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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 January 30, 1999
( ) 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
17 RIVERSIDE STREET, NASHUA, NH 03062
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(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
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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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 .
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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)
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The aggregate market value of the voting stock held by non-affiliates of the
registrant on April 9, 1999 was $113,871,982.
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The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of April 9, 1999 was 8,133,713 shares.
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Documents Incorporated By Reference
Portions of the registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
Table of Exhibits appears on Page 53.
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BROOKSTONE, INC.
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1998 FORM 10-K ANNUAL REPORT
Table of Contents
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Page No.
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Item 1....Business 3
Item 2....Properties 10
Item 3....Legal Proceedings 11
Item 4....Submission of Matters to a Vote of Securities Holders 11
Item 4A...Executive Officers of the Registrant 11
Item 5....Market for Registrant's Common Equity and Related Stockholders Matters 13
Item 6....Selected Financial Data 13
Item 7....Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 8....Financial Statements and Supplementary Data 25
Item 9....Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 25
Item 10...Directors and Executive Officers of the Registrant 25
Item 11...Executive Compensation 25
Item 12...Security Ownership of Certain Beneficial Owners and Management 25
Item 13...Certain Relationships and Related Transactions 25
Item 14...Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
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Exhibits Filed Herewith:
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Exhibit 11 Calculation of Earnings Per Share 58
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP 59
Exhibit 27 Financial Data Schedule 60
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ITEM 1. Business
Brookstone, Inc. is a nationwide specialty retailer offering 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. The Company offers approximately 1,500 active stock-keeping
units ("SKUs") at any given time. Brookstone sells its products through 198
full-year stores in 36 states and the District of Columbia. In addition to the
full-year stores, Brookstone typically operates temporary stores and kiosks
during the winter holiday season. Brookstone also operates a direct marketing
business which includes its traditional Hard-to-Find Tools and its Brookstone
Gift Collection catalogs in addition to an interactive Internet site,
www.Brookstone.com. For a further description of the Company's business
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segments, see Note 5 of the Notes to Consolidated Financial Statements on
page 39.
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 Brookstone's business. As used in this report,
unless the context otherwise requires, the terms the "Company" and "Brookstone"
refer 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.
Merchandising and Marketing
Merchandising. Brookstone 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 Company's products bear the Brookstone name in an
effort to reinforce its franchise value and generate customer loyalty.
The following lists the Company's four product worlds and 23 current
product categories:
<TABLE>
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Lawn & Garden Health & Fitness Home & Office Travel & Auto
<S> <C> <C> <C>
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
</TABLE>
Brookstone's merchandise assortment is carefully edited within a given
product category. In effect, Brookstone pre-shops for its customers by
identifying high quality products for a given price, providing its customers
with an added value when they shop at Brookstone. For example,
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a Brookstone customer may only find two or three different types of umbrellas,
scales, binoculars or travel clocks, but Brookstone's buyers attempt to ensure
that each product offered is among the best available in its price range.
The Company believes that the high quality construction and design of its
products are apparent to its customers. Information on the features and
benefits of products is conveyed through display cards and attentive customer
service. For example, Brookstone offers a five-piece garden tool set which is
ergonomically designed and made of high strength, rustproof aluminum. This
design and construction are intended to convey the perception that this tool set
will tend to outlast and be easier to work with than competing garden tools in a
similar price range.
The qualities of Brookstone's products make them suitable for gift giving.
A majority of the Company's sales are attributable to products purchased as
gifts, especially for men, and the Company'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 the Company'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 on a monthly
basis.
The Company's success depends to a large degree upon its ability to
introduce new or updated products in a timely manner. The Company's 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.
The Brookstone Store. Brookstone believes its retail stores are
distinctive in appearance and in the shopping experience they provide. The
Company 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 removed from its
packaging and 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 the Company believes will have
particular appeal to shoppers. The Company's existing stores occupy an average
of approximately 3,400 square feet, approximately 2,500 of which is selling
space.
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Since Fiscal 1996, all of the Company's new stores, and certain stores
targeted for remodeling, reflect an updated store prototype design which
features increased flexibility in display methods and storage capacity. In
Fiscal 1997, the Company introduced its retrofit strategy, a limited remodel
process which incorporates certain new store format elements into a traditional
store at a cost significantly less than that of a full remodel. During Fiscal
1997 and Fiscal 1998, the Company completed a total of 31 of these retrofits.
At the end of Fiscal 1998, 63% of the Company's retail stores were in the new
design. The Company anticipates the further aesthetic evolution of this store
prototype during Fiscal 1999 and 2000 while retaining the product-oriented focus
of the current prototype.
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 the Company'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. In Fiscal 1997 and Fiscal 1998, Brookstone also operated certain
temporary seasonal stores during the period between Memorial Day and Labor Day.
The Company does not plan to operate this summer seasonal store program in
Fiscal 1999.
Marketing. The Company'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, the Company 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 catalogs and its
Internet operations identify its 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.
Product Sourcing
Brookstone continually seeks to develop, identify and introduce new
products which meet its quality and profitability standards. Brookstone employs
nine specialized merchandise buyers who actively participate in the design
process for new products. These buyers 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
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.
Those products meeting the Company's initial merchandise selection criteria
are tested and reviewed by the Company's quality control department. Company
associates home-test
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most products as part of this quality control review. 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.
Brookstone currently conducts business with approximately 900 vendors, of
which approximately 200 are located overseas. In Fiscal 1998, no single vendor
supplied products representing more than 12% of net sales, with the 10 largest
vendors representing approximately 32% of net sales. Although the Company's
sales are not dependent on any single vendor, there can be no assurance that the
Company's operating results would not 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.
Store Operation and Training
The Company's stores are supervised by three regional managers, 12 district
managers and four to six assistant district managers. A typical store is
supervised by a store manager, an assistant store manager and a second assistant
store manger, and also employs 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
Brookstone merchandise. Store associates receive weekly product updates from
the Company's headquarters, which highlight both new and other selected
products. Brookstone has developed incentive compensation programs for
regional, district, assistant district, store and assistant store managers which
reward individual and store performance.
The Company uses "Closing Strong", a selling skills program designed to
train all associates in the art of identifying and qualifying customers, and in
closing the sale. The program focuses on generating incremental sales through
increasing demo sales, units per transaction and big-ticket sales.
Expansion Strategy
Brookstone currently operates 198 stores in 36 states and the District of
Columbia. 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 include
airport stores in terminals throughout the country.
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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 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 the Company'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. Brookstone
opened 24 stores in Fiscal 1998, seven of which were airport stores; 19 stores
in Fiscal 1997, three of which were airport stores; 16 stores in Fiscal 1996; 14
stores in Fiscal 1995 and 22 stores in Fiscal 1994. The Company plans to open
approximately 20 to 25 new stores, including up to seven airport locations, in
Fiscal 1999. Brookstone continually monitors individual store profitability and
will consider closing any stores that do not meet its performance criteria.
Brookstone closed five stores in Fiscal 1998, one store in each of Fiscal 1997,
Fiscal 1996 and Fiscal 1995 and two stores in Fiscal 1994. The Company
anticipates closing up to two stores prior to the end of Fiscal 1999.
Brookstone operated 95 seasonal stores (52 kiosk and 43 temporary in-line)
during the 1998 winter holiday selling season and 50 temporary in-line seasonal
stores during the 1998 summer season; 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; 121 seasonal
stores (62 kiosk and 59 temporary in-line) during the 1996 winter holiday
selling season, and 125 seasonal stores (78 kiosk and 47 temporary in-line)
during the 1995 winter holiday selling season. Brookstone plans to operate
approximately 75 seasonal stores during the 1999 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 Factors and Uncertainties" (found
on pages 21-23 of this document).
Direct Marketing
Brookstone was founded in 1965 as a mail order marketer of hard-to-find
tools. In Fiscal 1998, the direct marketing business accounted for
approximately 11% of the Company's net sales as compared to approximately 12% of
the Company's net sales in Fiscal 1997. The Company operates two catalogs,
Hard-to-Find-Tools and the Brookstone Gift Collection.
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The Hard-To-Find Tools catalog features a broad assortment of approximately
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 Gift Collection catalog, which
offers a selection of merchandise generally available in the Company's retail
stores. The Brookstone Gift Collection catalog is usually distributed before
Father's Day and Christmas, the Company's two busiest selling seasons. The
Brookstone Gift Collection catalog is mailed to persons with demographic
profiles similar to those of buyers in the Company's stores.
In Fiscal 1998 Brookstone mailed a total of approximately 20 million
catalogs, with 20 separate mail dates. In addition, during Fiscal 1998,
Brookstone also promoted products via SkyMall (an in-flight selection of
catalogs available on many U.S. airlines). Orders for SkyMall are taken by
SkyMall, then transmitted to the Company's distribution center where they are
fulfilled.
During Fiscal 1997, Brookstone created an interactive Internet site at
www.Brookstoneonline.com, featuring an offering of current products from both
the Hard-To-Find-Tools and Brookstone Gift Collection catalogs. In January of
1999, following the successful resolution of lengthy negotiations, the Company
obtained the domain name of www.Brookstone.com.__ The site has subsequently been
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upgraded to include enhanced speed, additional product categories and SKU
content and increased site functionality.
Brookstone employs a two-person 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. One dedicated
buyer selects products for the Brookstone Gift Collection catalog from the
product assortment available in the Company's stores, plus catalog-exclusive
product in existing categories. Products for both catalogs are chosen based on
their previous or estimated direct marketing order productivity.
The Company also employs a four-person marketing team responsible for
list selection, management of marketing offers and tests of catalog activity.
In-bound telemarketing and fulfillment are handled primarily by the Company's
Mexico, Missouri distribution and call centers.
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
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sufficient supply for sale to customers. Distributions to stores are made, at a
minimum, on a weekly basis via UPS. Distributions to direct marketing customers
are made daily via UPS and the U.S. Postal Service. The facility also houses the
Company's direct marketing call center.
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, 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.
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 all of its income from operations.
The seasonal nature of the Company's business increased in Fiscal 1998 and
is expected to continue to increase in Fiscal 1999 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 1998, 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. Brookstone competes for customers
principally on the basis of product assortment, convenience, customer service,
price and the attractiveness of its stores. Brookstone also competes against
other retailers for suitable real estate locations and qualified management
personnel. Because of the highly seasonal nature of Brookstone's business,
competitive factors are most important during the winter holiday selling season.
Brookstone 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.
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Employees
As of April 9, 1999, Brookstone had 1,002 regular full-time associates, of
which 558 were salaried staff and 444 were hourly workers. As of such date, the
Company also employed an additional 1,243 part-time associates and 200 temporary
hourly workers. 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 Brookstone's employees are
represented by labor unions, and Brookstone 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. In
addition, the Company has applied to register the "BROOKSTONE" trademark in
several foreign countries.
Adoption of Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that an
enterprise recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", which amends SFAS No. 115 in the required
classification of a mortgage-backed security committed for sale before or during
the securitization process. In February 1999, FASB issued SFAS No. 135,
"Rescission of FASB Statement No. 75 and Technical Corrections", which re-
defines financial reporting standards for defined benefit pension plans. The
Company believes adoption of these standards will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to form and content of its disclosures.
ITEM 2. Properties
Brookstone leases all of its retail stores. New retail store leases have
an average initial term of 12 years. As of January 30, 1999, the unexpired
terms under the Company's then existing store leases averaged seven years.
Store leases typically permit Brookstone to terminate the lease after five years
if the store does not achieve specified levels of sales. In most cases, the
Company pays a minimum fixed rent plus a contingent rent based upon net sales of
the store in excess of a certain threshold. The Company does not believe the
termination of any particular
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lease would have a material adverse effect on the Company. The following chart
describes the number of store leases which will expire in the periods indicated:
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YEAR LEASES EXPIRING
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1999 4
2000 10
2001 13
2002 11
2003 13
2004 and thereafter 146
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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.
ITEM 3. Legal Proceedings
Brookstone is involved in various routine legal proceedings incidental
to the conduct of its business. The Company believes that none of these legal
proceedings will have a material adverse effect on Brookstone's financial
condition or results of operations.
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 1998.
ITEM 4A. Executive Officers of the Registrant
The executive officers of the Company are as follows:
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NAME AGE PRESENT POSITION
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Michael F. Anthony 44 Chairman of the Board, President and
Chief Executive Officer
Philip W. Roizin 40 Executive Vice President, Finance &
Administration
Alexander M. Winiecki 51 Senior Vice President, Store Operations
Jo-Ann B. Karalus 53 Vice President, Human Resources
Steven C. Strickland 36 Vice President, Marketing
Scott R. Ornstein 37 Vice President, General Merchandise
Manager
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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.
ALEXANDER M. WINIECKI has been Senior Vice President, Store Operations
of the Company since March 1994, 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.
JO-ANN B. KARALUS has been Vice President, Human Resources of the
Company since July 1990. Prior to such time, Ms. Karalus held various positions
at Brookstone since joining the Company in 1980, including Director of Human
Resources from 1987 to July 1990.
STEVEN C. STRICKLAND has been Vice President, Marketing of the Company
since March 1997. Prior to such time, Mr. Strickland held the position of
Operating Vice President, Creative & Visual Services for the Company from
September 1995 to March 1997. From March 1994 to September 1995, he served as
Vice President Strategic Design & Visual Merchandising for Women's Specialty
Retailing, a division of U.S. Shoe Corporation and a retailer of women's ready-
to-wear. From April 1985 to March 1994, Mr. Strickland was with The Limited,
Inc. where he held various positions including Corporate Design Manager from
March 1991 through March 1994.
SCOTT R. ORNSTEIN has been Vice President, General Merchandise Manager
of the Company since May 1998. From November 1997 to May 1998, Mr. Ornstein
served as Senior
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Vice President for G.T. Interactive, a publisher/distributor of game and
educational software. He was Vice President, General Merchandise Manager of the
Company from March 1997 to November 1997. He served as Operating Vice President,
Merchandising for the Company from April 1995 to March 1997. From May 1990 to
March 1995, Mr. Ornstein was employed by Lechters, Inc., a nationwide chain of
600 specialty stores, where he held various merchandising positions including
Vice President, Merchandise Manager from April 1993 to March 1995. Mr. Ornstein
was a buyer with Abraham & Straus, formerly a division of Federated Department
Stores, from June 1987 to April 1990. He held various positions of increasing
responsibility with Macy's New York and Jordan Marsh, which at the time was a
division of Allied Department Stores, from January 1985 to May 1987.
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.
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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock: Fiscal 1997 Fiscal 1998
---------- -----------
Quarter High Low Quarter High Low
--------------------- ------------------------
<S> <C> <C> <C> <C> <C>
First $ 9.38 $ 7.75 First $14.94 $11.50
Second $ 9.00 $ 8.25 Second $15.47 $13.63
Third $13.13 $ 8.88 Third $14.13 $ 9.19
Fourth $12.50 $10.50 Fourth $17.81 $11.25
</TABLE>
- --------------------------------------------------------------------------------
As of April 9, 1999, there were 8,133,713 shares of common stock,
$.001 par value per share, outstanding and held of record by 200 stockholders.
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.
ITEM 6. Selected Financial Data
The selected financial data for the five years ended January 30, 1999
may be found on the following page of this document.
13
<PAGE>
Brookstone, Inc.
Selected Financial Data
(In thousands, except operating and per share data)
<TABLE>
<CAPTION>
Fiscal
-----------------------------------------------
1998 1997 1996 1995 * 1994
- --------------------------------------------------------------------------------------------------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $271,858 $239,866 $218,044 $196,333 $167,575
Cost of sales 170,639 151,633 137,612 123,413 102,298
Gross profit 101,219 88,233 80,432 72,920 65,277
Selling, general and administrative 84,138 75,023 69,856 64,328 55,837
expenses
Income from operations 17,081 13,210 10,576 8,592 9,440
Interest expense, net 1,672 1,084 885 845 648
Provision for income taxes 6,071 4,778 3,818 3,130 3,649
Net income $9,338 $7,348 $5,873 $4,617 $5,143
- --------------------------------------------------------------------------------------------------
Earnings per share - basic $1.17 $0.94 $0.76 $0.60 $0.68
Earnings per share - diluted $1.13 $0.91 $0.73 $0.58 $0.66
- --------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 7,988 7,824 7,744 7,662 7,530
Weighted average shares outstanding -
diluted 8,285 8,119 8,061 7,973 7,849
- --------------------------------------------------------------------------------------------------
Operating Data: (Unaudited)
-------------------------------------------
Increase in same store sales (1) 6.0% 3.6% 5.6% 2.2% ** 0.3%
Net sales per square foot of selling space $481 $469 $461 $452 $463
(2)
Number of stores:
Beginning of period 177 159 144 131 111
Opened during period 24 19 16 14 22
Closed during period 5 1 1 1 2
End of period 196 177 159 144 131
Number of winter holiday seasonal stores 95 138 121 125 103
Balance Sheet Data (at period end) :
-------------------------------------------
Total assets $114,561 $105,318 $87,261 $77,757 $72,553
Long-term debt, excluding current portion 2,612 2,698 2,784 2,863 2,936
Total shareholders' equity 72,310 61,766 53,957 47,714 42,756
*Fifty-three week year **Based upon
fifty-two weeks
</TABLE>
(1) 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.
(2) 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.
14
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
- ---------------------
The following table sets forth certain financial data of the Company expressed
as a percentage of net sales for Fiscal 1998, Fiscal 1997 and Fiscal 1996.
<TABLE>
<CAPTION>
Fiscal Year
----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.8 63.2 63.1
----- ----- -----
Gross profit 37.2 36.8 36.9
Selling, general and
administrative expenses 30.9 31.3 32.0
Income from operations 6.3 5.5 4.9
Interest expense, net 0.6 0.4 0.4
----- ----- -----
Income before taxes 5.7 5.1 4.5
Provision for income taxes 2.3 2.0 1.8
----- ----- -----
Net income 3.4% 3.1% 2.7%
----- ----- -----
</TABLE>
Fifty-two weeks ended January 30, 1999 versus Fifty-two weeks ended January 31,
- -------------------------------------------------------------------------------
1998
- ----
Net sales for Fiscal 1998 increased by $32.0 million, or 13.3%, over Fiscal
1997, primarily as the result of a $30.8 million, or 14.5%, increase in retail
sales, combined with a $1.2 million, or 4.2%, increase in direct marketing
sales. Of the increase in retail sales, $11.6 million was attributable to the
opening of 24 new stores (17 full line and 7 airport stores), $9.7 million to
additional sales from the operation of 19 stores for the full year in Fiscal
1998 that were only open for a portion of Fiscal 1997 (16 full line and 3
airport stores), and $11.1 million from a 6.0% increase in same store sales.
The retail sales increase also included $1.6 million in sales primarily
attributable to operating 50 temporary summer seasonal locations and 95
temporary winter holiday locations in Fiscal 1998, versus 13 temporary summer
seasonal locations and 138 temporary winter holiday locations in Fiscal 1997.
Partially offsetting such sales increases was the loss of $3.2 million in sales
from the closing of five stores during Fiscal 1998. The $1.2 million, or 4.2%,
increase in direct marketing sales was primarily attributable to a $1.0 million
increase in sales from the Brookstone Gift Collection catalog combined with a
$0.5 million increase in Internet sales, partially offset by a $0.3 million
decrease in sales from the Hard-to-Find-Tools catalog. Catalog circulation was
decreased by approximately 8.0% in Fiscal 1998 as compared to Fiscal 1997.
15
<PAGE>
Gross profit as a percentage of net sales increased 0.4% to 37.2% in Fiscal
1998 compared to 36.8% in Fiscal 1997. The increase was primarily due to a
0.4% reduction in net material costs as a percentage of net sales, resulting
primarily from lower sourcing costs. As a percentage of net sales, Fiscal 1998
occupancy costs were flat to Fiscal 1997.
Selling, general and administrative expenses increased $9.1 million to
$84.1 million in Fiscal 1998 from $75.0 million in Fiscal 1997, and decreased as
a percentage of net sales to 30.9% in Fiscal 1998 from 31.3% in Fiscal 1997.
This $9.1 million increase included a $4.4 million increase for operating
expenses associated with new stores opened in Fiscal 1998 and stores open for
the full year in Fiscal 1998 that were only open for a partial year in Fiscal
1997 and a $4.7 million increase in compensation and benefits to support the
base business and distribution center. These increases were partially offset by
a decrease in catalog costs as a result of decreased circulation.
Income from operations was $17.1 million, or 6.3% of net sales, in Fiscal
1998 versus $13.2 million, or 5.5% of net sales, in Fiscal 1997.
Net interest expense increased to $1.7 million, or 0.6% of net sales, in
Fiscal 1998 from $1.1 million, or 0.4% of net sales, in Fiscal 1997, primarily
to finance earlier inventory acquisition combined with increased fees associated
with the refinancing of the Company's revolving credit agreement during the
third quarter of Fiscal 1997. In Fiscal 1998, the Company recorded a provision
for income taxes of $6.1 million, or 2.3% of net sales, as compared to
$4.8 million, or 2.0% of net sales, in Fiscal 1997, resulting from an increase
in pre-tax income.
As a result of the foregoing factors, net income increased to $9.3 million
in Fiscal 1998 versus $7.3 million in Fiscal 1997. Net income was 3.4% and 3.1%
of net sales in Fiscal 1998 and Fiscal 1997, respectively. Earnings per share
on a diluted basis increased to $1.13 in Fiscal 1998 from $0.91 in Fiscal 1997.
Fifty-two weeks ended January 31, 1998 versus Fifty-two weeks ended February 1,
- -------------------------------------------------------------------------------
1997
- ----
Net sales for Fiscal 1997 increased by $21.8 million, or 10.0%, over Fiscal
1996 as the result of a $24.0 million, or 12.8%, increase in retail sales,
partially offset by a $2.2 million, or 7.4%, decrease in direct marketing sales.
Of the increase in retail sales, $10.2 million was attributable to the opening
of 19 new stores (16 full line and 3 airport stores), $7.8 million to additional
sales from the operation of 16 stores for the full year in Fiscal 1997 that were
only open for a portion of Fiscal 1996, and $6.3 million from a 3.6% increase in
same store sales. The retail sales increase also included $0.4 million in sales
primarily attributable to operating 13 temporary summer locations for the first
time during Fiscal 1997 and operating 138 temporary winter holiday locations for
Fiscal 1997, versus 121 such locations in Fiscal 1996. Partially offsetting
such sales increases was the loss of $0.7 million in sales from the closing of
one store during Fiscal 1996. The $2.2 million, or 7.4%, decrease in direct
marketing sales reflected a decrease of $2.8 million, or 11.2%, in sales from
the Hard-to-Find-Tools catalog partially offset by a $0.6 million increase in
sales from the Brookstone Gift Collection catalog. The decrease in direct
marketing sales was partially driven by a 5.1% decrease in catalog circulation.
16
<PAGE>
Gross profit as a percentage of net sales decreased 0.1% to 36.8% in Fiscal
1997 compared to 36.9% in Fiscal 1996. The decrease was primarily due to a 0.4%
increase in occupancy costs, offset by a reduction in net material costs as a
percentage of net sales. The primary reasons for the increase in occupancy cost
were the opening of 19 new stores in Fiscal 1997 and the operation of 16 stores
for the full year in Fiscal 1997 that were only open for a portion of Fiscal
1996. The impact of these store openings was largely mitigated by strong same
store sales growth in Fiscal 1997. The net material cost rate decreased 0.3% in
Fiscal 1997.
Selling, general and administrative expenses increased $5.1 million to
$75.0 million in Fiscal 1997 from $69.9 million in Fiscal 1996, and decreased as
a percentage of net sales to 31.3% in Fiscal 1997 from 32.0% in Fiscal 1996.
This $5.1 million increase included a $3.7 million increase for operating
expenses associated with new stores opened in Fiscal 1997 and stores open for
the full year in Fiscal 1997 that were only open for a partial year in Fiscal
1996 and a $2.2 million increase in compensation and benefits to support the
base business and distribution center. These increases were partially offset by
decreases primarily attributable to improved customer delivery expense and a
decrease in catalog costs as a result of decreased circulation.
Income from operations was $13.2 million, or 5.5% of net sales, in Fiscal
1997 versus $10.6 million, or 4.9% of net sales, in Fiscal 1996.
Net interest expense increased to $1.1 million, or 0.4% of net sales, in
Fiscal 1997 from $0.9 million, or 0.4% of net sales, in Fiscal 1996 primarily as
a result of reduced average cash balances in Fiscal 1997 versus Fiscal 1996. In
Fiscal 1997, the Company recorded a provision for income taxes of $4.8 million,
or 2.0% of net sales, as compared to $3.8 million, or 1.8% of net sales, in
Fiscal 1996, resulting primarily from an increase in pre-tax income.
As a result of the foregoing factors, net income increased to $7.3 million
in Fiscal 1997 versus $5.9 million in Fiscal 1996. Net income was 3.1% and 2.7%
of net sales in Fiscal 1997 and Fiscal 1996, respectively. Earnings per share
on a diluted basis increased to $0.91 in Fiscal 1997 from $0.73 in Fiscal 1996.
Quarterly Results
- -----------------
The following table sets forth certain unaudited quarterly information for
Fiscal 1998 and Fiscal 1997, which in the opinion of the Company, has been
prepared on the same basis as the Consolidated Financial Statements. This
information includes all adjustments, consisting only of normal recurring
adjustments, which management considers necessary for a fair presentation when
read in conjunction with the Consolidated Financial Statements, including the
notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period.
17
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited, in thousands, except per share data) Fiscal 1998
- ------------------------------------------------ --------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $37,919 $53,756 $43,459 $136,724
Gross profit 8,887 17,303 11,383 63,646
Income (loss)
from operations (7,059) (319) (6,780) 31,239
Net income (loss) (4,417) (475) (4,464) 18,694
Earnings (loss) per share:
Basic $ (0.56) $ (0.06) $ (0.56) $ 2.32
Diluted (0.56) (0.06) (0.56) 2.25
- -------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited, in thousands, except per share data) Fiscal 1997
- ------------------------------------------------ -------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $33,136 $44,848 $38,922 $122,960
Gross profit 8,187 14,551 10,275 55,220
Income (loss)
from operations (6,122) (554) (5,827) 25,713
Net income (loss) (3,773) (458) (3,733) 15,312
Earnings (loss) per share:
Basic $ (0.48) $ (0.06) $ (0.48) $ 1.95
Diluted (0.48) (0.06) (0.48) 1.87
</TABLE>
- --------------------------------------------------------------------------------
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.
The seasonal nature of the Company's business increased in Fiscal 1998 and
is expected to continue to increase in Fiscal 1999 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 1998, most of the Company's new stores were opened in the second half
of the fiscal year.
Liquidity and Capital Resources
- -------------------------------
During Fiscal 1998, the Company generated a total of $18.5 million of cash
including $17.3 million from operations and $1.2 million from the exercise of
stock options, the employee stock purchase plan and related tax benefits. In
addition, the Company's working capital increased approximately $5.9 million
principally from the timing of trade payments as compared to Fiscal 1997. The
Company applied $12.1 million to fund capital expenditures. The capital
expenditures included $5.4 million for new stores, $5.1 million for remodeling
and maintenance in existing
18
<PAGE>
stores, $0.8 million for information systems developments and $0.8 million for
distribution center and infrastructure maintenance. The Company's cash position
increased $0.5 million from the end of the prior fiscal year, with total cash on
hand amounting to $17.4 million.
During Fiscal 1997, the Company generated a total of $13.0 million of cash
including $12.5 million from operations and $0.5 million from the exercise of
stock options and related tax benefits. In addition, the Company's working
capital decreased approximately $5.5 million principally from the timing of
trade payments as compared to Fiscal 1996. The Company applied $11.4 million to
fund capital expenditures. The capital expenditures included $5.5 million for
new stores, $3.0 million for remodeling and maintenance in existing stores, $1.1
million for information systems developments and $1.8 million for distribution
center and infrastructure maintenance. The Company's cash position increased
$6.3 million from the end of the prior fiscal year, with total cash on hand
amounting to $16.9 million.
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's revolving credit facility is
typically at low levels from January through April, increases through May as
inventory is increased in anticipation of Father's Day, declines in June,
increases somewhat through August and sharply increases 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
January 30, 1999, the Company had no outstanding borrowings under its revolving
credit facility, although certain letters of credit in an aggregate amount of
approximately $7.2 million were outstanding. During Fiscal 1998, the Company
borrowed a maximum amount of $40.3 million under the revolving credit facility.
The Company's revolving credit facility provides for borrowings of up to
$75 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 $40 million, and borrowings. The revolving credit agreement requires 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 bear 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 January 30, 1999 the
rate was 6.44%). In addition, the Company is 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). The facility expires July 31, 2002. At the Lender's option, all
positive cash balances held by the lender banks may be applied to the
outstanding balance of the revolving line of credit. The revolving credit
agreement
19
<PAGE>
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 agreement prohibits the paying of cash dividends
on common stock and requires that the Company maintain certain financial ratios,
including tests pertaining to net worth, ratio of liabilities to net worth and
cash flow coverage. During the year ended, and as of, January 30, 1999, 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.
Fiscal 1999 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 21 - 23
--------------------------------------------
of this document).
The Company expects to add approximately 20 to 25 new stores, including up
to seven airport locations, in Fiscal 1999. The Company anticipates the cost of
opening a new store, including leasehold improvements (net of landlord
allowances), furniture and fixtures, and pre-opening expenses, to average
approximately $340,000. In addition, the Company expects new stores to require
$150,000 of working capital per store. The Company anticipates the cost of
opening airport stores, including leasehold improvements, furniture and
fixtures, and pre-opening expenses, to average approximately $235,000, and
expects airport stores to require $92,000 of working capital per store. The
Company expects to remodel approximately 10 stores, and update and maintain
other stores, during Fiscal 1999, incurring capital expenditures of
approximately $5.8 million. The Company plans to operate approximately 75
seasonal stores during the Fiscal 1999 winter holiday season based on the
availability of acceptable sites. In addition to the capital expenditures
listed above, the Company anticipates making capital expenditures of
approximately $1.9 million in Fiscal 1999, primarily to enhance the Company's
management information and other support systems.
In Fiscal 1999, 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. Accordingly, the
Company expects the new stores opened in the second half of Fiscal 1998 and its
store opening schedule in Fiscal 1999 to cause the Company to experience an
increase in losses from operations over the first three quarters of Fiscal 1999
as compared to the corresponding period of Fiscal 1998. Consequently, in order
for the Company to have income from operations in Fiscal 1999 that equals or
exceeds its income from operations in Fiscal 1998, the Company's income from
operations during the fourth quarter of Fiscal 1999 will need to exceed the
level achieved during the fourth quarter of Fiscal 1998.
20
<PAGE>
The Company anticipates closing up to two stores during Fiscal 1999. The
Company does not expect the closings to have a materially adverse effect on its
financial condition or results of operations for current or future periods.
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 1999.
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 1998 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:
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, the Company expects that its annual results of operations will
remain dependent on the Company's performance during the winter holiday
selling season.
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
21
<PAGE>
is unable to introduce in a timely fashion new or replacement products of
similar sales levels and profitability.
New Stores and Temporary Locations. The Company's ability to open new
stores, including airport locations, 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.
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. 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. 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.
Centralized Distribution. The Company conducts all of its distribution
operations and a significant portion of its direct marketing processing
functions from a single facility in Mexico, Missouri. A disruption in
operations at the distribution center may significantly increase the
Company's distribution costs.
Direct Marketing Costs. Increases in the costs of printing and mailing
catalogs could have an adverse effect on the Company's direct marketing
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.
22
<PAGE>
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, the recent imbalance in trade between Asia and
the United States has created disruption to the traditional ocean shipping
trade and has resulted in a shortage of cargo containers used to transport
goods from Asia to the United States. Should this trade imbalance
continue, the Company could face inventory shortages in certain products,
increased transportation costs and increased interest expense as a result
of moving inventory receipts forward.
Many of the foregoing factors and uncertainties have been discussed in the
Company's prior SEC filings but, because the Act did not become effective until
December 1995, were not presented in a format intended to comply with the Act.
The foregoing review of important factors and uncertainties is intended to
comply with the substantive and presentation requirements of the Act, but should
not be construed as exhaustive or as an admission regarding the adequacy of
disclosures made by the Company prior to the effective date of the Act.
Year 2000 Software Compliance
Many computer programs in use today were originally written using two digit
fields to identify years instead of four digits to define century and year.
These programs were written without considering the impact of the upcoming
change in the century and may experience difficulty in handling dates beyond
December 31, 1999. This phenomenon, sometimes referred to as "the year 2000
problem" or "the Y2K problem", could cause computer software to fail or create
erroneous results unless corrective or alternative measures are instituted.
The Company relies on software for the efficient operation of many of its
important functions, including inventory purchasing, shipping and receiving,
logistics, inventory forecasting and replenishment, payroll and human resource
record-keeping, direct marketing operations, point-of-purchase transaction
recording and financial reporting. Nearly all of the software relied upon in
the Company's operations is purchased from outside sources (who, in some
instances, modify or customize pre-packaged software to fit the Company's
needs). In addition, the Company has entered into maintenance contracts from
such vendors to ensure that such programs will remain operable or will be
upgraded at marginal incremental cost to the Company in the event that such a
program is not functioning optimally. Since 1996, the Company has been working
with its outside software vendors to (i) assess the Y2K readiness of their
products, (ii) implement changes and upgrades necessary to eliminate the risk of
Y2K problems and (iii) test the Company's systems and components to ensure
proper functionality.
The Company has decided to implement upgraded shipping, receiving and
logistics software (which has been represented to be year 2000 compliant) in
1999. In addition, the Company will implement upgrades of the employee
timekeeping, merchandise analysis, call
23
<PAGE>
scheduling and sales tax software in 1999 and will also complete the
installation of its point-of-purchase year 2000 compliant system which is now
being rolled out chain-wide after being successfully tested in five stores. With
the exception of the software mentioned in the previous two sentences, each of
the software products involved in the Company's significant operations has been
represented to be year 2000 compliant, or has been upgraded to versions that
have been represented to be year 2000 compliant, by their respective vendors. In
addition, the Company has received representations from its primary bank and its
credit card processors that the software programs they operate to facilitate
services provided to the Company are, or are in the process of becoming, year
2000 compliant. The total incremental cost to the Company for the software and
hardware upgrades described in this paragraph is expected to be approximately
$300,000.
Because the Y2K problem is often concealed, the Company believes that the
evaluation of its systems and the assessment of their readiness must be a
continuous process. During the first half of Fiscal 1999, the Company will
continue to test and evaluate its systems for year 2000 compliance.
There can be no assurance that the Company's operating results would not be
adversely affected if any of its largest vendors were unable to fill the
Company's orders. The Company has received written statements from each of its
largest vendors which represent that each such vendor has addressed, or is in
the process of addressing, the year 2000 issue such that manufacturing and
shipping activities will not be disrupted by the Y2K problem. The Company's
merchandising team is also considering other sources for similar products in the
event that such vendors are unable to meet the Company's needs. Because the
products sold by the Company are oftentimes unique in the marketplace, however,
there can be no assurance that adequate substitute products will be available.
See "Outlook: Important Factors and Uncertainties -- Dependence on Innovative
Merchandising". The Company currently uses neither electronic data interchange
("EDI") technology, nor advance shipping notification ("ASN") technology with
its vendors.
The Company believes that it has established appropriate measures to
minimize the risk of disruption to its business as it approaches the year 2000.
This belief is a forward-looking statement and is premised, in part, on
representations provided to the Company by third-party sources and vendors, the
accuracy of which is in many cases difficult or impossible for the Company to
validate. If any such representation relating to a software product relied upon
for a significant business function, or a representation from a significant
vendor, ultimately proves inaccurate, the Company could incur material
remediation expenses and/or lost sales. In addition, like most other retailers,
the Company could be materially adversely affected by disruption in the
externally controlled distribution channel (including ports, United States
Customs and transportation vendors), the banking and credit systems and electric
and other utility suppliers.
24
<PAGE>
ITEM 8. Financial Statements and Supplementary Data.
The financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, dated March 23, 1999, appear on pages 27 through 52
of this document.
In addition, information in response to this item may be found under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations--Quarterly Results"
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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
"Timeliness of Certain SEC Filings" of the Company's definitive Proxy Statement
for the Company's 1999 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 11 through 13 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 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.
25
<PAGE>
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.
<TABLE>
<CAPTION>
Page in
Report
-------
<S> <C>
Report of Independent Accountants 27
Consolidated balance sheet as of January 30, 1999 and January 31, 1998 28
Consolidated statement of income for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997 29
Consolidated statement of cash flows for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997 30
Consolidated statement of changes in shareholders' equity for the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 31
Notes to Consolidated Financial Statements 32
</TABLE>
26
<PAGE>
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF BROOKSTONE, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Brookstone, Inc. and its subsidiaries at January 30, 1999 and January 31, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 23, 1999
27
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 17,391 $ 16,906
Receivables, less allowances of 6,256 5,532
$176 at January 30, 1999 and $324
at January 31, 1998
Merchandise inventories 37,444 37,285
Deferred income taxes 1,781 2,805
Other current assets 4,623 955
-------- --------
Total current assets 67,495 63,483
-------- --------
Deferred income taxes 3,643 2,916
Property and equipment, net 42,124 37,854
Other assets 1,299 1,065
-------- --------
$114,561 $105,318
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 10,727 $ 14,440
Other current liabilities 18,950 16,602
-------- --------
Total current liabilities 29,677 31,042
Other long term liabilities 9,962 9,812
Long term obligation under capital lease 2,612 2,698
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock, $0.001 par value:
Authorized - 2,000,000 shares;
issued and outstanding - 0 shares at
January 30, 1999 and January 31, 1998
Common stock, $0.001 par value:
Authorized - 50,000,000 shares;
issued and outstanding - 8,064,586
shares at January 30, 1999 and
7,871,384 shares at January 31, 1998 8 8
Additional paid-in capital 48,330 47,124
Retained earnings 24,019 14,681
Treasury stock, at cost - 3,616 shares
at January 30, 1999 and January 31,
1998 (47) (47)
-------- --------
Total shareholders' equity 72,310 61,766
-------- --------
$114,561 $105,318
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
28
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales
$271,858 $239,866 $218,044
Cost of sales 170,639 151,633 137,612
-------- -------- --------
Gross profit 101,219 88,233 80,432
Selling, general and
administrative expenses 84,138 75,023 69,856
-------- -------- --------
Income from operations 17,081 13,210 10,576
Interest expense, net 1,672 1,084 885
-------- -------- --------
Income before taxes 15,409 12,126 9,691
Income tax provision 6,071 4,778 3,818
-------- -------- --------
Net income $ 9,338 $ 7,348 $ 5,873
======== ======== ========
Earnings per share - basic $ 1.17 $ 0.94 $ 0.76
======== ======== ========
Earnings per share - diluted $ 1.13 $ 0.91 $ 0.73
======== ======== ========
Weighted average shares
outstanding - basic 7,988 7,824 7,744
======== ======== ========
Weighted average shares
outstanding - diluted 8,285 8,119 8,061
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 9,338 $ 7,348 $ 5,873
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 7,792 6,921 6,463
Amortization of debt issuance
costs 143 55 ---
Deferred income taxes 297 (2,850) (857)
(Increase) Decrease in other
assets (377) 178 464
Increase in other long term
liabilities 150 889 351
Changes in working capital:
Accounts receivable, net (724) (84) (1,136)
Merchandise inventories (159) (6,019) (5,522)
Other current assets (3,668) 2,131 46
Accounts payable (3,713) 5,824 (848)
Other current liabilities 2,349 3,609 3,833
-------- -------- -------
Net cash provided by operating
activities 11,428 18,002 8,667
-------- -------- -------
Cash flows from investing
activities:
Expenditures for property and
equipment (12,062) (11,362) (9,719)
-------- -------- -------
Net cash used for investing
activities (12,062) (11,362) (9,719)
-------- -------- -------
Cash flows from financing
activities:
Payments for capitalized lease (87) (74) (75)
Payment of debt issuance costs --- (697) ---
Proceeds from exercise of stock
options, employee stock
purchase plan and related
tax benefits 1,206 461 370
-------- -------- -------
Net cash provided / (used) by
financing activities 1,119 (310) 295
-------- -------- -------
Net increase (decrease) in cash
and cash equivalents 485 6,330 (757)
Cash and cash equivalents at
beginning of period 16,906 10,576 11,333
-------- -------- -------
Cash and cash equivalents at end
of period $ 17,391 $ 16,906 $10,576
======== ======== =======
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 917 $ 471 $ 435
Cash paid for income taxes $ 5,737 $ 4,461 $ 2,521
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
BROOKSTONE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended February 1, 1997, January 31, 1998 and January 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Treasury Shareholders'
Shares Stock Capital Earnings Stock Equity
------ ----- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 7,680,708 $8 $46,293 $ 1,460 $(47) $47,714
Options exercised including
related tax benefit 112,905 370 370
Net income 5,873 5,873
- -------------------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 7,793,613 8 46,663 7,333 (47) 53,957
Options exercised including
related tax benefit 77,771 461 461
Net income 7,348 7,348
- -------------------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 7,871,384 8 47,124 14,681 (47) 61,766
Issuance of common stock
under employee stock
purchase plan 17,102 178 178
Options exercised including
related tax benefit 176,100 1,028 1,028
Net income 9,338 9,338
- -------------------------------------------------------------------------------------------------------------------
Balance at January 30, 1999 8,064,586 $8 $48,330 $24,019 $(47) $72,310
===================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND ORGANIZATION
- --------------------------------------
Brookstone, Inc. (the "Company") is a nationwide specialty retailer that
offers an assortment of consumer products that are functional in purpose,
distinctive in quality and design and not widely available from other retailers.
The Company sells its products nationally through 198 retail stores in 36 states
and the District of Columbia, temporary stores typically operated during the
winter holiday season and direct marketing vehicles including its Hard-to-Find
Tools and Brookstone Gift Collection catalogs and the Internet. The Company's
merchandise includes lawn and garden, health and fitness, home and office and
travel and auto products.
The Company's fiscal year end is the Saturday nearest the last day in
January. Results of operations for Fiscal 1998 are for the 52 weeks ended
January 30, 1999. Results for Fiscal 1997 are for the 52 weeks ended
January 31, 1998, and results for Fiscal 1996 are for the 52 weeks ended
February 1, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------
Principals of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and Brookstone Company, Inc., its wholly owned subsidiary 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. and Brookstone Holdings, Inc.). All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 with institutions with strong credit ratings. These investments are
subject to minimal 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. The fair values of amounts outstanding under the Company's debt
instruments approximate their book values in all material respects due to the
variable nature of the interest rate provisions associated with such
instruments.
32
<PAGE>
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, 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 and fixtures 3 to 10 years
Leasehold improvements The lesser of the lease term or the
estimated useful life
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.
Deferred Catalog 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 $0.9
million and $0.6 million at January 30, 1999 and January 31, 1998, respectively
and are classified as non-current assets. The Company expenses in-store
advertising costs as incurred. Advertising expense was approximately $10.1
million, $11.3 million and $11.3 million for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997, respectively.
33
<PAGE>
Revenue Recognition
- -------------------
The Company recognizes revenue from sales of merchandise at the time of
sale in its stores, or at the time of shipment for direct marketing sales.
Revenue is recognized net of actual merchandise returns and allowances. Revenue
from merchandise credits and gift certificates is deferred until redemption.
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.
Employee Benefit Programs
- -------------------------
The Company accounts for post-retirement benefits in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pension" (FAS 106). FAS 106 requires the
recognition of a liability for post-retirement benefits as earned during an
employee's years of service.
The Company accounts for pension benefits in accordance with Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"
(FAS 87). Pension expense is determined using the projected unit credit
actuarial cost method.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits" (FAS 132), issued
in February 1998, amends both FAS 106 and FAS 87, by standardizing disclosure
requirements, requiring additional information on changes in benefit obligations
and fair value of plan assets, and eliminating certain disclosures. The Company
has adopted this statement for the fiscal year ended January 30, 1999.
Income Taxes
- -------------
The provision for income taxes includes federal and state income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax basis of assets and liabilities. Deferred tax
assets are recognized, utilizing current tax rates for deductible temporary
differences that are more likely than not to be realized. Deferred tax benefit
or expense represents the change in the deferred tax asset or liability
balances.
Earnings Per Share
- ------------------
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share is computed by giving effect to all dilutive
potential common shares that were outstanding during the period.
34
<PAGE>
Segment Reporting
- -----------------
Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131),
became effective for financial statements issued for annual periods beginning
after December 15, 1997. FAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise" and amends SFAS 94, "Consolidation of All
Majority-Owned Subsidiaries". Under FAS 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 and Brookstone Gift Collection catalogs, products
promoted via SkyMall and the interactive 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.
35
<PAGE>
3. CONSOLIDATED BALANCE SHEET DETAILS
- -------------------------------------
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Other Current Assets:
Prepaid rent $ 2,760,000 $ 159,000
Prepaid leases and deposits 383,000 299,000
Prepaid insurances, postage and other 1,480,000 497,000
------------ ------------
$ 4,623,000 $ 955,000
============ ============
Property and Equipment:
Leasehold improvements $ 34,311,000 $ 28,150,000
Equipment and fixtures 49,421,000 44,343,000
------------ ------------
Total property and equipment 83,732,000 72,493,000
============ ============
Accumulated depreciation and
amortization (41,608,000) (34,639,000)
------------ ------------
$ 42,124,000 $ 37,854,000
============ ============
Other Current Liabilities:
Merchandise credits and gift
certificates $ 3,357,000 $ 2,640,000
Accrued employee compensation and
benefits 6,013,000 4,177,000
Rent payable 966,000 920,000
Income taxes payable 5,337,000 5,013,000
Accrued expenses 3,277,000 3,852,000
------------ ------------
$ 18,950,000 $ 16,602,000
============ ============
Other Long-term Liabilities:
Straight-line rent liability $ 5,156,000 $ 4,815,000
Employee benefit obligations and other
long term liabilities 4,806,000 4,997,000
------------ ------------
$ 9,962,000 $ 9,812,000
============ ============
</TABLE>
36
<PAGE>
4. INCOME TAXES
- ---------------
Temporary differences which give rise to deferred tax assets and
liabilities for Fiscal 1998 and Fiscal 1997 are as follows:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Rent expense $1,920,000 $1,809,000
Inventory capitalization and reserves 323,000 1,197,000
Accrued compensation --- 179,000
Employee benefit obligations 1,645,000 1,584,000
Vacation accrual 267,000 270,000
Merchandise credits and
gift certificates 920,000 663,000
Tax depreciation 598,000 ---
Other items 165,000 412,000
---------- ----------
Total deferred tax asset $5,838,000 $6,114,000
========== ==========
Deferred tax liabilities:
Tax depreciation $ --- $ 89,000
Prepaid rent --- 95,000
Deferred catalog costs 347,000 209,000
Other items 67,000 ---
---------- ----------
Total deferred tax liability $ 414,000 $ 393,000
---------- ----------
Net deferred tax asset $5,424,000 $5,721,000
========== ==========
</TABLE>
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.
37
<PAGE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $4,894,000 $ 6,713,000 $4,137,000
State 880,000 915,000 538,000
Deferred:
Federal 225,000 (2,534,000) (824,000)
State 72,000 (316,000) (33,000)
---------- ----------- ----------
$6,071,000 $ 4,778,000 $3,818,000
========== =========== ==========
</TABLE>
Reconciliation of the U. S. Federal statutory rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Statutory federal
income tax rate 34% 34% 34%
State income taxes,
net of federal tax
benefit 2% 3% 3%
Other 3% 2% 2%
---- ---- ----
Effective income
tax rate 39% 39% 39%
==== ==== ====
</TABLE>
The exercise of stock options which have been granted under the Company's
stock option plans (refer to Note 7) 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 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 $832,000, $256,000 and $165,000 in Fiscal 1998, Fiscal
1997 and Fiscal 1996, respectively.
38
<PAGE>
5. 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
and Brookstone Gift Collection catalogs, products promoted via SkyMall and the
interactive 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. 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 1998, Fiscal 1997 and Fiscal
1996 (in thousands):
<TABLE>
<CAPTION>
(in thousands) Net Sales Pre-tax Income
-------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reportable segment:
Retail $242,769 $211,938 $187,895 $16,273 $12,964 $10,584
Direct marketing 29,089 27,928 30,149 808 246 (8)
Reconciling items:
Interest expense -- -- -- (1,672) (1,084) (885)
-------- -------- -------- ------- ------- -------
Consolidated: $271,858 $239,866 $218,044 $15,409 $12,126 $ 9,691
======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Depreciation & Amortization
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reportable segment:
Retail $7,575 $6,708 $6,290
Direct marketing 217 213 173
------ ------ -------
Consolidated: $7,792 $6,921 $6,463
====== ====== ======
</TABLE>
39
<PAGE>
6. DEBT
- -------
Revolving Credit Agreement
On September 22, 1997, the Company entered into a new revolving credit
agreement replacing the existing $35 million revolving credit agreement. The new
agreement provides for borrowings of up to $75 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 $40 million, and borrowings.
The revolving credit agreement requires 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 bear 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 January 30, 1999 the rate was 6.44%).
In addition, the Company is 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).
The facility expires July 31, 2002. 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 revolving 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 agreement prohibits the paying of cash dividends
on common stock and requires that the Company maintain certain financial ratios,
including tests pertaining to net worth, ratio of liabilities to net worth and
cash flow coverage. During the year ended and as of January 30, 1999, the
Company was in compliance with these covenants.
The previous credit agreement provided for borrowings of up to
$30 million for letters of credit and working capital ($35 million in October
through December), as long as the Company met a borrowing base test equal to 50%
of the amount of eligible inventory and outstanding documentary letters of
credit (increasing to 75% August through November). Amounts available for
borrowings were reduced by the aggregate amount of outstanding letters of
credit, which could not exceed $15 million and borrowings. The previous
revolving credit agreement required the Company to have no borrowings
outstanding (excluding letters of credit) for one 30 consecutive day period
during the fiscal year. Borrowings outstanding under this facility bore
interest, at the election by the Company, equal to the bank's base lending rate,
money market rate or the Eurodollar rate for the applicable period plus an
additional 1.5% (at February 1, 1997 the rate was 6.82%). In addition, the
Company was obligated to pay a fee of 0.375% per annum on the unused portion of
the commitment. The facility would have expired on January 31, 1998.
The previous credit agreement was terminated on September 22, 1997 and,
pursuant to the terms and provisions of the new credit agreement, all
outstanding borrowings and outstanding letters of credit under the previous
credit agreement became borrowings and outstanding letters
40
<PAGE>
of credit under the new credit agreement. During Fiscal 1998, the Company
borrowed a maximum amount of $40.3 million under the revolving credit facility.
There were no outstanding borrowings under the new or previous revolving credit
agreement respectively at January 30, 1999, January 31, 1998 or February 1,
1997. There were $5.7 million and $8.6 million in outstanding documentary
letters of credit at January 30, 1999 and January 31, 1998, respectively. In
addition, $1.5 million and $1.6 million in stand-by letters of credit were
drawable by store lessors at January 30, 1999 and January 31, 1998,
respectively.
Capital Lease Obligation
The Company's lease for its Mexico, Missouri distribution facility extends
over twenty years at prime plus 1% per annum (9.50% at January 30, 1999 and
January 31, 1998). The interest rate is adjusted annually on October 1.
The principal balance of this obligation amounted to $2.7 million at
January 30, 1999 and $2.8 million at January 31, 1998. Property capitalized
under this capital lease amounted to $3.1 million, with accumulated amortization
of $533,000 and $435,000 at January 30, 1999 and January 31, 1998, respectively.
Scheduled payments of the capital lease obligation as of January 30, 1999
are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $ 342,000
2000 342,000
2001 342,000
2002 342,000
2003 342,000
Thereafter 3,302,000
-----------
$ 5,012,000
Interest on capital lease obligation
included above (2,311,000)
-----------
Remaining principal $ 2,701,000
===========
</TABLE>
Current portion of the capital lease obligation equaled $89,000 and $91,000
at January 30, 1999 and January 31, 1998, respectively.
41
<PAGE>
7. 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 January 30, 1999, options of 615,105 shares
were exercisable under the various associate stock option plans, and 22,664
shares were exercisable under the Directors' stock option plan. At January 30,
1999, options of 187,511 shares were available for future grants under the
various associate stock option plans, and 102,000 shares were available for
future grants under the Directors' stock option plan.
The Company also has an employee stock purchase plan which covers
substantially all associates and allows for the issuance of a maximum of 60,000
shares of common stock. 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, which began on July 1, 1993, January 1, 1994 and November 4, 1997. The
six-month option period that began on November 4, 1997 expired on May 4, 1998,
resulting in the issuance of 17,102 shares to participating associates. The
Board of Directors may, at its discretion, extend the 1992 Employee Stock
Purchase Plan for additional periods. As of January 30, 1999, there were 14,033
options available for future grants under this plan.
42
<PAGE>
Transactions under the Company's stock option plans for each of the
three years in the period ended January 30, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
February 3, 1996 1,114,794 $ 6.00
Granted 324,000 $ 9.22
Exercised (112,905) $ 1.77
Canceled (152,246) $11.95
----------
Outstanding at
February 1, 1997 1,173,643 $ 6.51
Granted 354,000 $ 8.79
Exercised (77,771) $ 2.14
Canceled (188,250) $ 8.65
----------
Outstanding at
January 31, 1998 1,261,622 $ 7.10
Granted 113,500 $12.89
Exercised (176,100) $ 0.53
Canceled (67,625) $ 9.26
----------
Outstanding at
January 30, 1999 1,131,397 $ 8.58
==========
</TABLE>
Of the 1,131,397 shares outstanding at January 30, 1999, 1,075,397 shares
were outstanding under the various associate stock option plans, and 56,000
shares were outstanding under the Directors' stock option plan.
43
<PAGE>
No compensation expense was recorded related to stock-based employee
compensation awards. Had compensation cost for the Company's stock option plans
been determined based on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
net income and earnings per share would have been reduced to the pro forma
amounts indicated in the table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income - as reported $9,338 $7,348 $5,873
Net income - pro forma 8,973 6,992 5,641
Earnings per share - basic
As reported $ 1.17 $ 0.94 $ 0.76
Pro forma 1.12 0.89 0.73
Earnings per share - diluted
As reported $ 1.13 $ 0.91 $0.73
Pro forma 1.08 0.86 0.70
</TABLE>
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.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected stock price volatility 47.8% 49.9% 53.4%
Risk-free interest rate 5.4% 6.1% 6.4%
Expected life of options 5 years 5 years 5 years
Dividend yield --- --- ---
</TABLE>
The weighted average fair value of options granted for Fiscal 1998,
Fiscal 1997 and Fiscal 1996 are $6.30, $4.49 and $4.92, respectively.
44
<PAGE>
The following table summarizes information about stock options outstanding
at January 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ -------------------------------------
Range of Exercise Number Outstanding Weighted Average Weighted Average Number Exercisable Weighted Average
Prices at 1/30/99 Remaining Exercise Price at 1/30/99 Exercise Price
Contractual Life
------------------------------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C>
$0.002 155,459 2.5 years $0.002 155,459 $0.002
$0.63 4,192 3.3 years $ 0.63 4,192 $ 0.63
$5.375-$8.00 131,371 5.4 years $ 5.94 129,371 $ 5.93
$8.125-$11.8125 624,875 7.6 years $ 9.24 191,247 $ 9.11
$13.4375-$15.00 215,500 6.6 years $14.62 157,500 $14.51
- ------------------------------------------------------------------------------------------------------------------------------------
1,131,397 637,769
</TABLE>
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".
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998 February 1,1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Net income $9,338 $7,348 $5,873
====== ====== ======
Weighted average common
shares outstanding 7,988 7,824 7,744
Effect of dilutive securities:
Stock options 297 295 317
------ ------ ------
Weighted average common shares
and common share equivalents 8,285 8,119 8,061
====== ====== ======
</TABLE>
45
<PAGE>
8. 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. As a result, the
Company recorded a gain on curtailment of $111,000 in Fiscal 1998. The Company
anticipates that curtailment of the plan will not have a material effect on the
Company's consolidated financial statements. 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 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 $402,000, $175,000 and $133,000 in
Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.
The following tables set forth the pension plan's funded status and amounts
recognized in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation
at beginning of fiscal year $ 4,576,000 $ 3,959,000
Service cost 230,000 378,000
Interest cost 284,000 298,000
Actuarial loss 385,000 219,000
Expenses paid (120,000) (80,000)
Benefits paid (168,000) (198,000)
Curtailment (1,095,000) ---
Special termination benefits --- ---
---------- ----------
Projected benefit obligation
at end of fiscal year $4,092,000 $4,576,000
========== ==========
</TABLE>
46
<PAGE>
The change in plan assets was:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Fair value at beginning of fiscal year $3,373,000 $2,728,000
Actual return on plan assets 458,000 401,000
Employer contributions 397,000 522,000
Expenses paid (120,000) (80,000)
Benefits paid (168,000) (198,000)
---------- ----------
Fair value at end of fiscal year $3,940,000 $3,373,000
========== ==========
</TABLE>
The funded status was:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Funded status at end of year $(152,000) $(1,203,000)
Unrecognized prior service cost --- (120,000)
Unrecognized net actuarial loss / (gain) (255,000) 585,000
--------- -----------
Accrued benefit cost $(407,000) $ (738,000)
========= ===========
</TABLE>
Assumptions used in computing the funded status were as follows:
<TABLE>
<S> <C> <C>
Weighted average discount rate 6.75% 7.00%
Expected return on plan assets 9% 9%
Rate of increase in compensation levels 4% 4%
</TABLE>
The components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 230,000 $ 378,000
Interest cost 284,000 298,000
Expected return on plan assets (334,000) (265,000)
Amortization of prior service cost (8,000) (24,000)
Recognized net actuarial loss 6,000 ---
--------- ---------
Net periodic benefit cost $ 178,000 $ 387,000
========= =========
</TABLE>
47
<PAGE>
9. 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.
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit
obligation:
APBO at end of prior fiscal year $1,378,000 $1,184,000
Service cost 72,000 62,000
Interest cost 78,000 94,000
Actuarial loss / (gain) and assumption
change (287,000) 99,000
Benefits paid (49,000) (61,000)
---------- ----------
APBO at end of current fiscal year $1,192,000 $1,378,000
========== ==========
The change in plan assets was:
<CAPTION>
January 30, 1999 January 31, 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Fair value at beginning of fiscal year $ --- $ ---
Actual return on plan assets --- ---
Employer contributions 49,000 61,000
Participant contributions --- ---
Expenses paid --- ---
Benefits paid (49,000) (61,000)
-------- --------
Fair value at end of fiscal year $ 0 $ 0
======== ========
</TABLE>
48
<PAGE>
The amounts recognized in the statement of financial position consisted of:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Accrued benefit cost (other plans) $(2,929,000) $(2,964,000)
----------- -----------
Accrued benefit cost $(2,929,000) $(2,964,000)
Funded status at end of fiscal year $(1,192,000) $(1,378,000)
Unrecognized prior service cost (1,047,000) (1,149,000)
Unrecognized net actuarial gain (690,000) (437,000)
----------- -----------
Accrued benefit cost $(2,929,000) $(2,964,000)
<CAPTION>
The components of the net periodic post-retirement benefit cost were:
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Service cost $ 72,000 $ 62,000
Interest cost 78,000 94,000
Amortization of prior service cost (102,000) (102,000)
Recognized net actuarial gain (34,000) (23,000)
----------- -----------
Net periodic benefit cost $ 14,000 $ 31,000
</TABLE>
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 6.75% as of January 30, 1999 and 7.00% as
of January 31, 1998. For measurement purposes, an 8.6% annual rate of increase
in the per capita cost of covered health care benefits was assumed for Fiscal
1998; this rate was assumed to decrease gradually down to 5% for Fiscal 2004 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 January 30, 1999:
<TABLE>
<CAPTION>
Increase Decrease
-------- --------
<S> <C> <C>
Effect on total of service
and interest cost components $ 5,500 $ (4,200)
Effect on accumulated post-retirement
benefit obligation $53,800 $(33,400)
</TABLE>
49
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
- ---------------------------------
Lease Commitments
The Company leases all of its retail store locations and its corporate
headquarters. These leases are non-cancellable and have terms of up to 15 years.
Certain leases provide for additional rents payable based on store sales.
At January 30, 1999, the minimum future rentals on noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $ 20,926,000
2000 20,804,000
2001 19,891,000
2002 19,591,000
2003 18,345,000
Thereafter 75,404,000
------------
$174,961,000
============
</TABLE>
Rent expense was approximately $22.7 million, $19.6 million and $16.9
million for the years ended January 30, 1999, January 31, 1998 and February 1,
1997, respectively, including contingent rent expenses of approximately
$310,000, $253,000 and $285,000, respectively. This rent expense, 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.
50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
ON FINANCIAL STATEMENT SCHEDULE
-------------------------------
TO THE BOARD OF DIRECTORS OF
BROOKSTONE, INC.
Our audits of the consolidated financial statements referred to in our report
dated March 23, 1999 appearing in this Form 10-K for the fiscal year ended
January 30, 1999 also included an audit of the Financial Statement Schedule
listed in Item 14 (2) of this Form 10-K. In our opinion, the Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 23, 1999
51
<PAGE>
2. Consolidated Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Year ended January 30, 1999
- ------------------------------------------------------------------------------------------------------------------
Charged to costs
Description Beginning Balance and expenses Deductions Ending Balance
----------- ----------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 324,000 $ 86,000 $(234,000) $ 176,000
---------- -------- --------- ----------
Inventory reserve $1,926,000 $452,000 $ 0 $2,378,000
---------- -------- --------- ----------
<CAPTION>
Year ended January 31, 1998
- ------------------------------------------------------------------------------------------------------------------
Charged to costs
Description Beginning Balance and expenses Deductions Ending Balance
----------- ----------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 222,000 $114,000 $ (12,000) $ 324,000
---------- -------- --------- ----------
Inventory reserve $1,543,000 $713,000 $(330,000) $1,926,000
---------- -------- --------- ----------
<CAPTION>
Year ended February 1,1997
- ------------------------------------------------------------------------------------------------------------------
Charged to costs
Description Beginning Balance and expenses Deductions Ending Balance
----------- ----------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 135,000 $100,000 $(13,000) $ 222,000
---------- -------- -------- ----------
Inventory reserve $1,328,000 $283,000 $(68,000) 1,543,000
---------- -------- -------- ----------
</TABLE>
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.
52
<PAGE>
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).
53
<PAGE>
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
1998 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).
54
<PAGE>
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 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 (files 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.)
55
<PAGE>
EXHIBIT NO. DESCRIPTION
11 Calculation of Earnings Per Share (filed herewith).
13 The 1998 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 with the Securities and Exchange
Commission as Exhibit 21 to the Registrants Form 10-K for the year
ended February 3, 1996, and incorporated herein by reference).
23.1 Consent of Pricewaterhouse Coopers LLP (filed herewith).
27 Financial Data Schedule (filed herewith).
14(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
January 30, 1999.
56
<PAGE>
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 April 30, 1999.
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 April 30, 1999.
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/ Adam Kirsch Director
- ------------------------
Adam Kirsch
/s/ Michael L. Glazer Director
- ----------------------
Michael L. Glazer
/s/ Robert F. White Director
- ------------------------
Robert F. White
57
<PAGE>
EXHIBIT 11
Calculation of Earnings per Share
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998 February 1,1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Net income $9,338 $7,348 $5,873
====== ====== ======
Weighted average common
shares outstanding 7,988 7,824 7,744
Effect of dilutive securities:
Stock options 297 295 317
------ ------ ------
Weighted average common shares
and common share equivalents 8,285 8,119 8,061
====== ====== ======
</TABLE>
58
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-88174) of Brookstone Company of our report dated
March 23, 1999, relating to the financial statements and financial statement
schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 17,391
<SECURITIES> 0
<RECEIVABLES> 6,432
<ALLOWANCES> 176
<INVENTORY> 37,444
<CURRENT-ASSETS> 67,495
<PP&E> 83,732
<DEPRECIATION> 41,608
<TOTAL-ASSETS> 114,561
<CURRENT-LIABILITIES> 29,677
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 72,302
<TOTAL-LIABILITY-AND-EQUITY> 114,561
<SALES> 271,858
<TOTAL-REVENUES> 271,858
<CGS> 170,639
<TOTAL-COSTS> 254,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,672
<INCOME-PRETAX> 15,409
<INCOME-TAX> 6,071
<INCOME-CONTINUING> 9,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,338
<EPS-PRIMARY> $1.17
<EPS-DILUTED> $1.13
</TABLE>
