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Brookstone Inc · 10-K405 · For 1/30/99

Filed On 4/30/99   ·   Accession Number 927016-99-1730   ·   SEC File 0-21406

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 4/30/99  Brookstone Inc                    10-K405     1/30/99    4:131K                                   Donnelley R R & S..07/FA

Annual Report — [X] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [X] Reg. S-K Item 405                57    245K 
 2: EX-11       Calculation of Earnings Per Share                      1      5K 
 3: EX-23.1     Consent of Pricewaterhousecoopers                      1      5K 
 4: EX-27       Financial Data Schedule                                2      6K 


10-K405   —   Annual Report — [X] Reg. S-K Item 405
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
10Item 2
11Item 3
"Item 4
"Item 4A
"Item 4A. Executive Officers of the Registrant
13Item 5
"Item 6
15Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Results of Operations
17Quarterly Results
21Outlook: Important Factors and Uncertainties
"Dependence on Innovative Merchandising
25Item 8. Financial Statements and Supplementary Data
"Item 9
"Item 10
"Item 11
"Item 12
"Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13
"Item 13. Certain Relationships and Related Transactions
26Item 14
34Earnings per Share
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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 -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 17 RIVERSIDE STREET, NASHUA, NH 03062 ------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 603-880-9500 Securities registered pursuant to Section 12(b) of the Act: Title of each class ------------------- None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 ------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. (X) --- The aggregate market value of the voting stock held by non-affiliates of the registrant on April 9, 1999 was $113,871,982. ------------- The number of shares outstanding of the registrant's Common Stock, $.001 par value, as of April 9, 1999 was 8,133,713 shares. --------- 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. ---------------- 1998 FORM 10-K ANNUAL REPORT Table of Contents [Enlarge/Download Table] Page No. ------- 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 Exhibits Filed Herewith: ------------------------ Exhibit 11 Calculation of Earnings Per Share 58 Exhibit 23.1 Consent of PricewaterhouseCoopers LLP 59 Exhibit 27 Financial Data Schedule 60 2
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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 ------------------ 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: [Download Table] Lawn & Garden Health & Fitness Home & Office Travel & Auto Backyard Leisure Personal Care Audio/Video Automobile Garden Personal Accessories Optical Travel Outdoor Games Home Comfort Wine Safety/Security Christmas Household Kitchen Lighting Pool / Beach Bedding Games Tools Time / Weather Massage Stationery 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, 3
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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. 4
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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 5
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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. 6
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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. 7
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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 ------------------- 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 8
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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. 9
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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 10
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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: [Download Table] YEAR LEASES EXPIRING ---- --------------- 1999 4 2000 10 2001 13 2002 11 2003 13 2004 and thereafter 146 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: [Download Table] NAME AGE PRESENT POSITION -------------------- ---- ---------------------------------- 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 11
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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 12
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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 -------------------------------------------------------------------------------- [Download Table] Common Stock: Fiscal 1997 Fiscal 1998 ---------- ----------- Quarter High Low Quarter High Low --------------------- ------------------------ 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 -------------------------------------------------------------------------------- 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
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Brookstone, Inc. Selected Financial Data (In thousands, except operating and per share data) [Enlarge/Download Table] Fiscal ----------------------------------------------- 1998 1997 1996 1995 * 1994 -------------------------------------------------------------------------------------------------- Income Statement Data: 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 (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
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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. [Download Table] Fiscal Year ---------------------- 1998 1997 1996 ------ ------ ------ 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% ----- ----- ----- 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
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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
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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
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-------------------------------------------------------------------------------- [Enlarge/Download Table] (Unaudited, in thousands, except per share data) Fiscal 1998 ------------------------------------------------ -------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- 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 ------------------------------------------------------------------------------------------- (Unaudited, in thousands, except per share data) Fiscal 1997 ------------------------------------------------ ------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 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 -------------------------------------------------------------------------------- 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
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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
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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
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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
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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
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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
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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
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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
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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. [Enlarge/Download Table] Page in Report ------- 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 26
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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
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BROOKSTONE, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data) [Download Table] January 30, 1999 January 31, 1998 ---------------- ---------------- 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 ======== ======== See Notes to Consolidated Financial Statements 28
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BROOKSTONE, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share data) [Enlarge/Download Table] Year Ended -------------------------------------------------------------------- January 30, 1999 January 31, 1998 February 1, 1997 ---------------- ---------------- ---------------- 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 ======== ======== ======== See Notes to Consolidated Financial Statements 29
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BROOKSTONE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) [Enlarge/Download Table] Year Ended -------------------------------------------------------------------- January 30, 1999 January 31, 1998 February 1, 1997 ---------------- ---------------- ---------------- 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 See Notes to Consolidated Financial Statements 30
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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) [Enlarge/Download Table] Additional Total Common Paid-In Retained Treasury Shareholders' Shares Stock Capital Earnings Stock Equity ------ ----- ------- -------- ----- ------ 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 =================================================================================================================== See Notes to Consolidated Financial Statements 31
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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
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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
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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
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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
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3. CONSOLIDATED BALANCE SHEET DETAILS ------------------------------------- [Download Table] January 30, 1999 January 31, 1998 ---------------- ---------------- 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 ============ ============ 36
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4. INCOME TAXES --------------- Temporary differences which give rise to deferred tax assets and liabilities for Fiscal 1998 and Fiscal 1997 are as follows: [Download Table] January 30, 1999 January 31, 1998 ---------------- ---------------- 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 ========== ========== 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
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The provision for income taxes is comprised of the following: [Download Table] Year Ended ---------------------------------------------------------- January 30, 1999 January 31, 1998 February 1, 1997 ---------------- ---------------- ---------------- 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 ========== =========== ========== Reconciliation of the U. S. Federal statutory rate to the Company's effective tax rate is as follows: [Download Table] Year Ended ---------------------------------------------------------- January 30, 1999 January 31, 1998 February 1, 1997 ---------------- ---------------- ---------------- 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% ==== ==== ==== 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
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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): [Enlarge/Download Table] (in thousands) Net Sales Pre-tax Income -------------------------------------------- ------------------------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- 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 ======== ======== ======== ======= ======= ======= [Download Table] (in thousands) Depreciation & Amortization -------------------------------------------- 1998 1997 1996 ---- ---- ---- Reportable segment: Retail $7,575 $6,708 $6,290 Direct marketing 217 213 173 ------ ------ ------- Consolidated: $7,792 $6,921 $6,463 ====== ====== ====== 39
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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
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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: [Download Table] Fiscal Year 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 =========== Current portion of the capital lease obligation equaled $89,000 and $91,000 at January 30, 1999 and January 31, 1998, respectively. 41
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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
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Transactions under the Company's stock option plans for each of the three years in the period ended January 30, 1999 are as follows: [Download Table] Weighted Average Number of Shares Exercise Price -------------------------------------------------------------------------------- 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 ========== 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
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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): [Download Table] Fiscal Year ---------------------------------- 1998 1997 1996 ---- ---- ---- 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 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. [Download Table] Fiscal Year ---------------------------------- 1998 1997 1996 ---- ---- ---- 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 --- --- --- 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
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The following table summarizes information about stock options outstanding at January 30, 1999: [Enlarge/Download Table] 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 ------------------------------------------------------------ ------------------------------------- $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 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". [Download Table] January 30, 1999 January 31, 1998 February 1,1997 ---------------- ---------------- --------------- 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 ====== ====== ====== 45
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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. [Download Table] January 30, 1999 January 31, 1998 ---------------- ---------------- 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 ========== ========== 46
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The change in plan assets was: [Download Table] January 30, 1999 January 31, 1998 -------------------------------------------------------------------------------- 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 ========== ========== The funded status was: [Download Table] January 30, 1999 January 31, 1998 -------------------------------------------------------------------------------- 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) ========= =========== Assumptions used in computing the funded status were as follows: [Download Table] Weighted average discount rate 6.75% 7.00% Expected return on plan assets 9% 9% Rate of increase in compensation levels 4% 4% The components of net periodic pension cost were as follows: [Download Table] January 30, 1999 January 31, 1998 -------------------------------------------------------------------------------- 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 ========= ========= 47
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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. [Download Table] January 30, 1999 January 31, 1998 ----------------------------------------------------------------------------- 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: January 30, 1999 January 31, 1998 ----------------------------------------------------------------------------- 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 ======== ======== 48
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The amounts recognized in the statement of financial position consisted of: [Download Table] January 30, 1999 January 31, 1998 ---------------- ---------------- 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) The components of the net periodic post-retirement benefit cost were: January 30, 1999 January 31, 1998 ---------------- ---------------- 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 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: [Download Table] Increase Decrease -------- -------- Effect on total of service and interest cost components $ 5,500 $ (4,200) Effect on accumulated post-retirement benefit obligation $53,800 $(33,400) 49
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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: [Download Table] Fiscal Year 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 ============ 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
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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
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2. Consolidated Financial Statement Schedules. Schedule II Valuation and Qualifying Accounts and Reserves [Enlarge/Download Table] Year ended January 30, 1999 ------------------------------------------------------------------------------------------------------------------ Charged to costs Description Beginning Balance and expenses Deductions Ending Balance ----------- ----------------- ------------ ---------- -------------- Allowance for doubtful accounts $ 324,000 $ 86,000 $(234,000) $ 176,000 ---------- -------- --------- ---------- Inventory reserve $1,926,000 $452,000 $ 0 $2,378,000 ---------- -------- --------- ---------- Year ended January 31, 1998 ------------------------------------------------------------------------------------------------------------------ Charged to costs Description Beginning Balance and expenses Deductions Ending Balance ----------- ----------------- ------------ ---------- -------------- Allowance for doubtful accounts $ 222,000 $114,000 $ (12,000) $ 324,000 ---------- -------- --------- ---------- Inventory reserve $1,543,000 $713,000 $(330,000) $1,926,000 ---------- -------- --------- ---------- Year ended February 1,1997 ------------------------------------------------------------------------------------------------------------------ Charged to costs Description Beginning Balance and expenses Deductions Ending Balance ----------- ----------------- ------------ ---------- -------------- Allowance for doubtful accounts $ 135,000 $100,000 $(13,000) $ 222,000 ---------- -------- -------- ---------- Inventory reserve $1,328,000 $283,000 $(68,000) 1,543,000 ---------- -------- -------- ---------- All other schedules of which provision is made in the applicable regulation of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or are not applicable. 52
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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
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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
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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
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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
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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

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2/1/924849
2/29/9253
3/26/9355
7/1/9342
1/1/9442
2/25/9454
9/30/9455
1/28/9555
2/3/9656
11/2/965510-Q
11/3/9655
2/1/97295010-K405
9/22/974055
11/1/975510-Q
11/4/9742
12/15/9735
1/31/98165210-K405, 10-K405/A
5/4/9842
5/30/9846
5/31/9846
For The Period Ended1/30/99156
3/23/992551
4/9/99113
Filed On / Filed As Of4/30/9957
12/31/9923
7/31/021940
 
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