BROOKSTONE INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 3, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21406.

Brookstone, Inc.

(Exact name of registrant as specified in its charter)

Delaware

06-1182895

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

17 Riverside Street, Nashua, NH 03062

(address of principal executive offices, zip code)

603-880-9500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,582,596 shares of common stock as of June 6, 2003.

BROOKSTONE, INC.

Index to Form 10-Q

		Page No.

Part I:	Financial Information

Item 1:

	Consolidated Balance Sheet as of May 3, 2003, February 1, 2003 and May 4, 2002	3

	Consolidated Statement of Operations for the thirteen weeks ended May 3, 2003 and May 4, 2002	4

	Consolidated Statement of Cash Flows for the thirteen weeks ended May 3, 2003 and May 4, 2002	5

	Notes to Consolidated Financial Statements	6

Item 2:

	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3:

	Quantitative and Qualitative Disclosures about Market Risk	12

Item 4:

	Controls and Procedures	12



Part II:	Other Information

Item 1:

	Legal Proceedings	13

Item 2:

	Changes in Securities	13

Item 3:

	Defaults by the Company upon its Senior Securities	13

Item 4:

	Submission of Matters to a Vote of Security Holders	13

Item 5:

	Other Information	13

Item 6:

	Exhibits and Reports on Form 8-K	13

Signatures		14

Certifications		15

Exhibits

Exhibit 10.35	Employment Agreement Amendment with Chief Executive Officer

Exhibit 99.1	Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

Exhibit 99.2	Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

	(Unaudited)						(Unaudited)
	May 3, 2003			February 1, 2003			May 4, 2002
Assets
Current assets:
Cash and cash equivalents	$	30,329		$	54,144		$	14,156
Receivables, net		6,922			6,079			6,222
Merchandise inventories		59,871			58,987			57,646
Deferred income taxes, net		8,274			4,161			7,824
Other current assets		6,137			5,280			5,009

Total current assets		111,533			128,651			90,857
Deferred income taxes, net		5,854			5,854			4,536
Property and equipment, net		39,851			39,720			43,258
Intangible assets, net		4,326			4,413			4,676
Other assets		3,753			1,954			2,720

	$	165,317		$	180,592		$	146,047

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	11,345		$	10,720		$	10,400
Other current liabilities		23,031			33,197			17,748

Total current liabilities		34,376			43,917			28,148
Other long-term liabilities		13,943			13,809			13,407
Long-term obligation under capital lease		2,069			2,110			2,238
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.001 par value: Authorized – 2,000,000 shares; issued and outstanding – 0 shares at May 3, 2003, February 1, 2003 and May 4, 2002
Common stock, $0.001 par value: Authorized 50,000,000 shares; issued and outstanding – 8,566,221 shares at May 3, 2003, 8,520,171 shares at February 1, 2003 and 8,476,972 shares at May 4, 2002		8			8			8
Additional paid-in capital		52,805			52,221			51,654
Accumulated other comprehensive loss		(1,031	)		(1,031	)		(447	)
Retained earnings		63,194			69,605			51,086
Treasury stock, at cost – 3,616 shares at May 3, 2003, February 1, 2003 and May 4, 2002		(47	)		(47	)		(47	)

Total shareholders’ equity		114,929			120,756			102,254

	$	165,317		$	180,592		$	146,047

Note: The accompanying notes are an integral part of these financial statements.

BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Thirteen-weeks Ended
	May 3, 2003			May 4, 2002
Net sales	$	60,957		$	56,633
Cost of sales		46,166			43,742

Gross profit		14,791			12,891
Selling, general and administrative expenses		25,085			23,098

Loss from operations		(10,294	)		(10,207	)
Interest expense, net		131			307

Loss before taxes		(10,425	)		(10,514	)
Income tax benefit		(4,014	)		(3,995	)

Net loss	$	(6,411	)	$	(6,519	)

Basic / diluted loss per share:
Net loss	$	(0.75	)	$	(0.78	)

Weighted average shares outstanding basic / diluted		8,539			8,407

Note: The accompanying notes are an integral part of these financial statements.

BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

	Thirteen-weeks Ended
	May 3, 2003			May 4, 2002
Cash flows from operating activities:
Net loss	$	(6,411	)	$	(6,519	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		2,948			3,020
Amortization of debt issuance costs		60			59
Deferred income taxes, net		(4,113	)		(4,377	)
Related tax benefits on exercise of stock options		99			382
Increase in other assets		(1,859	)		(842	)
Increase in other long-term liabilities		134			161
Changes in working capital:
Accounts receivable, net		(843	)		1,948
Merchandise inventories		(884	)		(2,017	)
Other current assets		(857	)		94
Accounts payable		625			(832	)
Other current liabilities		(10,155	)		(4,821	)

Net cash used for operating activities		(21,256	)		(13,744	)
Cash flows from investing activities:
Expenditures for property and equipment		(2,992	)		(1,084	)

Net cash used for investing activities		(2,992	)		(1,084	)
Cash flows from financing activities:
Payments for capitalized lease		(52	)		(35	)
Payments for debt issuance costs		—			(515	)
Proceeds from exercise of stock options		485			606

Net cash provided by financing activities		433			56

Net decrease in cash and cash equivalents		(23,815	)		(14,772	)
Cash and cash equivalents at beginning of period		54,144			28,928

Cash and cash equivalents at end of period	$	30,329		$	14,156

Note: The accompanying notes are an integral part of these financial statements.

BROOKSTONE, INC.

Notes to Consolidated Financial Statements

The results of the thirteen-week period ended May 3, 2003 are not necessarily indicative of the results for the full fiscal year. The Company’s business, like the business of retailers in general, is subject to seasonal influences. Historically, the Company’s fourth fiscal quarter, which includes the winter holiday selling season, has produced a disproportionate amount of the Company’s net sales and substantially all of its income from operations. The Company expects that its business will continue to be subject to such seasonal influences.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices consistently applied in the United States of America. In the opinion of the Company, these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations for the periods reported. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the annual financial statements and notes thereto which may be found in the Company’s Fiscal 2002 annual report on Form 10K.

Total comprehensive income is composed of net income plus minimum pension liability. For the thirteen-week period ended May 3, 2003, accumulated other comprehensive loss was approximately $1,031,000 as compared to $447,000 as of May 4, 2002.

The exercise of stock options, which have been granted under the Company’s stock option plans, gives rise to compensation, which is includable in the taxable income of the optionees and deductible by the Company for tax purposes upon exercise. Such compensation reflects an increase in the fair market value of the Company’s common stock subsequent to the date of grant. For financial reporting purposes, the tax effect of this deduction is accounted for as a credit to additional paid-in capital rather than as a reduction of income tax expense. Such exercises resulted in a tax benefit of approximately $99 thousand for the thirteen-week period ended May 3, 2003 and is reflected in the Company’s operating cash flow.

In March of 2002, the Company was served with a lawsuit brought in California superior court in Los Angeles as a class action on behalf of current and former managers and assistant managers of the Company’s California stores, alleging that they were improperly classified as exempt employees. The lawsuit seeks damages including overtime pay, restitution and attorneys fees. The Company has filed an answer denying the allegations and opposing class certification. At the present time, no class has been certified, nor has there been any determination regarding exempt classification or the extent to which overtime pay may or may not be owed. While the Company continues to vigorously defend the allegations brought against it, it has entered into settlement negotiations with legal counsel for the plaintiffs and may choose to settle this matter.

Business conducted by the Company is 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 three catalog titles (Hard-to-Find Tools, Brookstone Catalog and Gardeners Eden), the Internet site www.Brookstone.com and sales to corporate customers. Direct marketing product distribution is conducted primarily through the Company’s direct marketing customer sales and contact 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 tables below disclose segment net sales and pre-tax loss for the thirteen-week period ended May 3, 2003 and May 4, 2002 (in thousands).

Thirteen-weeks:	Net Sales				Pre-tax Loss
	May 3, 2003		May 4, 2002		May 3, 2003			May 4, 2002
Reportable segment:
Retail	$	50,834	$	46,313	$	(9,590	)	$	(9,852	)
Direct Marketing		10,123		10,320		(704	)	</

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