination; (c) The specific references to the pertinent Plan provisions on which the decision is based; (d) A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits; and (e) A statement of the Claimant's right to bring action under Section 502(a) of the Act. 7.13 Missing Persons If the Trustee is unable to effect delivery of any amount payable hereunder to the person entitled thereto, it shall so advise the Committee and the Committee shall give written notice to such person at his last known address as shown in the Employer's records, or take other reasonable steps to locate such person. If such person or such person's personal representative shall not have presented himself to the Employer within a reasonable time after the date of mailing of such notice or the completion of such steps, then the Committee shall direct the Trustee to (i) distribute such amount, including any amount thereafter becoming due to such person or such person's personal representative in the manner provided in Section 7.17.5(a) with respect to the death of the Participant where there is no valid designation of Beneficiary on file, (ii) petition for administration of such person's - 49 - estate pursuant to the requirements of local law, (iii) treat the same as a forfeiture in accordance with the provisions hereof, or (iv) take such other steps as may be authorized in guidance published by the Internal Revenue Service or the Department of Labor. In the event that a Participant, his Beneficiary, surviving spouse, executor, or administrator presents a valid claim for any amount payable hereunder after it has been forfeited pursuant to the preceding sentence, the Employer shall make a contribution to the Plan sufficient to reinstate the Participant in the value of such amount as of the date of its forfeiture. 7.14 Direct Rollovers This Section 7.14 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of this Plan to the contrary that would otherwise limit a "Distributee's" election under this Section 7.14, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an "Eligible Rollover Distribution" paid directly to an "Eligible Retirement Plan" specified by the Distributee in a "Direct Rollover." 7.14.1 Eligible Rollover Distribution. An "Eligible Rollover Distribution" is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary; or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; a portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and, effective January 1, 2000, any distribution described in Section 401(k)(2)(B)(1)(IV). 7.14.2 Eligible Retirement Plan. An "Eligible Retirement Plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. 7.14.3 Distributee. A "Distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. 7.14.4 Direct Rollover. A "Direct Rollover" is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 7.15 Withdrawal of Salary Deferral Contributions on Account of Hardship Upon written application to the Committee, and satisfaction of the conditions set forth in Section 7.15.2 hereof, a Participant may withdraw the amount of his Salary - 50 - Deferral Contributions (but not the earnings thereon) for the purposes set forth in Section 7.15.1. No Participant make take more than one (1) hardship withdrawal in any Plan Year, or any hardship withdrawal in an amount less than five hundred dollars ($500.00). 7.15.1 The purposes for which a Participant may withdraw his Salary Deferral Contributions are: 7.15.1.1 Payment of medical expenses described in Section 213(d) of the Code incurred by the Participant, the Participant's spouse, or any dependent of the Participant (as defined in Section 152 of the Code) or expenses necessary for such persons to obtain medical care; 7.15.1.2 Effective September 16, 1997, costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; 7.15.1.3 Effective September 16, 1997, the payment of tuition for the next twelve (12) months of post-secondary education for the Participant, or the Participant's spouse, children, or dependents; 7.15.1.4 To prevent the eviction of Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; or 7.15.1.5 Effective September 16, 1997, any other purpose set forth in a revenue ruling, notice, or other document of general applicability published by the Commissioner of Internal Revenue. 7.15.2 The conditions that must be satisfied for a Participant to withdraw his Salary Deferral Contributions are as follows: 7.15.2.1 The Participant must certify in writing to the Committee that the amount of the withdrawal is not in excess of the amount necessary to accomplish the applicable purpose set forth in Section 7.15.1, including amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the withdrawal; 7.15.2.2 The Participant has obtained all distributions (other than distributions on account of hardship) and all nontaxable loans currently available under all plans maintained by the Employer; 7.15.2.3 The Participant's Salary Deferral Contributions shall be suspended for twelve (12) months after receipt of the withdrawal under this Section 7.15 or under any comparable provision of any other plan maintained by the Employer; and 7.15.2.4 The Participant may not make Salary Deferral Contributions for the calendar year following the calendar year of the withdrawal in excess of the dollar limitation set forth in Section 4.3 for such next calendar year less the amount of such Participant's Salary Deferral Contributions for the calendar year in which the withdrawal was taken. 7.15.3 All distributions on account of hardship shall be made in cash; no distribution on account of hardship shall be made in the form of Company Stock. - 51 - ARTICLE VIII CONTINUANCE AND AMENDMENT OF PLAN 8.1 Continuance of the Plan Not a Contractual Obligation of the Company It is the expectation of the Company that it will continue this Plan indefinitely, but the continuance of this Plan is not a contractual obligation of the Company, and is not in consideration of, an inducement to, or condition of the employment of any person. The right is reserved to the Company by action of its Board of Directors at any time to discontinue this Plan, which action shall be binding on all Affiliates. The discontinuance of this Plan by the Company shall not have the effect of revesting in the Company or any Affiliate any part of the Trust Fund. Upon the termination or partial termination of this Plan or complete discontinuance of contributions by resolution of the Board of Directors or otherwise, the interests of affected Participants at such times shall thereupon be nonforfeitable and the Trustee shall continue to administer the Trust in accordance with the provisions hereof. 8.2 Continuance of Plan by Successor Business 8.2.1 In the event of the dissolution, consolidation, or merger of any entity which is an Employer or the sale by an Employer of its assets, the resulting successor person or persons, firm, or corporation may continue this Plan by direction from such person or persons or firm, if not a corporation, and if a corporation, by adoption of this Plan by resolution by its board of directors, and (if such predecessor was Williams-Sonoma, Inc.) by appointing a new Committee as though all members thereof had resigned, and by executing a proper Supplemental Agreement to the Trust Agreement with the Trustee. If such successor person or persons, firm, or corporation continues this Plan in the manner set forth above, then, unless otherwise specified at the time of such continuance either by the predecessor Employer or by such successor person or persons, firm, or corporation, (a) such successor person or persons, firm or corporation shall be deemed to be an Employer, (b) the Employees of the predecessor Employer shall not be deemed to have terminated their Employment or separated from Service by reason of such continuance, and (c) this Plan shall not be deemed to have terminated by reason of such continuance. 8.2.2 In the event the successor Employer has in effect or establishes a pension or profit sharing trust for the benefit of its employees, the assets of the Trust Fund required to satisfy the liabilities of the Trust with respect to Participants who continue in the employ of the successor Employer may be transferred to the trustee of the trust of such pension or profit sharing plan. 8.2.3 Notwithstanding the foregoing provisions of this Section 8.2, no merger or consolidation of this Plan with any other plan, nor transfer of the assets or liabilities of this Plan to any other plan, shall be permitted or be effective unless the provisions of such merged, consolidated, or transferee plan are such that each Participant of this Plan would, if said new plan were terminated immediately following said merger, consolidation, or transfer, receive a benefit equal to or greater than each said Participant would have received had this Plan been terminated immediately prior to such merger, consolidation, or transfer. - 52 - 8.3 Distribution of Trust Fund on Discontinuance of Plan If this Plan is terminated at any time under the terms of Sections 8.1 or 8.2, the Committee shall determine or cause to be determined the value of the Trust Fund and of the respective interests of the Participants and Beneficiaries therein, as follows: The value of the Trust Fund shall be determined by evaluating the entire Trust Fund as of the business day next following the date of such termination according to the fair market value of the assets on that date or on the date of actual sale of assets required to be sold to make any distribution, including in such value all assets of the Trust Fund. The value of the interest of each respective Participant or Beneficiary in the Trust Fund then held by the Trustee shall be his proportionate share of the Trust Fund as so evaluated and shall be vested in its entirety as of the date of the termination of the Plan. The Committee shall then direct the Trustee either to (i) transfer the Participants' interests in the Plan to the trustee of a trust under another qualified plan in which the Participants are or will be participants, (ii) distribute the Participants' interests as the Committee shall determine, or (iii) continue to hold the Participants' interests until they otherwise would be distributable under this Plan. In any event, the Trust shall continue until all Participants' interests shall have been so transferred or distributed. 8.4 Amendments The Company by action of its Board of Directors may at any time and from time to time amend this Plan; provided, however, that (a) no amendment shall be made at any time pursuant to which the Trust Fund may be diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries, (b) no amendment shall decrease the percentage of the interest of any Participant that theretofore has become vested, (c) no amendment shall discriminate in favor of Employees who are officers, shareholders, or highly compensated Employees, (d) no amendment shall reduce or eliminate any optional form of benefit offered under this Plan with respect to the Participant Account balance of any Participant as of the effective date of such amendment, and (e) no amendment shall eliminate or reduce any early retirement benefit or retirement-type subsidy with respect to benefits attributable to Service performed before the effective date of such amendment. Any amendment of the Plan by the Company shall be binding on each Affiliate, without any further action by any such Affiliate. Notwithstanding anything herein to the contrary, however, the Plan may be amended at any time if necessary to conform to the provisions and requirements of the Act and the Code, or any amendments thereto, or regulations issued pursuant thereto, or any similar act or any amendments thereto, and no such amendment shall be considered prejudicial to any interest of any Participant hereunder or his Beneficiaries. ARTICLE IX ADMINISTRATION OF THE TRUST FUND 9.1 The Trust Agreement Concurrently with or before the adoption of this Plan, the Company has executed a Trust Agreement providing for the administration of the Trust Fund by the trustees designated by the Board of Directors, herein called "Trustee," containing such provisions as the Company has deemed appropriate with respect to the powers and authority - 53 - of the Trustee as to the investment and reinvestment of the Trust Fund, the income therefrom, and the general administration thereof, subject to the right of the Committee to direct the Trustee with respect to investment of the Trust Fund and to remove therefrom any such investment as hereinbefore provided, the limitations on the liability of the Trustee, on authority of the Committee to settle the accounts of the Trustee on behalf of all persons having any interest in the Trust Fund, and from time to time to appoint a new Trustee in place of any then acting Trustee of the Trust Fund. All taxes upon or in respect of the Trust Fund or its assets and all expenses of administration (including reasonable compensation of the Trustee, its agents, and counsel) of the Trust Fund and special trust accounts established pursuant to this Plan shall be withdrawn by the Trustee from the Trust Fund (or from such special trust accounts) if it is legally permissible to do so, unless the Company elects to bear such expenses. The Trust Agreement shall be deemed to form a part of this Plan, and any and all rights or benefits that accrue to any person under this Plan shall be subject to all the terms and provisions of said Trust Agreement insofar as they are not in direct conflict with this Plan. ARTICLE X MISCELLANEOUS 10.1 Right of Employer to Dismiss Employees The adoption and maintenance of the Plan shall not be deemed to constitute a contract between the Employer and any Employee, or to be a consideration for or an inducement or condition of the Employment of any person. Neither the action of the Company in establishing this Plan nor any action taken by it or by the Committee under the provisions hereof, nor any provisions of this Plan shall be construed as giving to any Employee of the Employer the right to be retained in its employ or any right to any payment whatsoever except to the extent of the benefits provided for by this Plan to be paid from the Trust Fund. The Employer expressly reserves its right to dismiss any employee at any time without any liability for any claim either against the Company or against the Trust Fund for any payment whatsoever except to the extent provided for in this Plan. 10.2 Benefits Provided Solely from the Trust Fund All benefits payable under this Plan shall be paid or provided for solely from the Trust Fund and the Employer assumes no liability or responsibility therefor. 10.3 Plan Intended to Conform to Provisions of Federal Internal Revenue Code Relative to Employees' Trusts It is the intention of the Company that it shall be impossible for any part of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of the Employees of the Employer. This Section 10.3 shall be construed to follow the spirit and intent of the present Act, Code, and regulations thereunder or any future federal law and regulations governing trusts for the exclusive benefit of employees, to the end that the Trust Fund shall be incapable of such diversion, whether by operation or natural termination of the Trust by power of revocation, by amendment, or by any other means, except as expressly allowed by any such law or regulations. - 54 - 10.4 Amended and Successor Code or Act or Sections Thereof Wherever a reference is made in this Plan to the Code or Act or to a section of the Code or Act, such reference shall be deemed to refer to such Code or Act or section as the same may be amended from time to time, and to any successor Code or Act or section thereto. 10.5 Context to Control The headings of articles and sections are included solely for convenience or reference, and if there is any conflict between such headings and the text of the Plan, the text shall control. 10.6 Gender and Number Any gender, including neuter, shall include the other and the singular shall include the plural, and vice versa. 10.7 Service of Process Any member of the Committee who is then acting as such shall be authorized to receive service of process on behalf of the Plan. 10.8 Governing Law This plan shall be administered in the United States of America, and its validity, construction, and all rights hereunder shall be governed by the laws of the United States under the Act. To the extent that the Act shall not be held to have preempted local law, the Plan shall be administered under the laws of the state under which the Company is organized. If any provision of the Plan is held invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 10.9 Adoption by Other Employers In the event that any Employer other than the Company and its Affiliates adopts this Plan, completely independent records, allocations, and contributions shall be maintained for each entity, that constitutes an Employer, and, for purposes of this Section 10.9, the Company and its Affiliates shall be deemed to constitute a single Employer. The Trustee may invest all funds without segregating assets between or among signatory Employers. A separate Participant Account shall be established by each Employer for each Participant employed by any such Employer. Forfeitures arising with respect to one Employer's former Participants shall be allocated only among the Participant Accounts of that Employer's Participants and shall not be allocated to the Participant Accounts of other Employers. 10.10 No Reversion to Employer Except as provided in Section 4.1.8, no contribution to or other asset of this Plan and Trust shall revert to the Employer, the Plan being for the exclusive benefit of the Employees of the Employer. - 55 - IN WITNESS WHEREOF, this document has been executed this 25th day of February, 2002, to be effective as of January 1, 1997, except as otherwise stated herein. WILLIAMS-SONOMA, INC. By /s/ John S. Bronson ---------------------------- Title: Sr. Vice President ------------------------- By ---------------------------- Title: ------------------------- - 56 - EX-10.14 4 f87217kexv10w14.txt EXHIBIT 10.14 EXHIBIT 10.14 FIRST AMENDMENT TO THE FIRST AMENDMENT AND RESTATEMENT OF THE WILLIAMS-SONOMA, INC. ASSOCIATE STOCK INCENTIVE PLAN (2002 RESTATEMENT) Williams-Sonoma, Inc., a California corporation (the "Company"), hereby makes this First Amendment to the First Amendment and Restatement of the Williams-Sonoma, Inc. Associate Stock Incentive Plan (2002 Restatement), generally effective as of January 1, 1997, with reference to the following facts: A. The Company maintains the Williams-Sonoma, Inc. Associate Stock Incentive Plan, which was most recently amended and restated in its entirety in 2002, (the "Plan") for the benefit of its employees. B. By Section 8.4 of the Plan, the Company has reserved the right to amend the Plan. NOW, THEREFORE, the Plan is hereby amended, effective as of November 1, 2002, as follows: 1. Section 2.3.4(b) of the Plan is hereby amended in its entirety to provide as follows: "(b) Any portion of a Participant's Salary Deferral Contribution Account which is invested in the Company Stock Fund shall not thereafter be reinvested in any of the other investment funds, pools or vehicles selected by the Committee; except that, effective November 1, 2002, any portion of a Participant's Salary Deferral Contribution Account which is invested in the Company Stock Fund and has been received by the Trustee as of such date may, at the election of the Participant, be reinvested in any other investment funds, pools or vehicles selected by the Committee. Thereafter, on the third business day of each calendar quarter, any portion of a Participant's Salary Deferral Contribution Account which is invested in the Company Stock Fund and has been received by the Trustee as of such date may be reinvested, at the election of the Participant, in any other investment funds, pools or vehicles selected by the Committee." 2. In all other respects, the terms and provisions of the Plan are hereby ratified and declared to remain in full force and effect. IN WITNESS WHEREOF, Williams-Sonoma, Inc. has executed this First Amendment as of the 1 of November, 2002. WILLIAMS-SONOMA, INC. By: /s/ John S. Bronson ----------------------- EX-10.15 5 f87217kexv10w15.txt EXHIBIT 10.15 EXHIBIT 10.15 SECOND AMENDMENT TO THE FIRST AMENDMENT AND RESTATEMENT OF THE WILLIAMS-SONOMA, INC. ASSOCIATE STOCK INCENTIVE PLAN (2002 RESTATEMENT) Williams-Sonoma, Inc., a California corporation (the "Company"), hereby makes this Second Amendment to the First Amendment and Restatement of the Williams-Sonoma, Inc. Associate Stock Incentive Plan, generally effective January 1, 1997, with reference to the following facts: A. The Company maintains the Williams-Sonoma, Inc. Associate Stock Incentive Plan, which was most recently amended and restated in its entirety in 2002 (the "Plan"), for the benefit of eligible employees. B. The Company wishes to amend the Plan to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This Amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. This Amendment shall supercede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Amendment. C. The Company wishes to amend the Plan to comply with the Section 401(a)(9) Final and Temporary Regulations issued by the Internal Revenue Service on April 17, 2002 for purposes of determining minimum required distributions under Section 401(a)(9) of the Internal Revenue Code of 1986, as amended, (the "Code") for calendar years beginning with the 2003 calendar year. D. The Company wishes to amend the Plan to permit adjustments in the Company Stock Fund upon changes in capitalization. E. By Section 8.4 of the Plan, the Company has reserved the right to amend the Plan. NOW, THEREFORE, the Plan is hereby amended, effective as of the first Plan Year beginning after December 31, 2001, unless otherwise specified herein, as follows: 1. The first sentence of Section 1.11(d) shall be amended in its entirety to provide as follows: "The annual Compensation of each Participant taken into account in determining all benefits provided under this Plan for any Plan Year shall not exceed One Hundred Sixty Thousand Dollars ($160,000.00); except that, effective January 1, 2002, such limit shall be increased to Two Hundred Thousand Dollars ($200,000.00), as adjusted for cost of living increases after 2002 in accordance with Section 401(a)(17)(B) of the Code." 2. The following Section 2.16 shall be added to the end of Section 2: "2.16 Adjustments Upon Changes in Capitalization of Company Stock In the event shares of Company Stock held in the Company Stock Fund are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company or a member of the same controlled group (within the meaning of Section 409(l)(4) and 1563(a) of the Code as the Company) or a successor entity, or for other property (including without limitation, cash), through reorganization, recapitalization, reclassification, stock combination, stock dividend, stock split, reverse stock split, spin off or other similar transaction, an appropriate and proportionate adjustment will be made in the number and kind of shares of Company Stock held in the Company Stock Fund. A corresponding adjustment changing the number or kind of shares of Company Stock in the Company Stock Fund shall likewise be made. Any such adjustment shall be made with a corresponding adjustment in the price for each share of Company Stock or other unit held in the Company Stock Fund. Such adjustment will be made by the Committee, whose determination in that respect will be final, binding and conclusive." 3. The following sentences shall be added to the end of Section 4.1.6 of the Plan: "Effective January 1, 2002, the total amount of Contributions under this Section 4.1 made on behalf of all Participants for a Plan Year shall not exceed twenty-five percent (25%) of the total Compensation paid to all Participants during such Plan Year, plus the amount of any credit for contribution carryovers to which the Employer is entitled under Section 404(a)(3) of the Code. For purposes of determining the twenty-five (25%) Contribution limitation under this Section 4.1.5, Salary Deferral Contributions made under Section 4.1.1 and catch-up contributions shall not be considered Contributions." - 2 - 4. The following sentence shall be added to the end of Section 4.3.1: "Effective for Plan Years beginning after December 31, 2001, during any taxable year, the amount of Nine Thousand Five Hundred Dollars ($9,500.00) set forth in this Section 4.3.1 shall be adjusted to reflect the dollar limitation contained in Section 402(g) of the Code in effect for such taxable year, except to the extent permitted under Section 414(v) of the Code." 5. The following sentence shall be added to the end of Section 4.6: "The Multiple Use test described in this Section 4.6 and Treasury Regulation Section 1.401(m)-2 shall not apply for Plan Years beginning after December 31, 2001." 6. Effective November 1, 2002, the following two sentences shall be added to the end of Section 4.8: "Notwithstanding the preceding sentence, effective November 1, 2002, the Plan shall not accept rollover contributions under this Section 4.8 from (i) an annuity contract described in Section 403(b) of the Code, (ii) an individual retirement account or annuity described in Sections 408A or 408(b) of the Code, (iii) amounts attributable to employee after-tax contributions, and (iv) any amounts attributable to hardship distributions from any other plan. The Plan shall accept rollover contributions after the initial 60 day period, that are otherwise permitted under the Plan, provided that the Internal Revenue Service has granted relief for such rollover contributions on account of hardship." 7. The first sentence of Section 5.3.1 shall be amended in its entirety as follows: "Effective for Limitation Years beginning after January 1, 1994, the Annual Additions allocated to the Participant Accounts of any Participant, together with the Annual Additions allocated to a Participant's account in any other defined contribution plan, as defined in Section 414(i) of the Code, maintained by the Employer shall not exceed the lesser of (1) twenty-five percent (25%) of such Participant's Compensation, or (2) $30,000.00, as adjusted under Section 415(d) of the Code; except that, effective for Limitation Years beginning after December 31, 2001, the Annual Additions contribution limitation shall not exceed the lesser of (1) one-hundred percent (100%) of such Participant's Compensation, or (2) $40,000.00, as adjusted under 415(d) of the Code." - 3 - 8. The following sentence shall be added to the end of Section 5.3.1: "Effective for Limitation Years beginning after December 31, 2001, the term 'Annual Additions' shall not include catch-up contributions made to the Plan under Section 414(v) of the Code." 9. The following Section 6.4 shall be added to the end of Section 6. "6.4 Modification of Top-Heavy Rules This Section 6.4 shall apply for purposes of determining whether the Plan is a Top-Heavy Plan under Section 416(g) of the Code for Plan Years beginning after December 31, 2001, and whether the Plan satisfies the minimum benefits requirements of Section 416(c) of the Code for such years. This Section 6.4 amends the applicable provisions of Sections 6.1, 6.2 and 6.3 of the Plan as follows: 6.4.1 'Key Employee' means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the Determination Date was an officer of the Employer having annual Compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a 5-percent owner of the Employer, or a 1-percent owner of the Employer having annual Compensation of more than $150,000. The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder. 6.4.2 The Present Values of Accrued Benefits and the Participant's Participant Account balance of an Employee as of the Determination Date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the 1-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from Service, death, or Total Disability, this provision shall be applied by substituting '5-year period' for '1-year period.' 6.4.3 The Present Value of Accrued Benefits and the Participant's Participant Account of any individual who has - 4 - not performed Services for the Employer during the 1-year period ending on the Determination Date shall not be taken into account. 6.4.4 Employer Matching Contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Section 416(c)(2) of the Code and the Plan. The preceding sentence shall apply with respect to Matching Contributions under the Plan, or, if the Plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as Matching Contributions for purposes of the actual contribution percentage test under Section 4.5 of the Plan and other requirements of Section 401(m) of the Code." 10. Effective January 1, 2003, the second sentence of Section 7.11 shall be amended in its entirety to provide as follows: "Accordingly, the following provisions, which are intended to comply with such requirements, shall apply notwithstanding any other provisions of this Plan, provided that, for purposes of determining distributions for calendar years beginning with the 2003 calendar year, the provisions of Section 7.16 shall apply notwithstanding any other provisions of the Plan." 11. The following sentences shall be added to the end of Section 7.14.1: "Effective for distributions made after December 31, 2001, the term 'Eligible Rollover Distribution' shall not include any amount distributed on account of hardship under Section 7.15 of the Plan and a Distributee may not elect to have any portion of a hardship distribution paid directly to an Eligible Retirement Plan, as defined in Section 7.14.2. A portion of a distribution shall not fail to be an 'Eligible Rollover Distribution' merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in Section 408(a) or 408(b) of the Code, or to a qualified defined contribution plan described in Section 401(a) or 403(a) of the Code that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible." - 5 - 12. The following sentences shall be added to the end of Section 7.14.2: "Effective for distributions made after December 31, 2001, an 'Eligible Retirement Plan' shall also mean an annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from the Plan. The definition of 'Eligible Retirement Plan' shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code." 13. Section 7.15.2.3 of the Plan shall be amended in its entirety as follows: "7.15.2.3 A Participant's Salary Deferral Contributions shall be suspended for twelve (12) months after receipt of the withdrawal under this Section 7.15 or under any comparable provision of any plan maintained by the Employer; provided that with respect to withdrawals under this Section 7.15 made on and after January 1, 2002, the Participant's Salary Deferral Contributions shall be suspended for six (6) months after receipt of the withdrawal under this Section 7.15 or under any comparable provision of any plan maintained by the Employer; and..." 14. Effective January 1, 2003, the following Section 7.16 shall be added to the end of Section 7: "7.16 Required Minimum Distributions for Calendar Years Beginning With the 2003 Calendar Year Effective for calendar years beginning with the 2003 calendar year, all distributions required under Section 7.11 will be determined and made in accordance with the Treasury regulations issued under Section 401(a)(9) of the Code. Accordingly, the requirements of this Section 7.16 shall take precedence over any inconsistent provisions of the Plan. Furthermore, notwithstanding the other provisions of this Section 7.16, distributions may be made under a designation made before January 1, 1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA. - 6 - 7.16.1 For purposes of this Section 7.16: (a) The term 'Designated Beneficiary' means the individual who is designated as the Beneficiary under Section 7.5.2 of the Plan and is the designated beneficiary under Section 401(a)(9) of the Code and Treasury Regulation Section 1.401(a)(9)-1, Q&A-4. (b) The term 'Distribution Calendar Year' means a calendar year for which a minimum distribution is required pursuant to Section 7.11 of the Plan. For distributions beginning before the Participant's death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant's Beginning Date. For distributions beginning after the Participant's death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin under Section 7.16.4. The required minimum distribution for the Participant's first Distribution Calendar Year will be made on or before the Participant's Beginning Date. The required minimum distribution for other Distribution Calendar Years, including the required minimum distribution for the Distribution Calendar Year in which the Participant's Beginning Date occurs, will be made on or before December 31 of that Distribution Calendar Year. (c) Life expectancy shall be computed by the use of the Single Life Table in Treasury Regulation Section 1.401(a)(9)-9. (d) The term 'Participant's Benefit' means the balance in the Participant's interest in the Trust Fund as of the last Valuation Date in the calendar year immediately preceding the Distribution Calendar Year (the "Valuation Calendar Year") increased by the amount of any contributions made and allocated or forfeitures allocated to the Participant as of dates in the Valuation Calendar Year after the Valuation Date and decreased by distributions made in the Valuation Calendar Year after the Valuation Date. The Participant's Benefit for the Valuation Calendar Year includes any amounts rolled over or transferred to the Plan either in the Valuation Calendar Year or in the Distribution Calendar Year if distributed or transferred in the Valuation Calendar Year. (e) The term 'Beginning Date' shall have the meaning provided under Section 7.11.1(a) of the Plan. - 7 - 7.16.2 Unless the Participant's interest is distributed in a single sum on or before the Beginning Date, as of the first Distribution Calendar Year, distributions will be made in accordance with Sections 7.16.3, 7.16.4 and 7.16.5 of the Plan. 7.16.3 Required Minimum Distributions During Participant's Lifetime. 7.16.3.1 A Participant's entire interest in the Trust Fund shall be distributed as of the first Distribution Calendar Year, to such Participant either (a) in full, not later than such Participant's Beginning Date, or (b) in installments, beginning not later than such Participant's Beginning Date in accordance with Section 7.16.3.2. 7.16.3.2 During the Participant's lifetime, the minimum amount that will be distributed for each Distribution Calendar Year is the lesser of: (a) The quotient obtained by dividing the Participant's Benefit by the distribution period in the Uniform Lifetime Table set forth in Treasury Regulation Section 1.401(a)(9)-9, using the Participant's age as of the Participant's birthday in the Distribution Calendar Year; or (b) If the Participant's sole Designated Beneficiary for the Distribution Calendar Year is the Participant's spouse, the quotient obtained by dividing the Participant's Benefit by the number in the Joint and Last Survivor Table set forth in Treasury Regulation Section 1.401(a)(9)-9, using the Participant's and spouse's attained ages as of the Participant's and spouse's birthdays in the Distribution Calendar Year. 7.16.3.3 Required minimum distributions will be determined under this Section 7.16.3 beginning with the first Distribution Calendar Year and up to and including the Distribution Calendar Year that includes the Participant's date of death. 7.16.4 Death of Participant Before Distributions Are Required to Begin. 7.16.4.1 If a Participant dies before distributions of his interest in the Trust Fund are required to begin under Section 7.16.3, such Participant's entire interest in the Trust Fund shall be completely distributed by December 31 of the calendar year containing the fifth (5th) anniversary of - 8 - the Participant's death, except to the extent an election is made in accordance with paragraph (a) or paragraph (b) as follows: (a) If the Participant's surviving spouse is the Participant's sole Designated Beneficiary, then distributions to the surviving spouse may begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 1/2, if later. (b) If the Participant's surviving spouse is not the Participant's sole Designated Beneficiary, then distributions to the Designated Beneficiary may begin by December 31 of the calendar year immediately following the calendar year in which the Participant died. If the Participant has not made an election pursuant to this Section 7.16.4 by the time of his death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (i) December 31 of the calendar year in which the distributions would be required to begin under this Section 7.16.4, or (ii) December 31 of the calendar year which contains the fifth (5th) anniversary of the date of the death of the Participant. If the Participant has no Designated Beneficiary as of September 30 of the year following the year of the Participant's death, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest in the Trust Fund must be completed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. 7.16.4.2 If the Participant's surviving spouse is the Participant's sole Designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 7.16.4, other than Section 7.16.4.1(a), shall apply as if the surviving spouse were the Participant. 7.16.4.3 For purposes of this Section 7.16.4 and Section 7.16.5, unless Section 7.16.4.2 applies, distributions are considered to begin on the Participant's Beginning Date. If Section 7.16.4.2 applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 7.16.4.1(a). - 9 - 7.16.4.4 If a Designated Beneficiary elects to receive a distribution under Section 7.16.4.1(b), the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant's death is the quotient obtained by dividing the Participant's Benefit by the remaining life expectancy of the Participant's Designated Beneficiary, determined as provided in Section 7.16.5. 7.16.5 Required Minimum Distributions After Participant's Death. 7.16.5.1 If the Participant dies on or after the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant's death is the quotient obtained by dividing the Participant's Benefit by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant's Designated Beneficiary, determined as follows: (a) The Participant's remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year. (b) If the Participant's surviving spouse is the Participant's sole Designated Beneficiary, the remaining life expectancy of the surviving spouse is calculated for each Distribution Calendar Year after the year of the Participant's death using the surviving spouse's age as of the spouse's birthday in that year. For Distribution Calendar Years after the year of the surviving spouse's death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse's birthday in the calendar year of the spouse's death, reduced by one for each subsequent calendar year. (c) If the Participant's surviving spouse is not the Participant's sole Designated Beneficiary, the Designated Beneficiary's remaining life expectancy is calculated using the age of the Designated Beneficiary in the year following the year of the Participant's death, reduced by one for each subsequent year. 7.16.5.2 If the Participant dies on or after the date distributions begin and there is no Designated Beneficiary as of September 30 of the year after the year of the Participant's death, the minimum amount that will be distributed for each Distribution Calendar Year after the year - 10 - of the Participant's death is the quotient obtained by dividing the Participant's Benefit by the Participant's remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year." 15. The following Section 7.17 shall be added to the end of Section 7: "7.17 Effective January 1, 2002, a Participant's Participant Account shall be distributed on account of the Participant's severance from Employment, provided that such distribution, otherwise, complies with this Section 7 regarding distributions, other than provisions that require separation from Service before a Participant's Participant Account can be distributed. Any distribution on account of a severance from Employment shall be subject to Section 7.5.3 of the Plan and shall comply with any applicable regulations and other guidance of general applicability issued under the Code." This Amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. This Amendment shall supercede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Amendment. In all other respects, the terms and provisions of the Plan are hereby ratified and declared to remain in full force and effect. IN WITNESS WHEREOF, this Second Amendment has been executed this 31 day of December, 2002. WILLIAMS-SONOMA, INC. By: /s/ John S. Bronson -------------------------------- Title: Sr. VP Human Resources ----------------------------- - 11 - EX-10.39 6 f87217kexv10w39.txt EXHIBIT 10.39 EXHIBIT 10.39 [LETTERHEAD OF WILLIAMS-SONOMA, INC.] January 9, 2003 Dale W. Hilpert 3 Nina Court Mill Valley, CA 94941 By Fax and Federal Express Re: Separation Agreement Dear Dale: This letter (the "Agreement") summarizes the terms of your separation from employment at Williams-Sonoma, Inc. ("WSI"). 1. This Agreement will be effective upon its execution by both you and WSI (the "Effective Date"). By executing this Agreement, you agree to, and hereby do, voluntarily resign as an officer and a director of WSI, and any subsidiary or affiliate of WSI. This Agreement supersedes any employment contract that has existed between WSI and you, specifically including the agreement made as of February 5, 2001 (the "2001 Employment Agreement"), and that contract, or any other such contract, is hereby canceled. 2. Your employment with WSI terminated on January 8, 2003. In exchange for the promises given by you to WSI as described in this Agreement: a) WSI will accelerate to the Effective Date the vesting of the 800,000 unvested stock options (reflecting the stock split with the record date of April 29, 2002) that were granted in connection with the 2001 Employment Agreement; and b) WSI will cause to be vested at the Effective Date the 500,000 shares of Restricted Stock granted to you in connection with the 2001 Employment Agreement; and c) WSI will pay you a lump sum, consistent with the terms of the 2001 Employment Agreement and the WSI Incentive Bonus Plan, reflecting a percentage of your base salary (and as though you were employed for the entire 2002 fiscal year), as approved by the Compensation Committee of the WSI Board of Directors, and in accordance with the Bonus Plan approved by the Compensation Committee in April 2002. This amount will be paid as soon as practicable after the close of the WSI fiscal year and the meeting of the Compensation Committee. -1- Upon your separation, you will be eligible to continue medical coverage pursuant to COBRA. From and after January 8, 2003, you will not be entitled to any further payments or benefits of any kind, other than as stated in this Agreement. Notwithstanding anything to the contrary in this Agreement, in the event of a breach by you of any of the terms or conditions in this Agreement, or of a breach or violation of any of the terms or conditions of the agreement referred to in paragraph 5 below, all payments due under this Agreement will immediately cease, and WSI will have no further obligation to you under this Agreement. 3. You acknowledge that at termination you will be paid $14,615.39, less applicable withholdings which represents your final pay. You also acknowledge that at termination you will be paid an amount $59,375.01, less applicable withholdings, which represents accrued but unused vacation time and floating holidays. You will also be reimbursed for business expenses already incurred and approved. You agree that prior to the execution of this Agreement, you were not entitled to receive any further monetary payments from WSI, and that the only payments or benefits that you are entitled to receive from WSI in the future are those specified in paragraph 2 of this Agreement. 4. You understand that you must exercise all stock options pursuant to the provisions in the applicable plans and notices. The vested portion of such stock options may only be exercised during the period of 90 days following January 8, 2003. Failure to exercise any vested options during that period will result in the forfeiture of those options. 5. At all times from and after the Effective Date, you agree to continue to be bound by WSI's Corporate Ethics Policy and Agreement, a copy of which is attached. 6. At no time after the Effective Date will you disclose any Confidential Information gained during or as a result of your employment by WSI or service on the Board of Directors of WSI. Confidential Information means any information that is, or should reasonably be understood to be, confidential or proprietary to WSI. Confidential Information includes but is not limited to all information, whether in written, oral, electronic, magnetic, photographic or any other form, that relates to WSI's: past, present and future businesses, products, product specifications, designs, drawings, concepts, samples, intellectual property, inventions, know-how, sources, costs, pricing, technologies, customers, vendors, other business relationships, business ideas and methods, distribution methods, inventories, manufacturing processes, computer programs and systems, employees, hiring practices, operations, marketing strategies and other technical, business and financial information. Confidential Information also includes the identity, capabilities and capacity of vendors and of former vendors or others that were considered but rejected. 7. You agree that you will not disparage WSI or any officer, director, shareholder or employee of WSI or otherwise make any statement that could injure the personal or -2- business reputation of any of them, nor will you take any action that is inconsistent with the best interests of WSI. You also agree not to make any statement regarding your departure from WSI that is inconsistent with the press release issued by WSI on January 9, 2003. In addition to the foregoing, you agree, upon one or more requests from WSI, to deliver to it all documents and materials, of whatever nature, relating to WSI, its products and/or its services, including reports, files, memoranda, records, software, credit cards, door and file keys, computers, computer access codes, disks and instructional manuals and other physical or personal property which you received, prepared or helped prepare in connection with your employment with WSI or service on the Board of Directors of WSI. You further agree that you will not keep any copies or excerpts of any of the above items. 8. Except for claims arising out of the promises contained here, any and all Claims (as defined below), which you may have against WSI (as defined below) arising out of your employment with WSI or the termination of that employment, are fully and completely settled, and all liability or potential liability arising out of any such Claim is hereby released. "Claims," as used in this paragraph 8 and in paragraph 9 shall include but not be limited to those based upon or arising out of any alleged violation of your civil rights, wrongful discharge, breach of contract, tort, common law, statutory and constitutional claims, or any state, local or federal statute including those prohibiting race, sex, sexual orientation, national origin, disability, or perceived disability discrimination. "WSI," as used in this paragraph 8 and in Paragraph 9, shall include, in addition to Williams-Sonoma, Inc., any predecessor, successor, parent, subsidiary or affiliate of Williams-Sonoma, Inc. or any officer, director, employee, shareholder or affiliate of it. 9. You acknowledge that it is your intention to fully and finally resolve and release any and all Claims, known or unknown, which may exist against WSI and recognize that you may later discover facts in addition to or different from those which you now know or believe to be true. In furtherance of this intention, and to finally resolve all matters between yourself and WSI, you agree to waive and relinquish any and all rights and benefits afforded by Section 1542 of the Civil Code of the State of California which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 10. In addition to the release set forth in paragraphs 8 and 9 above, you voluntarily and knowingly waive all rights or claims arising under the Federal Age Discrimination in Employment Act. This waiver is given only in exchange for consideration in addition to anything of value to which you are entitled. This waiver does not waive rights or claims that may arise after the date of execution of this Agreement. You acknowledge that (a) this paragraph is written in a manner calculated to be understood by you, (b) by reviewing this paragraph you have been advised in writing -3- to consult with an attorney before executing this Agreement, (c) you are being given a period of twenty-one days within which to consider this paragraph, and (d) to the extent you execute this Agreement, including this paragraph, before the expiration of the twenty-one day period, you do so knowingly and voluntarily. You will have the right to cancel and revoke this Agreement during a period of seven days following your execution of it. In order to cancel and revoke this Agreement, you must deliver to WSI, prior to the expiration of the seven-day period, a written notice of cancellation and revocation. 11. You understand and agree that to the fullest extent permitted by law, you are precluded from filing or pursuing any legal claim of any kind against WSI at any time in the future, in any federal, state or municipal court, administrative agency or other tribunal, arising out of any of the claims that you have waived by virtue of executing this Agreement. You agree not to file or pursue any such legal claims. 12. You agree that you will not, for a period of twelve months from the Effective Date, directly or indirectly recruit, solicit or induce, or attempt to induce, any employee, consultant or vendor of WSI to terminate employment or any other relationship with WSI. You agree that you will not at any time use Confidential Information to recruit, solicit, retain or hire any of WSI's employees, consultants or vendors. 13. You agree that except as may be required by law, neither you nor any member of your family will disclose to any individual or entity (other than your legal, tax or financial advisors) the terms of this Agreement. In the event that such disclosure is made, any outstanding obligations of WSI under this Agreement will immediately terminate. 14. You agree to cooperate with WSI in connection with any currently pending or future litigation, including, without limitation, by making yourself reasonably available to testify in any action as reasonably requested by WSI. 15. You acknowledge that money damages are an inadequate remedy for any breach by you of any of the provisions of paragraphs 5, 6, 7 or 12 of this Agreement, and therefore WSI shall be entitled to injunctive relief for any such breach. 16. The provisions of this Agreement are severable. If any provision is held to be invalid or unenforceable, it will not affect the validity or the enforceability of any other provision. 17. Each of the parties has received, or had the opportunity to receive, independent legal advice from legal counsel of such party's choice with respect to the advisability of making the settlement provided for in this Agreement and with respect to the advisability of executing this Agreement. 18. This Agreement is governed by California law without regard to conflict of law principles. -4- 19. Any controversy, dispute, or claim between the parties to this Agreement, including any claim arising out of, in connection with, or in relation to the formation, interpretation, performance or breach of this Agreement shall be settled exclusively by arbitration, before a single arbitrator, in accordance with the rules of the American Arbitration Association. 20. This Agreement fully sets forth the terms of your separation of employment from WSI and supersedes any prior discussions or agreements whether verbal or written with regard to that subject. Please indicate your agreement to such terms by signing the extra copy of it and returning it to me. Sincerely, /s/ Howard Lester Howard Lester Chairman, Board of Directors Williams-Sonoma, Inc. ACCEPTED AND AGREED TO: /s/ Dale W. Hilpert _______________________ Dale W. Hilpert 01/13/03 _______________________ Date -5- EX-99.1 7 f87217kexv99w1.htm EXHIBIT 99.1 exv99w1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the period ended February 2, 2003 of Williams-Sonoma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward A. Mueller, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;

2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the period ended February 2, 2003 of Williams-Sonoma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sharon L. McCollam, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;

2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended February 2, 2003.
OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to


California		94-2203880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3250 Van Ness Avenue, San Francisco, CA		94109
(Address of principal executive offices)		(Zip Code)


Common Stock, $.01 par value		New York Stock Exchange, Inc.
(Title of class)		(Name of each exchange on which registered)


PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSEXECUTIVE COMPENSATION
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. CONTROLS AND PROCEDURES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.13
Exhibit 10.14
Exhibit 10.15
Exhibit 10.39
Exhibit 99.1
Exhibit 99.2


		PAGE

PART I
Item 1.	Business		3
Item 2.	Properties		5
Item 3.	Legal Proceedings		6
Item 4.	Submission of Matters to a Vote of Security Holders		6
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		7
Item 6.	Selected Financial Data		8
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 8.	Financial Statements and Supplementary Data		26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		44
PART III
Item 10.	Directors and Executive Officers of the Registrant		45
Item 11.	Executive Compensation		46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		46
Item 13.	Certain Relationships and Related Transactions		46
Item 14.	Controls and Procedures		46
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		47


Location		Square Footage (Approximate)

Olive Branch, Mississippi		2,105,000 square feet
Memphis, Tennessee		1,036,000 square feet


Location		Square Footage (Approximate)

Las Vegas, Nevada		36,000 square feet
Oklahoma City, Oklahoma		36,000 square feet
Camp Hill, Pennsylvania		38,000 square feet


Location		Square Footage (Approximate)

San Francisco, California		111,000 square feet
Brisbane, California		106,000 square feet
New York City, New York		33,000 square feet
Rocklin, California		14,000 square feet


ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Fiscal 2002		High	Low

	1st Quarter	$29.46	$20.90
	2nd Quarter	$32.80	$20.45
	3rd Quarter	$26.90	$19.96
	4th Quarter	$28.87	$21.25

Fiscal 2001		High	Low

	1st Quarter	$14.76	$11.50
	2nd Quarter	$19.46	$15.00
	3rd Quarter	$19.52	$10.87
	4th Quarter	$23.00	$12.65


Dollars and amounts in thousands except
percentages, per share amounts and retail
stores data				Feb. 2, 2003		Feb. 3, 2002¹		Jan. 28, 2001		Jan. 30, 2000		Jan. 31, 1999


Results of Operations
	Net revenues			$	2,360,830	$	2,086,662	$	1,829,483	$	1,460,000	$	1,160,909
	Net revenues growth				13.1%		14.1%		25.3%		25.8%		17.9%
	Gross margin			$	951,601	$	793,989	$	693,628	$	567,027	$	450,208
	Earnings before income taxes				202,282		122,106		92,329		110,721		90,745
	Net earnings				124,403		75,096		56,782		68,100		54,897
	Basic net earnings per share²				1.08		.67		.51		.61		.51
	Diluted net earnings per share²			$	1.04	$	.65	$	.49	$	.58	$	.48
	Gross margin as a percent of net revenues				40.3%		38.1%		37.9%		38.8%		38.8%
	Operating margin as a percent of net revenues³				8.6%		6.1%		5.4%		7.5%		7.9%
	Pre-tax operating margin as a percent of net revenues⁴				8.6%		5.9%		5.0%		7.6%		7.8%

Financial Position
	Working capital			$	200,556	$	120,060	$	81,623	$	194,093	$	172,866
	Long-term debt and other long-term obligations				23,217		29,307		28,267		40,453		44,649
	Total assets			$	1,264,455	$	994,903	$	891,928	$	738,942	$	576,245
	Return on assets				11.0%		8.3%		7.5%		10.6%		10.6%
	Shareholders’ equity			$	643,978	$	532,531	$	427,458	$	383,309	$	302,030
	Shareholders’ equity per share (book value)²			$	5.63	$	4.65	$	3.83	$	3.40	$	2.71
	Return on equity				21.1%		15.6%		14.0%		19.9%		22.2%
	Debt-to-equity ratio				4.0%		6.0%		8.3%		10.8%		15.8%

Retail Stores
	Store count
		Williams-Sonoma:			236		214		200		185		163
			Classic		32		38		45		57		65
			Grande Cuisine		204		176		155		128		98
		Pottery Barn:			159		145		136		117		96
			Classic		6		8		12		17		19
			Design Studio		153		137		124		100		77
		Pottery Barn Kids			56		27		8		—		—
		Hold Everything			13		15		26		32		33
		Outlets			14		14		12		10		6
	Number of stores at year-end				478		415		382		344		298
	Comparable store sales growth				2.7%		1.7%		5.5%		6.4%		5.0%
	Store selling area at fiscal year-end (sq. ft.)				2,356,000		2,012,000		1,764,000		1,497,000		1,217,000
	Gross leasable area at fiscal year-end (sq. ft.)				3,725,000		3,179,000		2,753,000		2,308,000		1,888,000

Direct-to-Customer Sales
	Catalogs circulated during the year				279,724		245,224		233,199		192,708		163,067
	Direct-to-customer sales growth				8.5%		7.4%		33.1%		34.2%		15.7%
	Direct-to-customer sales as a percent of net sales				36.0%		37.4%		39.7%		37.2%		34.8%


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Dollars in thousands	Fiscal 2002		% Total		Fiscal 2001		% Total		Fiscal 2000		% Total


Retail sales	$	1,416,585		60.0%	$	1,229,715		58.9%	$	1,039,312		56.8%
Direct-to-customer sales		798,195		33.8%		735,768		35.3%		685,202		37.5%
Shipping fees		146,050		6.2%		121,179		5.8%		104,969		5.7%

Net revenues	$	2,360,830		100.0%	$	2,086,662		100.0%	$	1,829,483		100.0%


	Store		Avg. LSF		Store		Avg. LSF		Store		Avg. LSF
	Count		per Store		Count		Per Store		Count		per Store


Williams-Sonoma		236		5,200		214		5,100		200		4,900
Pottery Barn		159		11,600		145		11,500		136		11,000
Pottery Barn Kids		56		7,600		27		7,500		8		6,800
Hold Everything		13		3,800		15		3,700		26		3,500
Outlets		14		13,100		14		12,600		12		10,700

Total		478		7,800		415		7,700		382		7,200


Percent increase (decrease) in comparable store
sales	Fiscal 2002		Fiscal 2001		Fiscal 2000


Williams-Sonoma		3.3%		4.2%		5.6%
Pottery Barn		2.6%		(0.1)%		4.8%
Pottery Barn Kids		(0.3)%		10.4%		N/A
Hold Everything		(5.4)%		(8.5)%		3.1%
Outlets		4.3%		6.9%		24.8%

Total		2.7%		1.7%		5.5%



	Payments Due by Period

	Fiscal		Fiscal 2004		Fiscal 2007
Dollars in thousands	2003		to Fiscal 2006		to Fiscal 2008		Thereafter		Total


Long-term debt	$	5,714	$	11,430		—		—	$	17,144
Capital leases		1,705		6,641		—		—		8,346
Operating leases		123,771		349,502	$	210,279	$	466,245		1,149,797

Total	$	131,190	$	367,573	$	210,279	$	466,245	$	1,175,287


Dollars in thousands	Feb. 2, 2003			Feb. 3, 2002


Land and buildings	$	102,639		$	102,926
Leasehold improvements		437,605			368,664
Fixtures and equipment		300,139			259,422
Capitalized software		88,758			69,210
Corporate systems projects in progress		39,359			28,898
Construction in progress¹		20,424			14,861
Capital leases		10,645			9,483

Total		999,569			853,464

Accumulated depreciation and amortization		(367,795	)		(283,344	)

Property and equipment — net	$	631,774		$	570,120



		Fiscal Year Ended

Dollars in thousands		Feb. 2, 2003			Feb. 3, 2002			Jan. 28, 2001


Current payable
	Federal		$69,536			$45,500			$25,529
	State		11,555			7,116			5,203
	Foreign		(696	)		1,120			—

	Total current		80,395			53,736			30,732

Deferred
	Federal		(2,749	)		(5,232	)		4,515
	State		(700	)		(525	)		300
	Foreign		933			(969	)		—

	Total deferred		(2,516	)		(6,726	)		4,815

Total provision			$77,879			$47,010			$35,547


			% Net				% Net				% Net
Dollars in thousands	Fiscal 2002		Revenues		Fiscal 2001		Revenues		Fiscal 2000		Revenues


Cost of goods and occupancy expenses		$1,281,613		54.3%		$1,168,030		56.0%		$1,026,681		56.1%
Shipping costs		127,616		5.4%		124,643		6.0%		109,174		6.0%

Total cost of goods sold		$1,409,229		59.7%		$1,292,673		62.0%		$1,135,855		62.1%



	Amount of Outstanding Commitment Expiration By Period


	Fiscal		Fiscal 2004		Fiscal 2007
Dollars in thousands	2003		to Fiscal 2006		to Fiscal 2008		Thereafter		Total

Line of credit		—		—		—		—		—
Letters of credit	$	67,199		—		—		—		$67,199
Standby letters of credit		9,964		—		—		—		9,964

Total	$	77,163		—		—		—		$77,163


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



			Fiscal Year Ended
Dollars and shares in thousands,
except per share amounts			Feb. 2, 2003		Feb. 3, 2002		Jan. 28, 2001


Net revenues			$	2,360,830	$	2,086,662	$	1,829,483
Cost of goods sold				1,409,229		1,292,673		1,135,855

		Gross margin		951,601		793,989		693,628

Selling, general and administrative expenses				749,299		666,015		594,112
Interest expense — net				20		5,868		7,187

		Earnings before income taxes		202,282		122,106		92,329

Income taxes				77,879		47,010		35,547

		Net earnings	$	124,403	$	75,096	$	56,782

Basic earnings per share			$	1.08	$	.67	$	.51
Diluted earnings per share			$	1.04	$	.65	$	.49

Shares used in calculation of earnings per share:
	Basic			115,100		112,494		111,800
	Diluted			119,550		115,440		114,920


Dollars and shares in thousands, except per share amounts			Feb. 2, 2003		Feb. 3, 2002


ASSETS
Current assets
	Cash and cash equivalents	$	193,495	$	75,374
	Accounts receivable (less allowance for doubtful accounts of $64 and $491)		34,288		32,141
	Merchandise inventories — net		321,247		249,237
	Prepaid catalog expenses		35,163		29,522
	Prepaid expenses		21,346		16,630
	Deferred income taxes		16,304		11,553
	Other assets		3,541		2,782

	Total current assets		625,384		417,239

Property and equipment — net			631,774		570,120
Other assets (less accumulated amortization of $1,353 and $957)			7,297		7,544

Total assets		$	1,264,455	$	994,903

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable	$	166,102	$	98,857
	Accrued expenses		82,027		60,406
	Customer deposits		93,073		80,425
	Income taxes payable		56,442		37,456
	Current portion of long-term debt		7,419		7,206
	Other liabilities		19,765		12,829

	Total current liabilities		424,828		297,179

Deferred rent and lease incentives			161,091		127,094
Long-term debt			18,071		24,625
Deferred income tax liabilities			11,341		8,792
Other long-term obligations			5,146		4,682

Total liabilities			620,477		462,372

Commitments and contingencies			—		—
Shareholders’ equity
	Preferred stock, $.01 par value, 7,500 shares authorized, none issued		—		—
	Common stock, $.01 par value, 253,125 shares authorized, 114,317 shares issued and outstanding at February 2, 2003; 116,468 shares issued and 114,486 shares outstanding at February 3, 2002		1,143		1,165
	Additional paid-in capital		196,259		169,996
	Retained earnings		446,837		392,300
	Accumulated other comprehensive loss		(11)		(116)
	Deferred stock-based compensation		(250)		(7,541)
	Treasury stock, at cost: nil and 1,982 shares		—		(23,273)

	Total shareholders’ equity		643,978		532,531

Total liabilities and shareholders’ equity		$	1,264,455	$	994,903


														Accumulated
		Common Stock						Additional						Other			Deferred						Total
Dollars and shares in								Paid-in			Retained			Comprehensive			Stock-Based			Treasury			Shareholders’			Comprehensive
thousands		Shares			Amount			Capital			Earnings			Loss			Compensation			Stock			Equity			Income


Balance at January 30, 2000			112,758		$	1,131		$	126,494		$	260,422			—			—		$	(4,738	)	$	383,309
	Net earnings		—			—			—			56,782			—			—			—			56,782		$	56,782
	Foreign currency translation adjustment		—			—			—			—		$	(6	)		—			—			(6	)		(6	)

	Comprehensive income		—			—			—			—			—			—			—			—		$	56,776

	Exercise of stock options and related tax benefit		498			5			5,903			—			—			—			—			5,908
	Repurchase of common stock		(1,650	)		—			—			—			—			—			(18,535	)		(18,535	)

Balance at January 28, 2001			111,606			1,136			132,397			317,204			(6	)		—			(23,273	)		427,458
	Net earnings		—			—			—			75,096			—			—			—			75,096		$	75,096
	Foreign currency translation adjustment and related tax benefit		—			—			—			—			(110	)		—			—			(110	)		(110	)

	Comprehensive income		—			—			—			—			—			—			—			—		$	74,986

	Exercise of stock options and related tax benefit		2,380			24			26,816			—			—			—			—			26,840
	Deferred stock-based compensation		500			5			10,783			—			—		$	(10,788	)		—			—
	Amortization of deferred stock-based compensation		—			—			—			—			—			3,247			—			3,247

Balance at February 3, 2002			114,486			1,165			169,996			392,300			(116	)		(7,541	)		(23,273	)		532,531
	Net earnings		—			—			—			124,403			—			—			—			124,403		$	124,403
	Foreign currency translation adjustment and related tax benefit		—			—			—			—			105			—			—			105			105

	Comprehensive income		—			—			—			—			—			—			—			—		$	124,508

	Exercise of stock options and related tax benefit		2,019			20			32,721			—			—			—			—			32,741
	Repurchase and retirement of common stock		(2,188	)		(42	)		(6,458	)		(69,866	)		—			—			23,273			(53,093	)
	Amortization of deferred stock-based compensation		—			—			—			—			—			7,291			—			7,291

Balance at February 2, 2003			114,317		$	1,143		$	196,259		$	446,837		$	(11	)	$	(250	)	$	—		$	643,978



Buildings and building improvements		12 – 40 years

Leasehold improvements		Shorter of estimated useful life or lease term (generally 2 – 15 years)

Fixtures and equipment		2 – 20 years

Capitalized software		2 – 10 years



		Fiscal Year Ended

Dollars in thousands, except per share amounts		Feb. 2, 2003			Feb. 3, 2002			Jan. 28, 2001


Net earnings, as reported		$	124,403		$	75,096		$	56,782
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effect			4,484			1,997			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect			(22,864	)		(15,220	)		(11,617	)

Pro forma net earnings		$	106,023		$	61,873		$	45,165

Basic earnings per share
	As reported	$	1.08		$	.67		$	.51
	Pro forma		.92			.55			.40

Diluted earnings per share
	As reported	$	1.04		$	.65		$	.49
	Pro forma		.87			.53			.39


Dollars in thousands


Fiscal 2003	$	7,419
Fiscal 2004		7,469
Fiscal 2005		7,625
Fiscal 2006		2,977
Fiscal 2007		—

Total	$	25,490



		Feb. 2, 2003					Feb. 3, 2002

		Deferred			Deferred		Deferred		Deferred
Dollars in thousands		Tax Assets			Tax Liabilities		Tax Assets		Tax Liabilities


Current:
	Compensation	$	13,537			—	$	8,423		—
	Inventory		8,076			—		6,379		—
	Accrued liabilities		8,334			—		7,474		—
	Deferred catalog costs		—		$	13,538		—	$	10,759
	Other		(105	)		—		36		—

	Total current		29,842			13,538		22,312		10,759

Non-current:
	Depreciation		—			6,580		—		3,930
	Deferred rent		1,515			—		1,024		—
	Deferred lease incentives		—			6,696		—		6,132
	Other		420			—		246		—

	Total non-current		1,935			13,276		1,270		10,062

Total		$	31,777		$	26,814	$	23,582	$	20,821


	Minimum Lease
Dollars in thousands	Commitments


Fiscal 2003	$	123,771
Fiscal 2004		120,085
Fiscal 2005		116,581
Fiscal 2006		112,836
Fiscal 2007		109,407
Thereafter		567,117

Total	$	1,149,797


Dollars and amounts in thousands,			Net		Weighted		Per-Share
except per share amounts			Earnings		Average Shares		Amount


2002
	Basic		$	124,403		115,100		$1.08
		Effect of dilutive stock options		—		4,450
	Diluted		$	124,403		119,550		$1.04

2001
	Basic		$	75,096		112,494		$ .67
		Effect of dilutive stock options		—		2,946
	Diluted		$	75,096		115,440		$ .65

2000
	Basic		$	56,782		111,800		$ .51
		Effect of dilutive stock options		—		3,120
	Diluted		$	56,782		114,920		$ .49


					Weighted Average
		Shares			Exercise Price


Balance at January 30, 2000			10,039,288			$ 9.80

	Granted (weighted average fair value of $8.06)		6,182,500			11.65
	Exercised		(498,054	)		8.69
	Canceled		(1,506,264	)		12.70

Balance at January 28, 2001			14,217,470			10.40

	Granted (weighted average fair value of $9.92)		4,846,930			14.39
	Exercised		(2,381,540	)		7.85
	Canceled		(2,917,186	)		12.73

Balance at February 3, 2002			13,765,674			11.57

	Granted (weighted average fair value of $15.71)		3,514,429			24.58
	Exercised		(2,019,273	)		9.68
	Canceled		(693,724	)		14.74

Balance at February 2, 2003			14,567,106			14.77

Exercisable, January 28, 2001			4,802,528			$ 7.35
Exercisable, February 3, 2002			4,535,892			8.74
Exercisable, February 2, 2003			5,734,820			10.60



	Options Outstanding						Options Exercisable

			Weighted		Weighted				Weighted
			Average		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of exercise prices	Outstanding		Life (Years)		Price		Exercisable		Price


$ 1.78 - $ 9.47		3,430,153		4.9		$ 7.32		2,261,351		$ 6.24
$ 9.50 - $13.66		4,257,164		7.6		12.13		1,966,758		11.51
$13.85 - $18.83		3,234,470		7.0		15.36		1,373,548		15.39
$19.15 - $26.00		3,276,950		9.3		23.65		119,737		20.94
$26.07 - $32.80		368,369		9.2		30.60		13,426		26.86

$ 1.78 - $32.80		14,567,106		7.2		14.77		5,734,820		10.60


			Direct-to-
Dollars in thousands		Retail	Customer	Unallocated			Total


2002
	Net revenues	$1,423,993	$936,837		—		$2,360,830
	Depreciation and amortization expense	59,312	19,378	$	12,794		91,484
	Earnings (loss) before income taxes	214,648	140,527		(152,893	)	202,282

	Assets	726,199	160,714		377,542		1,264,455
	Capital expenditures	124,416	14,972		16,793		156,181

2001
	Net revenues	$1,236,811	$849,851		—		$2,086,662
	Depreciation and amortization expense	50,859	19,217	$	11,518		81,594
	Earnings (loss) before income taxes	156,894	83,257		(118,045	)	122,106

	Assets	606,926	154,083		233,894		994,903
	Capital expenditures	115,647	24,421		15,919		155,987

2000
	Net revenues	$1,045,597	$783,886		—		$1,829,483
	Depreciation and amortization expense	39,156	13,879	$	9,367		62,402
	Earnings (loss) before income taxes	117,356	68,694		(93,721	)	92,329

	Assets	551,630	178,236		162,062		891,928
	Capital expenditures	112,110	25,425		97,314		234,849


Dollars in thousands, except per share amounts

Fiscal 2002		First Quarter	Second Quarter			Third Quarter	Fourth Quarter			Full Year

Net revenues	$	478,379	$	495,593	$	527,894	$	858,964	$	2,360,830
Gross margin		181,898		185,374		206,189		378,140		951,601
Earnings before income taxes		24,964		22,993		24,614		129,711		202,282
Net earnings		15,353		14,141		15,137		79,772		124,403
Basic earnings per share^2,3	$	.13	$	.12	$	.13	$	.69	$	1.08	²
Diluted earnings per share^2,3	$	.13	$	.12	$	.13	$	.67	$	1.04	²



Fiscal 2001¹		First Quarter	Second Quarter			Third Quarter		Fourth Quarter	¹		Full Year

Net revenues	$	417,572	$	428,994	$	462,096	$	778,000		$	2,086,662
Gross margin		146,966		146,171		165,972		334,880			793,989
Earnings before income taxes		800		2,198		6,265		112,843			122,106
Net earnings		492		1,352		3,853		69,399			75,096
Basic earnings per share^2,3	$	.00	$	.01	$	.03	$	.61		$	.67	²
Diluted earnings per share^2,3	$	.00	$	.01	$	.03	$	.59		$	.65	²


¹	Fiscal 2001 is a 53-week year versus a 52-week year in fiscal 2002. In fiscal 2001, the fourth quarter includes 14 weeks versus 13 weeks in the fourth quarter of fiscal 2002.
²	Per SFAS 128, the sum of the quarterly net earnings per share amounts will not necessarily equal the annual net earnings per share as each quarter is calculated independently.
³	Earnings per share restated to reflect the 2-for-1 stock split in May 2002.


Name		Position with the Company


Edward A. Mueller		Chief Executive Officer
W. Howard Lester		Chairman of the Company
Charles E. Williams		Founder of the Company and Vice Chairman
Laura J. Alber		President, Pottery Barn Brands
James E. Boike		Executive Vice President and Chief Operating Officer
Patrick J. Connolly		Executive Vice President and Chief Marketing Officer
Patrick Cowell		President, Williams-Sonoma Brand
Donna H. Isralsky		Senior Vice President, Product Supply Chain and International Operations
Ronald M. Loeb		Senior Vice President, General Counsel
Sharon L. McCollam		Senior Vice President, Chief Financial Officer
Dean A. Miller		Senior Vice President, Global Logistics


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS