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Restoration Hardware 10-K 2005

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(MARK ONE)

x                              Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended JANUARY 29, 2005

or

o                                 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                   to                   

Commission file number 000-24261


RESTORATION HARDWARE, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

68-0140361

(State or Other Jurisdiction of
Incorporation or Organization)

(IRS Employer
Identification No.)

15 KOCH ROAD, SUITE J, CORTE MADERA, CA 94925

(Address of Principal Executive Offices) (Zip Code)

(415) 924-1005

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class

 

Name of each exchange
on which registered

NONE

 

NONE

Securities registered pursuant to Section 12 (g) of the Act:

COMMON STOCK, $0.0001 PAR VALUE

(Title of class)

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 requirement for the past 90 days.  x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.   ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  x  Yes    ¨  No

The aggregate market value of common stock, par value $0.0001 per share, held by non-affiliates of the registrant based on the closing price for the common stock on The Nasdaq National Market on the last business day of the registrant’s most recently completed fiscal second quarter (July 31, 2004), was approximately $216 million. For purposes of this calculation, the registrant has assumed that only shares beneficially held by executive officers and directors of the registrant are deemed shares held by affiliates of the registrant. This assumption of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.

33,103,829 shares of the registrant’s common stock were outstanding on April 1, 2005.




TABLE OF CONTENTS

 

 

 

PAGE

PART I

 

 

 

 

 

 

Item 1.

 

Business

 

 

3

 

Item 2.

 

Properties

 

 

14

 

Item 3.

 

Legal Proceedings

 

 

15

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

15

 

PART II

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

 

16

 

Item 6.

 

Selected Financial Data

 

 

17

 

Item 7.

 

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

 

 

18

 

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

32

 

Item 8.

 

Consolidated Financial Statements and Supplementary Data

 

 

33

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     

 

 

61

 

Item 9A

 

Controls and Procedures

 

 

61

 

Item 9B

 

Other Information

 

 

62

 

PART III

 

 

 

 

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

 

63

 

Item 11.

 

Executive Compensation

 

 

63

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   

 

 

63

 

Item 13.

 

Certain Relationships and Related Transactions

 

 

63

 

Item 14.

 

Principal Accountant Fees and Services

 

 

63

 

PART IV

 

 

 

 

 

 

Item 15.

 

Exhibits and Consolidated Financial Statement Schedules

 

 

64

 

SIGNATURES

 

 

65

 

SCHEDULE II

 

 

66

 

EXHIBIT INDEX

 

 

67

 

 

2




This annual report on Form 10-K contains forward-looking statements that are based on the beliefs of, and estimates made by and information currently available to, our management. The words “believe,” “anticipate,” “expect,” “may,” “intend,” “plan” and similar expressions identify forward-looking statements. These statements are subject to risks and uncertainties. Actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in “Factors That May Affect Our Future Operating Results” and elsewhere in this annual report on Form 10-K. We assume no obligation to update this information.

Documents Incorporated by Reference

Portions of the registrant’s proxy statement for its 2005 annual meeting of stockholders are incorporated by reference into Item 5 of Part II and Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.

PART I

ITEM 1.     BUSINESS

Our Company, Restoration Hardware, Inc., together with our subsidiaries, is a specialty retailer of hardware, bathware, furniture, lighting, textiles, accessories and related merchandise that reflects our classic and authentic American point of view. We commenced business in 1979 as a purveyor of fittings and fixtures for older homes. Since then, we have evolved into a unique home furnishings retailer offering consumers an array of distinctive and high quality merchandise. Our merchandise strategy and our stores’ architectural style create a unique and attractive selling environment designed to appeal to an affluent, well educated 35 to 60 year old customer. Our plan is to fill the void in the marketplace above the current home lifestyle retailers, and below the interior design trade.

We were incorporated in California in June 1987 and were reincorporated in Delaware in 1998. We operated 102 stores and one outlet store in 30 states, the District of Columbia and in Canada at January 29, 2005. We operate on a 52 - 53 week fiscal year ending on the Saturday closest to January 31. The fiscal years ended January 29, 2005 (“fiscal 2004”), January 31, 2004 (“fiscal 2003”), and February 1, 2003 (“fiscal 2002”) consisted of 52 weeks.

In addition to our retail stores, we operate a direct-to-customer (“direct”) sales channel, which includes both catalog and Internet, and a wholly-owned furniture manufacturer. For additional information on our business segments, see Note 13 to our consolidated financial statements in Part II, Item 8 of this annual report on Form 10-K.

We are a multi-channel business and our catalog distribution drives sales across our retail, catalog and Internet businesses. We use our catalog as our primary marketing vehicle, marketing to new customers and return customers, both in and outside the retail trade area. We believe our catalog is a key resource to further market our brand to all our current and new customers.

We launched a new merchandising strategy in April 2002, which included new merchandise offerings, adjustments of overall product mix, and the remodeling of our stores in order to best present the new merchandise. In addition, to drive sales in our direct channels we expanded our product assortment of catalog and Internet only items. In 2003, we built on the prior year’s successful launch by refining and expanding our core merchandise offerings, which include premium textiles, bath fixtures and hardware, lighting, and furniture and in 2004, we re-merchandised our furniture assortment and revamped our accessories offering. We also redesigned our catalog in 2004 to improve the presentation of our core businesses and more clearly communicate the quality positioning of our offerings. Our customers have responded positively to the new merchandise introductions presented in all channels. We intend to further build on our core merchandise offerings in 2005. This shift will require some additional fixturing in our

3




retail stores to accomplish the presentation of the expanded assortment. Our catalog and Internet presentations will also reflect this expanded assortment.

In fiscal 2004, we opened one traditional retail store, remodeled another and opened our first outlet store. The outlet store strategy enables us to more effectively liquidate overstocked, discontinued, damaged merchandise and over time, we believe will eliminate the need for the less productive warehouse sales events that we have historically held.

During fiscal 2004, we continued other programs initiated in prior years to improve the operating results of the Company, which included the improvement of selling margins through sourcing changes, in particular, the expansion of our international sourcing. We also effected significant changes in management in fiscal 2004 particularly in the area of operations, including the hiring of a new Chief Operating Officer and the hiring into the new role of Senior Vice President of Supply Chain. We believe these initiatives and added operational leadership will provide a strong foundation for margin expansion, operational efficiencies and cost reductions as well as provide a springboard for future growth.

We make available free of charge through our website at www.restorationhardware.com under “Company Information,” our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and amendments to these and other reports filed or furnished by us pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we file such materials with the Securities and Exchange Commission.

RETAIL STORES

Merchandising Mix

We offer a broad but carefully edited selection of merchandise that provides a consistent point of view throughout our stores. Our collection of merchandise, not traditionally found in a single store environment, includes hardware, bathware, furniture, lighting, textiles and related merchandise. Our merchandise mix also includes proprietary products selected from non-traditional distribution channels that appear unique to our customers.

The percentage of total revenue contributed by major merchandising categories was as follows:

 

 

2004

 

2003

 

2002

 

Home furnishings

 

 

55

%

 

 

52

%

 

 

51

%

 

Hardware and accessories

 

 

45

%

 

 

48

%

 

 

49

%

 

 

The home furnishings category includes furniture, lighting and textiles. The hardware and accessories category includes bath and other functional and decorative hardware; vases, frames and other accessories; seasonal merchandise such as holiday and garden; and gift items.

Product Selection, Purchasing and Sourcing

We make merchandise purchases from over 500 vendors and source some of our furniture through our wholly-owned subsidiary, The Michaels Furniture Company, Inc. Only one vendor, (at 7%) accounted for more than 5% of aggregate merchandise purchases in fiscal 2004. Our vendors include major domestic manufacturers, specialty niche manufacturers and importers. We maintain agents in China, England, France, Japan, India, Portugal and Eastern Europe, and our merchandising team travels to Asia and Europe in search of new products. Approximately 60% of our purchases are sourced from vendors located abroad. By sourcing a large proportion of products offshore, we seek to achieve increased buying effectiveness and ensure exclusivity for a portion of our product line. In many instances, we also work closely with our vendors to develop products that are unique to us.

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DIRECT-TO-CUSTOMER—CATALOG AND INTERNET

Our catalog business complements our retail business by building customer awareness of our merchandise concepts, increasing customer traffic in our stores, enhancing brand image and acting as an effective advertising vehicle. In addition, we maintain a website, www.restorationhardware.com, designed to sell our products, promote consumer awareness of Restoration Hardware and generate store traffic.

In fiscal 2004, we distributed approximately 15% more catalogs than in fiscal 2003. We mail catalogs to persons with demographic profiles similar to those of our retail customers and who also possess previous mail order purchase histories. In fiscal 2004, approximately 63% of catalogs were circulated to past customers, and the remaining catalogs were mailed to prospects. These prospects were obtained primarily from customer lists of other high-end mail order companies sharing similar customer demographics. We outsource to a third party the fulfillment aspects of the direct-to-customer business, including customer service and non-furniture distribution.

THE MICHAELS FURNITURE COMPANY, INC.

Purchased by Restoration Hardware in 1998, The Michaels Furniture Company, Inc. (“Michaels”) offers a line of high quality furniture for the home and office. Specific product lines include bedroom, living room, dining room, home office and occasional items. Intercompany sales to Restoration Hardware represented virtually all of Michaels’ total sales during fiscal 2004, and this is expected to continue. Michaels is located in Sacramento, California.

MANAGEMENT INFORMATION SYSTEMS

Our retail management information systems include integrated store, merchandising, distribution and financial systems. We utilize one vendor for our point-of-sale, merchandise management and warehouse management systems, and rely on that vendor for software support as well.

COMPETITION

The retail market is highly competitive. We compete against a diverse group of retailers ranging from specialty stores to traditional furniture stores and department stores. Our product offerings also compete with a variety of national, regional and local retailers. We also compete with these and other retailers for customers, suitable retail locations, suppliers and qualified employees and management personnel. Many of our competitors have significantly greater financial, marketing and other resources. Moreover, increased competition may result, and has resulted, in potential or actual litigation between us and our competitors relating to such activities as competitive sales and hiring practices, exclusive relationships with key suppliers and manufacturers and other matters. As a result, increased competition may adversely affect our financial performance, and we cannot assure you that we will be able to compete successfully in the future.

We believe that our ability to compete successfully is determined by several factors, including, among other things, the strength of our management team, the breadth and quality of our product selection, effective merchandise presentation, customer service, pricing and store locations. Although we believe that we are able to compete favorably on the basis of these factors, we may not ultimately succeed in competing with other retailers in our market.

TRADEMARKS

We have registered our trademark “Restoration Hardware” in the United States, Mexico and Canada. Trademarks are generally valid as long as they are in use and their registrations typically can be renewed indefinitely so long as the marks are in use. Our trademark is of material importance to us.

5




EMPLOYEES

At January 29, 2005, we had approximately 1,500 full-time employees and 1,900 part-time employees. We consider our employee relations to be good.

FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

We may not be able to successfully anticipate changes in consumer trends and our failure to do so may lead to loss of sales revenue and the closing of underperforming stores.

Our success depends on our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. If, for example, we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our operating results. Conversely, shortages of popular items could result in loss of potential sales revenue and have a material adverse effect on our operating results.

We believe there is a lifestyle trend toward increased interest in home renovation and interior decorating, and we further believe we are benefiting from such a trend. If this trend fails to continue to directly benefit us or if there is an overall decline in the trend, we could experience an adverse decline in consumer interest in our major product lines. Moreover, our products must appeal to a broad range of consumers whose preferences cannot always be predicted with certainty and may change between sales seasons. If we misjudge either the market for our merchandise or our customers’ purchasing habits, we may experience a material decline in sales or be required to sell inventory at reduced margins. We could also suffer a loss of customer goodwill if we do not maintain a high level of quality control and service procedures or if we otherwise fail to ensure satisfactory quality of our products. These outcomes may have a material adverse effect on our business, operating results and financial condition.

During fiscal year 2004, we closed two underperforming stores and could close additional stores in the future.

A material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands could cause us to close additional underperforming stores. While we believe that we benefit in the long run financially by closing underperforming stores and reducing nonproductive costs, the closure of such stores would subject us to additional increased short-term costs including, but not limited to, employee severance costs, charges in connection with the impairment of assets and costs associated with the disposition of outstanding lease obligations.

Our success is highly dependent on improvements to our planning and supply chain processes.

An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the identification and implementation of improvements to our planning, logistical and distribution infrastructure and our supply chain, including merchandise ordering, transportation and receipt processing. An inability to improve our planning and supply chain processes or to take full advantage of supply chain opportunities could result in loss of potential sales revenue, increased cost and have a material adverse effect on our operating results.

Because our revenue is subject to seasonal fluctuations, significant deviations from projected demand for products in our inventory during a selling season could have a material adverse effect on our financial condition and results of operations.

Our business is highly seasonal. We make decisions regarding merchandise well in advance of the season in which it will be sold, particularly for the holiday selling season. The general pattern associated with the retail industry is one of peak sales and earnings during the holiday season. Due to the importance of the holiday selling season, the fourth quarter of each year has historically contributed, and we expect it

6




will continue to contribute, a disproportionate percentage of our net revenue and our gross profit for the entire year. In anticipation of increased sales activity during the fourth quarter, we incur significant additional expenses both prior to and during the fourth quarter. These expenses may include acquisition of additional inventory, catalog preparation and mailing, advertising, in-store promotions, seasonal staffing needs and other similar items. If, for any reason, our sales were to fall below our expectations in the fourth quarter, our business, financial condition and annual operating results may be materially adversely affected.

Increased catalog and other marketing expenditures without increased revenue may have a negative impact on our operating results.

Over the past several fiscal years, we have substantially increased the amount that we spend on catalog and other marketing costs, and we expect to continue to invest at these increased levels in the current fiscal year and in the future. As a result, if we misjudge the directions or trends in our market, we may expend large amounts of cash that generate little return on investment, which would have a negative effect on our operating results.

Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of future performance.

Our quarterly results have fluctuated in the past and may fluctuate significantly in the future, depending upon a variety of factors, including, among other things, the mix of products sold, the timing and level of markdowns, promotional events, store openings, closings, seasonality, remodelings or relocations, shifts in the timing of holidays, timing of catalog releases or sales, competitive factors and general economic conditions. Accordingly, our profits or losses may fluctuate. Moreover, in response to competitive pressures, we may take certain pricing or marketing actions that could have a material adverse effect on our business, financial condition and results of operations. Therefore, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and cannot be relied upon as indicators of future performance. If our operating results in any future period fall below the expectations of securities analysts or investors, or if our operating results do not meet the guidance that we issue from time to time, the market price of our shares of common stock would likely decline.

Fluctuations in comparable store sales may cause our revenue and operating results from period-to-period to vary.

A variety of factors affect our comparable store sales including, among other things, the general retail sales environment, our ability to efficiently source and distribute products, changes in our merchandise mix, promotional events, the impact of competition and our ability to execute our business strategy efficiently. Our comparable store sales increased 7.8 % in fiscal 2004 compared to 5.2% for fiscal 2003. Past comparable store sales results may not be indicative of future results. As a result, the unpredictability of our comparable store sales may cause our revenue and operating results to vary from quarter to quarter, and an unanticipated decline in comparable store sales may cause our stock price to fluctuate.

We depend on a number of key vendors to supply our merchandise and provide critical services, and the loss of any one of our key vendors may result in a loss of sales revenue and significantly harm our operating results.

We make merchandise purchases from over 500 vendors. Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. Our smaller vendors generally have limited resources, production capacities and operating histories, and some of our vendors have limited the distribution of their merchandise in the past. We have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products, and any vendor or distributor could discontinue selling to us at any time. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future, or be able to develop relationships with new

7




vendors to expand our options or replace discontinued vendors. Our inability to acquire suitable merchandise in the future or the loss of one or more key vendors and our failure to replace any one or more of them may have a material adverse effect on our business, results of operations and financial condition.

In addition, a single vendor supports our point-of-sale, merchandise management and warehouse management systems. We also rely on the same vendor for software support. A failure by this vendor to support our management information systems adequately in the future could have a material adverse effect on our business, results of operations and financial condition.

We routinely purchase products from new vendors from time to time, many of whom are located abroad. We cannot assure you that they will be reliable sources of our products. Moreover, a number of these manufacturers and suppliers are small and undercapitalized firms that produce limited numbers of items. Given their limited resources, these firms might be susceptible to production difficulties, quality control issues and problems in delivering agreed-upon quantities on schedule. We cannot assure you that we will be able, if necessary, to return products to these suppliers and manufacturers and obtain refunds of our purchase price or obtain reimbursement or indemnification from them if their products prove defective. These suppliers and manufacturers also may be unable to withstand a downturn in the U.S. or worldwide economy. Significant failures on the part of these suppliers or manufacturers could have a material adverse effect on our operating results.

In addition, many of these suppliers and manufacturers require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time requires us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in customer demands and trends, and any downturn in the U.S. economy.

A disruption in any of our distribution operations would materially affect our operating results.

The distribution functions for our stores as well as all of our furniture orders are currently handled from our facilities in Hayward and Tracy, California and Baltimore, Maryland. Any significant interruption in the operation of any of these facilities may delay shipment of merchandise to our stores and our customers, damage our reputation or otherwise have a material adverse effect on our financial condition and results of operations. Moreover, a failure to successfully coordinate the operations of these facilities also could have a material adverse effect on our financial condition and results of operations. For example, increases in operating income for fiscal 2004 due to higher revenue and improved product margins were offset by increases in costs of distribution. Separately, significant disruptions to the operations of the third party vendor who handles, among other things, the distribution and fulfillment functions for our direct-to-customer business on an outsourced basis could be expected to have similar negative consequences.

Labor activities could cause labor relations difficulties for us.

As of January 29, 2005, we had approximately 3,400 full and part time employees, and while we believe our relations with our employees are generally good, we cannot predict the effect that any future organizational activities will have on our business and operations. If we were to become subject to work stoppages, we could experience disruption in our operations and increases in our labor costs, either of which could materially adversely affect our business, financial condition or results of operations.

We are dependent on external funding sources, which may not make available to us sufficient funds when we need them.

We have significantly relied and may rely in the future on external funding sources to finance our operations and growth. Any reduction in cash flow from operations could increase our external funding requirements to levels above those currently available to us. While we currently have in place a $100.0 million revolving credit facility, which may be increased to $150.0 million under certain

8




circumstances, the amount available under this facility could be less than the stated amount if there is a shortfall in the availability of eligible collateral to support the borrowing base and reserves as established by the terms of the revolving credit facility. We currently believe that our cash flow from operations and funds available under our revolving credit facility will satisfy our capital and operating requirements for at least the next 12 months. However, the weakening of, or other adverse developments concerning, our sales performance or adverse developments concerning the availability of credit under our revolving credit facility due to covenant limitations or other factors could limit the overall amount of funds available to us.

Our revolving credit facility contains a subjective borrowing provision, which is a typical requirement in commercial credit agreements such as ours. This clause allows our lenders to forego additional advances should they determine there has been a material adverse change in our operations, business, properties, assets, liabilities, condition or prospects or a condition or event that is reasonably likely to result in a material adverse change in our financial position or prospects reasonably likely to result in a material adverse effect on our business, condition (financial or otherwise), operations, performance or properties taken as a whole. However, our lenders have not notified us of any indication that a material adverse effect exists at January 29, 2005 or that a material adverse change has occurred. We believe that no material adverse change has occurred and we believe that we will continue to borrow on the line of credit to fund our operations over the term of the revolving credit facility. We do not anticipate any changes in our business practices that would result in any determination that there has been a material adverse effect in our operations, business, properties, assets, liabilities, condition or prospects. However, we cannot be certain that our lenders will not make such a determination in the future.

In particular, we may experience cash flow shortfalls in the future and we may require additional external funding beyond the amounts available under our revolving credit facility. However, we cannot assure you that we will be able to raise funds on favorable terms, if at all, or that future financing requirements would not be dilutive to holders of our capital stock. In the event that we are unable to obtain additional funds on acceptable terms or otherwise, we may be unable or determine not to take advantage of new opportunities or defer on taking other actions that otherwise may be important to our operations. Additionally, we may need to raise funds to take advantage of unanticipated opportunities. We also may need to raise funds to respond to changing business conditions or unanticipated competitive pressures. If we fail to raise sufficient additional funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations.

Because our business requires a substantial level of liquidity, we are dependent upon a revolving credit facility with certain restrictive covenants that limit our flexibility.

Our business requires substantial liquidity in order to finance inventory purchases, the employment of sales personnel for the peak holiday period, advertising for the holiday buying season and other similar advance expenses. As described above, we currently have in place a revolving credit facility that provides for an overall commitment of $100.0 million, which may be increased to $150.0 million under certain circumstances. Over the past several years, we have entered into modifications, amendments and restatements of this revolving credit facility, primarily to address changes in the requirements applicable to us under the revolving credit facility documents, and, most recently, to increase the stated amount of commitment under the facility.

Covenants in the revolving credit facility include, among others, ones that limit our ability to incur additional debt, make liens, make investments, consolidate, merge or acquire other businesses, sell assets, pay dividends or other distributions, and enter into transactions with affiliates. These covenants restrict numerous aspects of our business. The revolving credit facility also includes a borrowing base formula to address the availability of credit at any given time based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, in each case, subject to the overall aggregate cap on borrowings. Consequently, for purposes of the borrowing base formula, the value of eligible inventory and eligible accounts receivable may limit our ability to borrow under the revolving credit facility.

9




We have drawn upon the revolving credit facility in the past and we expect to draw upon it in the future. As a result, failure to comply with the terms of the revolving credit facility would entitle the secured lenders to prevent us from further borrowing, and upon acceleration by the lenders, they would be entitled to begin foreclosure procedures against our assets, including accounts receivable, inventory, general intangibles, equipment, goods, and fixtures. The secured lenders would then be repaid from the proceeds of such foreclosure proceedings, using all available assets. Only after such repayment and the payment of any other secured and unsecured creditors would the holders of our capital stock receive any proceeds from the liquidation of our assets. Our ability to comply with the terms of the revolving credit facility may be affected by events beyond our control.

Future increases in interest and other expense may impact our future operations.

High levels of interest and other expense have had in the past and could have in the future negative effects on our operations. An increase in the variable interest rate under our revolving credit facility, coupled with an increase in our outstanding debt, could result in material amounts otherwise available for other business purposes being used to pay for interest expense.

Our ability to continue to meet our future debt and other obligations and to minimize our average debt level depends on our future operating performance and on economic, financial, competitive and other factors. Many of these factors are beyond our control. In addition, we may need to incur additional indebtedness in the future. We cannot assure you that our business will generate sufficient cash flow or that future financings will be available to provide sufficient proceeds to meet our needs or obligations or to service our total debt.

We are subject to trade restrictions and other risks associated with our dependence on foreign imports for our merchandise.

During fiscal year 2004, we purchased approximately 60% of our merchandise directly from vendors located abroad. As an importer, our future success will depend in large measure upon our ability to maintain our existing foreign supplier relationships and to develop new ones. While we rely on our long-term relationships with our foreign vendors, we have no long-term contracts with them. Additionally, many of our imported products are subject to existing duties, tariffs and quotas that may limit the quantity of some types of goods, which we may import into the United States of America. Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our distribution centers located in the United States of America, changes in import duties, tariffs and quotas, loss of “most favored nation” trading status by the United States of America in relation to a particular foreign country, work stoppages including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the United States of America, freight cost increases, economic uncertainties, including inflation, foreign government regulations, and political unrest and trade restrictions, including the United States of America retaliating against protectionist foreign trade practices. Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political, financial or other instabilities that are particular to their home countries, including without limitation local acts of terrorism or economic, environmental or health and welfare-related crises, which may in turn result in limitations or temporary or permanent halts to their operations, restrictions on the transfer of goods or funds and/or other trade disruptions. If any of these or other factors were to render the conduct of business in particular countries undesirable or impractical, our financial condition and results of operations could be materially adversely affected.

While we believe that we could find alternative sources of supply, an interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on our business, financial condition and results of operations unless

10




and until alternative supply arrangements are secured. Moreover, products from alternative sources may be of lesser quality and/or more expensive than those we currently purchase, resulting in reduction or loss of our profit margin on such items.

As an importer we are subject to the effects of currency fluctuations related to our purchases of foreign merchandise.

While most of our purchases outside of the United States currently are settled in U.S. dollars, it is possible that a growing number of them in the future may be made in currencies other than the U.S. dollar. Historically, we have not hedged our currency risk and do not currently anticipate doing so in the future. However, because our financial results are reported in U.S. dollars, fluctuations in the rates of exchange between the U.S. dollar and other currencies may decrease our sales margins or otherwise have a material adverse effect on our financial condition and results of operations in the future.

Rapid growth in our direct-to-customer business may not be sustained and may not generate a corresponding increase in profits to our business.

For fiscal year 2004, revenue through our direct-to-customer channel grew by 75% as compared to the prior fiscal year. Increased activity in our direct-to-customer business could result in material changes in our operating costs, including increased merchandise inventory costs and costs for paper and postage associated with the distribution and shipping of catalogs and products. Although we intend to attempt to mitigate the impact of these increases by improving sales revenue and efficiencies, we cannot assure you that we will succeed in mitigating expenses with increased efficiency or that cost increases associated with our direct-to-customer business will not have an adverse effect on the profitability of our business. Additionally, while we outsource to a third party the fulfillment of our direct-to-customer division, including customer service and non-furniture distribution, the third party may not have the capacity to accommodate our growth. This lack of capacity may result in delayed customer orders and deficiencies in customer service, both of which may adversely affect our reputation, cause us to lose sales revenue and limit or counter recent growth in our direct-to-customer business.

We depend on key personnel and could be affected by the loss of their services because of the limited number of qualified people in our industry.

The success of our business will continue to depend upon our key personnel, including our President, Chief Executive Officer, and Chairman of the Board, Gary Friedman. Competition for qualified employees and personnel in the retail industry is intense. The process of locating personnel with the combination of skills and attributes required to carry out our goals is often lengthy. Our success depends to a significant degree upon our ability to attract, retain and motivate qualified management, marketing and sales personnel, in particular store managers, and upon the continued contributions of these people. We cannot assure you that we will be successful in attracting and retaining qualified executives and personnel. In addition, our employees may voluntarily terminate their employment with us at any time. We also do not maintain any key man life insurance. The loss of the services of key personnel or our failure to attract additional qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

Recent regulatory changes may continue to increase our costs.

Recent changes in the laws, regulations and rules affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, have increased and may continue to increase our expenses in connection with our compliance with these new requirements. In particular, we have incurred increased expenses to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued in connection with it, which require management to report on, and our registered independent public accountants to attest to, our internal control over financial reporting. Compliance with these new requirements could also result in continued diversion of management’s time and attention, which could prove to be disruptive to

11




normal business operations. Further, the impact of these laws, regulations and rules and activities in response to them could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, which could harm our business.

Changes in general economic conditions affect consumer spending and may significantly harm our revenue and results of operations.

The success of our business depends to a significant extent upon the level of consumer spending. A number of economic conditions affect the level of consumer spending on merchandise that we offer, including, among other things, the general state of the economy, general business conditions, the level of consumer debt, interest rates, taxation and consumer confidence in future economic conditions. More generally, reduced consumer confidence and spending may result in reduced demand for discretionary items and luxury retail products, such as our products. Reduced consumer confidence and spending also may result in limitations on our ability to increase prices and may require increased levels of selling and promotional expenses. Adverse economic conditions and any related decrease in consumer demand for discretionary items such as those offered by us could have a material adverse effect on our business, results of operations and financial condition.

We face an extremely competitive specialty retail business market.

The retail market is highly competitive. We compete against a diverse group of retailers ranging from specialty stores to traditional furniture stores and department stores. Our product offerings also compete with a variety of national, regional and local retailers. We also compete with these and other retailers for customers, suitable retail locations, suppliers, qualified employees and management personnel. Many of our competitors have significantly greater financial, marketing and other resources. Moreover, increased competition may result, and has resulted in the past, in potential or actual litigation between us and our competitors relating to such activities as competitive sales and hiring practices, exclusive relationships with key suppliers and manufacturers and other matters. As a result, increased competition may adversely affect our future financial performance, and we cannot assure you that we will be able to compete successfully in the future.

We believe that our ability to compete successfully is determined by several factors, including, among other things, the breadth and quality of our product selection, effective merchandise presentation, customer service, pricing and store location. Although we believe that we are able to compete favorably on the basis of these factors, we may not ultimately succeed in competing with other retailers in our market.

Terrorist attacks and threats or actual war may negatively impact all aspects of our operations, revenue, costs and stock price.

Threats of terrorist attacks in the United States of America, as well as future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks or threats against United States of America targets, rumors or threats of war, actual conflicts involving the United States of America or its allies, including the on-going U.S. conflicts in Iraq and Afghanistan, further conflicts in the Middle East and in other developing countries, or military or trade disruptions affecting our domestic or foreign suppliers of merchandise, may impact our operations. The potential impact to our operations includes, among other things, delays or losses in the delivery of merchandise to us and decreased sales of the products we carry. Additionally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States of America and worldwide financial markets and economies. Also, any of these events could result in economic recession in the United States of America or abroad. Any of these occurrences could have a significant impact on our operating results, revenue and costs and may result in the volatility of the future market price of our common stock.

12




Our common stock price may be volatile.

The market price of our common stock has fluctuated significantly in the past, and is likely to continue to be highly volatile. In addition, the trading volume in our common stock has fluctuated, and significant price variations can occur as a result. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the United States equity markets have from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of companies such as ours. These broad market fluctuations may materially adversely affect the market price of our common stock in the future. Variations in the market price of our common stock may be the result of changes in the trading characteristics that prevail in the market for our common stock, including low trading volumes, trading volume fluctuations and other similar factors that are particularly common among highly volatile securities. Variations also may be the result of changes in our business, operations or prospects, announcements or activities by our competitors, entering into new contractual relationships with key suppliers or manufacturers by us or our competitors, proposed acquisitions by us or our competitors, financial results that fail to meet our guidance or public market analysts’ expectations, changes in stock market analysts’ recommendations regarding us, other retail companies or the retail industry in general, and domestic and international market and economic conditions.

Future sales of our common stock in the public market could adversely affect our stock price and our ability to raise funds in new equity offerings.

We cannot predict the effect, if any, that future sales of shares of our common stock or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock will have on the market price of our common stock prevailing from time to time. For example, in connection with our March 2001 preferred stock financing, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register approximately 6.4 million shares of our common stock issued, or to be issued, upon the conversion of our Series A preferred stock to some of our stockholders. The registration statement was declared effective by the Securities and Exchange Commission on October 31, 2002 and may remain effective under certain circumstances until as long as March 2009. Sale, or the availability for sale, of substantial amounts of common stock by our existing stockholders pursuant to an effective registration statement or under Rule 144, through the exercise of registration rights or the issuance of shares of common stock upon the exercise of stock options, or the conversion of our preferred stock, or the perception that such sales or issuances could occur, could adversely affect prevailing market prices for our common stock and could materially impair our future ability to raise capital through an offering of equity securities.

Newly adopted accounting regulations that require companies to expense stock options will result in a decrease in our earnings and our stock price may decline.

The Financial Accounting Standards Board recently adopted the previously proposed regulations that will eliminate the ability to account for share-based compensation transactions using the intrinsic method that we currently use and generally would require that such transactions be accounted for using a fair-value-based method and recognized as an expense in our consolidated statement of operations. We will be required to expense stock options effective in periods beginning after July 1, 2005. Currently, we generally only disclose such expenses on a pro forma basis in the Notes to our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America. The adoption of this new accounting regulation could have a significant impact on our results of operations and our stock price could decline accordingly.

13




We are subject to anti-takeover provisions and the terms and conditions of our preferred stock financing that could delay or prevent an acquisition and could adversely affect the price of our common stock.

Our Second Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws, certain provisions of Delaware law and the Certificate of Designation governing the rights, preferences and privileges of our preferred stock may make it difficult in some respects to cause a change in control of our company and replace incumbent management. For example, our Second Amended and Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws provide for a classified board of directors. With a classified board of directors, at least two annual meetings of stockholders, instead of one, will generally be required to effect a change in the majority of the board. As a result, a provision relating to a classified board may discourage proxy contests for the election of directors or purchases of a substantial block of our common stock because its provisions could operate to prevent obtaining control of the board in a relatively short period of time.

Separately, the holders of our preferred stock presently have the right to designate two members of our board of directors, and they also have a number of voting rights pursuant to the terms of the Certificate of Designation, which could potentially delay, defer or prevent a change of control. In particular, the holders of our Series A preferred stock have the right to approve a number of actions by us, including mergers, consolidations, acquisitions and similar transactions in which the holders of Series A preferred stock and common stock do not receive at least three times the then existing conversion price per share of the Series A preferred stock. This right may create a potentially discouraging effect on, among other things, any third party’s interest in completing these types of transactions with us. Consequently, the terms and conditions under which we issued our preferred stock, coupled with the existence of other anti-takeover provisions, may collectively have a negative impact on the price of our common stock, may discourage third-party bidders from making a bid for our company or may reduce any premiums paid to our stockholders for their common stock.

In addition, our board of directors has the authority to fix the rights and preferences of, and to issue shares of, our preferred stock, which may have the effect of delaying or preventing a change in control of our company without action by holders of our common stock.

ITEM 2.     PROPERTIES

We currently lease approximately 80,000 square feet of space for use as our headquarters, including 29,000 square feet of warehouse space, located in Corte Madera, California. The leases for this space expire between April 2005 and April 2009.

As of January 29, 2005, we leased space in three separate distribution facilities and outsourced the distribution efforts for non-furniture in the direct to customer channel. We lease approximately 160,000 square feet of warehouse space in Hayward, California, which primarily supports our non-furniture distribution for the west coast of the United States. This lease expires in October 2006 with an option to extend for a twelve-month term. In June 2004, we relocated our Tracy, California furniture distribution center to a new facility. The lease for this facility provides for 195,000 square feet of warehouse space and for expansion up to 284,000 square feet and expires in September 2011, with options to renew for one additional five-year term. We also lease approximately 470,000 square feet of warehouse space in Baltimore, Maryland, for use as our east coast distribution center. The lease expires in September 2006, with options to extend for two additional three-year terms.

As of January 29, 2005, we leased approximately 1,178,000 gross square feet for our 102 retail stores and our one outlet store. The initial lease term of our retail stores generally range from 10 to 20 years. Certain leases contain renewal options for up to 15 years. Most leases for our retail stores provide for a minimum rent, typically including escalating rent increases, plus a percentage rent based upon sales after

14




certain minimum thresholds are achieved. The leases generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.

In connection with our wholly owned furniture manufacturing subsidiary, The Michaels Furniture Company (“Michaels”), we lease two properties used for the manufacturing and storage of furniture, in Sacramento, California. We lease one of the properties from the previous owner and current president of Michaels. The main property consists of approximately 100,000 square feet of manufacturing space and 7,000 square feet of office space. The lease expires in February 2008, with options to extend the lease for two additional five-year terms. The second property consists of approximately 46,000 square feet of warehouse space, which is used to house finished goods. This lease expires in July 2006.

ITEM 3.     LEGAL PROCEEDINGS

There are no material pending legal proceedings against us. We are, however, involved from time to time in legal proceedings, including litigation arising in the ordinary course of our business. At the present time, we believe no legal proceedings will have a material adverse effect on our consolidated financial condition or results of operations. However, we cannot assure you that the results of any proceeding will be in our favor. Moreover, due to the uncertainties inherent in any legal proceeding, we cannot accurately predict the ultimate outcome of any proceeding and may incur substantial costs to defend the proceeding, irrespective of the merits. The unfavorable outcome of any legal proceeding could have an adverse impact on our business, financial condition and results of operations.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this annual report on Form 10-K.

15




PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is listed on The Nasdaq National Market (“NASDAQ”) under the symbol “RSTO.” The closing price of our common stock on Nasdaq was $5.42 on April 1, 2005.

STOCKHOLDERS

As of April 1, 2005 there were 493 stockholders of record of our common stock. This number excludes stockholders whose stock is held in nominee or street name by brokers.

DIVIDEND POLICY

No dividends have been declared on our common stock since our 1998 initial public offering and it is not anticipated that we will pay any dividends in the foreseeable future on our common stock. In addition, restrictive covenants in our revolving credit facility limit our ability to pay dividends and protective provisions in our Certificate of Designation of Series A and Series B preferred stock require the approval of two-thirds of the then outstanding shares of our Series A preferred stock, voting together as a single class, for us to declare or pay any dividend on any shares of common stock. As part of our Letter Agreement, dated as of August 2, 2002, with certain holders of our Series A preferred stock, these Series A holders agreed to waive their right to certain dividends in the event we were to declare a dividend on our common stock. In the same agreement, we agreed that we will not declare any dividend payable to our common stockholders unless and until we first obtain the approval of the holders of at least seventy percent of the then outstanding shares of Series A preferred stock.

STOCK PRICE INFORMATION

Set forth below are the high and low closing sale prices for shares of our common stock for each quarter during the fiscal years ended January 29, 2005 and January 31, 2004 as reported by The Nasdaq National Market.

Quarter Ending

 

 

 

High

 

Low

 

May 3, 2003

 

4.17

 

2.02

 

August 2, 2003

 

6.41

 

3.86

 

November 1, 2003

 

8.26

 

5.47

 

January 31, 2004

 

8.28

 

3.70

 

May 1, 2004

 

7.25

 

3.57

 

July 31, 2004

 

8.00

 

4.99

 

October 30, 2004

 

6.68

 

4.82

 

January 29, 2005

 

6.37

 

4.87

 

 

Information relating to the securities authorized for issuance under equity compensation plans will be set forth in the section with the caption “Equity Compensation Plan Information” in our definitive proxy statement. This information is incorporated herein by reference.

16




ITEM 6.                SELECTED FINANCIAL DATA

The following table sets forth selected, consolidated financial information as of and for the years indicated. All prior year periods have been restated to reflect adjustments that are further discussed in Note 2 “Restatement of Consolidated Financial Statements” under Notes to the Consolidated Financial Statements included in Item 8, “Consolidated Financial Statements and Supplementary Data.” This information is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements, related notes thereto and other financial data included elsewhere in this annual report on Form 10-K. The following results may not be indicative of our future operating results.

 

 

Fiscal Year

 

 

 

 

2004

 

2003(3)

 

2002(3)

 

2001(3)

 

2000(1)(3)

 

 

 

(Dollars in thousands, except per share data)

 

 

Results of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

525,823

 

$

438,508

 

$

400,337

 

$

366,473

 

$

366,236

 

 

Income (loss) before income taxes

 

1,604

 

(4,029

)

(10,864

)

(39,704

)

(6,269

)

 

Net income (loss)

 

1,704

 

(2,518

)

(2,845

)

(32,136

)

(4,708

)

 

Income (loss) attributable to common stockholders

 

1,704

 

(2,518

)

(3,203

)

(34,953

)

(4,708

)

 

Income (loss) per common share—basic

 

$

0.05

 

$

(0.08

)

$

(0.11

)

$

(1.49

)

$

(0.28

)

 

Income (loss) per common share—diluted

 

$

0.04

 

$

(0.08

)

$

(0.11

)

$

(1.49

)

$

(0.28

)

 

Financial Position:

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

51,791

 

$

52,097

 

$

49,398

 

$

56,094

 

$

7,077

 

 

Total assets

 

279,263

 

233,895

 

228,135

 

209,460

 

237,615

 

 

Line of credit & other current debt

 

33,819

 

10,286

 

13,909

 

 

38,858

 

 

Other long-term obligations

 

143

 

352

 

144

 

3,236

 

612

 

 

Redeemable convertible preferred
stock

 

8,331

 

8,541

 

13,328

 

14,106

 

 

 

Stockholders’ equity

 

$

99,286

 

$

96,532

 

$

90,142

 

$

84,105

 

$

73,105

 

 

Retail Stores:

 

 

 

 

 

 

 

 

 

 

 

 

Store count at year-end(4)

 

102

 

103

 

105

 

104

 

106

 

 

Comparable store sales growth(2)

 

7.8

%

5.2

%

6.2

%

(4.6

)%

(1.0

)%

 

Store selling square feet at year-end

 

676,520

 

679,300

 

688,634

 

682,936

 

701,628

 

 


(1)   Fiscal 2000 was a 53-week fiscal year. For purposes of the calculation of comparable store growth, results were calculated to correspond with a 52-week fiscal year.

(2)   Comparable store sales are defined as sales from stores whose gross square footage did not change by more than 20% in the previous 12 months and which have been open at least 12 full months and excludes warehouse and outlet store sales.

(3)   The results for fiscal years 2000 through 2003 were restated due to the impact of the correction in accounting for leases (see Note 2 to the Consolidated Financial Statements). The results of fiscal year 2001 were restated to correct an error related to tax accounting.

(4)   Store count at year-end excludes the one outlet location opened in the fourth quarter of fiscal 2004.

17




ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our Company, Restoration Hardware, Inc. (Nasdaq: RSTO), together with our subsidiaries, is a specialty retailer of high quality bathware, hardware, lighting, furniture, textiles and accessories that reflects our classic and authentic American point of view. We commenced business in 1979 as a purveyor of fittings and fixtures for older homes. Since then, we have evolved into a unique home furnishings retailer offering consumers an array of distinctive and high quality merchandise. We market our merchandise through retail locations, mail order catalogs and on the Internet at www.restorationhardware.com.

Our merchandise strategy and our stores’ architectural style create a unique and attractive selling environment designed to appeal to an affluent, well educated 35 to 60 year old customer. Over the next decade, we believe the fastest growing segment of the U.S. population will be 45 to 60 year olds. We believe that as these customers evolve, so will their purchasing needs and desires. We believe that our products can fulfill their aspirations to have homes designed with a high quality, classic and timeless style. Our plan is to fill the void in the marketplace above the current home lifestyle retailers, and below the interior design trade, by providing products targeted to 35 to 60 year olds and centered around our core businesses that reflect a predictable, high-quality promise to our customers.

We operate on a 52 – 53 week fiscal year ending on the Saturday closest to January 31. Our current fiscal year ended on January 29, 2005 (“fiscal 2004”), and the prior fiscal year ended on January 31, 2004 (“fiscal 2003”) and fiscal 2002 ended on February 1, 2003 (“fiscal 2002”). Fiscal 2004, 2003 and 2002 each consisted of 52 weeks.

As of January 29, 2005, we operated 102 stores and one outlet store in 30 states, the District of Columbia and Canada. In addition to our retail stores, we operate a direct-to-customer (“direct”) sales channel that includes both catalog and Internet, and a wholly-owned furniture manufacturer.

In fiscal 2001, we determined that we needed to implement a repositioning strategy to expand and clarify our core businesses, adjust down our proportion of lower margin furniture sales while increasing our higher margin textiles category, increase our direct imports, grow our direct-to-customer business and close underperforming stores. We launched a new merchandising strategy in April 2002, which included new merchandise offerings, adjustments of overall product mix, and the remodeling of our stores in order to best present the new merchandise. In addition, to drive sales in our direct channels, we expanded our product assortment of catalog and Internet only items. In 2003, we built on the prior year’s successful launch by refining and expanding our core merchandise offerings, which include premium textiles, bath fixtures and hardware, lighting, and furniture and in 2004, we re-merchandised our furniture assortment and revamped our accessories offering. We also redesigned our catalog in 2004 to improve the presentation of our core businesses and more clearly communicate the quality positioning of our offerings. Our customers have continued to respond positively to the new merchandise introductions in all channels. We intend to further build on our core merchandise offerings in 2005. This shift will require some additional fixturing in our retail stores to accomplish the presentation of the expanded assortment. Our catalog and Internet presentations will also reflect this expanded assortment.

In fiscal 2004, we opened one traditional retail store, remodeled another store and opened our first outlet store. The outlet store strategy enables us to more effectively liquidate overstocked, discontinued, damaged merchandise and over time, we believe will eliminate the need for the less productive warehouse sales events that we have historically held.

During fiscal 2004, we continued programs initiated in prior years to improve our operating results, which included increases in our selling margins through sourcing changes, in particular, the expansion of

18




our international sourcing. We also effected significant changes in management in fiscal 2004, particularly in the area of operations including the hiring of a new Chief Operating Officer and the hiring into the new role of Senior Vice President of Supply Chain. We believe these initiatives and added operational leadership will provide a strong foundation for margin expansion, operational efficiencies and cost reductions as well as provide a springboard for future growth.

On an ongoing basis, we evaluate stores for closure based on underperformance. During fiscal 2004, we closed two underperforming stores, and cumulatively since fiscal 2001, we have closed 9 stores. A material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands may cause us to close additional underperforming stores. As of January 29, 2005, we anticipated opening one new store in fiscal 2005, and had no current plans to close any stores.

Restatement of Consolidated Financial Statements

On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease-related accounting issues and their treatment under generally accepted accounting principles in the United States of America (“GAAP”). In response to this letter, management reviewed its lease accounting and determined that the Company’s method of accounting for rent holidays was not in accordance with GAAP. As a result, we restated our Consolidated Financial Statements for fiscal years 2003 and prior.

Historically, and consistent with industry practice, we have recognized the straight line rent expense for leases generally beginning on the store opening date which had the effect of excluding the construction period of our stores (rent holiday) from the calculation of the period over which we expensed rent. We determined that the appropriate accounting treatment is to include the construction period in our calculation of straight line rent in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases.” We corrected our straight line rent accrual and deferred rent credits accordingly.

The cumulative effect of this restatement was an increase in accumulated deficit of $4.8 million as of February 2, 2002 and increases in pre-tax results of $0.7 million ($0.4 million, after tax) and $1.3 million ($0.8 million, after tax) for fiscal years ended January 31, 2004 and February 1, 2003, respectively. Additionally, we corrected an error recorded in fiscal 2001 related to tax accounting; the correction had the effect of increasing accumulated deficit and decreasing prepaid tax assets by $0.6 million as of February 2, 2002.

The corrections are summarized in Note 2 to the Consolidated Financial Statements of this report. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to these corrections.

19




Summary Consolidated Statements of Operations

The following table sets forth for the periods indicated the amount and percentage of net revenue represented by certain line items in our Consolidated Statements of Operations:

 

 

Fiscal

 

% of Net 

 

Fiscal

 

% of Net 

 

Fiscal

 

% of Net 

 

 

 

2004

 

Revenue

 

2003

 

Revenue

 

2002

 

Revenue

 

 

 

(Dollars in thousands, except per share data)

 

Retail net revenue

 

$

406,833

 

 

77.4

%

 

$

370,609

 

 

84.5

%

 

$

355,632

 

 

88.8

%

 

 

Direct-to-customer net revenue

 

118,990

 

 

22.6

 

 

67,899

 

 

15.5

 

 

44,705

 

 

11.2

 

 

 

Net revenue

 

525,823

 

 

100.0

 

 

438,508

 

 

100.0

 

 

400,337

 

 

100.0

 

 

 

Cost of revenue and occupancy

 

359,808

 

 

68.4

 

 

305,265

 

 

69.6

 

 

281,815

 

 

70.4

 

 

 

Gross profit

 

166,015

 

 

31.6

 

 

133,243

 

 

30.4

 

 

118,522

 

 

29.6

 

 

 

Selling, general and administrative expense

 

161,939

 

 

30.8

 

 

135,118

 

 

30.8

 

 

126,290

 

 

31.5

 

 

 

Income (loss) from operations

 

4,076

 

 

0.8

 

 

(1,875

)

 

(0.4

)

 

(7,768

)

 

(1.9

)

 

 

Interest expense, net and other

 

(2,472

)

 

(0.5

)

 

(2,154

)

 

(0.5

)

 

(3,096

)

 

(0.8

)

 

 

Income (loss) before income
taxes

 

1,604

 

 

0.3

 

 

(4,029

)

 

(0.9

)

 

(10,864

)

 

(2.7

)

 

 

Income tax benefit

 

100

 

 

 

 

1,511

 

 

0.3

 

 

8,019

 

 

2.0

 

 

 

Net income (loss)

 

$

1,704

 

 

0.3

 

 

$

(2,518

)

 

(0.6

)

 

$

(2,845

)

 

(0.7

)

 

 

Preferred stockholder return:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(358

)

 

(0.1

)

 

 

Income (loss) attributable to common stockholders

 

$

1,704

 

 

0.3

 

 

$

(2,518

)

 

(0.6

)

 

$

(3,203

)

 

(0.8

)

 

 

Income (loss) per share of common stock—basic

 

$

0.05

 

 

 

 

 

$

(0.08

)

 

 

 

 

$

(0.11

)

 

 

 

 

 

Income (loss) per share of common stock—diluted

 

$

0.04

 

 

 

 

 

$

(0.08

)

 

 

 

 

$

(0.11

)

 

 

 

 

 

 

Income from operations improved to $4.1 million in fiscal 2004 as compared to a loss from operations of $1.9 million in fiscal 2003. We recorded a net benefit for income taxes for the year of $100 thousand. This reflects the reduction of the income tax provision of $3.0 million from the reversal of the valuation allowance established in prior years, offset by $2.1 million of tax contingency and other adjustments. Net income was $0.04 per share, or $1.7 million for fiscal 2004, compared to a net loss of $0.08 per share, or $2.5 million, for fiscal 2003.

The improvement in operating results of $6.0 million, to $4.1 million of income from operations in fiscal 2004 from a loss from operations of $1.9 million in fiscal 2003, is the result of cost leverage achieved on higher revenue from all channels and the expansion of product margins, which were somewhat offset by higher costs of distribution. Net revenue increased $87.3 million in fiscal 2004 as compared to fiscal 2003, or 20%, which largely resulted from a $51.1 million, or 75%, increase in our direct-to-customer sales, and a $27.7 million, or 7.8%, increase in comparable store sales, over fiscal 2003. The increase in comparable store sales over fiscal 2003 was driven by our ongoing focus on building “brand authority” in our core merchandise offerings and through annual, product-focused sales events such as our Famous Fall Lighting Sale and our Annual Bath Event. The increase in net revenue in both our retail and direct channels can also be attributed to our focus on growing our catalog circulation, as the catalog is our primary advertising vehicle. Additionally, revenue from an outlet store and warehouse sales events totaled $5.7 million for fiscal 2004, compared to $2.7 million of revenue from a warehouse sales event in fiscal 2003.

The cost of revenue and occupancy increased by $54.5 million in fiscal 2004 as compared to fiscal 2003, or 18%, primarily in support of our revenue growth. These costs rose at a lower rate than revenue as

20




the expansion of product margins and the leverage of our store occupancy costs more than offset the higher costs that we continued to experience throughout most of fiscal 2004 in our distribution and supply chain activities. This includes increases in freight costs as well as costs associated with investment in process improvement efforts including related labor costs and consultants that had been retained to temporarily manage those operations. We have eliminated the need for temporary labor and consultants in our distribution centers as of the end of fiscal 2004. Those costs are reflected in cost of revenue and occupancy on our Consolidated Statements of Operations and are reflected in unallocated costs in Note 13 to the Consolidated Financial Statements, Segment Reporting. The increase in selling, general and administrative expense of $26.8 million in fiscal 2004 over fiscal 2003, or 20%, was primarily driven by variable costs incurred in support of the revenue increase such as store payroll and advertising, and such expenses were also impacted by increases in professional fees and brand advertising. The increase in professional fees was primarily related to the implementation of the requirements of the Sarbanes-Oxley Act of 2002, in particular, with respect to Section 404 requiring management to report on, and our registered independent public accountants to attest to, the effectiveness of our internal control over financial reporting. As a percent of revenue, selling, general and administrative expense remained at 30.8% of net revenue in fiscal 2004 and cost of revenue and occupancy improved 120 basis points to 68.4% of net revenue in fiscal 2004.

Loss from operations improved to $1.9 million in fiscal 2003 as compared to a loss from operations of $7.8 million in fiscal 2002. Net loss was $0.08 per share, or $2.5 million for fiscal 2003, compared to a net loss of $0.11 per share, or $3.2 million in fiscal 2002. Fiscal year 2002 included a one-time tax benefit of $4.0 million, or $0.13 per share, related to the economic stimulus bill enacted on March 9, 2002.

The improvement in the loss from operations in fiscal 2003 of $5.9 million, to a loss of $1.9 million as compared to a loss from operations of $7.8 million in fiscal 2002, is the result of cost leverage achieved on higher sales, expansion of product margins and leverage of store occupancy which was somewhat offset by increased costs of distribution. The increase in net revenue of $38.2 million in fiscal 2003 as compared to fiscal 2002, or 10%, resulted from a 5.2% increase in comparable store sales, and growth of our direct-to-customer business, which increased $23.2 million, or 52%, over fiscal 2002. The increase in comparable store sales over fiscal 2002 was driven by our brand-building initiatives for our core merchandise offerings and the growth of our catalog circulation, which is our primary advertising vehicle. Selling, general and administrative expenses increased by $8.8 million in fiscal 2003 as compared to fiscal 2002, and such increase was primarily attributable to higher payroll expenses and advertising costs which were incurred in support of our revenue growth. Selling, general and administrative expenses, expressed as a percentage of revenue, improved 70 basis points in fiscal 2003 to 30.8% of net revenue versus fiscal 2002 from leverage on higher sales, and the cost of revenue and occupancy improved 80 basis points to 69.6% of net revenue in fiscal 2003.

Our business is highly seasonal, which reflects a general pattern in the retail industry wherein the highest sales and earnings occur during the holiday season. Historically, a significant percentage of our sales have occurred in the fourth fiscal quarter. In our peak holiday selling season, we incur significant additional expenses in connection with, among other things, the hiring of additional seasonal employees in our retail stores and the production and mailing of a higher volume of our catalogs.

21




REVENUE AND SEGMENT RESULTS

Retail Net Revenue and Segment Results

 

 

Fiscal Year

 

 

 

2004

 

2003

 

2002

 

 

 

(Dollars in thousands)

 

Retail net revenue

 

$

406,833

 

$

370,609

 

$

355,632

 

Retail net revenue growth percentage

 

10

%

4

%

7

%

Comparable store sales growth

 

7.8

%

5.2

%

6.2

%

Income from operations

 

51,932

 

39,611

 

36,709

 

Income from operations—percent of net revenue

 

12.8

%

10.7

%

10.3

%

Number of retail stores at beginning of year

 

103

 

105

 

104

 

Number of retail stores opened

 

1

 

2

 

1

 

Number of retail stores closed

 

2

 

4

 

 

Number of retail stores at year-end

 

102

 

103

 

105

 

Store selling square feet at year-end

 

676,520

 

679,300

 

688,634

 

 

Retail net revenue for fiscal 2004 increased by $36.2 million, or 10%, as compared to fiscal 2003, primarily due to a $27.7 million, or 7.8%, increase in comparable store sales. Additionally, several previously opened stores, although not open long enough to be included in the calculation of comparable store sales, contributed positively to fiscal 2004 results. Fiscal 2004 retail net revenue also reflects $5.7 million in revenue from outlet revenue and warehouse sales events, as compared to $2.7 million in fiscal 2003 for a warehouse sale event held in that year. We periodically hold warehouse sale events to liquidate our overstocked, discontinued and damaged inventory. In the fourth quarter of fiscal 2004, we opened our first outlet store, and over time we believe will eliminate the need for separate warehouse sales events as we open further outlet stores. Warehouse and outlet sales revenue is included in retail revenue, but is excluded from our comparable store sales.

For fiscal 2004, income from operations for the retail segment increased to $51.9 million from $39.6 million in fiscal 2003. As a percent of segment net revenue, income from operations for the retail segment grew 210 basis points, to 12.8% of retail net revenue, as compared to 10.7% for the prior fiscal year. This improvement resulted from occupancy cost leverage achieved on higher sales, expansion of product margins as well as improvements in payroll and other store expenses expressed as a percentage of net revenue, offset by higher costs of freight and distribution and the costs of brand advertising. Income from operations for the retail segment reflects the results associated with store operations less retail field management costs.

Retail net revenue for fiscal 2003 increased by $15.0 million or, 4%, from fiscal 2002 primarily due to an $18.0 million or 5.2% increase in comparable store sales. The 5.2% increase in comparable store sales in fiscal 2003 was driven primarily by strong performance in our core merchandise offerings. This increase was partially offset by decreased sales related to the closure of four underperforming stores during fiscal 2003 and the temporary closure of one store for expansion.

Income from operations for the retail segment for fiscal 2003 was $39.6 million, as compared to $36.7 million in fiscal 2002. Income from operations for the retail segment as a percent of segment revenue increased 40 basis points, to 10.7% of retail net revenue from 10.3% of retail net revenue for fiscal 2002, primarily due to occupancy cost leverage from increases in comparable stores sales assisted by improved margins offset by higher costs of distribution.

Comparable store sales are defined as sales from stores whose gross square footage did not change by more than 20% in the previous 12 months and which have been open at least 12 full months. We believe that comparable store sales are a more useful indicator of store performance than the change in total net

22




revenue, since comparable store sales exclude the effects of changes in the number of stores open. Revenue from outlet stores and warehouse sales events are not included in comperable store sales.

Direct-to-Customer Net Revenue and Segment Results

 

 

Fiscal Year

 

 

 

2004

 

2003

 

2002

 

 

 

(Dollars in thousands)

 

Catalog revenue

 

$

65,458

 

$

40,909

 

$

29,461

 

Internet revenue

 

53,532

 

26,990

 

15,244

 

Total direct-to-customer net revenue

 

$

118,990

 

$

67,899

 

$

44,705

 

Income from operations

 

$

14,280

 

$

8,538

 

$

3,062

 

Income from operations—percent of net revenue

 

12.0

%

12.6

%

6.8

%

Growth percentages:

 

 

 

 

 

 

 

Direct-to-customer net revenue

 

75

%

52

%

33

%

Number of catalogs mailed

 

15

%

9

%

46

%

Pages circulated

 

48

%

40

%

57

%

 

Direct-to-customer net revenue consists of both catalog and Internet sales. Direct-to-customer net revenue for fiscal 2004 increased $51.1 million, or 75%, as compared to fiscal 2003. This increase was attributable to an expansion of the merchandise offerings in both the catalog and on the Internet, coupled with an increase in the catalogs mailed during fiscal 2004.

For fiscal 2004, income from operations for the direct-to-customer segment increased to $14.3 million, or 12.0% of segment net revenue, as compared to $8.5 million, or 12.6% of segment net revenue, for fiscal 2003. Segment results were favorably impacted by higher sales for the segment and product margin expansion, which was more than offset by higher distribution and advertising costs expressed as a percentage of revenue. Income from operations for the direct segment reflects the results associated with catalog and Internet sales, less direct management costs.

Direct-to-customer net revenue during fiscal 2003 increased $23.2 million, or 52%, from fiscal 2002. A portion of this increase was the result of a 9% increase in the number of catalogs mailed in fiscal 2003, as well as a change in our product mix in the catalog and an increase in catalog-only furniture offerings. Additionally, we believe our website marketing efforts coupled with growing consumer familiarity with the Internet and growth in high-speed Internet consumers also helped drive customers to our website.

Income from operations for fiscal 2003 increased to $8.5 million, or 12.6% of related segment net revenue, from $3.1 million, or 6.8%, of related segment net revenue for fiscal 2002, primarily due to the increase in our direct-to customer revenue and improvements in our product margins, slightly offset by increases in selling general and administrative expense primarily due to advertising costs related to catalog production and mailing costs.

EXPENSES

Cost of Revenue and Occupancy Expense

For fiscal 2004, cost of revenue and occupancy expense expressed as a percentage of net revenue improved approximately 120 basis points to 68.4%, from 69.6% in fiscal 2003. Significant improvements were achieved due to the leveraging of relatively fixed store occupancy costs and improved product margins, which improvements were significantly offset by increased costs related to customer shipping, distribution and supply chain operations.

23




In fiscal 2003, cost of revenue and occupancy expense expressed as a percentage of net revenue improved approximately 80 basis points to 69.6%, from 70.4% in fiscal 2002. The majority of the improvement was achieved due to the leveraging of relatively fixed store occupancy costs and was partially offset by increases in distribution costs.

Selling, General and Administrative Expense

Selling, general and administrative expense expressed in absolute dollars increased $26.8 million, to $161.9 million for fiscal 2004 from $135.1 million in fiscal 2003. The increase in absolute dollars is primarily related to an increase in advertising, including catalog production and mailing costs, and to a lesser degree, an increase in payroll expense and professional fees as well as other selling related expenses. Selling, general and administrative expense expressed as a percentage of net revenue was consistent at 30.8% for fiscal 2004 and fiscal 2003. We generated cost savings in retail payroll costs, which declined as a percentage of net revenue, reflecting continued management focus and the implementation of tools to manage retail payroll expense, as well as reductions in other store expenses. Higher levels of advertising costs and professional fees for fiscal 2004 largely offset these improvements. Advertising costs include expenses associated with catalog production and mailing as well as the costs of a brand advertising campaign. In general, we expect that as the direct-to-customer channel revenue grows at a faster rate than retail revenue, the growth in the cost of advertising (primarily catalog circulation costs) will lead to increases in overall selling, general and administrative expense as a percentage of net revenue, and this general dynamic inherent in our business model impacted our results for fiscal 2004. In contrast, the cost of retail occupancy has declined as a percentage of net revenue, the benefit of which is reflected in improved gross margins. Additionally, higher professional fees were incurred with the implementation of the requirements of the Sarbanes-Oxley Act of 2002, in particular, with respect to Section 404 requiring management to report on, and our registered independent public accountants to attest to, the effectiveness of our internal control over financial reporting.

Selling, general and administrative expense expressed as a percentage of net revenue improved approximately 70 basis points to 30.8% in fiscal 2003, from 31.5% in fiscal 2002. Selling, general and administrative expense expressed in absolute dollars increased $8.8 million, to $135.1 million in fiscal 2003 from $126.3 million in fiscal 2002. The increase in absolute dollars primarily related to an increase in payroll expense and to a lesser degree, an increase in catalog production costs and credit card fees. The improvement in selling, general and administrative expense as a percentage of net revenue was primarily due to the leveraging of store payroll costs, which declined as a percentage of net revenue; cost saving initiatives for supplies; partially offset by increases in advertising costs as well as increased credit card fees related to the conclusion in fiscal 2003 of our incentive program in connection with our private label credit card. Advertising expense for fiscal 2003 primarily represents costs associated with catalog production and mailing. The increases in selling, general and administrative expense in absolute dollars were incurred largely to support our increase in net revenue.

Interest Expense, Net and Other

Interest expense, net and other includes interest on borrowings under our revolving credit facility and amortization of debt issuance costs. For fiscal 2004, interest expense, net and other was $2.5 million compared to $2.2 million in fiscal 2003. The $0.3 million increase was due to higher average debt levels that were offset by lower average interest rates year over year and lower amortization of debt issuance costs.

In fiscal 2003, interest expense, net and other was $2.2 million, a decrease of $0.9 million as compared to $3.1 million in fiscal 2002. The decrease was due to lower average borrowing rates and lower average borrowings outstanding.

24




Income Tax Benefit

We recorded an income tax benefit for fiscal 2004 of $100 thousand on pre-tax income of $1.6 million. The fiscal 2004 income tax benefit reflects a benefit of $3.0 million from the reversal of the valuation allowance established in prior years, offset by $2.1 million of tax contingency and other adjustments. Excluding these items, our effective tax rate would have been 47% for fiscal 2004.

Our effective tax rate was 38% in fiscal 2003, compared to an effective tax rate of 74% in fiscal 2002. The fiscal 2002 rate reflects a $4.0 million benefit realized due to the economic stimulus bill enacted in that year, which resulted in a reduction of the valuation allowance recorded in fiscal 2001. This reduction in the valuation allowance had the effect of increasing our fiscal 2002 tax benefit rate by 37 percentage points.

As of January 29, 2005 and January 31, 2004, we recorded net deferred tax assets totaling $25.9 million and $23.4 million, respectively, which primarily represent the income tax benefit associated with losses reported in prior years and differences in fixed asset bases. These losses are subject to federal and state carry-forward provisions of up to 20 years. As of January 29, 2005 and January 31, 2004, we concluded that the net deferred tax asset balances of $25.9 million and $23.4 million, respectively, were more likely than not to be recovered. If we are not able to maintain positive operating results in the future, a valuation allowance may need to be recorded.

PREFERRED STOCKHOLDER DIVIDENDS

Dividend charges of $0.4 million were recognized during fiscal 2002 associated with our outstanding Series A preferred stock. Subsequently, pursuant to an August 2, 2002 Letter Agreement, holders of our Series A preferred stock agreed to waive their dividend participation right in the event we were to declare a dividend on our common stock. In the same agreement, we agreed that we would not declare any dividends payable to our common stock holders until we first obtain the approval of at least seventy percent of the then outstanding shares of Series A preferred stock. We have never declared or paid any dividends on our common stock and we have no obligation to do so. As a result of the Letter Agreement, beginning with the second quarter of fiscal 2002, we no longer record dividend charges related to our outstanding Series A preferred stock.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows

For fiscal 2004, net cash used by operating activities was $9.8 million compared to $11.4 million of net cash provided by operating activities for fiscal 2003. The change in net cash (used) provided by operating activities resulted primarily from higher inventory purchases in support of higher sales and the acceleration of inventory receipts at year-end (including $20 million of shipments in transit) due to outdoor furniture and other spring selling programs. We also experienced acceleration of the timing of payment for goods due to increases in the levels of foreign sourced merchandise that tend to have faster payment terms than domestic vendors. Additionally, net cash used by operating activities increased due to higher prepaid expenses associated with catalog costs. These increases in net cash used were partially offset by higher accounts payable and accrued expenses balances.

In fiscal 2003, net cash provided by operating activities was $11.4 million compared to $19.5 million of net cash used by operating activities in fiscal 2002. The change in net cash provided (used) by operating activities resulted primarily from significantly lower merchandise inventory purchases from that required in the initial year of re-merchandising efforts; our improved operating results; and an increase in our accounts payable and accrued expenses. The impact of these items was partially offset by a decrease in deferred lease incentives and other long-term obligations.

25




Investing Cash Flows

Net cash used by investing activities was $13.4 million for fiscal 2004, an increase of $4.2 million compared to $9.2 million for fiscal 2003. The cash used for investing activities for fiscal 2004 primarily related to the opening and remodeling of two retail stores, the opening of our first outlet store and capital associated with distribution facility improvements and relocations.

Net cash used by investing activities was $9.2 million in fiscal 2003, a decrease of $10.2 million compared to $19.4 million of cash used by investing activities in fiscal 2002. The $9.2 million of cash used for investing activities in fiscal 2003 primarily related to capital expenditures associated with the opening of two retail stores, as well as the remodeling of one store.

Financing Cash Flows

Net cash provided by financing activities was $23.5 million for fiscal 2004, compared to net cash used by financing activities of $2.6 million for fiscal 2003. Substantially all of the change in net cash provided (used) by financing activities resulted from an increase in net borrowings of $23.2 million for fiscal 2004, as compared to a repayment of borrowings of $3.9 million for fiscal 2003, under our revolving credit facility. Cash financing requirements were higher in fiscal 2004 as compared to the same period of fiscal 2003 primarily due to the effect of higher inventory levels overall, and higher inventory of predominately foreign sourced merchandise, which have resulted in an acceleration of the timing of payment for our goods.

Net cash used by financing activities was $2.6 million in fiscal 2003, and net cash provided by financing activities was $18.2 million in fiscal 2002. Substantially all of the change in net cash provided (used) by financing activities resulted from net repayments of $3.9 million in fiscal 2003, as compared to net borrowings of $15.2 million in fiscal 2002, under our revolving credit facility. We reduced the borrowings outstanding under our line of credit in fiscal 2003 due to expense leverage gained on increased sales. In addition, we received $1.1 million during fiscal 2003 in connection with the settlement of a claim, and $1.1 million from the exercise of stock options.

As of January 29, 2005, our revolving credit facility provided for an overall commitment of $100.0 million. The revolving credit facility was amended in June 2004 to provide for additional borrowing capacity, reduced borrowing rates and elimination of limitations on capital expenditures and store openings. In support of our expected continued growth, the amendment increased the initial available commitment to $100.0 million, and further allowed us to request and receive incremental increases beyond the initial available commitment of $100.0 million up to a maximum commitment of $150.0 million, provided no default or event of default exists and certain other conditions are met. The amendment also increased the amount available for letters of credit from $30.0 million to $50.0 million and modified certain other terms in the revolving credit facility, which had the effect of expanding the borrowing base.

As of January 29, 2005, $33.8 million was outstanding under the line of credit, net of unamortized debt issuance costs of $0.7 million, and there was $12.0 million in outstanding letters of credit. Borrowings made under the revolving credit facility are subject to interest at either the bank’s reference rate or LIBOR plus a margin. As of January 29, 2005, the bank’s reference rate was 5.75 % and the LIBOR plus margin rate was 4.59%. The availability of credit at any given time under the revolving credit facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and reserves established by the agent of the revolving credit facility. The revolving credit facility is structured to increase availability to meet seasonal needs. As a result of the borrowing base formula, the actual borrowing availability under the revolving credit facility could be less than the stated amount of the revolving credit facility reduced by the actual borrowings and outstanding letters of credit. The Company had actual remaining availability under the revolving credit facility of $28.2 million as of January 29, 2005.

26




The revolving credit facility contains various restrictive covenants, including limitations on the ability to incur additional debt, acquisition of other businesses and payment of dividends and other distributions. The revolving credit facility does not contain any other significant financial or coverage ratio covenants, nor does the revolving credit facility require us to repay all borrowings for a proscribed “clean-up” period each year.

Our revolving credit facility requires a lock-box arrangement, which provides for all receipts to be swept daily to reduce borrowings outstanding under the revolving credit facility. This arrangement, combined with the existence of a subjective acceleration clause in the revolving credit facility, necessitates that the revolving credit facility be classified as a current liability on our Consolidated Balance Sheet, pursuant to guidance in the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement.” However, we do not expect to repay, or be required to repay, within one year, the balance of the revolving credit facility classified as a current liability.

We currently believe that our cash flows from operations and funds available under our revolving credit facility will satisfy our expected working capital and capital requirements, for at least the next 12 months. However, the weakening of, or other adverse developments concerning our sales performance or adverse developments concerning the availability of credit under our revolving credit facility due to covenant limitations or other factors could limit the overall availability of funds to us. We may not have successfully anticipated our future capital needs or the timing of such needs and we may need to raise additional funds in order to take advantage of unanticipated opportunities. We also may need to raise additional funds to respond to changing business conditions or unanticipated competitive pressures. However, should the need arise, additional sources of financing may not be available or, if available, may not be on terms favorable to our stockholders or us. If we fail to raise sufficient funds, we may be required to delay or abandon some of our planned future expenditures or aspects of our current operations. For more information, please see the section “Factors That May Affect Our Future Operating Results,” in particular the sections “We are dependent on external funding sources which may not make available to us sufficient funds when we need them,” and “Because our business requires a substantial level of liquidity, we are dependent upon a revolving credit facility with certain restrictive covenants that limit our flexibility.”

Contractual Commitments

The following table summarizes our significant contractual cash obligations and other commercial commitments as of January 29, 2005:

 

 

Payments Due By Period

 

 

 

Total

 

 Fiscal 2005 

 

Fiscal 2006
through 2007

 

Fiscal 2008
through 2009

 

 Thereafter 

 

 

 

(Dollars in thousands)

 

Operating leases

 

$

265,446

 

 

$

40,295

 

 

 

$

74,535

 

 

 

$

66,328

 

 

 

$

84,288

 

 

Capital leases

 

342

 

 

204

 

 

 

137

 

 

 

1

 

 

 

 

 

Line of credit(1) 

 

34,500

 

 

34,500

 

 

 

 

 

 

 

 

 

 

 

Standby letters of credit

 

7,937

 

 

7,937

 

 

 

 

 

 

 

 

 

 

 

Trade letters of credit

 

4,078

 

 

4,078

 

 

 

 

 

 

 

 

 

 

 

Purchase obligations for inventory

 

76,518

 

 

76,518

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

388,821

 

 

$

163,532

 

 

 

$

74,672

 

 

 

$

66,329

 

 

 

$

84,288

 

 


(1)          Gross of debt issuance costs of $0.7 million. We do not expect to be required to repay, within one year, the revolving credit facility that is classified as a current liability.

27




CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our Consolidated Financial Statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to sales returns, inventories, goodwill, income taxes, financing operations, contingencies and litigation. We base our estimates on historical experience and on various other facts and assumptions, including current and expected economic conditions and product mix, that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our management believes the following critical accounting policies require significant judgments and estimates in the preparation of our Consolidated Financial Statements:

Revenue Recognition

Revenue:   Revenue is recognized at the time of customer receipt. This can occur when an item is purchased in the store, or when the item is delivered to the customer. We record the sale as revenue in the channel where the transaction originated.

Shipping and handling:   We record shipping and handling fees as revenue in the revenue channel that originated the sales transaction. Costs of shipping and handling are included in cost of revenue and occupancy.

Returns:   We provide an allowance for sales returns based on historical return rates.

Merchandise Inventories

Our retail inventories are carried at the lower of cost or market with cost determined on a weighted average cost method. Manufacturing inventories are carried at the lower of cost or market with cost determined at standard costs, approximating average costs. Costs include certain buying and distribution costs, including payroll and other costs related to the purchase of inventory. We write down inventories whenever markdowns reduce the selling price below cost. Additionally, we provide for reserves on inventory based upon our estimate of shrinkage losses. We also write down our slow-moving and discontinued inventory to its estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, or if liquidation of the inventory is more difficult than anticipated, additional inventory write-downs may be required.

Prepaid Catalog Expenses

Prepaid catalog expenses consist of the cost to prepare, print and distribute catalogs. Such costs are amortized over the expected revenue generated from each catalog based on historical experience. Typically the cost of a catalog is amortized over approximately five months.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically ranging from three to ten years for all property and equipment except for leasehold improvements and lease acquisition costs. The cost of leasehold

28




improvements and lease acquisitions is amortized over the lesser of the useful life of the asset or applicable lease term.

Operating Leases

We lease retail stores, distribution facilities and office space under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives, premiums and minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin to make improvements in preparation of intended use. For tenant improvement allowances and rent holidays, we record a deferred rent liability and report it as a long-term liability on the consolidated balance sheets and amortize the deferred rent over the terms of the leases as adjustments to rent expense.

For scheduled rent changes during the lease terms or for rental payments commencing at a date other than the date of initial occupancy (rent holidays), we record minimum rental expenses on a straight-line basis over the terms of the leases.

Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability in “other current liabilities” and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

Impairment of Long-lived Assets

We review long-lived tangible assets and intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Using our best estimates based on reasonable assumptions and projections, we record an impairment loss to write the assets down to their estimated fair values if the carrying values of such assets exceed their related discounted expected future cash flows.

We review goodwill and other intangibles with indefinite useful lives for impairment annually, or more frequently if events or changes in circumstances warrant. If the carrying values of such assets exceed their estimated fair values, we record an impairment loss to write the assets down to their estimated fair values.

We generally evaluate long-lived tangible assets and intangible assets with finite useful lives at an individual store level, which is the lowest level at which independent cash flows can be identified. We evaluate corporate assets or other long-lived assets that are not store-specific at a consolidated entity or reporting unit level, as appropriate.

Since there is typically no active market for our long-lived tangible and intangible assets, we estimate fair values based on the expected future cash flows. We estimate future cash flows based on store-level historical results, current trends and operating and cash flow projections. Our estimates are subject to substantial uncertainty and may be affected by a number of factors outside our control, including general economic conditions, the competitive environment and regulatory changes. If actual results differ from our estimates of future cash flows, we may record significant additional impairment charges in the future.

Store Closure Reserves

The Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” requires that for exit or disposal activities, initiated after December 31, 2002, we recognize a liability for costs associated with closing a store when the liability is incurred. We record the present value of expected future lease costs and other closure costs when the store is closed. We

29




record severance and other employee-related costs in the period in which we communicate the closure and related severance packages to the affected employees.

While we do not currently have any reserves established for store closures, we periodically make judgments about which stores we should close and which stores we should continue to operate. All stores are subject to regular monitoring of their financial performance and cash flows, and many stores are subject to “kick out clauses” which allow us to terminate the store lease if certain contractually specified sales levels are not achieved. If we decide to close a number of these stores, we may incur significant store closure costs for which we have not currently reserved.

Self Insurance

We obtain insurance coverage for significant exposures as well as those risks that, by law, must be insured. It is generally our policy to retain a significant portion of certain losses related to workers’ compensation, general liability, property losses, business interruption and employee health care. We record provisions for these items based on an actuary report, claims experience, regulatory changes, an estimate of claims incurred but not yet reported and other relevant factors. The projections involved in this process are subject to substantial uncertainty because of several unpredictable factors, including actual future claims experience, regulatory changes, litigation trends and changes in inflation.

At January 29, 2005 and January 31, 2004, we had recorded accruals for these liabilities of approximately $3.1 million and $2.4 million, respectively.

Income Taxes

We account for income taxes under SFAS No. 109, “Accounting for Income Taxes.” SFAS No.109 requires income taxes to be accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns. In estimating future tax consequences, we generally take into account all expected future events then known to us, other than changes in the tax law or rates, which are not permitted to be considered. Accordingly, if needed we may record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. The amount of valuation allowance would be based upon management’s best estimate of the recoverability of our deferred tax assets. While future taxable income and ongoing prudent and feasible tax planning are considered in determining the amount of the valuation allowance, the necessity for an allowance is subject to adjustment in the future. Specifically, in the event we were to determine that we would not be able to realize our deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would decrease income in the period such determination was made.

Contingencies and Litigation

We are involved from time to time in legal proceedings, including litigation arising in the ordinary course of our business. Due to the uncertainties inherent in any legal proceeding, we cannot accurately predict the ultimate outcome of any proceeding and may incur substantial costs to defend the proceeding, irrespective of the merits. Unfavorable outcome of any legal proceeding could have an adverse impact on our business, financial condition and results of operations. As appropriate, we assess the likelihood of any adverse outcomes and the potential range of probable losses. The amount of loss accrual, if any, is subject to adjustment if and when warranted by new developments or revised strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these proceedings. We accrue our best estimates of the probable settlement for the resolution of legal claims. Such estimates are developed in consultation with outside

30




counsel handling these matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or our strategies change, it is possible that our best estimates of our probable liability in these matters may change.

Other Considerations

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto in this annual report on Form 10-K, which contain accounting policies and other disclosures required by generally accepted accounting principles.

RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This statement is effective for our 2005 fiscal year-end. We believe the adoption of SFAS 151 will not have a significant impact on the overall results of operations or financial position.

In December 2004, the FASB issued the revised SFAS No. 123(R) “Share-Based Payment.” SFAS 123(R) requires the recognition of stock-based compensation expense relating to share-based payment transactions in consolidated financial statements. That expense will be measured based on the fair value of the equity or liability instruments issued as of the grant date, based on the estimated number of awards that are expected to vest. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) is effective for interim periods that begin after June 15, 2005. The Company is allowed to select from three alternative transition methods, each having different reporting implications. We have not completed our evaluation or determined the impact of adopting SFAS 123(R).

OFF-BALANCE SHEET ARRANGEMENTS

Except for our operational lease commitments, we do not have any other off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

RELATED PARTY TRANSACTIONS

During fiscal 2004, Stephen Gordon was Chairman of our Board of Directors. Our store in Eureka, California involves two leases, one involving Mr. Gordon directly and the other involving a partnership in which Mr. Gordon is a partner. The aggregate lease payments paid to Mr. Gordon and the partnership were $42,000 for fiscal 2004, 2003 and 2002. We believe that the lease arrangements involving Mr. Gordon and the partnership in which Mr. Gordon is a partner were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. In January 2005, Mr. Gordon resigned from his role within the Company and as Chairman of the Board.

Jason Camp, a Senior Vice President of our Company and the son of one of our directors, Robert E. Camp, was asked to relocate to California in 2001 as part of his job function. In connection with this relocation, we made a full recourse loan to him in the principal amount of $200,000. The interest on the

31




outstanding principal amount of the loan is 8.0% per annum, compounded annually, and the entire amount of interest and all outstanding principal is due and payable on August 15, 2006, if not earlier pre-paid in full with interest.

We lease one of our properties from the previous owner and current president of The Michaels Furniture Company. Total annual payments made in fiscal 2004, 2003 and 2002 were $456,000.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, that involve known and unknown risks. Such forward-looking statements include without limitation statements relating to our future plans, in particular with respect to store openings and closings; statements relating to anticipated future costs and expenses; statements about new merchandise initiatives and website marketing efforts; statements relating to anticipated future revenue growth, including statements about margin expansion, operational efficiencies and cost reductions; statements relating to future availability under our revolving credit facility; statements relating to our working capital and capital expenditure needs, and other statements containing words such as “believe,” “anticipate,” “expect,” “may,” “intend,” and words of similar import or statements of our management’s opinion. These forward-looking statements and assumptions involve known and unknown risks, uncertainties and other factors that may cause our actual results, market performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause such differences include, but are not limited to, changes in economic or business conditions in general, changes in product supply, fluctuations in comparable store sales, limitations resulting from restrictive covenants in our revolving credit facility, failure of our management to anticipate changes in consumer trends, loss of key vendors, changes in the competitive environment in which we operate, changes in our management information needs, changes in management, failure to raise additional funds when required, changes in customer needs and expectations and governmental actions and consequences stemming from the continued wars in Iraq and Afghanistan or from terrorist activities in or related to the United States of America, and other factors described above in the section “Factors That May Affect Our Future Operating Results.” We undertake no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this annual report on Form 10-K.

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include changes in interest rates and, to a lesser extent, foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes.

The interest payable on our revolving credit facility is based on variable interest rates and is, therefore, affected by changes in market interest rates. If interest rates on existing variable rate debt rose more than 10% from the bank’s reference rate, our results of operations and cash flows would not be materially affected.

We do enter into a significant amount of purchase obligations outside of the United States of America which, to date, have been settled mostly in U.S. dollars and, therefore, we have only minimal exposure at present to foreign currency exchange risks. Historically, we have not hedged our currency risk and do not currently anticipate doing so in the future. However, it is possible that in the future a growing number of our purchases outside of the United States of America will be made in currencies other than the U.S. dollar. Consequently, fluctuations in the rates of exchange between the U.S. dollar and other currencies may subject us to foreign currency exchange risks in the future.

32




ITEM 8.                CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

RESTORATION HARDWARE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

 

 

 

 

January 31,
2004 

 

 

 

January 29,
2005

 

(As restated—see
Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

1,904

 

 

 

$

2,003

 

 

Accounts receivable

 

 

6,945

 

 

 

5,745

 

 

Merchandise inventories

 

 

144,185

 

 

 

102,926

 

 

Deferred tax assets, current portion, net

 

 

7,119

 

 

 

5,371

 

 

Prepaid expense and other current assets

 

 

12,455

 

 

 

10,299

 

 

Total current assets

 

 

172,608

 

 

 

126,344

 

 

Property and equipment, net

 

 

81,886

 

 

 

83,518

 

 

Goodwill

 

 

4,560

 

 

 

4,560

 

 

Deferred tax assets, net

 

 

18,745

 

 

 

18,051

 

 

Other assets

 

 

1,464

 

 

 

1,422

 

 

Total assets

 

 

$

279,263

 

 

 

$

233,895

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

$

63,920

 

 

 

$

45,292

 

 

Line of credit, net of debt issuance

 

 

33,819

 

 

 

10,286

 

 

Deferred revenue and customer deposits

 

 

8,130

 

 

 

7,231

 

 

Other current liabilities

 

 

14,948

 

 

 

11,438

 

 

Total current liabilities

 

 

120,817

 

 

 

74,247

 

 

Deferred lease incentives

 

 

30,365

 

 

 

33,999

 

 

Deferred rent

 

 

20,321

 

 

 

20,224

 

 

Other long-term obligations

 

 

143

 

 

 

352

 

 

Total liabilities

 

 

171,646

 

 

 

128,822

 

 

Series A redeemable convertible preferred stock, $.0001 par value, 28,037 shares designated, 8,473 and 8,683 shares outstanding at January 29, 2005 and January 31, 2004, respectively, aggregate liquidation preference and redemption value of $10,429 at January 29, 2005

 

 

8,331

 

 

 

8,541

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock, $.0001 par value, 60,000,000 shares authorized, 33,084,223 and 32,768,065 shares issued and outstanding at January 29, 2005 and January 31, 2004, respectively

 

 

3

 

 

 

3

 

 

Additional paid-in capital

 

 

159,233

 

 

 

158,174

 

 

Unearned compensation

 

 

 

 

 

(234

)

 

Accumulated other comprehensive income

 

 

812

 

 

 

1,055

 

 

Accumulated deficit

 

 

(60,762

)

 

 

(62,466

)

 

Total stockholders’ equity

 

 

99,286

 

 

 

96,532

 

 

Total liabilities, redeemable convertible preferred stock and stockholders’ equity

 

 

$

279,263

 

 

 

$

233,895

 

 

 

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

33




RESTORATION HARDWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)

 

 

Fiscal Year Ended

 

 

 

 

 

January 31,
2004

 

February 1,
2003

 

 

 

 January 29, 
2005

 

(As restated—see
Note 2)

 

(As restated—see 
Note 2)

 

Net revenue

 

 

$

525,823

 

 

 

$

438,508

 

 

 

$

400,337

 

 

Cost of revenue and occupancy

 

 

359,808

 

 

 

305,265

 

 

 

281,815

 

 

Gross profit

 

 

166,015

 

 

 

133,243

 

 

 

118,522

 

 

Selling, general and administrative expense

 

 

161,939

 

 

 

135,118

 

 

 

126,290

 

 

Income (loss) from operations

 

 

4,076

 

 

 

(1,875

)

 

 

(7,768

)

 

Interest expense, net

 

 

(2,472

)

 

 

(2,154

)

 

 

(2,818

)

 

Change in fair value of warrants

 

 

 

 

 

 

 

 

(278

)

 

Income (loss) before income taxes

 

 

1,604

 

 

 

(4,029

)

 

 

(10,864

)

 

Income tax benefit

 

 

100

 

 

 

1,511

 

 

 

8,019

 

 

Net income (loss)

 

 

1,704

 

 

 

(2,518

)

 

 

(2,845

)

 

Preferred stockholder return:

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

(358

)

 

Income (loss) attributable to common stockholders

 

 

$

1,704

 

 

 

$

(2,518

)

 

 

$

(3,203

)

 

Income (loss) per share of common stock, basic

 

 

$

0.05

 

 

 

$

(0.08

)

 

 

$

(0.11

)

 

Income (loss) per share of common stock, diluted

 

 

$

0.04

 

 

 

$

(0.08

)

 

 

$

(0.11

)

 

Weighted average shares outstanding, basic

 

 

32,940

 

 

 

30,873

 

 

 

29,754

 

 

Weighted average shares outstanding, diluted

 

 

38,183

 

 

 

30,873

 

 

 

29,754

 

 

 

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

34




RESTORATION HARDWARE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Dollars in thousands)

 

 

Redeemable
Convertible
Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Stockholder

 

Unearned

 

Accumulated
Other
Comprehensive

 

Accumulated

 

Total
Stockholders’

 

Total
Comprehensive
Income

 

 

 

Shares

 

Amount

 

Shares

 

 Amount

 

Capital

 

Loan

 

Compensation

 

Income

 

Deficit

 

Equity

 

(Loss)

 

BALANCE AT FEBRUARY 2, 2002
(As restated)

 

14,320

 

14,106

 

28,827,883

 

 

3

 

 

 

144,159

 

 

 

(2,050

)

 

 

(1,103

)

 

 

(159

)

 

 

(56,745

)

 

 

84,105

 

 

 

 

 

 

Issuance of common stock

 

 

 

490,700

 

 

 

 

 

1,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,770

 

 

 

 

 

 

Repayment of stockholder loan

 

 

 

 

 

 

 

 

 

 

 

2,050

 

 

 

 

 

 

 

 

 

 

 

 

2,050

 

 

 

 

 

 

Tax benefit on exercise of stock options

 

 

 

 

 

 

 

 

873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

873

 

 

 

 

 

 

Preferred stock issuance costs

 

 

(201

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred stock to common stock 

 

(850

)

(935

)

425,809

 

 

 

 

 

935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

935

 

 

 

 

 

 

Exercise of warrants

 

 

 

306,602

 

 

 

 

 

2,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,957

 

 

 

 

 

 

Accretion of cumulative dividends of preferred stock

 

 

358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(358

)

 

 

(358

)

 

 

 

 

 

Stock compensation

 

 

 

 

 

 

 

 

184

 

 

 

 

 

 

(92

)

 

 

 

 

 

 

 

 

92

 

 

 

 

 

 

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

536

 

 

 

 

 

 

 

 

 

536

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

27

 

 

 

27

 

 

Net loss (As restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,845

)

 

 

(2,845

)

 

 

(2,845

)

 

BALANCE AT FEBRUARY 1, 2003
(As restated)

 

13,470

 

13,328

 

30,050,994

 

 

3

 

 

 

150,878

 

 

 

 

 

 

(659

)

 

 

(132

)

 

 

(59,948

)

 

 

90,142

 

 

 

(2,818

)

 

Issuance of common stock

 

 

 

311,775

 

 

 

 

 

1,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,110

 

 

 

 

 

 

Stockholder settlement

 

 

 

 

 

 

 

 

1,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,050

 

 

 

 

 

 

Tax benefit on exercise of stock options

 

 

 

 

 

 

 

 

276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

276

 

 

 

 

 

 

Conversion of preferred stock to common stock 

 

(4,787

)

(4,787

)

2,405,296

 

 

 

 

 

4,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,787

 

 

 

 

 

 

Stock compensation

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

(73

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unearned stock compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

498

 

 

 

 

 

 

 

 

 

498

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,187

 

 

 

 

 

 

1,187

 

 

 

1,187

 

 

Net loss (As restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,518

)

 

 

(2,518

)

 

 

(2,518

)

 

BALANCE AT JANUARY 31, 2004
(As restated)

 

8,683

 

8,541

 

32,768,065

 

 

3

 

 

 

158,174

 

 

 

 

 

 

(234

)

 

 

1,055

 

 

 

(62,466

)

 

 

96,532

 

 

 

(1,331

)

 

Issuance of common stock

 

 

 

210,606

 

 

 

 

 

704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

704

 

 

 

 

 

 

Tax benefit on exercise of stock options

 

 

 

 

 

 

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145