10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 2, 2002 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 (IRS Employer Identification No.) incorporation or organization) 17 RIVERSIDE STREET, NASHUA, NH 03062 ------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 603-880-9500 Securities registered pursuant to Section 12(b) of the Act: Title of each class ------------------- None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 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 . ----- ----- 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. (X) --- The aggregate market value of the voting stock held by non-affiliates of the registrant on April 19, 2002 was $134,444,776. The number of shares outstanding of the registrant's Common Stock, $.001 par value, as of April 19, 2002 was 8,476,972 shares. Documents Incorporated By Reference Portions of the registrant's Proxy Statement for its 2002 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. Table of Exhibits appears on Page 63. BROOKSTONE, INC. ---------------- 2001 FORM 10-K ANNUAL REPORT Table of Contents
Page No. Item 1....Business 3 Item 2....Properties 12 Item 3....Legal Proceedings 12 Item 4....Submission of Matters to a Vote of Securities Holders 13 Item 4A...Executive Officers of the Registrant 13 Item 5....Market for Registrant's Common Equity and Related Stockholders Matters 15 Item 6....Selected Financial Data 16 Item 7....Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A...Quantitative and Qualitative Disclosures about Market Risk 31 Item 8....Financial Statements and Supplementary Data 31 Item 9....Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 Item 10...Directors and Executive Officers of the Registrant 32 Item 11...Executive Compensation 32 Item 12...Security Ownership of Certain Beneficial Owners and Management 32 Item 13...Certain Relationships and Related Transactions 32 Item 14...Exhibits, Financial Statement Schedules and Reports on Form 8-K 33 Exhibits Filed Herewith: Exhibit 10.30 Employment Agreement with Kathleen A. Staab dated March 7, 2002 Exhibit 10.31 Employment Agreement with M. Rufus Woodard dated April 30, 2002 Exhibit 10.32 Employment Agreement with Carol A. Lambert dated April 30, 2002 Exhibit 10.33 Amended and Restated Credit Agreement dated February 21, 2002 Exhibit 21 Subsidiary of Registrant
2 ITEM 1. Business Brookstone, Inc. (the "Company") is a nationwide specialty retailer whose strategy is to develop unique, proprietary branded products and offer them to customers via multiple distribution channels including retail stores, catalogs, and the Internet. The Company's retail portfolio includes three brands: Brookstone, Gardeners Eden, and Hard to Find Tools. The Brookstone brand features an assortment of consumer products functional in purpose, distinctive in quality and design and not widely available from other retailers. Brookstone's merchandise includes lawn and garden, health and fitness, home and office and travel and auto products. Hard to Find Tools features solutions for home owners primarily focused on home improvement and the indoor and outdoor home environment. Gardeners Eden is a garden inspired lifestyle brand which features garden themed home accessories, live plants, and outdoor furniture. The Company offers approximately 2,500 active stock-keeping units ("SKUs") for Brookstone and Hard to Find Tools, and approximately the same amount for Gardeners Eden at any given time. The Company sells its products through 248 full-year stores (including 20 airport based stores, three outlet stores and two Gardeners Eden stores) in 39 states, the District of Columbia and Puerto Rico. In addition to these full-year stores, Brookstone operates temporary stores and kiosks during the winter holiday season; there were a total of 67 such stores operating during the 2001 holiday season. The Company also operates a direct marketing business, which includes its Hard-To-Find-Tools, its Brookstone Catalog and its Gardeners Eden catalogs in addition to an interactive Internet site, www.Brookstone.com. For a further description of the Company's business segments, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of the Notes to Consolidated Financial Statements on page 48. The Company was incorporated in Delaware in 1986. The Company is a holding company, the principle asset of which is the capital stock of Brookstone Company, Inc., a New Hampshire corporation that, along with its direct and indirect subsidiaries, operates the Company's business. As used in this report, unless the context otherwise requires, the term "Company" refers collectively to Brookstone, Inc. and its operating subsidiaries. The Company's executive offices are located at 17 Riverside Street, Nashua, New Hampshire 03062 and its telephone number is (603) 880-9500. Retail Store Business Brookstone Brand Merchandising and Marketing Merchandising. The Brookstone brand seeks to be a leader in identifying and selling products which are functional in purpose, distinctive in quality and design and not widely available from other retailers. Brookstone's products are intended to make some aspect of the user's life easier, better, more enjoyable or more comfortable. A majority of the Brookstone products bear the Brookstone name in an effort to reinforce its franchise value and generate customer loyalty. 3 The following lists Brookstone's four current product worlds and 23 current product categories: Lawn & Garden Health & Fitness Home & Office Travel & Auto ------------- ---------------- ------------- ------------- Backyard Leisure Personal Care Audio/Video Automobile Garden Personal Accessories Optical Travel Outdoor Games Home Comfort Wine Safety/Security Christmas Household Kitchen Lighting Pool / Beach Bedding Games Tools Time / Weather Massage Stationery The Company believes that the uniqueness, high quality construction, innovation and design of its products are apparent to its customers. For example, Brookstone offers a BBQ tool set as part of its Brookstone Heritage collection, which is ergonomically designed, and made of high strength, rustproof aluminum and beautiful rosewood. This design and construction are intended to convey the message that this tool set will tend to outlast and be easier to work with than competing BBQ tools in a similar price range. Brookstone has developed a wide range of 900 MHz products ranging from high quality wireless speakers and headphones to wireless indoor/outdoor thermometers to wireless BBQ alarms that help to perfectly cook a wide range of meat, poultry and fish. Due to the unique nature of its products, Brookstone has obtained both functional and design patents on its products. Information on the features and benefits of products is further conveyed through display cards and attentive customer service. The qualities of Brookstone's products make them suitable for gift giving. A majority of Brookstone's sales are attributable to products purchased as gifts, especially for men, and Brookstone's two busiest selling seasons occur prior to Christmas and Father's Day. The distinctive quality and design of Brookstone's products are intended to create an image that each product is special. In addition, Brookstone's effort to educate its customers about its products is often important in connection with the purchase of a gift, particularly if the customer is uncertain as to which product features might be most attractive to the recipient. Brookstone prices its products to be affordable to the typical mall shopper. The majority of Brookstone's products are priced at less than $40.00, although the items in its stores are priced in a range from $5.00 to approximately $3,000. Brookstone closely monitors gross profit dollar contribution by SKU and adjusts merchandise displays accordingly. Brookstone's success depends to a large degree upon its ability to introduce new or updated products in a timely manner. Brookstone's current policy is to replace or update approximately 30% of the items in its merchandise assortment every year, thereby maintaining customer interest through the freshness of its product selections and further establishing Brookstone as a leader in identifying high quality, functional products which are not widely available from other retailers. While the average sales life of Brookstone products is between two and four years, the sales life of certain products may be significantly shorter. 4 The Brookstone Store. Brookstone believes its retail stores are distinctive in appearance and in the shopping experience they provide. Brookstone emphasizes the visual aspects of its merchandise presentation and the creation of a sense of "theater" in its stores. Recognizing the functional nature of many of its products, Brookstone strives to present its merchandise in a manner that will spark the interest of shoppers and encourage them to pick up sample products. At least one sample of each product is displayed with an information card highlighting the features and benefits of the product in an easy-to-read format. Special signs and displays give prominence to selected products which Brookstone believes will have particular appeal to shoppers. Seasonal Stores. Brookstone's seasonal stores are typically open during the winter holiday selling season. These include both kiosks positioned in common areas of shopping malls and other retail sites and temporary stores set up within vacant retail in-line space. These locations are designed to carry a limited line of Brookstone's most popular, gift-oriented merchandise. The typical Brookstone kiosk is a temporary structure of approximately 160 square feet, which can carry approximately 120 SKUs. The typical temporary store has approximately 1,500 square feet and is designed to carry up to 300 SKUs. Both kiosks and temporary stores are built with reusable, portable and modular materials. Marketing. Brookstone's principal marketing vehicle is the Brookstone store. Brookstone's eye-catching open storefront design and attractive window displays are designed to attract shoppers into its stores by highlighting products that are anticipated to be of particular interest to customers and are appropriate to the season. In addition, Brookstone creates in-store displays of many of its key products in attractively gift-wrapped packages to provide added convenience to its customers, particularly during its two busiest selling periods, Christmas and Father's Day. Both the Company's Brookstone Catalog and its Internet site identify Brookstone's retail store locations, and the stores advertise the Internet program and supply customers with catalogs. The Company's merchandising strategy does not depend on price discounting. In addition to its store displays, Brookstone markets its products through the media. In 2001, for example, Brookstone co-branded a promotion with DaimlerChrysler that featured DaimlerChrysler and Brookstone products in many major national magazines. Brookstone's products have also been featured on many television programs including Oprah, the Today Show and CBS This Morning. Product Sourcing Brookstone continually seeks to develop, identify and introduce new products that meet its quality and profitability standards. Brookstone employs a staff of specialized merchandise directors who actively participate in the design process for many new products. These directors also travel worldwide visiting trade shows, manufacturers and inventors in search of new products for Brookstone's stores, Internet site and catalogs. The Company has product development sourcing agents in Hong Kong, Paris, Taipei and Tokyo. These agents provide the 5 Company with important venues for developing relationships with manufacturers and allow the Company to monitor and maintain quality standards throughout the development and manufacturing process. Brookstone Labs, the Company's internal product design and development facility, in cooperation with the merchandise directors, provides design and engineering support for innovative Brookstone-branded products. For quality assurance, the Company employs a staff to review and test its products. Once a product has been approved, Brookstone begins negotiations with the product's vendor to secure a source of supply. When determining which products to introduce, the Company takes into account the probable cost of the product relative to what the Company believes the product's appropriate selling price will be, as well as whether the vendor expects to distribute the product through mass merchant channels, thereby diluting the sense of uniqueness which Brookstone seeks to convey to its customers. While the time between the approval of a new product and its introduction in the stores varies widely, the typical period is between two and four months. For products designed by the Company, the period from conception of the idea to introduction in the stores can be significantly longer. As a result of Brookstone's product development infrastructure, the percentage of Brookstone branded products in Brookstone stores has risen from 14% in 1996 to over 60% in 2001. Store Operation and Training The Company employs regional managers, district managers and assistant district managers to supervise the Company's stores. Staffing of a typical store includes a store manager, an assistant store manager, a second assistant store manger, and approximately 10 to 15 full- and part-time sales associates, depending upon the time of year. Store associates are trained to inform and assist customers in the features, benefits and operation of the Company's merchandise. Store associates receive weekly product updates from the Company's headquarters, which highlight both new and other selected products. The Company has developed incentive compensation programs for its retail store management team which reward individual and store performance based on profitability. The Company uses "Closing Strong" and "Prodigy", selling skills programs designed to train all associates in the art of identifying and qualifying customers, and in closing the sale. The programs focus on generating incremental sales through increasing demo sales, units per transaction and big-ticket sales. 6 Expansion Strategy The Company operates 246 Brookstone stores in 39 states, the District of Columbia and Puerto Rico. Brookstone's stores are primarily located in high traffic regional malls, as well as in central retail districts and multi-use specialty projects, such as Copley Square in Boston, The Forum Shops in Las Vegas and Rockefeller Center and West 57th Street in New York City. Brookstone's stores also include airport stores in terminals throughout the country. Brookstone locates its stores in areas which are destinations for large numbers of shoppers and which reinforce the Company's quality image. To assess potential new mall locations, Brookstone applies a stringent set of financial as well as other criteria to determine the overall acceptability of a mall and the optimal locations within it. Non-mall locations are selected based on the level and nature of retail activity in the area. Brookstone believes that its distinctive store and innovative merchandise provide a unique shopping experience, which makes it a desirable tenant to regional mall developers and other prospective landlords. The Company's new Brookstone stores average approximately 3,500 square feet, approximately 2,800 of which is selling space. Airport stores range from 600 to 2,000 square feet in size and typically carry a limited assortment of Brookstone's products. Brookstone's store expansion strategy is to open stores in existing markets where it can build on its name recognition and achieve certain operating economies of scale, and in new markets where management believes it can successfully transport Brookstone's unique positioning and strategy. The Company opened 25 Brookstone stores in Fiscal 2001, including seven airport stores; 14 stores in Fiscal 2000, including two airport stores; 15 stores in Fiscal 1999, one of which was an airport store; 24 stores in Fiscal 1998, seven of which were airport stores; and 19 stores in Fiscal 1997 including three airport stores. The Company plans to open approximately 15 new Brookstone stores in Fiscal 2002, up to five of which will be in post-security airport locations. Brookstone continually monitors individual store profitability and will consider closing any stores that do not meet its performance criteria. Brookstone closed two stores in Fiscal 2001, two stores in Fiscal 2000, no stores in Fiscal 1999, five stores in Fiscal 1998, and one store in Fiscal 1997. In Fiscal 2002, the Company anticipates closing a nominal number of stores. Brookstone operated 67 seasonal stores (35 kiosks and 32 temporary in-line) during the 2001 winter holiday season. During the 2000 winter holiday selling season, Brookstone operated 60 seasonal stores (31 kiosks and 29 temporary in-line); 71 seasonal stores (44 kiosk and 27 temporary in-line) during the 1999 winter holiday season; 95 seasonal stores (52 kiosk and 43 temporary in-line) during the 1998 winter holiday season and 50 temporary in-line seasonal stores during the 1998 summer season; and 138 seasonal stores (75 kiosk and 63 temporary in-line) during the 1997 winter holiday selling season and 13 temporary in-line seasonal stores during the 1997 summer season. Brookstone plans to operate approximately 65 seasonal stores during the 2002 winter holiday selling season based on the availability of acceptable sites. Use of seasonal stores also provides the Company the ability to test retail sites during the period of the year when customer traffic and sales prospects are greatest. In certain cases, seasonal stores may be operated at a mall where there is a Brookstone retail store. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - - Outlook: Important 7 Factors and Uncertainties" (found on pages 26-30 of this document). Gardeners Eden Brand The Company purchased the Gardeners Eden brand in May of 1999. At the time, Gardeners Eden was a catalog only business. The Company believes that a Gardeners Eden retail store concept contains much promise, and in Fiscal 2001 the Company opened two Gardeners Eden stores, signifying the launch of its new retail store concept tied to its Gardeners Eden catalog title. The Gardeners Eden product assortment features garden inspired products for the home that emphasize the natural components of the earth. The products feature excellent craftsmanship and quality, and help fulfill home and garden decorating and gift giving needs. Key product categories include outdoor furniture, live plants, indoor and outdoor decorative accessories and tabletop. The store will feature approximately 2,500 SKUs and a wide range of price points. Currently, the majority of products are sourced domestically and through Europe. The stores contain approximately 4,000 - 5,000 sq. ft. of interior selling space coupled with exterior selling space of approximately 1,500 sq. ft. The stores design is meant to reflect nature; when the customer enters they hear a fountain of running water and smell the aroma of live plants. The stores also feature natural lighting through extensive use of skylights. The Company employs dedicated Gardeners Eden merchants, planners and store personnel, but, to as great an extent as possible, leverages the Company's support infrastructure. The Company anticipates opening one additional Gardeners Eden location in Fiscal 2002. Direct Marketing Business The Company was founded in 1965 as a mail order marketer of hard-to-find tools. In both Fiscal 2001 and Fiscal 2000, the direct marketing business accounted for approximately 18% of the Company's net sales as compared to 17% in Fiscal 1999. The Company operates three catalogs: Hard-To-Find-Tools, Brookstone Catalog and Gardeners Eden. In Fiscal 2001, the Company mailed a total of approximately 35.7 million catalogs, with 31 separate mail dates. The Hard-To-Find-Tools catalog features a broad assortment of approximately 1,500 products, set forth in what the Company believes to be an informative and convenient format. Whereas most of the products sold through the Company's stores are sold as gifts, most of the products sold through the Hard-To-Find-Tools catalog are primarily sold directly to the end-user. Approximately 80-85% of the products in the Hard-To-Find-Tools catalog are not available in the Company's stores. The Company also produces the Brookstone Catalog, which offers a selection of merchandise generally available in the Company's retail stores. The Brookstone Catalog is 8 usually distributed before Father's Day and Christmas, the Company's two busiest selling seasons. The Brookstone Catalog is mailed to persons with demographic profiles similar to those of buyers in the Company's stores. In May of 1999, the Company acquired the Gardeners Eden catalog from Williams-Sonoma, Inc. The core product categories of the catalog are; Plants, Furniture & Accessories, Plant Containers & Accessories, Wreath & Dried Arrangements, Garden Tools, Indoor and Outdoor Decorative, Entry, Tabletop and Personal Care. Product assortment within these categories ranges from fine teak furniture to live plants. Brookstone has operated an interactive Internet site since 1996 featuring an offering of products from catalogs and retail stores. During the third quarter of Fiscal 2001, the Company brought on-line version 6.0 of the web site. This new state of the art site is the Company's most sophisticated to date, with faster response and improved navigation. Features incorporated in this release include a sophisticated gift finder, enhanced product search, membership with address books, enhanced product images, multimedia for special products, enhanced cross-selling by SKU and Lifestyle presentations for purchasing complementary products. Customer service enhancements include real time inventory availability, order history inquiry and on-line order tracking. Merchandising, Marketing and Product Sourcing Brookstone employs a merchandising team that is dedicated exclusively to identifying products for the Company's Hard-To-Find-Tools catalog. The approval process for new Hard-To-Find-Tools products is similar to the approval process for new products in the Company's stores. A dedicated staff selects products for the Brookstone Catalog and Internet from the product assortment available in the Company's stores, plus catalog and Internet-exclusive products in existing categories. A merchandising team is dedicated to the selection of products for the Gardeners Eden catalog. Products for all catalogs are chosen based on their previous or estimated direct marketing order productivity. The Company also employs a marketing staff responsible for list selection, management of marketing offers and tests of catalog activity. Distribution and Management Information Systems The Company operates a single 181,000 square foot distribution facility located in Mexico, Missouri. Nearly all of the Company's inventory is received and distributed through this facility, which supports both the retail store and direct marketing distribution systems. The Company maintains an inventory of products in the distribution center in order to ensure a sufficient supply for sale to customers. Distributions to stores are made, at a minimum, on a weekly basis predominantly via UPS. Distributions to direct marketing customers are made daily, predominantly via UPS and Airborne. The facility also houses the Company's direct marketing call center. Also, the Company uses an outside call center to handle overflow order 9 calls and to provide coverage during off-peak hours. In addition, the Company leases approximately 190,000 square feet in Mexico, Missouri to handle its distribution support functions. Overflow from the direct marketing business may also be handled by a third party distribution center which primarily handles Internet order fulfillment. The efficient coordination of inventory planning, inventory logistics and store operations is a primary focus for the Company. The Company uses distribution control software and a sales forecasting system. These systems, along with the store-based point-of-sale system and our mail order management system, provide daily tracking of item activity and availability to the Company's inventory allocation and distribution teams. Additionally, the Company uses an inventory planning and distribution requirements planning client-server based system. This system uses weekly sales forecasts by SKU and selling location to determine inventory replenishment requirements and will recommend inventory purchases to the merchandise procurement team. Vendors The Company currently conducts business with approximately 900 vendors, of which approximately 300 are located overseas. In Fiscal 2001, no single vendor supplied products representing more than 17% of net sales, with the 10 largest vendors representing approximately 37% of net sales. Although the Company's sales are not dependent on any single vendor, the Company's operating results could be adversely affected if any of its 10 largest vendors were unable to continue to fill the Company's orders for such vendor's products or failed to fill those orders in a timely way. Seasonality The Company's sales in the second fiscal quarter are generally higher than sales during the first and third quarters as a result of sales in connection with Father's Day. The fourth fiscal quarter, which includes the winter holiday selling season, has historically produced a disproportionate amount of the Company's net sales and substantially all of its income from operations. The seasonal nature of the Company's business increased in Fiscal 2001 and is expected to continue to increase in Fiscal 2002 as the Company opens additional retail stores and continues its program to operate a significant number of small, temporary locations during the winter holiday selling season. In Fiscal 2001, most of the Company's new stores were opened in the second half of the fiscal year. Competition Competition is highly intense among specialty retailers, traditional department stores and mass-merchant discount stores in regional shopping malls and other high-traffic retail locations. The Company competes for customers principally on the basis of product assortment, convenience, customer service, price and the attractiveness of its stores. The Company also 10 competes against other retailers for suitable real estate locations and qualified management personnel. Because of the highly seasonal nature of the Company's business, competitive factors are most important during the winter holiday selling season. The Company differentiates itself from department and mass-merchant discount stores, which offer a broader assortment of consumer products, by providing a concentrated selection of functional, hard-to-find products of distinctive quality and design. The Company believes that the uniqueness, functionality and generally affordable prices of its products differentiate it from other mall-based specialty retailers and specialty companies which primarily or exclusively offer their products through direct marketing channels. The Company's direct marketing business competes with other direct marketing retailers offering similar products. The direct marketing industry has become increasingly competitive in recent years, as the number of catalogs mailed to consumers has increased and with the advent of the Internet. Employees As of April 5, 2002, The Company had 1,276 regular full-time associates, of which 703 were salaried and 573 were hourly. As of such date, the Company also employed an additional 1,424 part-time and 257 temporary associates. The Company regularly supplements its workforce with temporary workers, especially in the fourth quarter of each year to service increased customer traffic during the peak winter holiday selling season. The Company believes that the success of its business depends, in part, on its ability to attract and retain qualified personnel. None of the Company's employees are represented by labor unions, and the Company believes its employee relations are excellent. Trademarks The Company's "BROOKSTONE" trademark has been registered in various product classifications with the United States Patent and Trademark Office and in several foreign countries. In addition, the Company has applications to register the "BROOKSTONE" trademark still pending in several foreign countries. The Company acquired the trademarks "GARDENERS EDEN" and "GARDENERS EDEN (with Design)" and their associated registrations with the United States Patent and Trademark Office from Williams-Sonoma, Inc. in connection with its acquisition of the Gardeners Eden catalog in May of 1999. The Company also owns or is seeking registration of in various jurisdictions of other marks used by the Company in its business. 11 ITEM 2. Properties The Company leases all of its retail stores. New retail store leases have an average initial term of 10 years. As of February 2, 2002, the unexpired terms under the Company's then existing store leases averaged just under seven years. Store leases may permit the Company to terminate the lease after approximately five years if the store does not achieve specified levels of sales. In most leases, the Company pays a minimum fixed rent plus a contingent rent based upon net sales of the store in excess of a certain threshold amount. The Company does not believe the termination of any particular lease would have a material adverse effect on the Company. The following chart describes the number of store leases that will expire in the periods indicated: YEAR LEASES EXPIRING ---- --------------- 2002 25 2003 9 2004 12 2005 25 2006 27 2007 and thereafter 150 The space for a seasonal store is leased only for the period during which the temporary location will be operating. Generally, each such location is leased only for the season in question, although certain agreements have been reached with landlords covering more than a single season. The Company generally pays a minimum fixed rent for each temporary location plus a contingent rent based upon net sales in excess of a certain threshold. The Company operates a single 181,000 square foot distribution facility located in Mexico, Missouri under a capital lease obligation (see Note 7 of the Notes to Consolidated Financial Statements) that extends over 20 years at prime plus 1% per annum. The interest rate is adjusted annually on November 1. The Company also leases approximately 75,000 square feet in Mexico, Missouri on a month-to-month lease and another 115,000 square feet under a lease that is renewable annually in January. The Company leases a building with approximately 51,000 square feet in Nashua, New Hampshire to house its corporate headquarters. The lease expires in February of 2004, with two five-year renewal options. ITEM 3. Legal Proceedings The Company 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 the Company's financial condition or results of operations. 12 ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders of the Company during the fourth quarter of Fiscal 2001. ITEM 4A. Executive Officers of the Registrant The executive officers of the Company are as follows:
NAME AGE PRESENT POSITION -------------------------- ------- ------------------------------------ Michael F. Anthony 47 Chairman of the Board, President and Chief Executive Officer Philip W. Roizin 43 Executive Vice President, Finance & Administration Alexander M. Winiecki 54 Executive Vice President, Store Operations Carol A. Lambert 48 Vice President, Human Resources Kathleen A. Staab 54 Vice President, Gardeners Eden Gregory B. Sweeney 47 Vice President, General Manager Direct Marketing M. Rufus Woodard, Jr. 45 Vice President, Merchandising
MICHAEL F. ANTHONY was appointed Chairman of the Board, President and Chief Executive Officer of the Company in March 1999. He was President and Chief Executive Officer of the Company from September 1995 until March 1999. From October 1994 until September 1995, Mr. Anthony served as President and Chief Operating Officer of the Company. From 1989 to October 1994, he held various senior executive positions with Lechter's, Inc., a nationwide chain of 600 specialty stores, including President in 1994, Executive Vice President from 1993 to 1994 and Vice President/General Merchandise Manager from 1989 to 1993. From 1978 to 1989, he was with Gold Circle, which at the time was a division of Federated Department stores, where he held various merchandising positions, including Divisional Vice President/Divisional Merchandise Manager from February 1986 to 1989. PHILIP W. ROIZIN has been Executive Vice President, Finance and Administration of the Company since December 1996. From May 1995 to December 1996, Mr. Roizin served as Chief Financial Officer of The Franklin Mint. From July 1989 to May 1995, he held various senior positions with Dole Food Company, including Vice President / General Manager of Dole Beverages and Vice President of Strategic Services. From 1985 to 1989, Mr. Roizin served as a consultant for Bain & Co., a management consulting firm. 13 ALEXANDER M. WINIECKI was appointed Executive Vice President, Store Operations in May 2000. He was Senior Vice President, Store Operations of the Company from March 1994 until May 2000, having previously served as Vice President, Store Operations of the Company beginning in October 1990. Mr. Winiecki was Executive Vice President of Decor Corporation, a retailer of framed fine art prints and posters, from November 1989 until September 1990. He was Vice President, Administration of Claire's Boutiques, Inc., a chain of women's costume jewelry and accessory specialty stores, from November 1986 until October 1989. From February 1985 until November 1986, Mr. Winiecki was a Regional Vice President of The Ben Franklin Stores, a chain of craft and variety stores, which was a division of Household Merchandising Inc. He was a Regional Manager of The Gap Stores, Inc., a specialty retailer of apparel, from May 1978 until January 1985. CAROL A. LAMBERT was appointed Vice President of Human Resources in April 2000. Prior to such time, Ms. Lambert held the position of Director of Compensation and Benefits for the Company from August 1996 to April 2000. From 1990 until August 1996 she served as Senior Vice President of Human Resources for Home Bank where she was employed since 1979. KATHLEEN A. STAAB was appointed Vice President of Gardeners Eden in April 2002 after having worked as a consultant for various retailers since 1998. From 1991 to 1997, Ms. Staab was Vice President, General Merchandise Manager at Talbot's. Previous to her positions at Talbot's, Ms. Staab held managerial positions at Jordan Marsh Company and R. H. Macy and Company. GREGORY B. SWEENEY was appointed Vice President and General Manager of the Direct Marketing segment in February 2001. From June 1998 to January 2001, Mr. Sweeney served as Vice President of Database Marketing at Office Depot, the world's largest office supply company. From 1981 to 1998, Mr. Sweeney was with L. L. Bean, a national specialty mail order company, where he held various positions including Director of Strategic Planning and Vice President of Customer Loyalty Marketing. M. RUFUS WOODARD, JR. was appointed Vice President of Merchandising in January 2002. From April 2001 until his recent appointment, Mr. Woodard was Operational Vice President, General Merchandise Manager. In 1998, Mr. Woodard was appointed to Divisional Merchandise Manager and held that position until 2001. Mr. Woodard joined the Company in 1993 as Buyer and managed numerous product categories from 1993 to 1998. Prior to joining the Company, Mr. Woodard held senior buying positions at Jordan Marsh /Abraham & Strauss and Miller and Rhoads. Each executive officer has been elected to hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders and until such executive officer's successor is chosen or qualified or until such executive officer sooner dies, resigns, is removed or becomes disqualified. 14 PART II. ITEM 5. Market for Registrant's Common Equity and Related Stockholders' Matters. Stock exchange listing: The Company's common stock trades on the NASDAQ National Market tier of The NASDAQ Stock Market under the Symbol: BKST -------------------------------------------------------------------------------- Common Stock: Fiscal 2000 Fiscal 2001 ----------- ----------- Quarter High Low Quarter High Low First $19.00 $14.94 First $16.47 $14.50 Second $17.06 $ 9.25 Second $17.70 $13.68 Third $14.50 $11.75 Third $14.05 $10.35 Fourth $14.94 $10.61 Fourth $13.05 $10.55 -------------------------------------------------------------------------------- As of April 19, 2002, there were 8,476,972 shares of common stock, $.001 par value per share, outstanding and held of record by 146 stockholders. The Company has never paid a cash dividend and currently plans to retain any earnings for use in the operations of the business. For restrictions on payment of dividends, see Note 7 of the Notes to Consolidated Financial Statements. 15 ITEM 6. Selected Financial Data Brookstone, Inc. Selected Financial Data (In thousands, except operating and per share data)
Fiscal ------------------------------------------------------ 2001 2000* 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------- Income Statement Data: (1) Net sales $352,917 $364,541 $326,855 $276,051 $243,662 Cost of sales 224,643 224,968 199,569 175,381 155,952 Gross profit 128,274 139,573 127,286 100,670 87,710 Selling, general and administrative expenses 118,590 114,187 104,554 83,589 74,500 Income from operations 9,684 25,386 22,732 17,081 13,210 Interest expense, net 1,028 626 1,125 1,672 1,084 Provision for income taxes 3,324 9,508 8,297 6,071 4,778 ------------------------------------------------------ Income before cumulative effect of accounting change 5,332 15,252 13,310 9,338 7,348 Cumulative effect of accounting change, net of tax --- (308) --- --- --- Net income $5,332 $14,944 $13,310 $9,338 $7,348 ------------------------------------------------------------------------------------------------------------------- Earnings per share - basic -------------------------- Income before cumulative effect of accounting change $0.64 $1.84 $1.63 $1.17 $0.94 Cumulative effect of accounting change, net of tax --- (0.04) --- --- --- ------------------------------------------------------ Net income $0.64 $1.80 $1.63 $1.17 $0.94 ====================================================== Earnings per share - diluted ---------------------------- Income before cumulative effect of accounting change $0.63 $1.80 $1.58 $1.13 $0.91 Cumulative effect of accounting change, net of tax --- (0.04) --- --- --- ------------------------------------------------------ Net income $0.63 $1.76 $1.58 $1.13 $0.91 ====================================================== Weighted average shares outstanding - basic 8,361 8,310 8,155 7,988 7,824 Weighted average shares outstanding - diluted 8,493 8,472 8,422 8,285 8,119 ------------------------------------------------------------------------------------------------------------------- Operating Data: (Unaudited) ---------------------------- Increase/(Decrease) in same store sales (2) (8.6%) 3.5%** 5.8% 6.0% 3.6% Net sales per square foot of selling space (3) $484 $538 $521 $501 $469 Number of stores: Beginning of period 223 211 196 177 159 Opened during period 27 14 15 24 19 Closed during period 2 2 -- 5 1 End of period 248 223 211 196 177 Number of winter holiday seasonal stores 67 60 71 95 138 Balance Sheet Data (at period end): ----------------------------------- Total assets $157,105 $159,168 $141,906 $114,561 $105,318 Long-term debt, excluding current portion 2,273 2,414 2,511 2,612 2,698 Total shareholders' equity 107,785 102,511 87,310 72,310 61,766 *Fifty-three week year **Based upon fifty-two weeks
16 1. Effective January 30, 2000, the Company changed its revenue recognition policy for catalog sales and other drop shipment sales to be in accordance with the provisions of Securities and Exchange Commission's Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements". Under the provision of SAB101, revenue is recognized at time of customer receipt instead of at time of shipment. The cumulative effect of this change for prior periods is $0.3 million, net of tax of $0.2 million. The pro forma effect of SAB 101 on the net income of prior periods presented is not material. In the fourth quarter of Fiscal 2000, the Company changed its income statement classification of shipping and handling fees and costs in accordance with EITF 00-10, "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 reclassified to conform to the new income statement presentation. 2. Same store sales percentage is calculated using net sales of stores, which were open for the full current period and the entire preceding fiscal year. 3. Net sales per square foot of selling space dollar amount is calculated using net sales generated for stores open for the entire fiscal period divided by the square feet of selling space of such stores. Selling space does not include stock rooms. 17 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Critical Accounting Policies In December 2001, the Securities and Exchange Commission ("SEC") requested that all registrants list their three to five most critical accounting policies in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of their Form 10-K. The SEC defined a critical accounting policy as one which is important to the portrayal of the Company's financial condition and results of operations and requires management's subjective or complex judgments. In accordance with this request, the Company has described its critical accounting policies below. Revenue Recognition. The Company recognizes revenue from sales of merchandise at the time of customer receipt. Revenue is recognized net of actual merchandise returns and allowances. The Company allows merchandise returns for all merchandise and has established an allowance for merchandise returns based upon historical experience. Revenue from merchandise credits and gift certificates is deferred until redemption. 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 SAB 101. Under the provisions of SAB 101, revenue on catalog sales and other drop shipment sales is recognized at time of receipt instead of at time of shipment, as the Company retains risk of loss while the goods are in transit. Inventory Reserves. The Company maintains information about its merchandise performance at the item level. This level of detail enables the management team to assess the viability of each item and to estimate the Company's ability to sell through each item. The Company recognizes the write-down of slow moving or obsolete inventory in cost of sales when the write-down is probable and estimable. Management's estimates can be affected by many factors, some of which are outside the Company's control, which include but are not limited to, consumer buying trends and general economic conditions. The Company takes a physical inventory at least twice a year at its retail store locations and distribution center. The second of these inventories is conducted near the end of the fiscal year. The Company maintains a reserve for inventory shrinkage for the periods between physical inventories. Management establishes this reserve based on historical results of previous physical inventories, shrinkage trends or other judgments that Management believes to be reasonable under the circumstances. Deferred tax assets. The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record a valuation allowance against its deferred tax assets resulting in income tax expense in the Company's consolidated statement of 18 operations. Management evaluates the realizability of the deferred tax assets and assesses the need for valuation allowances periodically. Valuation of Long-Lived Assets. The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted net cash flows of individual stores, and consolidated net cash flows for long-lived assets not identifiable to individual stores, to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the Company's evaluations. Results of Operations The following table sets forth certain financial data of the Company expressed as a percentage of net sales for Fiscal 2001, Fiscal 2000 and Fiscal 1999.
Fiscal Year -------------------------------------------- 2001 2000 1999 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 63.7 61.7 61.1 --------- -------- --------- Gross profit 36.3 38.3 38.9 Selling, general and administrative expenses 33.6 31.3 32.0 --------- -------- --------- Income from operations 2.7 7.0 6.9 Interest expense, net 0.3 0.2 0.3 --------- -------- --------- Income before taxes and cumulative effect of accounting change 2.4 6.8 6.6 Provision for income taxes 0.9 2.6 2.5 --------- -------- --------- Income before cumulative effect of accounting change 1.5 4.2 4.1 Cumulative effect of accounting change, net of tax -- (0.1) -- --------- -------- --------- Net income 1.5% 4.1% 4.1% ========= ======== =========
-------------------------------------------------------------------------------- 19 Fifty-two weeks ended February 2, 2002 versus Fifty-three weeks ended February 3, 2001 Net sales for Fiscal 2001 decreased by $11.6 million, or 3.2% to $352.9 million as compared to $364.5 million in Fiscal 2000. In Fiscal 2001, retail sales decreased $8.9 million, or 3.0% and direct marketing sales decreased $2.7 million, or 4.0% on a circulation decrease of 12.0%. Both retail and direct marketing decreases were primarily attributable to reduced sales since the tragic events on September 11th which severely disrupted consumer shopping patterns. Of the retail store sales decreases, same store sales accounted for approximately $25.7 million of the decrease. Additionally a decrease of $2.2 million resulted from stores which were open in Fiscal 2000, but closed in Fiscal 2001. These retail store decreases were offset by net sales increases of $13.9 million related to the 27 new stores (18 full line, seven airport and two Gardeners Eden stores) opened in Fiscal 2001 and by an increase of $4.4 million attributable to additional sales from the operation of 14 stores (12 full line and two airport stores) for the full year in Fiscal 2001 that were only open for a portion of Fiscal 2000. Additionally, seasonal store operations accounted for approximately $0.4 million in increased net sales and increased revenue generated from customers for shipping and handling of approximately $0.3 million. The decrease in direct marketing net sales resulted primarily from decreases across all catalog titles amounting to approximately $6.1 million, partially offset by increases in Internet net sales of approximately $1.9 million and increased revenue generated from customers for shipping and handling of approximately $1.5 million. Gross profit as a percentage of net sales decreased 2.0% to 36.3% in Fiscal 2001 compared to 38.3% in Fiscal 2000. The decrease is primarily due to increased occupancy costs (230 basis points) as a result of the additional stores open in Fiscal 2001 and reduced same store sales, offset by improved product margins. Selling, general and administrative ("SG&A") expenses increased $4.4 million to $118.6 million in Fiscal 2001 from $114.2 million in Fiscal 2000. As a percent of net sales, SG&A increased to 33.6% in Fiscal 2001 from 31.3% in Fiscal 2000. This $4.4 million increase includes $4.6 million related to operating expenses associated with new stores opened in Fiscal 2001 and stores open for the full year in Fiscal 2001 that were only open for a partial year in Fiscal 2000. The increase in SG&A also includes $1.2 million associated with marketing costs for the direct marketing segment. These increases were offset by decreases in SG&A of $1.4 million associated with decreases in costs expended to support the base business. Income from operations was $9.7 million, or 2.7% of net sales, in Fiscal 2001 compared to $25.4 million, or 7.0% of net sales in Fiscal 2000. Net interest expense increased to $1.0 million, or 0.3% of net sales in Fiscal 2001 from $0.6 million, or 0.2% of net sales in Fiscal 2000. The net increase was primarily the result of lower interest income earned in Fiscal 2001 as compared with Fiscal 2000. Interest income, which offsets interest expense, was lower in Fiscal 2001 as a result of lower average cash balances earning lower interest rates in Fiscal 2001. In Fiscal 2001, the Company recorded an income tax provision of $3.3 million, or 0.9% of net sales, as compared to $9.5 million, or 2.6% of net sales in Fiscal 2000. This decrease in income tax provision resulted from the decrease in pre-tax income in Fiscal 2001. 20 As a result of the foregoing factors, net income decreased to $5.3 million in Fiscal 2001 versus $14.9 million in Fiscal 2000. Net income was 1.5% of net sales in Fiscal 2001 as compared to 4.1% in Fiscal 2000. Earnings per share on a diluted basis decreased to $0.63 in Fiscal 2001 as compared to $1.76 in Fiscal 2000 (after reflecting the reduction of a cumulative effect of accounting change of $0.04 in Fiscal 2000). Fifty-three weeks ended February 3, 2001 versus Fifty-two weeks ended January 29, 2000 Net sales for Fiscal 2000 increased by $37.7 million, or 11.5%, over Fiscal 1999, primarily as the result of a $27.7 million, or 10.2%, increase in retail sales, combined with a $10.0 million, or 17.8%, increase in direct marketing sales. Of the increase in retail sales, $9.8 million was attributable to the opening of 14 new stores (12 full line and 2 airport store), $8.8 million to additional sales from the operation of 15 stores for the full year in Fiscal 2000 that were only open for a portion of Fiscal 1999 (14 full line and 1 airport store), and $10.3 million is from same store sales. Offsetting this increase is the loss of sales of $1.2 million attributable to operating 11 less Holiday seasonal stores. The $10.0 million, or 17.8%, increase in direct marketing sales was primarily attributable to $3.9 million in sales from the Gardeners Eden catalog (which was acquired in May, 1999) and a $4.9 million increase in Internet sales. The remaining increase of $1.2 million is primarily the result of revenue generated from customers for shipping and handling and increased sales from the Hard-To-Find-Tools and Brookstone Catalog catalogs. Gross profit as a percentage of net sales decreased 0.6% to 38.3% in Fiscal 2000 compared to 38.9% in Fiscal 1999. The decrease was primarily due to a 0.9% increase in net material costs as a percentage of net sales, resulting primarily from sales of lower margin products in Fiscal 2000 versus Fiscal 1999. As a percentage of net sales, Fiscal 2000 occupancy costs decreased by 0.3% as compared to Fiscal 1999. The decrease in occupancy is primarily the result of additional sales from the Company's Direct Marketing business without any associated occupancy costs. Selling, general and administrative ("SG&A") expenses increased $9.6 million to $114.2 million in Fiscal 2000 from $104.6 million in Fiscal 1999. As a percent of net sales, SG&A decreased to 31.3% in Fiscal 2000 from 32.0% in Fiscal 1999. This $9.6 million increase included $3.5 million expended for operating expenses associated with new stores opened in Fiscal 2000 and stores open for the full year in Fiscal 2000 that were only open for a partial year in Fiscal 1999. Also, $3.0 million associated with marketing costs for the Direct Marketing segment, which includes the Internet and full year costs for the Gardeners Eden catalog, which was acquired in May of 1999. Additionally, there was a $3.1 million increase in compensation and benefits to support the base business and distribution center. Income from operations was $25.4 million, or 7.0% of net sales, in Fiscal 2000 as compared to $22.7 million, or 6.9% of net sales, in Fiscal 1999. 21 Net interest expense decreased to $0.6 million, or 0.2% of net sales, in Fiscal 2000 from $1.1 million, or 0.3% of net sales, in Fiscal 1999, primarily due to increased average cash balance resulting from a higher beginning of year balance and decreased capital expenditures offset by increased working capital in Fiscal 2000 versus Fiscal 1999. In Fiscal 2000, the Company recorded a provision for income taxes of $9.5 million, or 2.6% of net sales, as compared to $8.3 million, or 2.5% of net sales, in Fiscal 1999, resulting from an increase in pre-tax income. As a result of the foregoing factors, net income increased to $14.9 million in Fiscal 2000 (after reflecting the reduction of a cumulative effect of an accounting change of $0.3 million, net of tax) versus $13.3 million in Fiscal 1999. Net income was 4.1% of net sales in Fiscal 2000 and Fiscal 1999. Earnings per share on a diluted basis increased to $1.76 in Fiscal 2000 (after reflecting the reduction of a cumulative effect of accounting change of $0.04) from $1.58 in Fiscal 1999. Seasonality The seasonal nature of the Company's business increased in Fiscal 2001 and is expected to continue to increase in Fiscal 2002 as the Company opens additional retail stores and continues its program to operate a significant number of small, temporary locations during the winter holiday selling season. In Fiscal 2001, most of the Company's new stores were opened in the second half of the fiscal year. The Company's sales in the second fiscal quarter are generally higher than sales during the first and third quarters as a result of sales in connection with Father's Day. The fourth fiscal quarter, which includes the winter holiday selling season, has historically produced a disproportionate amount of the Company's net sales and all of its income from operations. Liquidity and Capital Resources During Fiscal 2001, the Company generated a total of $18.4 million of cash including $18.2 million from operations and $0.2 million from the exercise of stock options and the purchase of stock under the Employee Stock Purchase Plan. In addition, the Company's working capital increased approximately $10.9 million principally from the timing of payment of accounts payable and other current liabilities. The Company utilized cash of $13.8 million to fund capital expenditures. The capital expenditures included approximately $7.0 million for new stores, approximately $4.0 million for remodeling and maintenance in existing stores, $2.5 million for information systems developments and $0.3 million for distribution center and infrastructure improvements. At the end of Fiscal 2001, the Company's cash position decreased to $28.9 million, a $6.5 million decrease from the end of the prior fiscal year. During Fiscal 2000, the Company generated a total of $24.4 million of cash including $24.2 million from operations and $0.2 million from the exercise of stock options. In addition, the Company's working capital increased approximately $11.7 million principally from increased inventory as compared to Fiscal 1999. The Company utilized cash of $8.5 million to fund capital expenditures. The capital expenditures included $3.3 million for new stores, $3.2 million for remodeling and maintenance in existing stores, $1.4 million for information systems developments and $0.6 million for distribution center and infrastructure improvements. The Company's cash position increased $4.0 million from the end of the prior fiscal year, to $35.4 million. 22 The Company's primary short-term liquidity needs consist of financing seasonal merchandise inventory build-ups. The Company's primary sources of financing for such needs are from operations, borrowings under its revolving credit facility and trade credit. The Company typically has no borrowings under the revolving credit facility from January through July, increasing somewhat through August and sharply increasing from September through November to finance purchases of merchandise inventory in advance of the winter holiday selling season. The Company generally repays all outstanding borrowings under its revolving credit facility prior to Christmas and relies on cash from operations obtained during the winter holiday selling season until it begins to borrow again under its revolving credit facility the following fiscal year. At February 2, 2002, the Company had no outstanding borrowings under its revolving credit facility, although certain letters of credit in an aggregate amount of approximately $10.8 million were outstanding. During Fiscal 2001, the Company's borrowings peaked at $40.0 million under the revolving credit facility. Additionally, the maximum amount outstanding during the Fiscal year still provided the Company with an additional $19.0 million in borrowings under its Borrowing Base. The Company's revolving credit facility which was in effect in Fiscal 2001 provided for borrowings of up to $75 million for letters of credit and working capital, limited by a borrowing base test equal to 50% of the amount of eligible inventory and outstanding documentary letters of credit (increasing to 65% June through July and to 75% August through November). Amounts available for borrowings were reduced by the aggregate amount of outstanding letters of credit, which could not exceed $40 million, and borrowings. The revolving credit agreement required the Company to have no more than $10 million in borrowings (excluding letters of credit) outstanding for one 30 consecutive day period during the December 15 to April 30 period. Borrowings outstanding under this facility bore interest, at the election by the Company, equal to the agent bank's base lending rate or the Eurodollar rate for the applicable period plus an additional 1.0%, 1.25% or 1.5% depending on the applicable cash flow coverage ratio (at February 2, 2002 the rate was 2.8125%). In addition, the Company was obligated to pay a fee of 0.25% or 0.30% on the unused portion of the commitment and 0.50%, 0.625% or 0.75% on documentary letters of credit (depending on the applicable cash flow coverage ratio). At the Lender's option, all positive cash balances held by the lender banks could be applied to the outstanding balance of the revolving line of credit. The revolving credit agreement contained a number of restrictive covenants, including limitations on incurring additional indebtedness, granting liens, selling assets, engaging in mergers and other similar transactions, engaging in new business lines and making capital expenditures. In addition, the agreement prohibited the payment of cash dividends on common stock and required that the Company maintain certain financial ratios, including tests pertaining to net worth, ratio of liabilities to net worth and cash flow coverage. This agreement was scheduled to expire in July of 2002. As a result of this, management began negotiations to amend and restate the credit agreement in the fall of 2001. The Company successfully completed its negotiations with its lenders to extend and increase the facility in January of 2002. The Amended and Restated Credit Agreement (the "Amended Credit Agreement") was signed on February 21, 2002 with a term that expires February 21, 2005. The Amended Credit Agreement provides for increased borrowings of up to $80 million for letters of credit and 23 working capital as long as the Company meets a borrowing base test equal to 50% of the amount of eligible inventory and outstanding documentary letters of credit (increasing to 65% June through July and to 75% August through November). Amounts available for borrowings are reduced by the aggregate amount of outstanding letters of credit, which may not exceed $50 million, and borrowings. The Amended Credit Agreement requires the Company to have no borrowings (excluding letters of credit) outstanding for at least 30 consecutive days during the period of December 15, 2002 to April 30, 2003. Thereafter, during the December 15th to April 30th time frame, the Company must have no more than $10 million in borrowings (excluding letters of credit) outstanding for 30 consecutive days. Borrowings under the facility bear interest that is dependent on the level of the Company's fixed charge coverage ratio. Depending on the calculated ratio of the Company's fixed charge coverage, there are four different levels that have different fees and different margin rates on the applicable borrowings. Under the Amended Credit Agreement, the interest rates on the facility, at the Company's option, were either: the agent bank's base lending rate plus 0.75%, 0.50%, or 0.25%, or the Eurodollar rate for the applicable period plus 2.25%, 2.00%, 1.75% or 1.50%. In addition, the Company is obligated to pay a fee of 0.75%, 0.625%, or 0.50% on the unused portion of the commitment and 1.125%, 1.00%, 0.875%, or 0.75% on the documentary letters of credit. Amounts due under the Amended Credit Agreement are secured by the personal property of the Company, tangible or intangible including all stock of Brookstone, Inc.'s subsidiaries, but excluding real property, machinery and equipment encumbered on February 21, 2002, and general intangibles. The security interest in the Amended Credit Agreement is subject to collateral release conditions dependent upon four consecutive quarters fixed charge coverage ratio of 1.40 to 1.00 and consolidated EBITDA for the four quarters then ended of at least $34.5 million. At the Lender's option, all positive cash balances held by the Lender's banks may be applied to the outstanding balance of the revolving line of credit. The Amended Credit Agreement contains a number of restrictive covenants, including limitations on incurring additional indebtedness, granting liens, selling assets, engaging in mergers and other similar transactions, engaging in new business lines and making capital expenditures. In addition, the Amended Credit Agreement prohibits the payment of cash dividends on common stock and requires that the Company maintain certain financial ratios, including tests pertaining to consolidated net worth, fixed charge coverage and cash flow leverage. For the fourth quarter of Fiscal 2001, the Company was in compliance with these covenants. The Company has never paid a cash dividend and currently plans to retain any earnings for use in the operations of the business. Any determination by the Board of Directors to pay future cash dividends will be based upon conditions then existing, including the Company's earnings, financial condition and requirements, restrictions in its financing arrangements and other factors. 24 The following table (in thousands) summarizes the Company's contractual and other commercial obligations as of February 2, 2002 and the effect such obligations are expected to have on its liquidity and cash flows in future periods.
Payment Standby Letters Capital Lease Operating Lease Total Dates of Credit Obligations Obligations ---------------------- ------------ ---------------- --------------- -------------- Fiscal 2002 $ 661 $ 310 $ 29,566 $ 30,537 Fiscal 2003 --- 310 28,549 28,859 Fiscal 2004 --- 310 27,976 28,286 Fiscal 2005 --- 310 26,807 27,117 Fiscal 2006 --- 310 23,901 24,211 Thereafter --- 2,067 87,460 89,527 ------------ ---------------- --------------- -------------- Total $ 661 $ 3,617 $ 224,259 $228,537 ============ ================ =============== ==============
The Company believes its cash balances, funds to be generated by future operations and borrowing capacity will be sufficient to finance its capital requirements during Fiscal 2002. The amount of cash generated from operations is dependent upon many factors including but not limited to the ability of the Company to attain its business plan and general economic and retail industry conditions in the United States, during the upcoming year. Borrowing under the Company's Amended Credit Agreement may also be limited by the following factors: o Inventory obsolescence issues resulting from decreased revenues, that would affect the borrowing base assets, as eligible inventory in the borrowing base would decrease o Borrowings under the Agreement are limited to a borrowing base calculation which may impact the ability of the Company to fund its business o The Agreement contains a number of restrictive covenants. If the Company fails to meet any of these covenants, it may severely limit the Company's ability to conduct its business o The Agreement contains a requirement for the Company to have zero borrowings for thirty consecutive days between December 15, 2002 and April 30, 2003. Failure to do so may severely limit the Company's ability to borrow under its credit facility Fiscal 2002 Store Openings and Capital Expenditure Expectations The following discussion includes certain forward-looking statements of management's expectations for store growth and related capital expenditures. These statements should be read in light of the considerations presented under the caption Outlook: Important Factors and Uncertainties (found on pages 26 - 30 of this document). The Company expects to add approximately 15 new stores, including up to five airport locations and one Gardeners Eden retail store, in Fiscal 2002. The Company anticipates the cost of opening a new Brookstone store, including leasehold improvements (net of landlord allowances), furniture and fixtures, and pre-opening expenses, to average approximately $375,000 and a Gardeners Eden store to average approximately $600,000. In addition, the Company expects new stores to require $150,000 of working capital per store. The Company 25 anticipates the cost of opening airport stores, including leasehold improvements, furniture and fixtures, and pre-opening expenses, to average approximately $250,000, and expects airport stores to require $100,000 of working capital per store. The Company expects to identify between 6 and 8 stores for remodeling, and update and maintain other stores, during Fiscal 2002, incurring capital expenditures of approximately $2.5 million. The Company plans to operate approximately 65 seasonal stores during the Fiscal 2002 winter holiday season subject to the availability of acceptable sites. In addition to the capital expenditures listed above, the Company anticipates making capital expenditures of approximately $2.0 million in Fiscal 2002, primarily to enhance the Company's management information, distribution and other support systems. In Fiscal 2002, the Company expects to open most of its new stores in the second half of the year. The Company's retail operations are not generally profitable until the fourth quarter of each fiscal year. Outlook: Important Factors and Uncertainties The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves without fear of litigation so long as the forward-looking information is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those set forth in the forward-looking statement. Statements in this 2001 Annual Report on Form 10-K which are not historical facts, including statements about the Company's or management's confidence or expectations, seasonality of the Company's future sales and earnings, plans for opening new stores and other retail locations, introduction of new or updated products, opportunities for sales growth or cost reductions and other statements about the Company's operational outlook, are forward-looking statements subject to risks and uncertainties that could cause actual results to vary materially. The following are important factors, among others, that should be considered in evaluating these forward-looking statements, as well as in evaluating the Company's business prospects generally: Concentration of Sales in Winter Holiday Season. A high percentage of the Company's annual sales and all or substantially all of its annual income from operations have historically been attributable to the winter holiday selling season. In addition, like many retailers, the Company must make merchandising and inventory decisions for the winter holiday selling season well in advance of actual sales. Accordingly, unfavorable economic conditions and/or deviations from projected demand for products during this season could have a material adverse effect on the Company's results of operations for the entire fiscal year. While the Company anticipates implementing certain measures to improve its results during periods outside of the winter holiday selling season, such as the opening of stores in airports and the development of Gardeners Eden stores, the Company expects that its annual results of operations will remain dependent on the Company's performance during the winter holiday selling season. 26 Dependence on Innovative Merchandising. Successful implementation of the Company's merchandising strategy depends on its ability to introduce in a timely manner new or updated products which are affordable, functional in purpose, distinctive in quality and design and not widely available from other retailers. If the Company's products or substitutes for such products become widely available from other retailers (especially department stores or discount retailers), demand for these products from the Company may decline or the Company may be required to reduce their retail prices. A decline in the demand for, or a reduction in the retail prices of, the Company's important existing products can cause fluctuations in the Company's sales and profitability if the Company is unable to introduce in a timely fashion new or replacement products of similar sales levels and profitability. Even with innovative merchandising, there remains a risk that the products will not sell at planned levels. Product Risks. Although the Company seeks to maintain quality standards at a high level, its products may have defects that could result in high rates of return, recalls or product liability claims. Such returns, recalls or claims could adversely affect profitability. Third parties may assert claims for patent or trademark infringement, or violation of other proprietary rights. If successful, such claims could result in the inability to sell a particular product or, in the case of a settlement or royalty, adversely impact the profitability of the product. Such claims could entail significant legal expenses even if they are ultimately determined to be meritless. Gardeners Eden Stores. The Gardeners Eden stores represent an initiative by the Company to develop a new store model focused on a market that is different from that of the traditional Brookstone store, and to help decrease the concentration of sales in the winter holiday season by generating more sales in the spring and summer. The success of this new model could vary based on a wide variety of factors including the selection of optimum locations, innovative merchandising, increasing profitability, accurate prediction of customer response in a new market, and the overall condition of the economy. New Stores and Temporary Locations. The Company's ability to open new stores, including airport locations and the new Gardeners Eden concept stores, and to operate its temporary location program successfully depends upon, among other things, the Company's capital resources and its ability to locate suitable sites, negotiate favorable rents and other lease terms and implement its operational strategy. In addition, because the Company's store designs must evolve over time so that the Company may effectively compete for customers in top malls, airports and other retail locations, actual store-related capital expenditures may vary from historical levels (and projections based thereon) due to such factors as the scope of remodeling projects, general increases in the costs of labor and materials and unusual product display requirements. 27 Competition. The Company faces intense competition for customers, personnel and innovative products. This competition comes primarily from other specialty retailers, department stores, discount retailers and direct marketers, including Internet sites. Many of the Company's competitors have substantially greater financial, marketing and other resources than the Company. Retention of Qualified Employees. The Company's success depends upon its ability to attract and retain highly skilled and motivated, full-time and temporary associates with appropriate retail experience to work in management and in its stores and temporary locations. Further, because of the limited time periods during which temporary locations are open each year, the availability of suitable associates for such locations is limited. Seasonal Fluctuation of Operating Results. The Company's quarterly results of operations fluctuate based upon such factors as the amount and timing of sales contributed by new stores, the success of its temporary location program, capital expenditures and the timing of catalog mailings and associated expenses. Terrorism. The events of September 11, 2001 had a negative effect on retail and direct marketing sales as a result of the disruption of consumer shopping patterns. The Company's stores are located predominantly in large public areas such as malls and airports, which experienced a significant decrease in traffic last fall. The Company's stores are dependent on pedestrian traffic for sales volume. Acts of terrorism that affect such traffic could have an adverse impact on sales. Poor Economic Conditions. The Company's business may be impacted by economic conditions that tend to reduce the level of discretionary consumer spending. Such factors could include high interest rates, inflation, unemployment, stock market uncertainty, and low consumer confidence. Information and Communications Infrastructure. The success of the Company is dependent upon its computer hardware and software systems, and its telecommunications systems. The Internet portion of the direct marketing business relies heavily on the proper operation of these systems, as well as on the continued operation of the external components of the Internet, to market goods and to receive and process orders. The retail business utilizes point of sale computers located in the stores. The Company's headquarters and Distribution Center rely on a wide variety of applications to carry on the business. These systems are subject to damage from natural disasters, power failures, hardware and software failures, security breaches, network failures, computer viruses and operator negligence. Centralized Distribution. The Company conducts all of its distribution operations and a significant portion of its direct marketing processing functions from multiple facilities in Mexico, Missouri and through a third party distribution center for its Internet operation. A disruption in operations at the distribution center may significantly increase the Company's distribution costs and prevent goods from flowing to stores and customers. 28 The Company utilizes third party carriers for its product shipments. The distribution of products is vulnerable to disruption from employee strikes and labor unrest, in particular,potential strikes by UPS employees and/or longshoremen, which could increase costs and impede or restrict the supply of goods. Direct Marketing. The success of the Company's catalog operation hinges on the achievement of adequate response rates to mailings, merchandising and catalog presentation that appeal to mail order customers, and the expansion of the potential customer base in a cost effective manner. Lack of consumer response to particular catalog mailings could increase the costs and decrease the profitability of the direct marketing business. Significant costs relative to paper, postage and inventory are associated with the direct marketing business. Rising paper and postal rates can negatively impact the business and the failure to accurately predict consumer response or to achieve the optimum cost-effective level of catalog circulation could adversely affect revenues and growth of the business. Dependence on Key Vendors. Because the Company strives to sell only unique merchandise, adequate substitutes for certain key products may not be widely available in the marketplace. Because of this, there can be no assurance that vendor manufacturing or distribution problems, or the loss of the Company's exclusive rights to distribute important products, would not have a material adverse effect on the Company's performance. In Fiscal 2001, the Company had one vendor who supplied products representing approximately 17% of net sales, with the 10 largest vendors representing approximately 37% of net sales. Although the Company's sales are not dependent on any single vendor, the Company's operating results could be adversely affected if any of its 10 largest vendors were unable to continue to fill the Company's orders for such vendor's products or failed to fill those orders in a timely way. Foreign Vendors. The Company is purchasing an increasing portion of its merchandise from foreign vendors. Although management expects this strategy to increase profit margins for these products, the Company's reliance on such vendors subjects the Company to associated legal, social, political and economic risks, including import, licensing and trade restrictions. In addition, while the shortage of cargo containers used to transport goods from Asia to the United States experienced in recent years has eased somewhat, the Company remains vulnerable should such shortages reemerge. In such a situation, the Company could face inventory shortages in certain products, increased transportation costs and increased interest expense as a result of moving inventory receipts forward. Increased Petroleum Prices. In recent years, increases in petroleum prices have resulted in increased transportation and shipping costs for the Company. Further increases in petroleum prices, or failure of such prices to decline, could continue to increase the Company's costs for transportation and shipping and also cause increases in the cost of goods that are manufactured from plastics and other petroleum-based products. 29 Increased Reliance on E-Commerce. As a greater proportion of the Company's sales are made via the Internet, and as the Company begins to look more to that channel to increase overall sales, the Company will become more subject to the uncertainties inherent in the quickly developing area of e-commerce. Such uncertainties include, but are not limited to, the extent to which the Company's customers will adopt the Internet as their method of purchase, the effect that government regulation of the Internet (or lack thereof) will have on the Internet as a medium of commerce. New Accounting Pronouncements In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and specifies criteria for recognizing intangible assets separate from goodwill. This statement applies to all business combinations after June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material impact on the Company's consolidated financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 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 No. 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 is not expected to have a material impact on the Company's consolidated financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity is required to capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and will be adopted by the Company in Fiscal 2003. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets, excluding goodwill. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's consolidated financial statements. 30 In November 2001, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer." EITF 01-09 addresses the income statement characterization of consideration given by a vendor to a customer and provides guidance on recognizing and measuring sales incentives. EITF Issue No. 01-09 becomes effective in the first quarter of Fiscal 2002. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The Company's exposure to interest rate fluctuations is minimal due to the Company's use of short-term borrowings and cash flows to fund operations and capital improvements rather than long-term borrowings. The Company does not currently use derivative financial instruments and management does not foresee or expect any significant changes in its current management strategy. ITEM 8. Financial Statements and Supplementary Data. The financial statements, together with the report thereon of PricewaterhouseCoopers LLP, dated March 18, 2002, and supplementary data appear on pages 34 through 62 of this document. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 31 PART III. ITEM 10. Directors and Executive Officers of the Registrant. Information in response to this item with respect to directors of the Company may be found in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's definitive Proxy Statement for the Company's 2002 Annual Meeting of Stockholders (the "Proxy Statement"), and such information is incorporated herein by reference. Information in response to this item with respect to executive officers of the Company appears in Item 4A entitled "Executive Officers of the Registrant" on pages 13 through 14 of this report, and such information is incorporated herein by reference. ITEM 11. Executive Compensation. Information in response to this item may be found in the sections entitled "Board of Directors and Committees" and "Compensation of Executive Officers" of the Proxy Statement, and such information is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Information in response to this item may be found in the section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement, and such information is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. Information in response to this item may be found in the section entitled "Certain Relationships and Related Transactions" of the Proxy Statement, and such information is incorporated herein by reference. 32 PART IV. ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) List of Financial Statements, Financial Statement Schedules, and Exhibits. 1. Financial Statements The financial statements appear on the following pages of this document.
Page in Report ------ Report of Independent Accountants 34 Consolidated Balance Sheet as of February 2, 2002 and February 3, 2001 35 Consolidated Statement of Income for the years ended February 2, 2002, February 3, 2001 and January 29, 2000 36 Consolidated Statement of Cash Flows for the years ended February 2, 2002, February 3, 2001 and January 29, 2000 37 Consolidated Statement of Changes in Shareholders' Equity for the years ended February 2, 2002, February 3, 2001 and January 29, 2000 38 Notes to Consolidated Financial Statements 39 2. Consolidated Financial Statement Schedule 62
33 Report of Independent Accountants To the Board of Directors and Shareholders of Brookstone, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Brookstone, Inc. and its subsidiaries at February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, during the year ended February 3, 2001, the Company changed its method of accounting for revenue in accordance with the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". /s/ PricewaterhouseCoopers LLP ------------------------------ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts March 18, 2002 34 BROOKSTONE, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data)
February 2, 2002 February 3, 2001 Assets Current assets: Cash and cash equivalents $ 28,928 $ 35,397 Receivables, less allowances of $615 at February 2, 2002 and $606 at February 3, 2001 8,170 7,477 Merchandise inventories 55,629 55,059 Deferred income taxes, net 3,447 3,633 Other current assets 4,933 4,030 --------- --------- Total current assets 101,107 105,596 Deferred income taxes, net 4,536 3,662 Property and equipment, net 45,058 41,956 Intangible assets, net 4,812 5,359 Other assets 1,592 2,595 --------- --------- $ 157,105 $ 159,168 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 11,232 $ 13,522 Other current liabilities 22,569 28,966 --------- --------- Total current liabilities 33,801 42,488 Other long term liabilities 13,246 11,755 Long term obligation under capital lease 2,273 2,414 Commitments and contingencies (Note 11) Shareholders' equity: Preferred stock, $0.001 par value: Authorized - 2,000,000 shares; issued and outstanding - 0 shares at February 2, 2002 and February 3, 2001 Common stock, $0.001 par value: Authorized- 50,000,000 shares; issued and outstanding - 8,369,720 shares at February 2, 2002 and 8,320,640 shares at February 3, 2001 8 8 Additional paid-in capital 50,666 50,277 Accumulated other comprehensive income (447) -- Retained earnings 57,605 52,273 Treasury stock, at cost - 3,616 shares at February 2, 2002 and February 3, 2001 (47) (47) --------- --------- Total shareholders' equity 107,785 102,511 --------- --------- $ 157,105 $ 159,168 ========= =========
See Notes to Consolidated Financial Statements 35 BROOKSTONE, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share data)
Year Ended ------------------------------------------------------ February 2, 2002 February 3, 2001 January 29, 2000 ---------------- ---------------- ---------------- Net sales $ 352,917 $ 364,541 $ 326,855 Cost of sales 224,643 224,968 199,569 --------- --------- --------- Gross profit 128,274 139,573 127,286 Selling, general and administrative expenses 118,590 114,187 104,554 --------- --------- --------- Income from operations 9,684 25,386 22,732 Interest expense, net 1,028 626 1,125 --------- --------- --------- Income before taxes and cumulative effect of accounting change 8,656 24,760 21,607 Income tax provision 3,324 9,508 8,297 --------- --------- --------- Income before cumulative effect of accounting change 5,332 15,252 13,310 Cumulative effect of accounting change, net of tax -- (308) -- of $193 --------- --------- --------- Net income $ 5,332 $ 14,944 $ 13,310 ========= ========= ========= Earnings per share - basic Income before cumulative effect of accounting change $ 0.64 $ 1.84 $ 1.63 Cumulative effect of accounting change, net of tax -- (0.04) -- --------- --------- --------- Net income $ 0.64 $ 1.80 $ 1.63 ========= ========= ========= Earnings per share - diluted Income before cumulative effect of accounting change $ 0.63 $ 1.80 $ 1.58 Cumulative effect of accounting change, net of tax -- (0.04) -- --------- --------- --------- Net income $ 0.63 $ 1.76 $ 1.58 ========= ========= ========= Weighted average shares outstanding - basic 8,361 8,310 8,155 ========= ========= ========= Weighted average shares outstanding - diluted 8,493 8,472 8,422 ========= ========= ========= See Notes to Consolidated Financial Statements
36 BROOKSTONE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Year Ended ---------------------------------------------------------- February 2, 2002 February 3, 2001 January 29, 2000 ---------------- ---------------- ---------------- Cash flows from operating activities: Net income $ 5,332 $ 14,944 $ 13,310 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,206 10,187 9,144 Amortization of debt issuance costs 245 158 154 Deferred income taxes (410) (928) (549) Related tax benefits on exercise of stock options 196 48 782 (Increase) decrease in other assets 133 (1,219) 1,240 Increase in other long term liabilities 1,491 959 834 Changes in working capital: Accounts receivable, net (693) (2,052) 831 Merchandise inventories (570) (11,420) (3,792) Other current assets (903) 542 (343) Accounts payable (2,290) (2,237) 5,032 Other current liabilities (6,432) 3,436 5,849 -------- -------- -------- Net cash provided by operating activities 7,305 12,418 32,492 Cash flows from investing activities: Expenditures for Gardeners Eden acquisition -- -- (9,616) Expenditures for property and equipment (13,761) (8,522) (9,684) -------- -------- -------- Net cash used for investing activities (13,761) (8,522) (19,300) Cash flows from financing activities: Payments for capitalized lease (106) (97) (102) Payments for debt issuance costs (100) -- -- Proceeds from exercise of stock options and employee stock purchase plan 193 209 908 -------- -------- -------- Net cash provided by (used for) financing activities (13) 112 806 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (6,469) 4,008 13,998 Cash and cash equivalents at beginning of period 35,397 31,389 17,391 -------- -------- -------- Cash and cash equivalents at end of period $ 28,928 $ 35,397 $ 31,389 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid for interest $ 707 $ 784 $ 706 Cash paid for income taxes $ 10,115 $ 9,066 $ 5,901
See Notes to Consolidated Financial Statements 37 BROOKSTONE, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended January 29, 2000, February 3, 2001 and February 2, 2002 (In thousands, except share data)
Accumulated Additional Other Total Common Paid-In Comprehensive Retained Treasury Shareholders' Shares Stock Capital Income Earnings Stock Equity --------- ------- --------- ------------- --------- ------- ------------ Balance at January 30, 1999 8,064,586 $ 8 $48,330 $ --- $ 24,019 $ (47) $72,310 Options exercised 232,304 908 908 Related tax benefits on exercise of stock options 782 782 Net income 13,310 13,310 ------------------------------------------------------------------------------------------------------------------------------- Balance at January 29, 2000 8,296,890 8 50,020 --- 37,329 (47) 87,310 Options exercised 23,750 209 209 Related tax benefits on exercise of stock options 48 48 Net income 14,944 14,944 ------------------------------------------------------------------------------------------------------------------------------- Balance at February 3, 2001 8,320,640 8 50,277 --- 52,273 (47) 102,511 Issuance of common stock under employee stock purchase plan 11,948 157 157 Options exercised 37,132 36 36 Related tax benefits on exercise of stock options 196 196 Components of comprehensive income (net of tax): Net income 5,332 5,332 Minimum pension liability Adjustment (net of tax of $279) (447) (447) ----- Total Comprehensive Income 4,885 ------------------------------------------------------------------------------------------------------------------------------- Balance at February 2, 2002 8,369,720 $ 8 $ 50,666 $ (447) $57,605 $ (47) $107,785 ===============================================================================================================================
See Notes to Consolidated Financial Statements 38 1. NATURE OF BUSINESS AND ORGANIZATION Brookstone, Inc. (the "Company") is a nationwide specialty retailer whose strategy is to develop unique, proprietary branded products and offer them to customers via multiple distribution channels including retail stores, catalogs, and the Internet. The Company's retail portfolio includes three brands: Brookstone, Gardeners Eden, and Hard to Find Tools. The Brookstone brand features an assortment of consumer products functional in purpose, distinctive in quality and design and not widely available from other retailers. Brookstone's merchandise includes lawn and garden, health and fitness, home and office and travel and auto products. Hard to Find Tools features solutions for home owners primarily focused on home improvement and the indoor and outdoor home environment. Gardeners Eden is a garden inspired lifestyle brand which features garden themed home accessories, live plants, and outdoor furniture. The Company offers approximately 2,500 active stock-keeping units ("SKUs") for Brookstone and Hard to Find Tools, and approximately the same amount for Gardeners Eden at any given time. The Company sells its products through 248 full-year stores (including 20 airport based stores, three outlet stores and two Gardeners Eden stores) in 39 states, the District of Columbia and Puerto Rico. In addition to these full-year stores, Brookstone operates temporary stores and kiosks during the winter holiday season; there were a total of 67 such stores operating during the 2001 holiday season. The Company also operates a direct marketing business, which includes its Hard-To-Find-Tools, its Brookstone Catalog and its Gardeners Eden catalogs in addition to an interactive Internet site, www.Brookstone.com. The Company's fiscal year end is the Saturday nearest the last day in January. Results of operations for Fiscal 2001 are for the 52 weeks ended February 2, 2002. Results for Fiscal 2000 are for the 53 weeks ended February 3, 2001, and results for Fiscal 1999 are for the 52 weeks ended January 29, 2000. 2. SIGNIFICANT ACCOUNTING POLICIES Principals of Consolidation The accompanying consolidated financial statements include the accounts of the Company and Brookstone Company, Inc. and the direct and indirect wholly owned subsidiaries of Brookstone Company, Inc. (Brookstone Stores, Inc., Brookstone Purchasing, Inc., Brookstone Properties, Inc., Brookstone By Mail, Inc., Fork Distribution Corporation, Gardeners Eden by Mail, Inc., Brookstone Retail Puerto Rico, Inc. and Brookstone Holdings, Inc.) All intercompany accounts and transactions have been eliminated in consolidation. 39 Cash and Cash Equivalents The Company considers all highly liquid investment instruments purchased with a remaining maturity of three months or less to be cash equivalents. These instruments are carried at cost plus accrued interest. The Company invests its excess cash in money market funds and commercial paper with institutions with strong credit ratings. These investments are less subject to credit and market risk. Fair Value of Financial Instruments The recorded amounts for cash and cash equivalents, other current assets, accounts receivable, accounts payable and other current liabilities approximate fair value due to the short-term nature of these financial instruments. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Merchandise Inventories Merchandise inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. In addition to the cost of merchandise purchased, certain costs related to the purchasing, distribution, storage and handling of merchandise are included in inventory. Property and Equipment Property and equipment are recorded at cost. Expenditures for maintenance and repairs of minor items are charged to expense as incurred. Depreciation and amortization of property and equipment (excluding temporary locations) are determined using the straight-line method over the estimated useful lives shown below. Materials used in the construction of temporary locations such as kiosks are depreciated based on usage over a maximum five-year period and are included in equipment and fixtures. Equipment, furniture and fixtures and software 3 to 10 years Leasehold improvements The lesser of the lease term or the estimated useful life 40 The Company leases retail store locations under operating lease agreements, which sometimes provide for leasehold completion allowances to be received from the lessors. These allowances are recorded against the cost of leasehold improvements related to individual retail store locations. Depreciation expense totaled $10,659,000 and $9,640,000 for Fiscal 2001 and Fiscal 2000, respectively. The Company accounts for software costs in accordance with Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs related to developing or obtaining internal use software should be capitalized. In addition, the Company accounts for the costs incurred to develop and maintain its web site in accordance with Emerging Issues Task Force Summary No. 00-2 (EITF 00-2), "Accounting for Web Site Development Costs." Advertising Costs Direct response advertising costs, which consist of catalog production and postage costs, are deferred and amortized over the period of expected direct marketing revenue, which is less than one year. Deferred costs were $1.3 million and $2.1 million at February 2, 2002 and February 3, 2001, respectively and are classified as non-current assets. The Company expenses in-store and print advertising costs as incurred. Advertising expense, primarily catalog costs, was approximately $23.1 million, $22.3 million and $18.2 million for the years ended February 2, 2002, February 3, 2001 and January 29, 2000, respectively. Intangible Assets Intangible assets include trade name and customer lists. Intangible assets are amortized on the straight-line basis over the estimated useful lives ranging from 3 years to 20 years. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted net cash flows of individual stores, and consolidated net cash flows for long-lived assets not identifiable to individual stores, to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis. Revenue Recognition The Company recognizes revenue from sales of merchandise at the time of customer receipt. Revenue is recognized net of actual merchandise returns and allowances. Revenue from merchandise credits and gift certificates is deferred until redemption. 41 The Company allows merchandise returns for all merchandise, and has established an allowance for merchandise returns based on historical experience, in accordance with Statement of Financial Accounting Standards No. 48 ("SFAS No. 48"), "Revenue Recognition When Right of Return Exists." The returns allowance is recorded as a reduction to net sales. 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 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 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 is $308,000, net of tax benefit of $193,000, and is reflected in the Company's first fiscal quarter of 2000. The pro forma effect of SAB 101 on the net income of prior periods presented is not material. 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. Store Closings The Company continually assesses the operating financial results of its retail stores. As a result of this assessment, management may decide to remodel or phase out and close certain stores. When such determinations are made, a provision for store closing costs is recorded in the Statement of Income. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS No. 109"). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the fiscal year in which those temporary differences are expected to be recovered or settled. The effect of any future change in tax rates is recognized in the period in which the change occurs. 42 Earnings Per Share Earnings per share are presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which requires the presentation of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average shares of common stock outstanding during the period. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding during the period and the weighted average number of potential common stock, such as stock options. Segment Reporting The Company presents its financial information in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). Under SFAS No. 131, the Company's business is comprised of two distinct business segments 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 Catalog and Gardeners Eden catalogs and products promoted via the Internet site www.Brookstone.com. Direct marketing product distribution is primarily conducted through the Company's direct marketing call center and distribution facility located in Mexico, Missouri. Reclassifications Certain reclassifications have been made to the Fiscal 2000 and Fiscal 1999 balances to conform to the current year presentation. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and specifies criteria for recognizing intangible assets separate from goodwill. This statement applies to all business combinations after June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material impact on the Company's financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 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 No. 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 is not expected to have a material impact on the Company's financial statements. 43 In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity is required to capitalize the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and will be adopted by the Company in Fiscal 2003. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets, excluding goodwill. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial statements. In November 2001, Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer." EITF 01-09 addresses the income statement characterization of consideration given by a vendor to a customer and provides guidance on recognizing and measuring sales incentives. EITF Issue No. 01-09 becomes effective in the first quarter of Fiscal 2002. 44 3. CONSOLIDATED BALANCE SHEET DETAILS
February 2, 2002 February 3, 2001 ----------------------------------------------------------------------------------------- Other Current Assets: Prepaid rent $ 3,821,000 $ 3,490,000 Prepaid insurances, postage, deposits and other 1,112,000 540,000 ------------- ------------- $ 4,933,000 $ 4,030,000 ============= ============= Property and Equipment: Leasehold improvements $ 41,076,000 $ 38,288,000 Equipment, furniture and fixtures and software 64,758,000 56,083,000 ------------- ------------- Total property and equipment 105,834,000 94,371,000 Accumulated depreciation and amortization (60,776,000) (52,415,000) ------------- ------------- $ 45,058,000 $ 41,956,000 ============= ============= Intangible Assets: Trade name $ 5,407,000 $ 5,407,000 Customer list 908,000 908,000 ------------- ------------- Total intangible assets 6,315,000 6,315,000 Accumulated amortization (1,503,000) (956,000) ------------- ------------- $ 4,812,000 $ 5,359,000 ============= ============= Other Current Liabilities: Merchandise credits and gift certificates $ 7,933,000 $ 5,425,000 Accrued employee compensation and benefits 3,953,000 5,680,000 Rent payable 1,392,000 819,000 Income taxes payable 3,621,000 9,104,000 Accrued expenses 5,670,000 7,938,000 ------------- ------------- $ 22,569,000 $ 28,966,000 ============= ============= Other Long-term Liabilities: Straight-line rent liability $ 6,722,000 $ 6,249,000 Employee benefit obligations and other long term liabilities 6,524,000 5,506,000 ------------- ------------- $ 13,246,000 $ 11,755,000 ============= =============
45 4. GARDENERS EDEN ACQUISITION Effective on May 3, 1999, the Company acquired certain assets relating to the Gardeners Eden catalog from Williams-Sonoma, Inc. at a purchase price of approximately $9.6 million. The acquisition was accounted for as a purchase. The assets acquired were comprised of inventory valued at approximately $2.4 million, prepaid catalog costs of approximately $0.3 million and deferred catalog costs valued at approximately $1.3 million. The value of these assets was offset by a liability of approximately $0.7 million for open customer orders under the Gardeners Eden continuity program. The Company allocated the remaining purchase price, approximately $6.3 million, to the valuation of intangible assets consisting of trade name for $5.4 million and customer lists for $0.9 million. The intangible assets are being amortized on a straight-line basis, from 3 years to 20 years. 5. INCOME TAXES Temporary differences, which give rise to deferred tax assets and liabilities for Fiscal 2001 and Fiscal 2000, are as follows:
February 2, 2002 February 3, 2001 ---------------- ---------------- Deferred tax assets: Rent expense $2,537,000 $2,366,000 Inventory capitalization and reserves 630,000 607,000 Employee benefit obligations 1,798,000 1,475,000 Vacation accrual 106,000 94,000 Merchandise credits and gift certificates 1,094,000 1,710,000 Tax depreciation 543,000 215,000 Sales return reserve 459,000 380,000 Other items 1,343,000 1,102,000 ---------- ---------- Total deferred tax asset $8,510,000 $7,949,000 ========== ========== Deferred tax liabilities: Deferred catalog costs $ 508,000 $ 639,000 Other items 19,000 15,000 ---------- ---------- Total deferred tax liability 527,000 654,000 ---------- ---------- Net deferred tax asset $7,983,000 $7,295,000 ========== ==========
46 Current and non-current deferred tax assets and liabilities within the same tax jurisdiction are offset for presentation in the consolidated balance sheet. A valuation allowance has not been established as management expects that it is more likely than not that the net deferred tax asset will be realized. The provision for income taxes is comprised of the following: Year Ended -------------------------------------------------------------- February 2, 2002 February 3, 2001 January 29, 2000 ---------------- ---------------- ---------------- Current: Federal $ 3,252,000 $ 9,380,000 $ 7,962,000 State 489,000 863,000 884,000 Deferred: Federal (385,000) (606,000) (476,000) State (32,000) (129,000) (73,000) ----------- ----------- ----------- $ 3,324,000 $ 9,508,000 $ 8,297,000 =========== =========== =========== Reconciliation of the U. S. Federal statutory rate to the Company's effective tax rate is as follows: Year Ended ---------------------------------------------------------- February 2, 2002 February 3, 2001 January 29, 2000 ---------------- ---------------- ---------------- Statutory federal income tax rate 35% 35% 35% State income taxes, net of federal tax benefit 2% 2% 2% Other 1% 1% 1% ---- ---- ---- Effective income tax rate 38% 38% 38% ==== ==== ==== The exercise of stock options which have been granted under the Company's stock option plans (refer to Note 8) gives rise to compensation which is includable in the taxable income of the optionees and deductible by the Company for federal and state income tax purposes. Such compensation considers increases in the fair market value of the Company's common stock subsequent to the date of the grant. For financial reporting purposes, the tax effect of this 47 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 to the Company of approximately $196,000, $48,000, and $782,000 in Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. 6. SEGMENT REPORTING 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 Catalog and Gardeners Eden catalogs and products promoted via 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 and a third party distribution warehouse. 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 following table discloses segment net sales, pre-tax income and depreciation and amortization expense for Fiscal 2001, Fiscal 2000 and Fiscal 1999 (in thousands):
Net Sales Pre-tax Income --------------------------------------------- ------------------------------------------- 2001 2000 1999 2001 2000 1999 --------------------------------------------- ------------------------------------------- Reportable segment: Retail $ 289,409 $ 298,360 $ 270,660 $11,595 $ 25,008 $ 21,729 Direct marketing 63,508 66,181 56,195 (1,911) 378 1,003 Reconciling items: Interest income --- --- --- 503 982 535 Interest expense --- --- --- (1,531) (1,608) (1,660) --------------------------------------------- ------------------------------------------- Consolidated: $ 352,917 $ 364,541 $ 326,855 $ 8,656 $ 24,760 $ 21,607 ============================================= =========================================== Depreciation & Amortization --------------------------------------------- 2001 2000 1999 --------------------------------------------- Reportable segment: Retail $ 10,027 $ 9,336 $ 8,514 Direct marketing 1,179 851 630 --------------------------------------------- Consolidated: $ 11,206 $ 10,187 $ 9,144 =============================================
48 7. DEBT Revolving Credit Agreement The Company's revolving credit facility which was in effect in Fiscal 2001 provided for borrowings of up to $75 million for letters of credit and working capital, limited by a borrowing base test equal to 50% of the amount of eligible inventory and outstanding documentary letters of credit (increasing to 65% June through July and to 75% August through November). Amounts available for borrowings were reduced by the aggregate amount of outstanding letters of credit, which could not exceed $40 million, and borrowings. The revolving credit agreement required the Company to have no more than $10 million in borrowings (excluding letters of credit) outstanding for one 30 consecutive day period during the December 15 to April 30 period. Borrowings outstanding under this facility bore interest, at the election by the Company, equal to the agent bank's base lending rate or the Eurodollar rate for the applicable period plus an additional 1.0%, 1.25% or 1.5% depending on the applicable cash flow coverage ratio (at February 2, 2002 the rate was 2.8125%). In addition, the Company was obligated to pay a fee of 0.25% or 0.30% on the unused portion of the commitment and 0.50%, 0.625% or 0.75% on documentary letters of credit (depending on the applicable cash flow coverage ratio). At the Lender's option, all positive cash balances held by the lender banks could be applied to the outstanding balance of the revolving line of credit. The revolving credit agreement contained a number of restrictive covenants, including limitations on incurring additional indebtedness, granting liens, selling assets, engaging in mergers and other similar transactions, engaging in new business lines and making capital expenditures. In addition, the agreement prohibited the payment of cash dividends on common stock and required that the Company maintain certain financial ratios, including tests pertaining to net worth, ratio of liabilities to net worth and cash flow coverage. This agreement was scheduled to expire in July of 2002. As a result of this, management began negotiations to amend and restate the credit agreement in the fall of 2001. The Company successfully completed its negotiations with its lenders to extend and increase the facility in January of 2002. The Amended and Restated Credit Agreement (the "Amended Credit Agreement") was signed on February 21, 2002 with a term that expires February 21, 2005. The Amended Credit Agreement provides for increased borrowings of up to $80 million for letters of credit and working capital as long as the Company meets a borrowing base test equal to 50% of the amount of eligible inventory and outstanding documentary letters of credit (increasing to 65% June through July and to 75% August through November). Amounts available for borrowings are reduced by the aggregate amount of outstanding letters of credit, which may not exceed $50 million, and borrowings. The Amended Credit Agreement requires the Company to have no borrowings (excluding letters of credit) outstanding for at least 30 consecutive days during the period of December 15, 2002 to April 30, 2003. Thereafter, during the December 15th to April 30th time frame, the Company must have no more than $10 million in borrowings (excluding letters of credit) outstanding for 30 consecutive days. Borrowings under the facility bear interest that is dependent on the level of the Company's fixed charge coverage ratio. Depending on the calculated ratio of the Company's fixed charge coverage, there are four different levels that have 49 different fees and different margin rates on the applicable borrowings. Under the Amended Credit Agreement, the interest rates on the facility, at the Company's option, were either: the agent bank's base lending rate plus 0.75%, 0.50%, or 0.25%, or the Eurodollar rate for the applicable period plus 2.25%, 2.00%, 1.75% or 1.50%. In addition, the Company is obligated to pay a fee of 0.75%, 0.625%, or 0.50% on the unused portion of the commitment and 1.125%, 1.00%, 0.875%, or 0.75% on the documentary letters of credit. Amounts due under the Amended Credit Agreement are secured by the personal property of the Company, tangible or intangible including all stock of Brookstone, Inc.'s subsidiaries, but excluding real property, machinery and equipment encumbered on February 21, 2002, and general intangibles. The security interest in the Amended Credit Agreement is subject to collateral release conditions dependent upon four consecutive quarters fixed charge coverage ratio of 1.40 to 1.00 and consolidated EBITDA for the four quarters then ended of at least $34.5 million. At the Lender's option, all positive cash balances held by the Lender's banks may be applied to the outstanding balance of the revolving line of credit. The Amended Credit Agreement contains a number of restrictive covenants, including limitations on incurring additional indebtedness, granting liens, selling assets, engaging in mergers and other similar transactions, engaging in new business lines and making capital expenditures. In addition, the Amended Credit Agreement prohibits the payment of cash dividends on common stock and requires that the Company maintain certain financial ratios, including tests pertaining to consolidated net worth, fixed charge coverage and cash flow leverage. For the fourth quarter of Fiscal 2001, the Company was in compliance with these covenants. During Fiscal 2001, the Company borrowed a maximum amount of $40.0 million under the revolving credit facility. There were no outstanding borrowings under the Amended Credit Agreement respectively at February 2, 2002 and February 3, 2001. There were $10.1 million and $6.6 million in outstanding documentary letters of credit at February 2, 2002 and February 3, 2001, respectively. In addition, $0.7 million and $1.5 million in stand-by letters of credit were drawable by store lessors at February 2, 2002 and February 3, 2001, respectively. Capital Lease Obligation The Company's lease for its Mexico, Missouri distribution facility extends over twenty years (concluding in October of 2013) at prime plus 1% per annum (7.5% at February 2, 2002 and 10.50% at February 3, 2001). The interest rate is adjusted annually on November 1. The principal balance of this obligation amounted to $2.4 million at February 2, 2002 and $2.5 million at February 3, 2001. Property capitalized under this capital lease amounted to $3.1 million, with accumulated amortization of $828,000 and $730,000 at February 2, 2002 and February 3, 2001, respectively. 50 Scheduled payments of the capital lease obligation as of February 2, 2002 are as follows: Fiscal Year 2002 $ 310,000 2003 310,000 2004 310,000 2005 310,000 2006 310,000 Thereafter 2,067,000 -------------- $ 3,617,000 Interest on capital lease obligation included above (1,210,000) -------------- Remaining principal $ 2,407,000 ============== Current portion of the capital lease obligation equaled $134,000 and $99,000 at February 2, 2002 and February 3, 2001, respectively. 8. SHAREHOLDERS' EQUITY Preferred Stock The Board of Directors is authorized, subject to any limitations prescribed by law, to issue shares of preferred stock in one or more series. Each such series of preferred stock shall have rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board of Directors. Employee Stock Plans The Company has stock option plans for key associates, officers and directors of the Company, which provide for nonqualified and incentive stock options. The Board of Directors determines the term of each option, option price and number of shares at the date of grant. For all options granted after Fiscal 1991, such option prices equaled the fair market value at the date of grant. Options granted generally vest over four years from the date of grant and expire after ten years. Certain non-qualified options become exercisable five years from the date of grant, however, the exercise date of all or a portion of such options may be accelerated if the price of the Company's common stock reaches certain target amounts. At February 2, 2002 options of 627,627 shares were exercisable under the various associate stock option plans, and 50,500 shares were exercisable under the Directors' stock option plan. At February 2, 2002, options of 280,345 shares were available for future grants under the various associate stock option plans, and 78,000 shares were available for future grants under the Directors' stock option plan. 51 Stock Purchase Plans The Company's stock purchase plans, which cover substantially all associates, allow for the issuance of a maximum of 60,000 and 75,000 shares of common stock under the 1992 Employee Stock Purchase Plan ("1992 ESPP") and 2000 Employee Stock Purchase Plan ("2000 ESPP"), respectively. The options are exercisable at the lower of 85% of market value at the beginning or end of the six-month period, through accumulation of payroll deductions of up to 10% of each participating employee's regular base pay during such period. Purchases occur at the end of one or more option periods. Since adoption, there have been three, six-month option periods under the 1992 ESPP, which began on July 1, 1993, January 1, 1994 and November 4, 1997 and one six month period under the 2000 ESPP, which began on November 1, 2000. The six-month option period that began on November 1, 2000 expired on May 1, 2001, resulting in the issuance of 11,948 shares to participating associates. The Board of Directors may, at its discretion, extend the 1992 Employee Stock Purchase Plan and the 2000 ESPP for additional periods. As of February 2, 2002, there were 14,033 and 63,052 options available for future grants under the 1992 ESPP and 2000 ESPP, respectively. Transactions under the Company's stock option plans for each of the three years in the period ended February 2, 2002 are as follows: Number of Shares Weighted Average Exercise Price --------------------- ---------------------------------- Outstanding at January 30, 1999 1,131,397 $ 8.58 Granted 68,000 $ 15.21 Exercised (232,304) $ 3.91 Canceled (85,584) $ 12.84 Outstanding at January 29, 2000 881,509 $ 9.90 Granted 368,000 $ 15.09 Exercised (23,750) $ 8.84 Canceled (64,500) $ 12.33 Outstanding at February 3, 2001 1,161,259 $ 11.42 Granted 127,500 $ 14.00 Exercised (37,132) $ 0.98 Canceled (65,250) $ 15.26 Outstanding at February 2, 2002 1,186,377 $ 11.81 Of the 1,186,377 shares outstanding at February 2, 2002, 1,114,377 shares were outstanding under the various associate stock option plans, and 72,000 shares were outstanding under the Directors' stock option plan. 52 Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" permits the Company to follow the measurement provisions of APB Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees". Stock Options have historically been granted at or above the market price on the date of the grant, therefore, no compensation expense has been recognized under APB No. 25. Had compensation cost for the Company's stock-based incentive compensation plans been determined based on the fair value at the grant dates of awards under those plans, consistent with the methodology prescribed by SFAS No. 123, the Company's net income and related earnings per share for Fiscal 2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated below: Fiscal Year ------------------------------------------ 2001 2000 1999 ---------- ----------- ----------- Net income - as reported $5,332,000 $14,944,000 $13,310,000 Net income - pro forma 4,709,000 14,672,000 12,958,000 Earnings per share - basic As reported $ 0.64 $ 1.80 $ 1.63 Pro forma 0.56 1.77 1.59 Earnings per share - diluted As reported $ 0.63 $ 1.76 $ 1.58 Pro forma 0.55 1.73 1.54 The fair value of each option grant is estimated on the date of grant using the Black - Scholes option-pricing model with the following weighted-average assumptions. Fiscal Year ---------------------------------------- 2001 2000 1999 ---- ---- ---- Expected stock price volatility 46.8% 46.9% 47.9% Risk-free interest rate 4.7% 6.6% 5.8% Expected life of options 5 years 5 years 5 years Dividend yield --- --- --- The weighted average fair value of options granted for Fiscal 2001, Fiscal 2000 and Fiscal 1999 are $6.58, $10.34 and $7.52, respectively. 53 The following table summarizes information about stock options outstanding at February 2, 2002:
Options Outstanding Options Exercisable ----------------------------------------------------------------------------------- Range of Exercise Prices Number Weighted Average Weighted Number Weighted Outstanding at Remaining Average Exercisable Average 2/2/02 Contractual Life Exercise Price at 2/2/02 Exercise Price ------------------ ------------------ --------------- --------------- ------------- $5.375-$8.1250 156,502 2.9 years $ 6.31 156,502 $ 6.31 $8.750-$10.750 397,125 4.9 years $ 9.43 242,375 $ 9.77 $11.650-$13.9375 102,750 8.9 years $13.16 14,251 $ 12.09 $14.250-$15.950 530,000 6.3 years $14.96 264,999 $ 14.80 ----------------------------------------------------------------------------------------------------------------- 1,186,377 678,127
Because the determination of the fair value of all options granted includes vesting periods over several years and additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects of reported net income for future periods. Earnings per common share The following is an analysis of the differences between basic and diluted earnings per common share in accordance with SFAS No. 128, "Earnings per Share".
February 2, 2002 February 3, 2001 January 29, 2000 ---------------- ---------------- ---------------- Net income $5,332,000 $ 14,944,000 $ 13,310,000 ================ ================ ================ Weighted average common shares outstanding 8,361,000 8,310,000 8,155,000 Effect of dilutive securities: Stock options 132,000 162,000 267,000 ---------------- ---------------- ---------------- Weighted average common shares and common share equivalents 8,493,000 8,472,000 8,422,000 ================ ================ ================
54 9. PENSION AND 401(k) PLANS The Company sponsors the Brookstone Pension Plan, which provides retirement benefits for its employees who have completed one year of service and who were participating in the plan prior to May 31, 1998. As of May 30, 1998, the Board of Directors approved freezing future benefits under this plan. The retirement plan is a final average pay plan. It is the Company's policy to fund the cost of benefits expected to accrue during the year plus amortization of any unfunded accrued liabilities related to periods of service prior to the valuation date. The following tables set forth the pension plan's funded status and amounts recognized in the Company's consolidated financial statements. February 2, 2002 February 3, 2001 -------------------------------------------------------------------------------- Change in Projected benefit obligation: Projected benefit obligation at beginning of fiscal year $ 3,947,000 $ 3,840,000 Service cost 125,000 125,000 Interest cost 293,000 286,000 Actuarial loss (gain) 288,000 (3,000) Expenses paid (70,000) (80,000) Benefits paid (201,000) (221,000) ----------- ----------- Projected benefit obligation at end of fiscal year $ 4,382,000 $ 3,947,000 =========== =========== The change in plan assets was: February 2, 2002 February 3, 2001 -------------------------------------------------------------------------------- Fair value at beginning of fiscal year $ 3,818,000 $ 4,211,000 Actual return on plan assets (329,000) (199,000) Employer contributions 91,000 107,000 Expenses paid (70,000) (80,000) Benefits paid (201,000) (221,000) ----------- ----------- Fair value at end of fiscal year $ 3,309,000 $ 3,818,000 =========== =========== 55 The funded status was: February 2, 2002 February 3, 2001 -------------------------------------------------------------------------------- Funded status at end of year $ (1,073,000) $ (129,000) Unrecognized net actuarial loss(gain) 726,000 (220,000) ------------ ---------- Net amount recognized $ (347,000) $ (349,000) ============ ========== Amounts recognized in the consolidated balance sheet February 2, 2002 February 3, 2001 -------------------------------------------------------------------------------- Accrued benefit liability $ (1,073,000) $ (349,000) Accumulated other comprehensive income $ 726,000 - ------------ ---------- Net Amount Recognized $ (347,000) $ (349,000) ============ ========== Assumptions used in computing the funded status were as follows: Weighted average discount rate 7.0% 7.5% Expected return on plan assets 9.0% 9.0% Rate of increase in compensation levels 3.5% 4.0% The components of net periodic pension cost were as follows: February 2, 2002 February 3, 2001 -------------------------------------------------------------------------------- Service cost $ 125,000 $ 125,000 Interest cost 293,000 286,000 Expected return on plan assets (330,000) (366,000) Amortization of prior service cost --- --- Recognized net actuarial loss --- (30,000) ---------- ---------- Net periodic benefit cost $ 88,000 $ 15,000 ========== ========== The Company sponsors a 401(k) plan for all associates who have completed at least one year of service with a minimum of 1,000 hours and have attained the age of 21. The Board of Directors, concurrently with freezing the pension plan, approved the increase of the Company's 401(k) matching contribution of each participating employee's salary from a maximum of 1.5% to a maximum of 4.0%. The Company's matching 401(k) contribution was $792,000, $710,000 and $618,000 in Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. 56 10. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors a defined benefit post-retirement medical plan that covers all of its full time associates. All associates who retire from the Company's defined benefit pension plan who have either attained age 65 with five years of service, or who have attained age 55 with 10 years of service and 70 points are eligible. Associates, who retire prior to age 65, and their spouses, are each required to contribute 50% of the premium. Spouses of associates who retire after age 65 with 10 years of service are required to contribute 50% of their premium. Associates, who retire at age 65 with five to nine years of service, and their spouses, are required to contribute 50% and 75% of the premium, respectively. Associates not eligible for retirement as of February 1, 1992 will be required to contribute the amount of premium in excess of $4,200 pre-65 and $2,225 post-65; spouses are not eligible. The plan is not funded. The following tables set forth the post-retirement plans funded status and amounts recognized in the Company's consolidated financial statements.
February 2, 2002 February 3, 2001 ---------------- ---------------- Accumulated post-retirement benefit obligation("APBO"): APBO at end of prior fiscal year $ 1,372,000 $ 1,332,000 Service Cost 160,000 106,000 Interest Cost 102,000 99,000 Actuarial loss / (gain) and assumption change 283,000 (79,000) Benefits paid (89,000) (86,000) ------------ ------------ APBO at end of current fiscal year $ 1,828,000 $ 1,372,000 ============ ============
The change in plan assets was:
February 2, 2002 February 3, 2001 ---------------- ---------------- Fair value at beginning of fiscal year $ --- $ --- Actual return on plan assets --- --- Employer contributions 89,000 86,000 Participant Contributions --- --- Expenses paid --- --- Benefits paid (89,000) (86,000) ------------ ------------ Fair value at end of fiscal year $ 0 $ 0 ============ ============
57 The amounts recognized in the statement of financial position consisted of: February 2, 2002 February 3,2001 -------------------------------------------------------------------------------- Accrued benefit cost (other plans) $ (2,936,000) $ (2,890,000) ------------- ------------- Accrued benefit cost $ (2,936,000) $ (2,890,000) Funded status at end of fiscal year (1,828,000) (1,372,000) Unrecognized prior service cost (740,000) (843,000) Unrecognized net actuarial gain (368,000) (675,000) ------------- ------------- Accrued benefit cost $ (2,936,000) $ (2,890,000) The components of the net periodic post-retirement benefit cost were: February 2, 2002 February 3, 2001 -------------------------------------------------------------------------------- Service cost $ 160,000 $ 106,000 Interest cost 102,000 99,000 Amortization of prior service cost (102,000) (102,000) Recognized net actuarial gain (24,000) (28,000) ------------- ------------- Net periodic benefit cost $ 136,000 $ 75,000 The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7.0% as of February 2, 2002 and 7.50% as of February 3, 2001. For measurement purposes, an 11.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for Fiscal 2001; this rate was assumed to decrease gradually down to 5.5% for Fiscal 2008 and remain at that level thereafter. The medical cost trend rate assumption has a significant effect on the amounts reported. However, the impact of medical inflation eventually diminishes because of the limit of the Company's share of plan cost for accruals for associates who were not eligible to retire as of February 1, 1992. A one-percentage point change in assumed health care cost trend rate would have had the following effects on February 2, 2002: Increase Decrease Effect on total of service and interest cost components $ 2,468 $ (2,726) Effect on accumulated post-retirement benefit obligation $ 25,284 $ (24,271) 58 11. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases all of its retail store locations and its corporate headquarters. These leases are non-cancelable and have terms of up to 15 years. Certain leases provide for additional rents payable based on store sales. At February 2, 2002, the minimum future rentals on non-cancelable operating leases are as follows: Fiscal Year 2002 $ 29,566,000 2003 28,549,000 2004 27,976,000 2005 26,807,000 2006 23,901,000 Thereafter 87,460,000 ------------- $ 224,259,000 ============= Rent expense was approximately $29.2 million, $27.0 million and $24.9 million for the years ended February 2, 2002, February 3, 2001 and January 29, 2000, respectively. Contingent rent expenses totaled approximately $255,000, $284,000 and $200,000, for the years ended Fiscal 2001, Fiscal 2000 and Fiscal 1999, respectively. These rent expenses, along with other costs of occupancy are included in cost of sales in the consolidated statement of income. Litigation The Company is involved in various legal proceedings arising in the normal course of business. Management believes that the resolution of these matters will not have a material effect on the consolidated financial statements. 59 12. QUARTERLY FINANCIAL DATA (unaudited). ---------------------------------------- The following Fiscal 2001 quarterly information (in thousands, except per share data):
Fiscal 2001 ------------------- ----------------- ------------------ ------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net Sales $ 54,997 $ 69,612 $ 58,523 $169,785 Gross Profit 14,156 20,772 14,217 79,129 Income (loss) from operations (8,492) (4,272) (14,122) 36,570 ------------------- ----------------- ------------------ ------------------ Net income (loss) $ (5,193) $ (2,761) $ (8,987) $ 22,273 =================== ================= ================== ================== Earnings (loss) per share: Basic ------------------- ----------------- ------------------ ------------------ Net income (loss) $ (0.62) $ (0.33) $ (1.07) $ 2.66 =================== ================= ================== ================== Earnings (loss) per share: Diluted ------------------- ----------------- ------------------ ------------------ Net income (loss) $ (0.62) $ (0.33) $ (1.07) $ 2.63 =================== ================= ================== ==================
The following fiscal 2000 quarterly information includes the impact of the adoption of SAB 101 and EITF 00-10 (in thousands, except per share data):
Fiscal 2000 ------------------- ----------------- ------------------ ------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------------- ----------------- ------------------ ------------------ Net Sales $ 51,077 $ 68,699 $ 63,817 $ 180,948 Gross Profit 13,670 22,915 18,084 84,904 Income (loss) from operations (7,638) (606) (7,537) 41,167 Income (loss) before cumulative effect of accounting change (4,682) (399) (4,889) 25,222 Cumulative effect of accounting change (308) -- -- -- ------------------- ----------------- ------------------ ------------------ Net income (loss) $ (4,990) $ (399) $ (4,889) $ 25,222 =================== ================= ================== ================== Earnings (loss) per share: Basic Earnings (loss) before cumulative effect of accounting change $ (0.56) $ (0.05) $ (0.59) $ 3.03 Cumulative effect of accounting change (0.04) -- -- -- ------------------- ----------------- ------------------ ------------------ Net income (loss) $ (0.60) $ (0.05) $ (0.59) $ 3.03 =================== ================= ================== ================== Earnings (loss) per share: Diluted Earnings (loss) before cumulative effect of accounting change $ (0.56) $ (0.05) $ (0.59) $ 2.98 Cumulative effect of accounting change (0.04) -- -- -- ------------------- ----------------- ------------------ ------------------ Net income (loss) $ (0.60) $ (0.05) $ (0.59) $ 2.98 =================== ================= ================== ==================
The effect of SAB 101 and EITF 00-10 on previously reported quarters was as follows (in thousands, except per share data):
Effect of Change in Fiscal 2000 ---------------------------------------------------------- Quarter Ended Net Sales Net Income Diluted EPS --------- ---------- ----------- April 29, 2000 $ 1,849 $(271) $(0.03) July 29, 2000 2,048 45 --- October 28, 2000 881 (97) (0.01)
60 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (Nos. 33-88174, 33-48580, 33-32018, 33-17341 and 33-63740) of Brookstone, Inc. of our report dated March 18, 2002 relating to the financial statements and financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts May 2, 2002 61 2. Consolidated Financial Statement Schedules. Schedule II Valuation and Qualifying Accounts and Reserves
Year ended February 2, 2002 -------------------------------------------------------------------------------------------------------------- Charged to costs Description Beginning Balance and expenses Deductions Ending Balance Allowance for doubtful accounts $ 606,000 $280,000 $(271,000) $ 615,000 ---------- -------- --------- ---------- Inventory reserve $2,992,000 $160,000 $(134,000) $3,018,000 ---------- -------- --------- ---------- Year ended February 3, 2001 -------------------------------------------------------------------------------------------------------------- Charged to costs Description Beginning Balance and expenses Deductions Ending Balance Allowance for doubtful accounts $ 325,000 $478,000 $(197,000) $ 606,000 ---------- -------- --------- ---------- Inventory reserve $3,061,000 $548,000 $(617,000) $2,992,000 ---------- -------- --------- ---------- Year ended January 29, 2000 -------------------------------------------------------------------------------------------------------------- Charged to costs Description Beginning Balance and expenses Deductions Ending Balance Allowance for doubtful accounts $ 176,000 $211,000 $(62,000) $ 325,000 ---------- -------- --------- ---------- Inventory reserve $2,378,000 $683,000 $ --- $3,061,000 ---------- -------- --------- ---------- --------------------------------------------------------------------------------------------------------------
All other schedules of which provision is made in the applicable regulation of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable. 62 3. Exhibits. EXHIBIT NO. DESCRIPTION 3.1 Restated Certificate of Incorporation, (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 3.2 Amended and restated by-laws (filed with the Securities and Exchange Commission as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 4.1 Specimen Certificate Representing the Common Stock (filed with the Securities and Exchange Commission as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.1 Amended and Restated Stockholders Agreement dated as of August 22, 1991, among the Company and its stockholders party thereto and named therein (filed with the Securities and Exchange Commission as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.2 1991 Stock Purchase and Option Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (File No. 33-63470), and incorporated herein by reference). 10.3 Stock Option Agreement dated as of August 22, 1991, between the Company and Merwin F. Kaminstein, including amendment dated February 29, 1992, (filed with the Securities and Exchange Commission as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.5 Stock Option Agreement dated as of August 22, 1991, between the Company and Alexander M. Winiecki (filed with the Securities and Exchange Commission as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.6 Stock Option Agreement dated as of August 22, 1991, between the Company and Jo-Ann B. Karalus (filed with the Securities and Exchange Commission as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 63 EXHIBIT NO. DESCRIPTION 10.7 Stock Option Agreement dated as of October 11, 1991, between the Company and Mone Anathan, III (filed with the Securities and Exchange Commission as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.8 1992 Equity Incentive Plan, as amended and restated (filed with the Securities and Exchange Commission as Exhibit A to the Registrant's 1999 Proxy Statement, and incorporated herein by reference). 10.9 1992 Stock Purchase Plan, as amended (filed with the Securities and Exchange Commission as Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (File No. 33-63740), and incorporated herein by reference). 10.10 1992 Management Incentive Bonus Plan (filed with the Securities and Exchange Commission as Exhibit 10.12 to the Registrant's Form 10-K for Fiscal 1993, and incorporated herein by reference). 10.11 1992 Profit Sharing Plan (filed with the Securities and Exchange Commission as Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.12 Form of the Company's Pension Plan (filed with the Securities and Exchange Commission as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.13 Amendment No. 1 dated as of February 25, 1994, to Kaminstein Agreement (filed with the Securities and Exchange Commission as Exhibit 10.15.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-75728), and incorporated herein by reference). 10.14 Employment Agreement dated April 2, 1991, between the Company and Alexander M. Winiecki (filed with the Securities and Exchange Commission as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 10.15 Severance Agreement dated March 15, 1991, between the Company and Jo-Ann B. Karalus (filed with the Securities and Exchange Commission as Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (File No. 33-47123), and incorporated herein by reference). 64 EXHIBIT NO. DESCRIPTION 10.16 Employment Agreement dated September 30, 1994, between the Company and Michael F. Anthony (filed with the Securities and Exchange Commission as Exhibit 10.17 to the Registrant's Form 10-K for the year ended January 28, 1995, and incorporated herein by reference). 10.18 Lease Agreement dated as of March 26, 1993, between the City of Mexico, Missouri, as lessor, and Brookstone Company, Inc. ("BCI"), as lessee (filed with the Securities and Exchange Commission as Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (File No. 33-75728), and incorporated herein by reference). 10.19 Option Agreement dated as of March 26, 1993, between the City of Mexico, Missouri and BCI (filed with the Securities and Exchange Commission as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (File No. 33-75728), and incorporated herein by reference). 10.20 Loan Agreement dated as of March 26, 1993, among BCI, the City of Mexico, Missouri, The Industrial Development Authority of Mexico, Missouri and First National Bank (filed with the Securities and Exchange Commission as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (File No. 33-75728), and incorporated herein by reference). 10.22 1996 Directors Stock Option Plan (filed with the Securities and Exchange Commission as Exhibit A to the Registrant's 1996 Proxy Statement, and incorporated herein by reference). 10.23 Employment Agreement dated November 3, 1996, between the Company and Philip W. Roizin (filed with the Securities and Exchange Commission as Exhibit 10.25 to the Registrant's Form 10-Q for the quarter ended November 2, 1996, and incorporated herein by reference). 10.24 Revolving Credit Agreement dated September 22, 1997, among the Company, Brookstone Company, Inc. ("BCI") and Brookstone Stores, Inc. and BankBoston N.A. as agent for the lenders (filed with the Securities and Exchange Commission as Exhibit 10.25 to the Registrant's Form 10-Q for the quarter ended November 1, 1997 and incorporated herein by reference.) 10.25 Amended and Restated Revolving Credit Agreement dated May 11, 1999, among the Company, Brookstone Company, Inc. ("BCI") and Brookstone Stores, Inc., Brookstone Acquisitions Sub, Inc. and BankBoston N.A. as agent for the lenders (filed with the Securities and Exchange Commission as Exhibit 10.25 to the Registrant's Form 10-K for the year ended January 29, 2000 and incorporated herein by reference). 65 EXHIBIT NO. DESCRIPTION 10.26 1999 Equity Incentive Plan (filed with the Securities and Exchange Commission as Exhibit A to the Registrant's 1999 Proxy Statement, and incorporated herein by reference). 10.27 Employment Agreement dated January 17, 2000, between the Company and Kenneth J. Mesnik (filed with the Securities and Exchange Commission as Exhibit 10.27 to the Registrant's Form 10-K for the year ended January 29, 2000 and incorporated herein by reference). 10.28 Employment Agreement dated January 4, 2001, between the Company and Gregory B. Sweeney (filed with the Securities and Exchange Commission as Exhibit 10.28 to the Registrant's Form 10-K for the year ended February 3, 2001 and incorporated herein by reference). 10.29 2000 Employee Stock Purchase Plan (filed with the Securities and Exchange Commission on Registrant's Form S-8 dated October 25, 2000 and incorporated herein by reference). 10.30 Employment Agreement dated March 7, 2002, between the Company and Kathleen A. Staab (filed herewith). 10.31 Employment Agreement dated April 30, 2002, between the Company and M. Rufus Woodard (filed herewith). 10.32 Employment Agreement dated April 30, 2002, between the Company and Carol A. Lambert (filed herewith). 10.33 Amended and Restated Credit Agreement dated February 21, 2002, among Brookstone, Inc., Brookstone Company, Inc., Brookstone Stores, Inc., Brookstone Purchasing, Inc., Gardeners Eden by Mail, Inc., Gardeners Eden Company, Inc., Gardeners Eden Purchasing, Inc. and Fleet National Bank as agent for the Lenders and Citizens Bank of Massachusetts as Documentation Agent for the Lenders (filed herewith). 66 EXHIBIT NO DESCRIPTION 13 The 2001 Annual Report to Stockholders of the Company, except for those portions thereof which are incorporated in this Form 10-K, shall be furnished for the information of the Commission and shall not be deemed "filed". 21 List of Subsidiaries (filed herewith) 23.1 Consent of PricewaterhouseCoopers LLP, which is reflected on page 61 (filed herewith). 14(b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended February 2, 2002. 67 SIGNATURES 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, on May 3, 2002. Brookstone, Inc. By: /s/ Philip W. Roizin ------------------------ Philip W. Roizin Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities, each on May 3, 2002. Signature Title /s/ Michael F. Anthony Chairman, President and Chief Executive Officer ----------------------- Director Michael F. Anthony (Principal Executive Officer) /s/ Philip W. Roizin Executive Vice President, Finance & Administration ----------------------- (Principal Financial and Accounting Officer) Philip W. Roizin /s/ Mone Anathan, III Director ----------------------- Mone Anathan, III /s/ Kenneth E. Nisch Director ----------------------- Kenneth E. Nisch /s/ Michael L. Glazer Director ----------------------- Michael L. Glazer /s/ Robert F. White Director ----------------------- Robert F. White 68