BROOKSTONE INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 1, 2004

¨	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: 20,180,951 shares of common stock as of June 7, 2004.

BROOKSTONE, INC.

Index to Form 10-Q


		Page No.
Part I:	Financial Information

Item 1:
	Consolidated Balance Sheet as of May 1, 2004, January 31, 2004 and May 3, 2003	3

	Consolidated Statement of Operations for the thirteen weeks ended May 1, 2004 and May 3, 2003	4

	Consolidated Statement of Cash Flows for the thirteen weeks ended May 1, 2004 and May 3, 2003	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

Exhibits

10.39	Amendment No. 2 to Amended and Restated Credit Agreement

31.1	Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of The Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2	Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of The Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)


	(Unaudited) May 1, 2004			January 31, 2004			(Unaudited) May 3, 2003
Assets

Current assets:
Cash and cash equivalents	$	37,409		$	69,738		$	30,329
Receivables, net		7,505			7,476			6,922
Merchandise inventories		69,978			66,876			59,871
Deferred income taxes, net		7,778			4,799			8,274
Other current assets		7,485			6,217			6,137

Total current assets		130,155			155,106			111,533

Deferred income taxes, net		4,738			4,738			5,854
Property and equipment, net		58,058			53,970			39,851
Intangible assets, net		4,056			4,123			4,326
Other assets		4,237			2,390			3,753

	$	201,244		$	220,327		$	165,317

Liabilities and Shareholders’ Equity

Current liabilities:
Accounts payable	$	15,249		$	15,759		$	11,345
Other current liabilities		27,119			41,827			23,031

Total current liabilities		42,368			57,586			34,376

Other long-term liabilities		16,214			15,676			13,943
Long-term obligation under capital lease		1,975			1,941			2,069

Commitments and contingencies

Shareholders’ equity:
Preferred stock, $0.001 par value: Authorized - 2,000,000 shares; issued and outstanding - 0 shares at May 1, 2004, January 31, 2004 and May 3, 2003
Common stock, $0.001 par value: Authorized 50,000,000 shares; issued and outstanding – 20,040,846 shares at May 1, 2004, 20,024,288 shares at January 31, 2004 and 19,273,997 shares at May 3, 2003		20			20			19
Additional paid-in capital		59,406			59,169			52,794
Unearned stock compensation		(214	)		(184	)		—
Accumulated other comprehensive loss		(991	)		(991	)		(1,031	)
Retained earnings		82,513			87,157			63,194
Treasury stock, at cost - 8,136 shares at May 1, 2004, January 31, 2004 and May 3, 2003		(47	)		(47	)		(47	)

Total shareholders’ equity		140,687			145,124			114,929

	$	201,244		$	220,327		$	165,317

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 1, 2004			May 3, 2003
Net sales	$	77,451		$	60,957
Cost of sales		54,364			46,166

Gross profit		23,087			14,791
Selling, general and administrative expenses		30,240			25,085

Loss from operations		(7,153	)		(10,294	)
Interest expense, net		236			131

Loss before taxes and other party interests in consolidated entities		(7,389	)		(10,425	)
Income tax benefit		(2,845	)		(4,014	)

Loss before other party interests in consolidated entities		(4,544	)		(6,411	)
Other party interests in consolidated entities, net of tax of $62		100			—

Net loss	$	(4,644	)	$	(6,411	)

Basic and diluted loss per share:

Net loss	$	(0.23	)	$	(0.33	)

Weighted average shares outstanding basic and diluted		20,020			19,213

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 1, 2004			May 3, 2003
Cash flows from operating activities:
Net loss	$	(4,644	)	$	(6,411	)

Adjustments to reconcile net loss to net cash used for operating activities:

Depreciation and amortization		3,235			2,948
Amortization of debt issuance costs		46			60
Stock based compensation expense		22			—
Deferred income taxes, net		(2,979	)		(4,113	)
Related tax benefits on exercise of stock options		72			99
Increase in other assets		(1,893	)		(1,859	)
Increase in other long-term liabilities		538			134

Changes in working capital:
Accounts receivable, net		(29	)		(843	)
Merchandise inventories		(3,102	)		(884	)
Other current assets		(1,268	)		(857	)
Accounts payable		(510	)		625
Other current liabilities		(14,646	)		(10,155	)

Net cash used for operating activities		(25,158	)		(21,256	)

Cash flows from investing activities:
Expenditures for property and equipment		(7,256	)		(2,992	)

Net cash used for investing activities		(7,256	)		(2,992	)

Cash flows from financing activities:
Payments on capital lease		(28	)		(52	)
Proceeds from exercise of stock options		113			485

Net cash provided by financing activities		85			433

Net decrease in cash and cash equivalents		(32,329	)		(23,815	)

Cash and cash equivalents at beginning of period		69,738			54,144

Cash and cash equivalents at end of period	$	37,409		$	30,329

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

BROOKSTONE, INC.

Notes to Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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, the results of operations, and the cash flows for the periods reported. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America 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 2003 annual report on Form 10-K.

The results of the thirteen-week period ended May 1, 2004 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.

3.	Accumulated other comprehensive loss consists of the Company’s minimum pension liability which is disclosed in the accompanying consolidated balanced sheets. Total comprehensive loss was equal to the net loss disclosed for the thirteen-week period presented.

4.	Stock-Based Compensation

The Company has stock option plans in effect that provide for the issuance of non-qualified and incentive stock options. Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation”, as amended by Statement of Accounting Standards No. 148 (“SFAS 148”), 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. The Company has also issued restricted stock awards under its stock option plans. Restricted stock awards are issued at no cost to the recipient of the award, and have restrictions that lapse over four years from date of grant. The market value in excess of cost is charged to income ratably over the period during which these awards vest. No stock option awards were granted during the first fiscal quarter of 2004. 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, as amended by SFAS No. 148, the Company’s net loss and related loss per share for the quarter ended May 1, 2004 and May 3, 2003 would have been increased to the pro forma amounts indicated below:


	Thirteen-weeks Ended
	May 1, 2004			May 3, 2003
Net loss - as reported	$	(4,644	)	$	(6,411	)

Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects		(177	)		(147	)
Add: Stock based employee compensation expense included in reported net income, net of related tax effects		13			—

Net loss - pro forma	$	(4,808	)	$	(6,558	)

Loss per share – basic/diluted
As reported	$	(0.23	)	$	(0.33	)
Pro forma	$	(0.24	)	$	(0.34	)

On April 30, 2004 the six-month option period for the Employee Stock Purchase Plan (“ESPP”), which began on November 1, 2003, closed. On May 3, 2004 the Company issued 28,874 shares under its 2000 ESPP related to this option period.

The exercise of stock options 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. Such exercises resulted in a tax benefit of approximately $72 thousand for the thirteen-week period ended May 1, 2004 which is reflected in the Company’s operating cash flow.

6.	In March of 2002, the Company was served with a lawsuit brought in California superior court in Los Angeles

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