10-Q 1 d10q.txt FORM 10-Q FOR 08/04/2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 4, 2001 -------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________to _________________ Commission file number 0-21406 ------------------------------------ Brookstone, Inc. --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1182895 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 17 Riverside Street, Nashua, NH 03062 -------------------------------------- (address of principal executive offices, zip code) 603-880-9500 ------------ (Registrant's telephone number, including area code) -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes___ No___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 8,369,720 shares of common --------- stock as of September 7, 2001. BROOKSTONE, INC. Index to Form 10-Q
Part I: Financial Information Page No. --------------------- -------- Item 1: Consolidated Balance Sheet as of August 4, 2001, February 3, 2001 and July 29, 2000 3 Consolidated Statement of Operations for the thirteen & twenty-six weeks ended August 4, 2001 and July 29, 2000 4 Consolidated Statement of Cash Flows for the twenty-six weeks ended August 4, 2001 and July 29, 2000 5 Notes to Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II: Other Information ----------------- Item 1: Legal Proceedings 10 Item 2: Change in Securities 10 Item 3: Defaults by the Company upon its Senior Securities 10 Item 4: Submission of Matters to a Vote of Security Holders 10 Item 5: Other Information 10 Item 6: Exhibits and Reports on Form 8-K 10 Signatures 11
2 BROOKSTONE, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data)
(Unaudited) (Unaudited) August 4, 2001 February 3, 2001 July 29, 2000 -------------- ---------------- ------------- Assets ------ Current assets: Cash and cash equivalents $ 2,391 $ 35,397 $ 3,992 Receivables, net 4,421 7,477 5,200 Merchandise inventories 61,969 55,059 47,285 Deferred income taxes 8,775 3,633 5,943 Other current assets 6,044 4,030 4,733 -------- -------- -------- Total current assets 83,600 105,596 67,153 Deferred income taxes 3,662 3,662 3,806 Property and equipment, net 44,592 41,956 40,751 Intangible assets, net 5,086 5,359 5,632 Other assets 1,866 2,595 1,235 -------- -------- -------- $138,806 $159,168 $118,577 ======== ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term borrowings $ 2,050 $ --- $ --- Accounts payable 13,199 13,522 9,157 Other current liabilities 14,309 28,966 14,059 -------- -------- -------- Total current liabilities 29,558 42,488 23,216 Other long-term liabilities 11,954 11,755 10,895 Long-term obligation under capital lease 2,360 2,414 2,457 Commitments and contingencies Shareholders' equity: Preferred stock, $0.001 par value: Authorized - 2,000,000 shares; issued and outstanding - 0 shares at August 4, 2001, February 3, 2001 and July 29, 2000 Common stock, $0.001 par value: Authorized 50,000,000 shares; issued and outstanding - 8,369,720 shares at August 4, 2001, 8,320,640 shares at February 3, 2001 and 8,304,140 shares at July 29, 2000 8 8 8 Additional paid-in capital 50,654 50,277 50,108 Retained earnings 44,319 52,273 31,940 Treasury stock, at cost-3,616 shares at August 4, 2001, February 3, 2001 and July 29, 2000 (47) (47) (47) -------- -------- -------- Total shareholders' equity 94,934 102,511 82,009 -------- -------- -------- $138,806 $159,168 $118,577 ======== ======== ========
Note: The accompanying notes are an integral part of these financial statements. 3 BROOKSTONE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------------------ ----------------------------------- August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 -------------- ------------- -------------- ------------- Net sales $69,612 $68,699 $124,609 $119,776 Cost of sales 48,840 45,784 89,681 83,191 ------- ------- -------- -------- Gross profit 20,772 22,915 34,928 36,585 Selling, general and 25,044 23,521 47,692 44,829 administrative expenses ------- ------- -------- -------- Loss from operations (4,272) (606) (12,764) (8,244) Interest expense, net 210 42 149 5 ------- ------- -------- -------- Loss before taxes and cumulative effect of accounting change (4,482) (648) (12,913) (8,249) Income tax benefit (1,721) (249) (4,959) (3,168) ------- ------- -------- -------- Loss before cumulative effect of accounting change (2,761) (399) (7,954) (5,081) Cumulative effect of accounting change, net of tax --- --- --- (308) ------- ------- -------- -------- Net Loss $(2,761) $ (399) $ (7,954) $ (5,389) ------- ------- -------- -------- Basic/ diluted loss per share: ------------------------------- Loss before cumulative effect of accounting change $ (0.33) $ (0.05) $ (0.95) $ (0.61) Cumulative effect of accounting change, net of tax --- --- --- (0.04) ------- ------- -------- -------- Net loss $ (0.33) $ (0.05) $ (0.95) $ (0.65) ------- ------- -------- -------- Weighted average shares outstanding - basic/diluted 8,357 8,304 8,346 8,301 ------- ------- -------- --------
Note: The accompanying notes are an integral part of these financial statements. 4 BROOKSTONE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Twenty-Six Weeks Ended -------------------------------------- August 4, 2001 July 29, 2000 ------------------ ----------------- Cash flows from operating activities: Net loss $ (7,954) $ (5,389) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 5,288 5,029 Amortization of debt issuance costs 92 79 Deferred income taxes (5,142) (3,382) Related tax benefits on exercise of stock options 183 22 Decrease in other assets 637 220 Increase in other long-term liabilities 199 99 Changes in working capital: Accounts receivable, net 3,056 225 Merchandise inventories (6,910) (3,646) Other current assets (2,014) (161) Accounts payable (323) (6,602) Other current liabilities (14,657) (11,471) -------- -------- Net cash used by operating activities (27,545) (24,977) -------- -------- Cash flows from investing activities: Expenditures for property and equipment (7,651) (2,432) -------- -------- Net cash used for investing activities (7,651) (2,432) -------- -------- Cash flows from financing activities: Borrowings from Revolving credit 2,050 --- Payments for capitalized lease (54) (54) Proceeds from exercise of stock options 194 66 -------- -------- Net cash provided by financing activities 2,190 12 -------- -------- Net decrease in cash and cash equivalents (33,006) (27,397) Cash and cash equivalents at beginning of period 35,397 31,389 -------- -------- Cash and cash equivalents at end of period $ 2,391 $ 3,992 ======== ========
Note: The accompanying notes are an integral part of these financial statements. 5 BROOKSTONE, INC. Notes to Consolidated Financial Statements 1. The results of the twenty-six week period ended August 4, 2001 are not necessarily indicative of the results for the full fiscal year. The Company's business, like the business of retailers in general, is subject to seasonal influences. Historically, the Company's fourth fiscal quarter, which includes the winter holiday selling season, has produced a disproportionate amount of the Company's net sales and substantially all of its income from operations. The Company expects that its business will continue to be subject to such seasonal influences. 2. During the fourth quarter of Fiscal 2000, the Company changed its revenue recognition policy for catalog sales and other drop shipment sales in accordance with Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". Under the provisions of SAB 101, revenue on catalog sales is recognized at time of customer receipt instead of at time of shipment, as the company retains risk of loss while the goods are in transit. The cumulative effect of this change for periods prior to Fiscal 2000 was $308 thousand, net of tax benefit of $193 thousand, and has been reflected in the Company's twenty-six week period ended July 29, 2000. 3. In the fourth quarter of Fiscal 2000, the Company changed its income statement classification of shipping and handling fees and costs in accordance with the Emerging Issues Task Force 2000-10, "Shipping and Handling Fees and Costs" ("EITF 00-10"). As a result of this adoption of EITF 00-10, the Company now reflects shipping and handling fees billed to customers as revenue while the related shipping and handling costs are included in cost of goods sold. Prior to the adoption of EITF 00-10 such fees and costs were netted in selling, general and administrative expenses. Shipping and handling fees and costs for all prior periods presented have been classified to conform to the new income statement presentation. 4. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices consistently applied in the United States of America. In the opinion of the Company, these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations for the periods reported. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the annual financial statements and notes thereto which may be found in the Company's Fiscal 2000 annual report. 5. Certain reclassifications have been made to the thirteen and twenty-six week periods ended July 29, 2000 to conform to the current year presentation. 6. The exercise of stock options, which have been granted under the Company's stock option plans, gives rise to compensation, which is includable in the taxable income of the optionees and deductible by the Company for tax purposes upon exercise. Such compensation reflects an increase in the fair market value of the Company's common stock subsequent to the date of grant. For financial reporting purposes, the tax effect of this deduction is accounted for as a credit to additional paid-in capital rather than as a reduction of income tax expense. Such exercises resulted in a tax benefit of approximately $183 thousand for the twenty-six week period ended August 4, 2001. 7. Business conducted by the Company can be segmented into two distinct areas determined by the method of distribution channel. The retail segment is comprised of all full-year stores in addition to all temporary stores and kiosks. Retail product distribution is conducted directly through the store location. The direct marketing segment is comprised of the Hard-to-Find Tools, Brookstone Collection and Gardeners Eden catalogs and the Internet site www.Brookstone.com. Direct marketing product distribution is conducted ------------------ through the Company's direct marketing call center and distribution facility located in Mexico, Missouri or by the Company's vendors. Both segments of the Company sell similar products, although not all Company products are fully available within both segments. All costs directly attributable to the direct marketing segment are charged accordingly while all remaining operating costs are charged to the retail segment. The Company's management does not review assets by segment. 6 The tables below disclose segment net sales and pre-tax loss for the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 (in thousands).
Thirteen Weeks: Net Sales Pre-tax Loss ----------------------------- ------------------------------ August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 ----------------------------- ------------------------------ Reportable segment: Retail $ 58,059 $ 56,758 $ (3,493) $ (473) Direct marketing 11,553 11,941 (779) (133) Reconciling items: Interest expense --- --- (272) (252) Interest income --- --- 62 210 ------------------------ ------------------------ Consolidated: $ 69,612 $ 68,699 $ (4,482) $ (648) ======================== ======================== Twenty-six Weeks: Net Sales Pre-tax Loss ----------------------------- ----------------------------- August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 ----------------------------- ----------------------------- Reportable segment: Retail $102,377 $ 97,620 $(10,719) $(6,703) Direct marketing 22,232 22,156 (2,045) (1,541) Reconciling items: Interest expense --- --- (563) (569) Interest income --- --- 414 564 ------------------------ ------------------------ Consolidated: $124,609 $119,776 $(12,913) $(8,249) ======================== ========================
8. Basic and diluted earnings per share (EPS) were calculated for the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------- --------------------------------- August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 ------------------------------- --------------------------------- Net loss $(2,761) $ (399) $(7,954) $(5,389) ======= ====== ======= ======= Weighted average number of common shares outstanding 8,357 8,304 8,346 8,301 Effect of dilutive securities: --- --- --- --- ------- ------ ------- ------- Stock options Weighted average number of common shares as adjusted 8,357 8,304 8,346 8,301 ======= ====== ======= ======= Net loss per share - basic/diluted $ (0.33) $(0.05) $ (0.95) $ (0.65) ======= ====== ======= =======
For the thirteen and twenty-six week periods ended August 4, 2001, antidilutive shares of 168,427 and 532,462 respectively were excluded from the computations of diluted earnings per share. For the thirteen and twenty-six week periods ended July 29, 2000, antidilutive shares of 148,162 and 195,351 respectively were excluded from the computations of diluted earnings per share. 7 BROOKSTONE, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Thirteen-Week and Twenty-Six Week Periods Ended August 4, 2001 Results of Operations --------------------- For the thirteen-week and twenty-six week periods ended August 4, 2001, net sales increased 1.3% and 4.0% respectively over the comparable periods last year. The retail sales increase for the thirteen and twenty-six week periods of 2.3% and 4.9% respectively reflected the results of opening 19 new stores subsequent to the second quarter of Fiscal 2000, six of which opened during the second quarter of Fiscal 2001, including two airport locations. The net sales from these new store openings were offset by the closing of two stores in Fiscal 2000 and a decrease in comparable store sales for the thirteen-week and twenty- six week periods of 3.6% and 1.4% respectively. The decreases in comparable store sales resulted from soft consumer response to new products, less than expected customer traffic and the overall penetration of new product sales into the Company's second quarter assortment below historical levels. The total number of Brookstone stores open at the end of the twenty-six week period ended August 4, 2001 was 231 versus 214 at the end of the comparable period in Fiscal 2000. Direct marketing sales for the thirteen-week period ended August 4, 2001 decreased 3.2% when compared to the thirteen week period ended July 29, 2000 on a planned decrease in circulation of 7.5%. Direct marketing sales remained essentially flat when compared to the twenty-six week period last year. For the thirteen-week and twenty-six week periods ended August 4, 2001, gross profit as a percentage of net sales was 29.8% and 28.0% respectively versus 33.3% and 30.5% for the comparable periods last year. The decreases in the gross profit percentage for the thirteen-week and twenty-six week periods were primarily attributable to higher occupancy costs attributable to the additional number of stores in Fiscal 2001 and increased net material costs resulting from sales of lower margin products. Selling, general and administrative expenses as a percentage of net sales for the thirteen and twenty-six week periods ended August 4, 2001 were 36.0% and 38.3% respectively versus 34.2% and 37.4% respectively for the comparable period last year. The thirteen-week and twenty-six week period increases in percentage were primarily due to soft sales experienced during the second quarter and investment spending related to the direct marketing channel, principally the Company's internet site. Net interest expense for the thirteen and twenty-six week periods ended August 4, 2001 was $210 thousand and $149 thousand respectively compared to $42 thousand and $5 thousand during the comparable period last year. This increase is primarily the result of approximately $2.1 million in borrowings under the Company's Revolving Credit Agreement in Fiscal 2001 versus no borrowings outstanding in Fiscal 2000. As a result of the foregoing, the Company reported a net loss of $2.8 million, or $0.33 per basic and diluted share, for the thirteen-week period ended August 4, 2001, as compared to a net loss of $0.4 million, or $0.05 per basic and diluted share, for the comparable period last year. For the twenty- six week period ended August 4, 2001 the Company reported a net loss of $8.0 million, or $0.95 per basic and diluted share as compared to a $5.4 million net loss, or $0.65 per basic and diluted share (after reflecting the reduction of the cumulative effect of accounting change of $0.04), for the comparable period last year. Financial Condition ------------------- For the twenty-six week period ended August 4, 2001, net cash used by operating activities totaled $27.5 million, primarily as a result of the net loss, the payment of income taxes and the purchase of inventory, partially offset by a decrease in receivables. Cash used for investment activities during the first twenty-six weeks of Fiscal 2001, representing the purchase of property and equipment, amounted to $7.7 million. Cash from financing activities during the twenty-six week period of Fiscal 2001 amounted to $2.2 million, acquired primarily through borrowings under the Company's revolving credit agreement and the exercise of stock options. For the twenty-six week period ended July 29, 2000, net cash used by operating activities totaled $25.0 million, reflecting primarily the net loss, the payment of income taxes and the purchase of inventory. Cash used for 8 investment activities during the twenty-six week period of Fiscal 2000, representing the purchase of property and equipment amounted to $2.4 million. Merchandise inventories were $62.0 million at August 4, 2001 compared to $55.1 million at February 3, 2001. This higher inventory position is a result of the Company's inventory position at the end of the first quarter and the small sales increases experienced in the second quarter. The Company anticipates the level of inventory to remain higher than the sales increase for the third quarter. In addition, during the third quarter the Company will continue the practice established last year of bringing low risk inventory in early to smooth the flow of inventory through the Company's distribution network. For the back half of the year the Company has decreased planned purchases to adjust for the inventory levels coming out of the second quarter and in relation to expected Fall sales. The Company expects inventories to be in line with sales increases by the end of the year and the quality of inventory remains excellent. Receivables decreased 40.8% from $4.4 million at August 4, 2001 compared to $7.5 million at February 3, 2001 as a result of the collection of landlord allowances. The accounts payable balance was $13.2 million at August 4, 2001 compared to $13.5 million at February 3, 2001. The Company's capital expenditures in the second quarter of Fiscal 2001 were principally related to the opening of six stores, including two airport locations and the remodeling of four stores, which were completed during the second quarter. Capital expenditures were also made during the second quarter of Fiscal 2001 that are related to new store openings and the remodeling of current stores which are scheduled for completion during the third and fourth quarters of Fiscal 2001. The Company anticipates opening between 24 and 27 new stores, including as many as eight airport locations, up to two Gardeners Eden stores and expects to remodel approximately six stores during Fiscal 2001. The Company maintains a revolving credit agreement to finance inventory purchases, which historically peak in the third quarter in anticipation of the winter holiday selling season. At August 4, 2001, the Company had approximately $2.1 million in outstanding borrowings under its revolving credit agreement. At July 29, 2000 the Company had no outstanding borrowings under its Revolving Credit Agreement. The Company believes that available borrowings, cash on hand and anticipated cash generated from operations will be sufficient to finance planned retail store openings, remodelings and other capital requirements throughout Fiscal 2001. Outlook: Important Factors and Uncertainties -------------------------------------------- Statements in this quarterly report which are not historical facts, including statements about the Company's confidence or expectations, plans for opening new stores, capital needs and liquidity and other statements about the Company's operational outlook, are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, risks of changing market conditions in the overall economy and the retail industry, consumer demand, the availability of appropriate real estate locations and the ability to negotiate favorable lease terms in respect thereof, customer response to the Company's direct marketing initiatives, availability of products, availability of adequate transportation of such products and other factors detailed from time to time in the Company's annual and other reports filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date thereof. The Company undertakes no obligations to publicly release any revisions to these forward- looking statements or reflect events or circumstances after the date hereof. 9 PART II Other Information Item 1: LEGAL PROCEEDINGS ----------------- Brookstone is involved in various routine legal proceedings incidental to the conduct of its business. The Company does not believe that any of these legal proceedings will have a material adverse effect on Brookstone's financial condition or results of operations. Item 2: CHANGES IN SECURITIES --------------------- None Item 3: DEFAULT UPON SENIOR SECURITIES ------------------------------ None Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- A) The 2000 Annual Meeting of Stockholders of the Company was held on June 12, 2001. B) The following persons were elected Directors at the 2001 Annual Meeting for a one-year term expiring at the 2002 Annual Meeting of Stockholders. For Withheld --------- -------- Michael F. Anthony 7,562,140 455,508 Mone Anathan, III 7,991,589 26,059 Michael L. Glazer 7,997,389 20,259 Kenneth E. Nisch 7,991,314 26,334 Robert F. White 7,991,389 26,259 C) The appointment of PricewaterhouseCoopers LLP as the independent accountants to examine the financial statements of the Company and its subsidiaries for the fiscal year ending February 2, 2002 was ratified. For Against Abstain --- ------- ------- 8,000,635 16,983 30 Item 5: OTHER INFORMATION ----------------- None Item 6: EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- A) Reports on Form 8-K No reports on Form 8-K were filed during the period for which this report is filed. 10 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Brookstone, Inc. ---------------- (Registrant) /s/ Philip W. Roizin ---------------------------------- September 18, 2001 (Signature) Philip W. Roizin Executive Vice President Finance and Administration, Treasurer and Secretary (Principal Financial Officer and duly authorized to sign on behalf of registrant) 11