<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.txt
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2001
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to _________________
Commission file number 0-21406 .
----------------------------------------------
Brookstone, Inc. .
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1182895
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
17 Riverside Street, Nashua, NH 03062
--------------------------------------
(address of principal executive offices, zip code)
603-880-9500
------------
(Registrant's telephone number, including area code)
.
------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
------- --------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 8,369,720 shares of common
stock as of December 7, 2001.
<PAGE>
BROOKSTONE, INC.
Index to Form 10-Q
<TABLE>
<CAPTION>
Part I: Financial Information Page No.
--------------------- --------
<S> <C>
Item 1:
Consolidated Balance Sheet
as of November 3, 2001, February 3, 2001 and
October 28, 2000 3
Consolidated Statement of Operations for the
thirteen & thirty-nine weeks ended November 3,
2001 and October 28, 2000 4
Consolidated Statement of Cash Flows for the
thirty-nine weeks ended November 3, 2001 and
October 28, 2000 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II: Other Information
-----------------
Item 1:
Legal Proceedings 11
Item 2:
Change in Securities 11
Item 3:
Defaults by the Company upon its Senior Securities 11
Item 4:
Submission of Matters to a Vote of Security 11
Holders
Item 5:
Other Information 11
Item 6:
Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
November 3, 2001 February 3, 2001 October 28, 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 1,573 $ 35,397 $ 1,328
Receivables, net 6,799 7,477 9,637
Merchandise inventories 87,054 55,059 82,614
Deferred income taxes 13,568 3,633 9,016
Other current assets 6,951 4,030 5,310
---------- ------------ -----------
Total current assets 115,945 105,596 107,905
Deferred income taxes 3,689 3,662 3,806
Property and equipment, net 48,097 41,956 41,047
Intangible assets, net 4,949 5,359 5,496
Other assets 6,100 2,595 4,289
----------- ------------ ------------
$178,780 $159,168 $162,543
=========== ============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term borrowings $ 35,470 $ --- $ 21,400
Accounts payable 27,248 13,522 34,380
Other current liabilities 15,683 28,966 16,016
----------- ------------ ------------
Total current liabilities 78,401 42,488 71,796
Other long-term liabilities 12,100 11,755 11,040
Long-term obligation under capital lease 2,332 2,414 2,429
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.001 par value:
Authorized - 2,000,000 shares; issued and
outstanding - 0 shares at November 3, 2001,
February 3, 2001 and October 28, 2000
Common stock, $0.001 par value:
Authorized 50,000,000 shares; issued and
outstanding - 8,369,720 shares at
November 3, 2001, 8,320,640 shares at
February 3, 2001 and 8,319,640 shares at
October 28, 2000 8 8 8
Additional paid-in capital 50,654 50,277 50,266
Retained earnings 35,332 52,273 27,051
Treasury stock, at cost-3,616 shares at
November 3, 2001, February 3, 2001 and (47) (47) (47)
October 28, 2000 ------------- ----------- ------------
Total shareholders' equity 85,947 102,511 77,278
------------- ----------- ------------
$178,780 $159,168 $162,543
============= =========== ============
</TABLE>
Note: The accompanying notes are an integral part of these financial statements.
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------------------- ---------------------------------------------
November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000
---------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales $ 58,523 $63,817 $183,132 $183,593
Cost of sales 44,306 45,733 133,987 128,924
-------- ------- -------- --------
Gross profit 14,217 18,084 49,145 54,669
Selling, general and
administrative expenses 28,339 25,621 76,031 70,450
--------- ------- ------- --------
Loss from operations (14,122) (7,537) (26,886) (15,781)
Interest expense, net 467 400 616 405
--------- ------- -------- -------
Loss before taxes and
cumulative effect of
accounting change (14,589) (7,937) (27,502) (16,186)
Income tax benefit (5,602) (3,048) (10,561) (6,216)
-------- ------- -------- --------
Loss before cumulative effect
of accounting change (8,987) (4,889) (16,941) (9,970)
Cumulative effect of
accounting change, net of tax --- --- --- (308)
-------- ------- -------- --------
Net Loss $ (8,987) $(4,889) $(16,941) $(10,278)
======== ======= ======== ========
Basic/diluted loss per share:
-----------------------------
Loss before cumulative effect
of accounting change $ (1.07) $ (0.59) $ (2.03) $ (1.20)
Cumulative effect of
accounting change, net of tax --- --- --- (0.04)
-------- ------- -------- --------
Net loss $ (1.07) $ (0.59) $ (2.03) $ (1.24)
======== ======= ======== ========
Weighted average shares
outstanding - basic/diluted 8,370 8,316 8,350 8,306
======== ======= ======== ========
</TABLE>
Note: The accompanying notes are an integral part of these financial statements.
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
---------------------------------------
November 3, 2001 October 28, 2000
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,941) $(10,278)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 8,189 7,616
Amortization of debt issuance costs 119 220
Deferred income taxes (9,962) (6,455)
Related tax benefits on exercise of stock options 183 47
Increase in other assets (3,624) (2,975)
Increase in other long-term liabilities 345 244
Changes in working capital:
Accounts receivable, net 678 (4,212)
Merchandise inventories (31,995) (38,975)
Other current assets (2,921) (738)
Accounts payable 13,726 18,621
Other current liabilities (13,283) (9,514)
-------- ---------
Net cash used by operating activities (55,486) (46,399)
-------- ---------
Cash flows from investing activities:
Expenditures for property and equipment (13,920) (5,179)
-------- ---------
Net cash used for investing activities (13,920) (5,179)
-------- ---------
Cash flows from financing activities:
Borrowings from revolving credit agreement 35,470 21,400
Payments for capitalized lease (82) (82)
Proceeds from exercise of stock options 194 199
-------- ---------
Net cash provided by financing activities 35,582 21,517
-------- ---------
Net decrease in cash and cash equivalents (33,824) (30,061)
Cash and cash equivalents at beginning of period 35,397 31,389
-------- ---------
Cash and cash equivalents at end of period $ 1,573 $ 1,328
======== =========
</TABLE>
Note: The accompanying notes are an integral part of these financial statements.
<PAGE>
BROOKSTONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The results of the thirty-nine week period ended November 3, 2001 are not
necessarily indicative of the results for the full fiscal year. The
Company's business, like the business of retailers in general, is subject to
seasonal influences. Historically, the Company's fourth fiscal quarter,
which includes the winter holiday selling season, has produced a
disproportionate amount of the Company's net sales and substantially all of
its income from operations. The Company expects that its business will
continue to be subject to such seasonal influences.
2. During the fourth quarter of Fiscal 2000, the Company changed its revenue
recognition policy for catalog sales and other drop shipment sales in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements".
Under the provisions of SAB 101, revenue on catalog sales is recognized at
time of customer receipt instead of at time of shipment, as the company
retains risk of loss while the goods are in transit. The cumulative effect
of this change for periods prior to Fiscal 2000 was $308 thousand, net of
tax benefit of $193 thousand, and has been reflected in the Company's
thirty-nine week period ended October 28, 2000.
3. In the fourth quarter of Fiscal 2000, the Company changed its income
statement classification of shipping and handling fees and costs in
accordance with the Emerging Issues Task Force 2000-10, "Shipping and
Handling Fees and Costs" ("EITF 00-10"). As a result of this adoption of
EITF 00-10, the Company now reflects shipping and handling fees billed to
customers as revenue while the related shipping and handling costs are
included in cost of goods sold. Prior to the adoption of EITF 00-10 such
fees and costs were netted in selling, general and administrative expenses.
Shipping and handling fees and costs for all prior periods presented have
been classified to conform to the new income statement presentation.
4. In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 142, "Goodwill and
Other Intangible Assets." SFAS 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets, other than goodwill, which have determinable useful
lives be amortized over that period. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. The Company has not yet determined the
impact, if any, of implementing SFAS 142 on the Company's consolidated
financial statements.
5. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 modifies the rules for accounting
for the impairment or disposal of long-lived assets, excluding goodwill. The
new rules will become effective for fiscal years beginning after December
15, 2001, with earlier application encouraged. The Company has not yet
determined the impact, if any, of implementing SFAS 144 on the Company's
consolidated financial statements.
6. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
practices consistently applied in the United States of America. In the
opinion of the Company, these financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position and the results of operations for the periods
reported. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the accompanying unaudited consolidated financial statements be read in
conjunction with the annual financial statements and notes thereto which may
be found in the Company's Fiscal 2000 annual report.
7. Certain reclassifications have been made to the thirteen and thirty-nine
week periods ended October 28, 2000 to conform to the current year
presentation.
8. The exercise of stock options, which have been granted under the Company's
stock option plans, gives rise to compensation, which is includable in the
taxable income of the optionees and deductible by the Company for tax
purposes upon exercise. Such compensation reflects an increase in the fair
market value of the Company's common stock subsequent to the date of grant.
For financial reporting purposes, the tax effect of
<PAGE>
this deduction is accounted for as a credit to additional paid-in capital
rather than as a reduction of income tax expense. Such exercises resulted in
a tax benefit of approximately $183 thousand for the thirty-nine week period
ended November 3, 2001.
9. Business conducted by the Company can be segmented into two distinct areas
determined by the method of distribution channel. The retail segment is
comprised of all full-year stores in addition to all temporary stores and
kiosks. Retail product distribution is conducted directly through the store
location. The direct marketing segment is comprised of the Hard-to-Find
Tools, Brookstone Collection and Gardeners Eden catalogs and the Internet
site www.Brookstone.com. Direct marketing product distribution is conducted
through the Company's direct marketing call center and distribution facility
located in Mexico, Missouri or by the Company's vendors. Both segments of
the Company sell similar products, although not all Company products are
fully available within both segments.
All costs directly attributable to the direct marketing segment are charged
accordingly while all remaining operating costs are charged to the retail
segment. The Company's management does not review assets by segment.
The tables below disclose segment net sales and pre-tax loss for the
thirteen and thirty-nine week periods ended November 3, 2001 and October
28, 2000 (in thousands).
<TABLE>
<CAPTION>
Thirteen Weeks: Net Sales Pre-tax Loss
---------------------------------- -----------------------------------
November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Reportable segment:
Retail $ 45,060 $ 52,094 $(12,204) $ (6,800)
Direct marketing 13,463 11,723 (1,918) (737)
Reconciling items:
Interest expense --- --- (471) (454)
Interest income --- --- 4 54
-------- -------- -------- --------
Consolidated: $ 58,523 $ 63,817 $(14,589) $ (7,937)
-------- -------- -------- --------
Thirty-nine Weeks: Net Sales Pre-tax Loss
----------------------------------- -----------------------------------
November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000
----------------- ---------------- ---------------- ----------------
Reportable segment:
Retail $147,437 $149,714 $(22,923) $(13,503)
Direct marketing 35,695 33,879 (3,963) (2,278)
Reconciling items:
Interest expense --- --- (1,034) (1,023)
Interest income --- --- 418 618
-------- -------- -------- --------
Consolidated: $183,132 $183,593 $(27,502) $(16,186)
======== ======== ======== ========
</TABLE>
<PAGE>
10. Basic and diluted earnings per share (EPS) were calculated for the thirteen
and thirty-nine week periods ended November 3, 2001 and October 28, 2000 as
follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------------- ------------------------------------
November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss $(8,987) $ (4,889) $ (16,941) $ (10,278)
======== ========= ========= =========
Weighted average
number of common
shares outstanding 8,370 8,316 8,350 8,306
Effect of dilutive
securities: --- --- --- ---
Stock options -------- --------- --------- ---------
Weighted average
number of common
shares as adjusted 8,370 8,316 8,350 8,306
======== ========= ========= =========
Net loss per share -
basic/diluted $ (1.07) $ (0.59) $ (2.03) $ (1.24)
======== ========= ========= =========
</TABLE>
For the thirteen and thirty-nine week periods ended November 3, 2001,
antidilutive shares of 757,112 and 683,735 respectively were excluded from the
computations of diluted earnings per share. For the thirteen and thirty-nine
week periods ended October 28, 2000, antidilutive shares of 140,009 and 176,903
respectively were excluded from the computations of diluted earnings per share.
<PAGE>
BROOKSTONE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED NOVEMBER 3, 2001
Results of Operations
---------------------
For the thirteen and thirty-nine week periods ended November 3, 2001, net
sales decreased 8.3% and 0.3%, respectively, over the comparable periods last
year. Same store sales for the thirteen and thirty-nine week periods decreased
17.0% and 6.7%, respectively. Net retail sales decreased 13.5% and 1.5%,
respectively, over the comparable periods last year as a result of exceptionally
strong scooter sales in the third quarter of last year and also due to reduced
sales since the tragic events of September 11, 2001, especially in the Company's
airport and tourist locations. The retail sales decreases were partially offset
by the opening of 23 new stores since the third quarter of Fiscal 2000, 14 of
which opened in the third quarter of 2001. The total number of stores open at
the end of the thirty-nine week period ended November 3, 2001 was 245, net of
two store closings in Fiscal 2000, versus 224 at the end of the comparable
period in Fiscal 2000. Direct marketing sales for the thirteen and thirty-nine
week periods increased 14.8% and 5.4%, respectively, over the comparable periods
last year.
For the thirteen and thirty-nine week periods ended November 3, 2001, gross
profit as a percentage of net sales was 24.3% and 26.8%, respectively, versus
28.3% and 29.8% for the comparable periods last year. The decreases in
percentages are due to occupancy cost increases as a result of the additional
number of stores in Fiscal 2001 and same store sales decreases. These
decreases were partially offset by decreases in net material costs.
Selling, general and administrative expenses as a percentage of net sales
for the thirteen and thirty-nine week periods ended November 3, 2001 were 48.4%
and 41.5%, respectively, versus 40.1% and 38.4%, respectively, for the
comparable periods last year. The thirteen-week percentage increase resulted
from the sales decrease experienced during the quarter as well as costs
associated with the direct marketing channel, principally catalog and postage
costs. The thirty-nine week percentage increase resulted primarily from
decreased sales and third quarter catalog and postage costs.
Net interest expense for the thirteen and thirty-nine week periods ended
November 3, 2001 was $467 thousand and $616 thousand, respectively, compared to
$400 thousand and $405 thousand during the comparable periods last year. These
increases are primarily the result of increased borrowings under the Company's
revolving credit agreement in Fiscal 2001 versus the same periods in Fiscal
2000.
As a result of the foregoing, the Company reported a net loss of $9.0
million, or $1.07 per basic and diluted share, for the thirteen-week period
ended November 3, 2001, as compared to a net loss of $4.9 million, or $0.59 per
basic and diluted share, for the comparable period last year. For the thirty-
nine week period ended November 3, 2001 the Company reported a net loss of $16.9
million, or $2.03 per basic and diluted share as compared to a $10.3 million net
loss, or $1.24 per basic and diluted share (after reflecting the reduction of
the cumulative effect of accounting change of $0.04), for the comparable period
last year.
Financial Condition
-------------------
For the thirty-nine week period ended November 3, 2001, net cash used by
operating activities totaled $55.5 million, primarily as a result of the net
loss, the payment of income taxes and the purchase of inventory, offset by an
increase in the accounts payable balance due to the timing of expense and
merchandise payments. Cash used for investment activities during the first
thirty-nine weeks of Fiscal 2001, representing the purchase of property and
equipment, amounted to $13.9 million. Cash from financing activities during the
thirty-nine week period of Fiscal 2001 amounted to $35.6 million, acquired
primarily through borrowings under the Company's revolving credit agreement.
For the thirty-nine week period ended October 28, 2000, net cash used by
operating activities totaled $46.4 million, reflecting primarily the net loss,
the payment of income taxes and the purchase of inventory, offset by an increase
in the accounts payable balance due to the timing of expense and merchandise
payments. Cash used for investment activities during the thirty-nine week period
of Fiscal 2000, representing the purchase of property and
<PAGE>
equipment amounted to $5.2 million. Cash from financing activities during the
thirty-nine week period of Fiscal 2000 amounted to $21.5 million, acquired
primarily through borrowings under the Company's revolving credit agreement.
Merchandise inventories were $87.1 million at November 3, 2001 compared to
$55.1 million at February 3, 2001. This higher inventory position is
attributable to inventory purchases during the year to support the holiday
selling period. At the end of the third quarter of Fiscal 2001, merchandise
inventories were 5.4% higher than the comparable period in Fiscal 2000,
reflecting the Company's third quarter 2001 efforts to realign inventories with
anticipated sales through reduced receipts and tighter inventory controls.
The Company's capital expenditures in the third quarter of Fiscal 2001 were
principally related to the opening of 14 new stores, including one airport
location and one Gardeners Eden store. The Company anticipates opening 27 new
stores, including five airport locations, two Gardeners Eden stores and
remodeling five stores during Fiscal 2001.
The Company maintains a revolving credit agreement to finance inventory
purchases, which historically peak in the third quarter in anticipation of the
winter holiday selling season. At November 3, 2001, the Company had
approximately $35.5 million in outstanding borrowings under its revolving credit
agreement. At October 28, 2000 the Company had $21.4 million in outstanding
borrowings under its revolving credit agreement. The Company's current
revolving credit agreement expires July 2, 2002, and the Company has begun
renegotiations.
The Company believes that available borrowings, cash on hand and
anticipated cash generated from operations will be sufficient to finance planned
retail store openings, remodelings and other capital requirements throughout
Fiscal 2001.
Outlook: Important Factors and Uncertainties
--------------------------------------------
Statements in this quarterly report which are not historical facts,
including statements about the Company's confidence or expectations, plans for
opening new stores, capital needs and liquidity and other statements about the
Company's operational outlook, are forward-looking statements subject to risks
and uncertainties that could cause actual results to differ materially from
those set forth in such forward-looking statements. Such risks and
uncertainties include, without limitation, risks of changing market conditions
in the overall economy and the retail industry, consumer demand, the
availability of appropriate real estate locations and the ability to negotiate
favorable lease terms in respect thereof, customer response to the Company's
direct marketing initiatives, the effectiveness of e-commerce technology, the
availability of products, availability of adequate transportation of such
products and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Words such
as "estimate", "project", "plan", "believe", "feel", "anticipate", "assume",
"may", "will", "should", and similar words and phrases may identify forward
looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The Company
undertakes no obligations to publicly release any revisions to these forward-
looking statements or reflect events or circumstances after the date hereof.
<PAGE>
PART II
OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
-----------------
Brookstone is involved in various routine legal proceedings incidental
to the conduct of its business. The Company does not believe that any
of these legal proceedings will have a material adverse effect on
Brookstone's financial condition or results of operations.
Item 2: CHANGES IN SECURITIES
---------------------
None
Item 3: DEFAULT UPON SENIOR SECURITIES
------------------------------
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5: OTHER INFORMATION
-----------------
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A) Reports on Form 8-K
No reports on Form 8-K were filed during the period for which this
report is filed.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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.
Brookstone, Inc.
----------------
(Registrant)
/s/ Philip W. Roizin
----------------------------
December 18, 2001 (Signature)
Philip W. Roizin
Executive Vice President Finance
and Administration,
Treasurer and Secretary
(Principal Financial Officer
and duly authorized to sign on
behalf of registrant)
</TEXT>
</DOCUMENT>