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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO_____________.
COMMISSION FILE NUMBER 333-51027
RESTORATION HARDWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0140361
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER ID NO.)
OF INCORPORATION OR ORGANIZATION)
15 KOCH ROAD, SUITE J, CORTE MADERA, CA 94925
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415) 924-1005
Indicate by check [x] 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 requirement for the past 90 days [X] Yes [ ] No
As of October 28, 2000, 17,088,944 shares of the Registrant's Common
Stock were outstanding.
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FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 28, 2000
INDEX
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PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Balance Sheets as of October 28, 2000,
January 29, 2000 and October 30, 1999 3
Statements of Operations for the three and nine months
ended October 28, 2000 and October 30, 1999 4
Statements of Cash Flows for the nine months ended
October 28, 2000 and October 30, 1999 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURE PAGE 11
2
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
October 28, January 29, October 30,
2000 2000 1999
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<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ...................................... $ 1,710 $ 4,627 $ 2,236
Accounts receivable ............................................ 7,502 6,551 10,850
Merchandise inventories ........................................ 100,380 85,902 98,332
Prepaid expense ................................................ 8,448 6,793 6,818
Tax benefit receivable and deferred tax asset .................. 9,984 815 6,061
--------- --------- ---------
Total current assets ...................................... 128,024 104,688 124,297
Property and equipment, net .................................... 117,600 108,706 103,707
Goodwill ....................................................... 4,660 4,910 4,803
Other long term assets ......................................... 3,990 4,057 2,440
--------- --------- ---------
Total assets .............................................. $ 254,274 $ 222,361 $ 235,247
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .......................... $ 57,955 $ 45,375 $ 62,408
Current portion of deferred lease incentives ................... 4,534 3,777 3,409
Revolving line of credit and short term debt ................... 0 2 41,984
Other current liabilities ...................................... 5,175 6,515 6,711
--------- --------- ---------
Total current liabilities ................................. 67,664 55,669 114,512
Long-term debt ................................................. 266 344 400
Long-term line of credit, net of debt issuance costs ........... 63,048 37,447 --
Long-term portion of deferred lease incentives ................. 42,524 37,950 34,734
Deferred rent .................................................. 10,200 8,069 7,075
--------- --------- ---------
Total liabilities ......................................... 183,702 139,479 156,721
Stockholders' equity:
Common stock, $.0001 par value; 40,000,000, 40,000,000 and
40,000,000 shares authorized, respectively; 17,088,944
16,901,338 and 16,864,089 issued and outstanding,
respectively .............................................. 94,884 94,318 93,918
Accumulated other comprehensive income ......................... (16) 26 10
Accumulated deficit ............................................ (24,296) (11,462) (15,402)
--------- --------- ---------
Total stockholders' equity ................................ 70,572 82,882 78,526
Total liabilities and stockholders' equity ................ $ 254,274 $ 222,361 $ 235,247
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales ........................................ $ 79,713 $ 64,754 $ 219,471 $ 178,729
Cost of sales and occupancy ...................... 59,305 44,749 162,586 130,535
--------- --------- --------- ---------
Gross profit .............................. 20,408 20,005 56,885 48,194
Selling, general and administrative expenses ..... 26,832 21,787 73,818 57,788
Pre-opening store expenses ....................... 373 787 905 1,592
--------- --------- --------- ---------
Loss from operations ............................. (6,797) (2,569) (17,838) (11,186)
Interest expense, net ............................ (1,894) (448) (3,924) (716)
--------- --------- --------- ---------
Loss before income taxes .................. (8,691) (3,017) (21,762) (11,902)
Income tax benefit ............................... 3,568 1,273 8,926 4,921
--------- --------- --------- ---------
Loss available to common stockholders ............ $ (5,123) (1,744) (12,836) (6,981)
--------- --------- --------- ---------
Loss per share:
Basic ..................................... $ (0.30) $ (0.10) $ (0.75) $ (0.42)
Diluted ................................... $ (0.30) $ (0.10) $ (0.75) $ (0.42)
Weighted average shares outstanding:
Basic ..................................... 17,074 16,840 17,018 16,635
Diluted ................................... 17,074 16,840 17,018 16,635
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
October 28, October 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $(12,836) $ (6,981)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................................. 11,010 7,249
Changes in assets and liabilities:
Accounts receivable .................................................... (949) (5,673)
Merchandise inventories ................................................ (14,478) (32,934)
Prepaid expenses and other assets ...................................... (1,592) (980)
Accounts payable and accrued expenses .................................. 12,549 22,715
Taxes payable .......................................................... (9,943) (9,387)
Other current liabilities .............................................. (573) 2,083
Deferred rent .......................................................... 2,131 2,794
Deferred lease incentives and other
long-term liabilities ............................................. 5,331 10,219
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Net cash used in operating activities .................................. (9,350) (10,895)
Cash flows used in investing activities:
Capital expenditures .......................................................... (19,716) (38,134)
Purchase of furniture subsidiary .............................................. 89 (434)
-------- --------
Net cash used in investing activities .................................. (19,627) (38,568)
Cash flows from financing activities:
Borrowings under revolving line of
credit - net .............................................................. 25,598 41,982
Principal payments - capital lease obligations ................................ (78) (215)
Borrowings (repayments) on long term debt, net ................................ 12 (17)
Issuance of common stock ...................................................... 566 1,748
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Net cash provided by financing activities .............................. 26,098 43,498
Effect of foreign currency exchange rate changes on cash balances ...... (38) --
Net decrease in cash and cash equivalents ........................................... (2,917) (5,965)
Cash and cash equivalents:
Beginning of period ........................................................... 4,627 8,201
-------- --------
End of period ................................................................. $ 1,710 $ 2,236
-------- --------
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 28, 2000 AND OCTOBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have been
prepared from our records without audit and, in management's opinion, include
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position at October 28, 2000 and October 30, 1999;
results of operations for the three months and nine months ended October 28,
2000 and October 30, 1999; and changes in cash flows for the nine months then
ended. The balance sheet at January 29, 2000, as presented, has been derived
from our audited financial statements for the year then ended. Certain
reclassifications have been made to the 1999 presentation to conform to the 2000
presentation.
Our accounting policies are described in Note 1 to the audited consolidated
financial statements for the year ended January 29, 2000. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the interim condensed consolidated
financial statements. The interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including notes thereto, for the year ended January 29, 2000.
The results of operations for the three months presented herein are not
necessarily indicative of the results to be expected for the full year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as delayed by FAS No. 137, that will be
effective for fiscal years beginning after June 15, 2000. This will require all
derivatives to be recognized in the balance sheet as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be reassessed and documented pursuant to the provisions of FAS No. 133. We
will adopt FAS No. 133 for the 2000 fiscal year, but do not expect such adoption
to materially affect our financial statement presentation as such activities are
minimal.
2. REVOLVING LINE OF CREDIT
Pursuant to our senior secured credit facility, as amended and restated in
September 2000, we have a line of credit of up to a maximum of $111,000,000 with
amounts available for letters of credit under the line up to a maximum of
$10,000,000. As of October 28, 2000, we were in compliance with the covenants
under the credit facility and we had outstanding $63.0 million in loans (net of
debt issuance costs of $2.2 million) and $1.4 million in letters of credit. The
availability under the credit facility is limited by reference to a borrowing
base formula calculated based upon eligible inventory and eligible accounts
receivable (subject to the overall maximum cap on total borrowings). As a
result, fluctuations in our inventory and accounts receivable can affect our
ability to make additional borrowings under the credit facility. Interest is
paid monthly at the bank's reference rate or LIBOR plus a margin. At October
28, 2000, the margin over the LIBOR rate was 3.00%, as compared to 1.50% as of
October 30, 1999.
3. EARNINGS PER SHARE
Basic earnings per share is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur from common shares to be issued through stock options, warrants and
other convertible securities. The potential dilutive effects of 366,096 and
547,893 stock options are excluded from the diluted earnings per share for the
quarter and year-to-date periods ending October 28, 2000 and October 30, 1999,
respectively, because their inclusion in net loss periods would be anti-dilutive
to earnings per share.
4. SEGMENT REPORTING
We classify our business interests into three identifiable segments: retail,
furniture and RH Direct. The retail segment includes revenue and expense
associated with our retail locations (105 and 85 at October 28, 2000 and October
30, 1999, respectively). The furniture segment includes all revenue and expense
associated with The Michaels Furniture Company ("Michaels"). RH Direct includes
all revenue and expense associated with the catalog, e-commerce and other
operations.
We evaluate performance and allocate resources based on income from operations
which excludes unallocated corporate general and administrative costs. Certain
segment information, including segment assets, asset expenditures and related
depreciation expense, is not presented as all assets of the Company are
commingled and are not available by segment.
Financial information for our business segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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October 28, October 30, October 28, October 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales
Retail .............................. $ 75,312 $ 61,465 $ 207,150 $ 167,664
Furniture ........................... 4,094 7,197 15,002 20,604
RH Direct ........................... 4,327 2,120 11,346 5,847
Intersegment sales .................. (4,020) (6,028) (14,027) (15,386)
--------- --------- --------- ---------
Consolidated net sales ..................... 79,713 64,754 219,471 178,729
--------- --------- --------- ---------
Income/(Loss) from operations
Retail .............................. 3,865 4,448 14,228 8,978
Furniture ........................... (647) 1,032 23 2,267
Unallocated ......................... (10,358) (7,145) (32,182) (20,123)
Intersegment income/(loss) from
Operations .................... (343) (904) (93) (2,308)
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Consolidated loss from operations .......... $ (6,797) $ (2,569) $ (32,182) $ (11,186)
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</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS (YEAR-TO-DATE) ENDED OCTOBER
28, 2000 AS COMPARED TO THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS
(YEAR-TO-DATE) ENDED OCTOBER 30, 1999
NET SALES. Net sales increased $14.9 million, or 23.0%, to $79.7 million in the
third quarter of 2000 from $64.8 million in the third quarter of the prior year.
At October 28, 2000, we operated 105 stores compared to 85 stores at October 30,
1999. Non-comparable stores contributed $17.9 million for the quarter to net
sales, but was partially offset by the comparable stores sales decrease of 1.7%
for the quarter, over the prior year. Year-to-date sales increased $40.8
million, or 22.8%, to $219.5 million from $178.7 million in the prior year.
Non-comparable stores contributed $54.6 million to net year-to-date sales, but
was partially offset by the comparable store sales decrease of 5.3% over the
prior year.
GROSS PROFIT. Gross profit increased $0.4 million, or 2.0%, to $20.4 million in
the third quarter of 2000 from $20.0 million in the third quarter of the prior
year. As a percentage of net sales, third quarter gross profit was 25.6% in 2000
compared to 30.9% in the prior year. Reduced consumer demand in the quarter led
to an increase in promotional activity in the retail division and negatively
impacted merchandise margin. Additionally, gross margin was negatively impacted
by a reduction in occupancy expense leverage due to the decline in comparable
store sales. Year-to-date gross profit increased $8.7 million, or 18.0%, to
$56.9 million from $48.2 million in the prior year. As a percentage of net
sales, year-to-date gross profit was 25.9% compared to 27.0% in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased
$5.0 million, or 23.1%, to $26.8 million in the third quarter of 2000 from $21.8
million in the third quarter of the prior year. As a percentage of net sales,
SG&A expenses remained nearly flat at 33.7%. Year-to-date SG&A expense increased
$16.0 million, or 27.7%, from $57.8 million in the prior year. As a percentage
of net sales, SG&A expenses increased to 33.6% compared to 32.3% in the prior
year. The increase in selling, general and administrative expenses reflects
investments that have been made in the company's infrastructure in the last 12
-- 18 months, including a new distribution center, new warehouse management
system and a customer service center.
PREOPENING STORE EXPENSE. Pre-opening store expense decreased $414,000, to
$373,000 in the third quarter of 2000 from $787,000 in the third quarter of the
prior year. As a percentage of net sales, pre-opening expense decreased to 0.5%
in the third quarter of 2000 compared to 1.2% in the third quarter of the prior
year. During the quarter we opened 7 stores compared to 11 stores in the third
quarter of 1999. Year-to-date pre-opening expense decreased $687,000, to
$905,000 from $1,592,000 in the prior year. Again, this reduction in expense,
both in dollars and as a percentage of net sales, is due to our reduction in new
store openings year over year. Pre-opening store expenses include all costs
associated with the start-up of the store prior to opening including recruiting,
payroll, travel, supplies, occupancy and advertising, and are expensed as
incurred. As a percentage of sales, we anticipate this expense to decrease over
time.
NET INTEREST EXPENSE. Interest expense, which is net of interest income and
includes amortization of debt issuance costs and interest expense on borrowings
under our line of credit facility, increased $1.4 million in the third quarter
of 2000 to $1.9 million. Average borrowings under the line of credit were $55.2
million during the third quarter of 2000, as compared to $29.1 million during
the same period of the prior year. In addition, as discussed below, the interest
rate that the company pays on outstanding borrowings has increased as compared
to the prior year. Year-to-date interest expense increased $3.2 million to $3.9
million from $0.7 million in the prior year, also as a result of higher
borrowings under the line of credit in 2000 and a higher interest rate as
compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities year to date for 2000 was $9.4 million, an
improvement of $1.5 million from the prior year's $10.9 million. On a net basis,
cash used for merchandise inventories and trade and other payables was $1.9
million for year-to-date 2000, as compared to $10.2 million for the same period
of the prior year. Partially offsetting this year over year favorability was a
higher net loss for year-to-date 2000.
Net cash used in investing activities year to date for 2000 was $19.6 million, a
decrease of $19.0 million over net cash used in investing activities of $38.6
million in the prior year. Historically, cash used in investing activities has
been primarily related to capital expenditures for new store expansion.
Net cash provided by financing activities year to date for 2000 was $26.1
million, a decrease of $17.4 million over net cash provided by financing
activities of $43.5 million in the prior year. Net cash provided by borrowings
under our line of credit totaled $25.6 million year to date, compared to $42.0
million for the same period in the prior year. The reduction in net borrowings
year-over-year is primarily attributable to the reduction in capital
expenditures.
Pursuant to our senior secured credit facility, as amended and restated in
September 2000, we have a line of credit of up to a maximum of $111,000,000
with amounts available for letters of credit under the line up to a maximum of
$10,000,000. As of October 28, 2000, we were in compliance with the covenants
under the credit facility and we had outstanding $63.0 million in loans (net of
debt issuance costs of $2.2 million) and $1.4 million in letters of credit. The
availability under the credit facility is limited by reference to a borrowing
base formula calculated based upon eligible inventory and eligible accounts
receivable (subject to the overall maximum cap on total borrowings). As a
result, fluctuations in our inventory and accounts receivable can affect our
ability to make additional borrowings under the credit facility. Interest is
paid monthly at the bank's reference rate or LIBOR plus a margin. At October
28, 2000, the margin over the LIBOR rate was 3.00%, as compared to 1.50% as of
October 30, 1999.
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In connection with the acquisition of our furniture subsidiary, we are required
to pay the former owner contingent cash consideration equal to 25% of Michaels'
EBITDA for fiscal year ending February 3, 2001. In addition, we are required to
transfer shares of Michaels to the former owner of Michaels equal to 3.4% of the
outstanding shares of Michaels if Michaels' EBITDA for the fiscal year ending
2001 equals or exceeds $4.0 million. An EBITDA based payment of $592,000 for the
fiscal year 1999 was paid in March 2000 to the President of Michaels and no
shares of Michaels were transferred to the previous owner.
FACTORS THAT MAY AFFECT FUTURE RESULTS
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our business is highly seasonal, reflecting the general pattern associated with
the retail industry of peak sales and earnings during the holiday season. Due to
the importance of the holiday selling season, the fourth quarter of each year
has historically contributed, and we expect it will continue to contribute, a
disproportionate percentage of our net sales and most of our net income for the
entire year. In anticipation of increased sales activity during the fourth
quarter we incur significant additional expenses. If, for any reason, our sales
were to fall significantly below our expectations in November and December, our
business, financial condition and annual operating results would be materially
adversely affected. In addition, we make decisions regarding merchandise well in
advance of the season in which it will be sold, particularly for the holiday
selling season. Significant deviations from projected demand for products could
have a material adverse effect on our financial condition and results of
operations.
Our quarterly results of operations may also fluctuate based upon a variety of
other factors, including, among other things, the number and timing of store
openings and related pre-opening store expenses, the amount of net sales
contributed by new and existing stores, the mix of products sold, the timing and
level of markdowns, promotional events, store closings, refurbishments or
relocations, adverse weather conditions, shifts in the timing of holidays,
timing of catalog releases or catalog sales, competitive factors and general
economic conditions. We have experienced, and expect to continue to experience,
substantial seasonal fluctuations in our sales and operating results, which is
typical of many retailers. Historically, a disproportionate amount of our retail
sales and nearly all of our profits have been realized during the fourth
quarter. We expect this pattern to continue during the current year and
anticipate that in subsequent years the fourth quarter will continue to
contribute disproportionately to our operating results, particularly during
November and December.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
Our net sales have grown significantly during the past several years, primarily
as a result of the opening of new stores. Our future operating results will
depend largely on our ability to operate stores and manage a larger business
successfully. We have opened 13 new stores in 2000 and we intend to open 2 new
stores in 2001. Our ability to open stores on a timely basis and the performance
of such stores will depend upon many factors, including, among others, our
ability to identify and enter new markets, locate suitable store sites,
negotiate acceptable lease terms, acquire merchandise, hire and train store
managers and sales associates and obtain adequate capital resources on
acceptable terms. Any restrictions on our ability to expand would have a
material adverse effect on our business, results of operations and financial
condition. As a result, there can be no assurance that we will be able to
achieve our targets for opening new stores. Moreover, there can be no assurance
that our new stores will be successful or achieve operating results comparable
to our existing stores.
We have expanded significantly in the last three years, and we plan to continue
to enter new markets in various regions of the United States over the next few
years. Operation of a greater number of new stores and expansion into new
markets may present competitive, distribution and merchandising challenges that
are different from those currently encountered by us in our existing stores and
markets. In addition, there can be no assurance that our expansion within our
existing markets will not adversely affect the individual financial performance
of our existing stores or our overall results of operations. Specifically, we
cannot determine the impact on current profitability as we expand our
distribution of catalogs and increase our mail order and e-commerce businesses.
We will need to continually evaluate the adequacy of our store management and
management information and distribution systems to manage our expansion. There
can be no assurance that we will anticipate all of the changing demands that our
expanding operations will impose on such systems, and the failure to adapt our
systems and procedures to such changing demands could have a material adverse
effect on our business, results of operations and financial condition. There can
be no assurance that we will successfully achieve our expansion targets or, if
achieved, that planned expansion will not have an adverse impact on results of
operations.
We have implemented a change in distribution strategy from maintaining furniture
and lighting inventories at third party warehouse locations near stores to more
centralized locations whereby furniture and lighting is stored at Company
operated regional distribution centers. We have also transitioned our vendor
direct shipments to the regional distribution centers. We implemented a new
Warehouse Management System at our West coast facility last year and our East
coast facility during this spring to aid us in our distribution administration.
There can be no assurance that such changes will not cause disruptions that
could materially adversely affect our business, results of operations and
financial condition.
We rely upon third party carriers and warehouses for our product shipments,
including shipments to and from all of our stores, and accordingly are subject
to the risks, including employee strikes and inclement weather, associated with
such carriers' ability to provide warehousing and delivery services to meet our
needs. In addition, distribution, warehousing and freight costs also fluctuate
as a result of sales activity and there is no assurance that we can generate
sufficient merchandise margins to offset these additional costs. We are also
dependent upon temporary employees to adequately staff our distribution
facility, particularly during busy periods such as the Christmas season and
while stores are opening. There can be no assurance that we will continue to
receive adequate assistance from our temporary employees, or that there will
continue to be sufficient sources of temporary employees.
8
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FINANCING GROWTH AND OPERATIONS
In order to finance its operations and capital requirements, we expect to use
internally generated funds, trade credit and funds available to us under our
revolving line of credit. We typically purchase merchandise from our suppliers
on terms requiring payment to suppliers within 30 days after our receipt of the
merchandise. We did not experience any change in trade terms with our suppliers
in 2000, nor do we anticipate any changes in trade terms in the future. However,
if some or all of our suppliers were to demand shorter payment terms, the
company's working capital needs would increase. There can be no assurance that
our operations and trade financing will generate sufficient cash flow or that
adequate financing will be available to support our continued expansion program.
Our credit facility includes a number of restrictive, affirmative and financial
covenants, including restrictions on annual capital expenditures, minimum levels
of earnings before interest, income taxes, depreciation and amortization and
minimum accounts payable to inventory ratios. If we are not successful in
meeting our covenant obligations under the credit facility, it could result in a
default under our loan agreement and any such default, if not resolved, could
have a material adverse effect on our business, results of operations and
financial condition.
Our available borrowings under the line of credit facility are limited by
reference to a borrowing base formula calculated based upon eligible inventory
and eligible accounts receivable. As a result, fluctuations in monthly
performance can affect our ability to make additional borrowings under the
credit facility.
SMALL STORE BASE
We operated 105 stores at October 28, 2000. The results achieved to date by our
relatively small store base may not be indicative of the results that may be
achieved from a larger number of stores. In addition, should any new store be
unprofitable or should any existing store experience a decline in profitability,
the effect on our results of operations could be more significant than would be
the case if we had a larger store base.
FLUCTUATIONS IN COMPARABLE STORE SALES
A variety of factors affect our comparable store sales including, among others,
the general retail sales environment, our ability to efficiently source and
distribute products, changes in our merchandise mix, promotional events, the
impact of competition and our ability to execute our business strategy
efficiently. Our comparable store sales results have fluctuated significantly in
the past and we believe that such fluctuations may continue. Past comparable
store sales results are no indication of future results.
DEPENDENCE ON KEY PERSONNEL
Our performance depends largely on the efforts and abilities of our executive
and senior management team, particularly Stephen Gordon, our Chief Executive
Officer. The loss of Mr. Gordon's services or the services of other members of
the management team could have a material adverse effect on our business,
results of operations and financial condition. We do not have employment
agreements with any of the members of our executive management team. In
addition, our performance will depend upon our ability to attract and retain
qualified management, merchandising and sales personnel. There can be no
assurance that Mr. Gordon and the existing management team will be able to
manage the Company or our growth or that we will be able to attract and retain
additional qualified personnel as needed in the future.
DEPENDENCE ON KEY VENDORS
Our performance depends on our ability to purchase our merchandise in sufficient
quantities at competitive prices. Although we have many sources of merchandise,
two of our vendors (Mitchell Gold, a manufacturer of upholstered furniture and
Robert Abbey Inc., a manufacturer of table and floor lamps) together accounted
for approximately 15% of our aggregate merchandise purchases in fiscal year
1999. In addition, our smaller vendors generally have limited resources,
production capacities and operating histories, and some of our vendors have
limited the distribution of their merchandise in the past. We have no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to new products and any vendor or distributor could discontinue
selling to us at any time. There can be no assurance that we will be able to
acquire desired merchandise in sufficient quantities on terms acceptable to us
in the future, or be able to develop relationships with new vendors or that any
inability to acquire suitable merchandise or the loss of one or more key vendors
will not have a material adverse effect on our business, results of operations
and financial condition. In addition, a single vendor supports our merchandise
management information systems and we have generally employed a single general
contractor to oversee the construction of our new stores. A failure by such
vendor to support these systems or by such contractor to continue such services
adequately could have a material adverse effect on the Company.
DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS
Historically we have purchased approximately 15% of our merchandise directly
from vendors located abroad, primarily in India, and expect that such purchases
will increase slightly as a percentage of total merchandise purchases in 2000.
These arrangements are subject to the risks of relying on products manufactured
abroad, including import duties and quotas, loss of "most favored nation"
trading status, currency fluctuations, work stoppages, economic uncertainties
including inflation, foreign government regulations, political unrest and trade
restrictions, including United States retaliation against foreign trade
practices. While we believe that we could find alternative sources of supply, an
interruption or delay in supply from India or our other foreign sources, or the
imposition of additional duties, taxes or other charges on these imports could
have a material adverse effect on our business, financial condition and results
of operations unless and until alternative supply arrangements are secured.
Moreover, products from alternative sources may be of lesser quality or more
expensive than those we currently purchase.
CHANGES IN CONSUMER TRENDS
Our success depends on our ability to anticipate and respond to changing
merchandise trends and consumer demands in a timely manner. We believe we are
benefiting from a lifestyle trend toward increased interest in home renovation,
gardening and interior decorating. Any change in such trend could adversely
affect consumer interest in our major product lines. Moreover, our products
must appeal to a broad range of consumers whose preferences cannot always be
predicted with certainty and may change between sales seasons. If we misjudge
either the market for our merchandise or our customers' purchasing habits, we
may experience a material decline in sales or be required to sell inventory at
reduced margins. We could also suffer a loss of customer goodwill if our stores
or newly acquired furniture making operations do not adhere to our quality
control or service procedures or otherwise fail to ensure satisfactory quality
of our products. These outcomes may have a material adverse effect on our
business, operating results and financial condition.
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GENERAL ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on merchandise
that we offer, including, among others, general business conditions, interest
rates, taxation and consumer confidence in future economic conditions. Adverse
economic conditions and any related decrease in consumer demand for
discretionary items such as those offered by us could have a material adverse
effect on our business, results of operations and financial condition.
GOVERNMENT REGULATION
Many of our imported products are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods which
may be imported into the United States and other countries. In addition, we are
subject to currency fluctuations, work stoppages, economic uncertainties
including inflation, foreign government regulations, political unrest and trade
restrictions, including United States retaliation against foreign practices.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report on this quarterly Form 10-Q contains "forward looking statements,"
within the meaning of the Private Securities Litigation Reform Act of 1995, that
involve known and unknown risks. Such forward-looking statements include
statements as to our plans to open additional stores, the results of strategic
initiatives, the anticipated performance of new stores, the impact of
competition and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may," "intends," and words of similar
import or statements of management's opinion. These forward-looking statements
and assumptions involve known and unknown risks, uncertainties and other factors
that may cause the actual results, market performance or our achievements to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Important factors that could
cause such differences include, but are not limited to, changes in economic or
business conditions in general, changes in product supply, changes in our
distribution strategy, changes in the competitive environment in which we
operate, competition for and the availability of sites for new stores, changes
in our management information needs, changes in customer needs and expectations
and governmental actions. We undertake no obligation to update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to our market risk as disclosed in our report on
Form 10-K filed for the fiscal year ended January 29, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings against us. We are, however,
involved in routine litigation arising in the ordinary course of our business,
and, while the results of the proceedings cannot be predicted with certainty, we
believe that the final outcome of such matters will not have a material adverse
effect on our consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.12 Sixth Amended and Restated Loan and Security Agreement dated
September 27, 2000
*10.14 Warrant Agreement, dated as of September 27, 2000, by and among
Restoration Hardware, Inc., Goldman Sachs & Co., and Enhanced
Retail Funding, LLC
*10.15 Warrant Certificate No. 002, dated September 27, 2000, issued to
Enhance Retail Funding, LLC
*10.16 Warrant Certificate No. 003, dated September 27, 2000, issued to
Goldman Sachs & Co.
*10.17 Warrant Certificate No. 004, dated September 27, 2000, issued to
Clyde Street Investments, LLC
*27.1 Financial Data Schedule
----------------
* Filed herewith
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(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three month period ended
October 28, 2000.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Restoration Hardware, INC.
/s/ STEPHEN GORDON
Date: December 12, 2000 By:______________________
Stephen Gordon
Chief Executive Officer
/s/ WALTER PARKS
Date: December 12, 2000 By:______________________
Walter Parks
Chief Administrative Officer
(Principal Financial Officer)
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EXHIBIT INDEX
-------------
*10.12 Sixth Amended and Restated Loan and Security Agreement dated
September 27, 2000
*10.14 Warrant Agreement, dated as of September 27, 2000, by and among
Restoration Hardware, Inc., Goldman Sachs & Co., and Enhanced
Retail Funding, LLC
*10.15 Warrant Certificate No. 002, dated September 27, 2000, issued to
Enhance Retail Funding, LLC
*10.16 Warrant Certificate No. 003, dated September 27, 2000, issued to
Goldman Sachs & Co.
*10.17 Warrant Certificate No. 004, dated September 27, 2000, issued to
Clyde Street Investments, LLC
*27.1 Financial Data Schedule
----------------
* Filed herewith
