10-Q 1 d10q.txt FORM 10-Q 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. BROOKSTONE, INC. Index to Form 10-Q
Part I: Financial Information Page No. --------------------- -------- 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
BROOKSTONE, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited) (Unaudited) November 3, 2001 February 3, 2001 October 28, 2000 ---------------- ---------------- ---------------- 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 ============= =========== ============
Note: The accompanying notes are an integral part of these financial statements. BROOKSTONE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------------------------- --------------------------------------------- November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000 ---------------------- -------------------- ---------------------- --------------------- 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 ======== ======= ======== ========
Note: The accompanying notes are an integral part of these financial statements. BROOKSTONE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (Unaudited)
Thirty-nine Weeks Ended --------------------------------------- November 3, 2001 October 28, 2000 ---------------- ---------------- 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 ======== =========
Note: The accompanying notes are an integral part of these financial statements. 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 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).
Thirteen Weeks: Net Sales Pre-tax Loss ---------------------------------- ----------------------------------- November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000 ---------------- ---------------- ---------------- ---------------- 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) ======== ======== ======== ========
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:
Thirteen Weeks Ended Thirty-nine Weeks Ended ----------------------------------- ------------------------------------ November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000 ---------------- ---------------- ---------------- ---------------- 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) ======== ========= ========= =========
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. 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 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. 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. 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)