Back to GetFilings.com
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