##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended August 2, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 0-21406



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Brookstone, Inc.

(Exact name of registrant as specified in its charter)



|Delaware                                                      |  | 06-1182895                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction of incorporationor organization) |  | (I.R.S. EmployerIdentification No.)



17 Riverside Street,
Nashua, NH 03062

(address of principal executive offices, zip code)



603-880-9500

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)



---



Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  x  No ̈



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ̈No ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable
date: 8,690,457 shares of common stock as of September 12, 2003.



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##### Table of Contents

BROOKSTONE, INC.



Index to Form 10-Q



|         |  |                                                                                                                  |  | Page No.
|-------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------
|Part I:  |  | Financial Information                                                                                            |  |         
|         |  |                                                                                                                 
|Item 1:  |  | Consolidated Balance Sheet as of August 2, 2003, February 1, 2003 and August 3, 2002                             |  | 3       
|         |  |                                                                                                                 
|         |  | Consolidated Statement of Operations for the thirteen & twenty-six weeks ended August 2, 2003 and August 3, 2002 |  | 4       
|         |  |                                                                                                                 
|         |  | Consolidated Statement of Cash Flows for the twenty-six weeks ended August 2, 2003 and August 3, 2002            |  | 5       
|         |  |                                                                                                                 
|         |  | Notes to Consolidated Financial Statements                                                                       |  | 6       
|         |  |                                                                                                                 
|Item 2:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 11      
|         |  |                                                                                                                 
|Item 3:  |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 13      
|         |  |                                                                                                                 
|Item 4:  |  | Controls and Procedures                                                                                          |  | 13      
|         |  |                                                                                                                 
|Part II: |  | Other Information                                                                                                |  |         
|         |  |                                                                                                                 
|Item 1:  |  | Legal Proceedings                                                                                                |  | 14      
|         |  |                                                                                                                 
|Item 2:  |  | Change in Securities                                                                                             |  | 14      
|         |  |                                                                                                                 
|Item 3:  |  | Defaults by the Company upon its Senior Securities                                                               |  | 14      
|         |  |                                                                                                                 
|Item 4:  |  | Submission of Matters to a Vote of Security Holders                                                              |  | 14      
|         |  |                                                                                                                 
|Item 5:  |  | Other Information                                                                                                |  | 14      
|         |  |                                                                                                                 
|Item 6:  |  | Exhibits and Reports on Form 8-K                                                                                 |  | 15      



|         | 
|-------- | 
|Exhibits | 
|         | 
|10.36    | 
|         | 
|10.37    | 
|         | 
|31.1     | 
|         | 
|31.2     | 
|         | 
|32.1     | 
|         | 
|32.2     | 



2



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##### Table of Contents

PART I

Item 1:



BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)



|                                                                                                                                                                       |  | (Unaudited) August 2,2003 |         |   | February 1,2003 |   |         | (Unaudited) August 3,2002 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | --------------- | - | ------- | ------------------------- | 
|Assets                                                                                                                                                                 |  |                           |         |   |                 |   |         |                           | 
|Current assets:                                                                                                                                                        |  |                           |         |   |                 |   |         |                           | 
|Cash and cash equivalents                                                                                                                                              |  | $                         | 29,008  |   |                 | $ | 54,144  |                           | 
|Receivables, net                                                                                                                                                       |  |                           | 6,478   |   |                 |   | 6,079   |                           | 
|Merchandise inventories                                                                                                                                                |  |                           | 55,489  |   |                 |   | 58,987  |                           | 
|Deferred income taxes                                                                                                                                                  |  |                           | 9,849   |   |                 |   | 4,161   |                           | 
|Other current assets                                                                                                                                                   |  |                           | 6,024   |   |                 |   | 5,280   |                           | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 
|Total current assets                                                                                                                                                   |  |                           | 106,848 |   |                 |   | 128,651 |                           | 
|Deferred income taxes, net                                                                                                                                             |  |                           | 5,854   |   |                 |   | 5,854   |                           | 
|Property and equipment, net                                                                                                                                            |  |                           | 45,184  |   |                 |   | 39,720  |                           | 
|Intangible assets, net                                                                                                                                                 |  |                           | 4,258   |   |                 |   | 4,413   |                           | 
|Other assets                                                                                                                                                           |  |                           | 1,937   |   |                 |   | 1,954   |                           | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 
|                                                                                                                                                                       |  | $                         | 164,081 |   |                 | $ | 180,592 |                           | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 
|Liabilities and Shareholders Equity                                                                                                                                   |  |                           |         |   |                 |   |         |                           | 
|Current liabilities:                                                                                                                                                   |  |                           |         |   |                 |   |         |                           | 
|Accounts payable                                                                                                                                                       |  | $                         | 10,780  |   |                 | $ | 10,720  |                           | 
|Other current liabilities                                                                                                                                              |  |                           | 23,647  |   |                 |   | 33,197  |                           | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 
|Total current liabilities                                                                                                                                              |  |                           | 34,427  |   |                 |   | 43,917  |                           | 
|Other long-term liabilities                                                                                                                                            |  |                           | 14,567  |   |                 |   | 13,809  |                           | 
|                                                                                                                                                                       |  |                           |        
|Long-term obligation under capital lease                                                                                                                               |  |                           | 2,027   |   |                 |   | 2,110   |                           | 
|                                                                                                                                                                       |  |                           |        
|Commitments and contingencies                                                                                                                                          |  |                           |         |   |                 |   |         |                           | 
|                                                                                                                                                                       |  |                           |        
|Shareholders equity:                                                                                                                                                  |  |                           |         |   |                 |   |         |                           | 
|Preferred stock, $0.001 par value:                                                                                                                                     |  |                           |         |   |                 |   |         |                           | 
|Authorized - 2,000,000 shares; issued and outstanding - 0 shares at August 2, 2003, February 1, 2003 and
August 3, 2002                                                |  |                           |         |   |                 |   |         |                           | 
|Common stock, $0.001 par value:                                                                                                                                        |  |                           |         |   |                 |   |         |                           | 
|Authorized 50,000,000 shares; issued and outstanding  8,597,096 shares at August 2, 2003, 8,520,171 shares at
February 1, 2003 and 8,514,597 shares at August 3, 2002 |  |                           | 8       |   |                 |   | 8       |                           | 
|Additional paid-in capital                                                                                                                                             |  |                           | 53,251  |   |                 |   | 52,221  |                           | 
|Accumulated other comprehensive loss                                                                                                                                   |  |                           | (1,031  | ) |                 |   | (1,031  | )                         | 
|Retained earnings                                                                                                                                                      |  |                           | 60,879  |   |                 |   | 69,605  |                           | 
|Treasury stock, at cost-3,616 shares at August 2, 2003, February 1, 2003 and August 3, 2002                                                                            |  |                           | (47     | ) |                 |   | (47     | )                         | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 
|Total shareholders equity                                                                                                                                             |  |                           | 113,060 |   |                 |   | 120,756 |                           | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 
|                                                                                                                                                                       |  | $                         | 164,081 |   |                 | $ | 180,592 |                           | 
|                                                                                                                                                                       |  |                           |         |   |                 |   |         |                           | 



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



3



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##### Table of Contents

BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                    |  | Thirteen WeeksEnded |        |   | Twenty-Six WeeksEnded |  
|--------------------------------------------------- |  | ------------------- | ------ | - | --------------------- | -
|                                                    |  | August 2,2003       |        |   | August 3,2002         |  
|Net sales                                           |  | $                   | 80,474 |   |                       | $
|                                                    |  |                     |        |  
|Cost of sales                                       |  |                     | 53,850 |   |                       |  
|                                                    |  |                     |        |   |                       |  
|Gross profit                                        |  |                     | 26,624 |   |                       |  
|                                                    |  |                     |        |  
|Selling, general and administrative expenses        |  |                     | 30,207 |   |                       |  
|                                                    |  |                     |        |  
|Gain on curtailment of retiree medical plan         |  |                     |       |   |                       |  
|                                                    |  |                     |        |   |                       |  
|Loss from operations                                |  |                     | (3,583 | ) |                       |  
|Interest expense, net                               |  |                     | 181    |   |                       |  
|                                                    |  |                     |        |   |                       |  
|Loss before taxes                                   |  |                     | (3,764 | ) |                       |  
|Income tax benefit                                  |  |                     | (1,449 | ) |                       |  
|                                                    |  |                     |        |   |                       |  
|Net Loss                                            |  | $                   | (2,315 | ) |                       | $
|                                                    |  |                     |        |   |                       |  
|Basic/ diluted loss per share:                      |  |                     |        |   |                       |  
|                                                    |  |                     |        |  
|Net Loss                                            |  | $                   | (0.27  | ) |                       | $
|                                                    |  |                     |        |   |                       |  
|Weighted average shares outstanding  basic/diluted |  |                     | 8,588  |   |                       |  
|                                                    |  |                     |        |   |                       |  



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



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BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                             |  | Twenty-Six WeeksEnded |        
|---------------------------------------------------------------------------- |  | --------------------- | -------
|                                                                             |  | August 2,2003         |        
|Cash flows from operating activities:                                        |  |                       |        
|Net loss                                                                     |  | $                     | (8,726 
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                       |        
|                                                                             |  |                      
|Depreciation and amortization                                                |  |                       | 5,929  
|Gain on curtailment of retiree medical plan                                  |  |                       |       
|Amortization of debt issuance costs                                          |  |                       | 120    
|Deferred income taxes                                                        |  |                       | (5,688 
|Related tax benefits on exercise of stock options                            |  |                       | 167    
|Increase in other assets                                                     |  |                       | (23    
|Increase in other long-term liabilities                                      |  |                       | 758    
|                                                                             |  |                      
|Changes in working capital:                                                  |  |                       |        
|Accounts receivable, net                                                     |  |                       | (399   
|Merchandise inventories                                                      |  |                       | 3,498  
|Other current assets                                                         |  |                       | (744   
|Accounts payable                                                             |  |                       | 60     
|Other current liabilities                                                    |  |                       | (9,550 
|                                                                             |  |                       |        
|Net cash used for operating activities                                       |  |                       | (14,598
|                                                                             |  |                       |        
|Cash flows from investing activities:                                        |  |                       |        
|Expenditures for property and equipment                                      |  |                       | (11,238
|                                                                             |  |                       |        
|Net cash used for investing activities                                       |  |                       | (11,238
|                                                                             |  |                       |        
|Cash flows from financing activities:                                        |  |                       |        
|Payments for capitalized lease                                               |  |                       | (83    
|Payment for debt issuance costs                                              |  |                       | (80    
|Proceeds from exercise of stock options                                      |  |                       | 863    
|                                                                             |  |                       |        
|Net cash provided by financing activities                                    |  |                       | 700    
|                                                                             |  |                       |        
|Net decrease in cash and cash equivalents                                    |  |                       | (25,136
|                                                                             |  |                      
|Cash and cash equivalents at beginning of period                             |  |                       | 54,144 
|                                                                             |  |                       |        
|Cash and cash equivalents at end of period                                   |  | $                     | 29,008 
|                                                                             |  |                       |        



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



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BROOKSTONE, INC.

Notes to Consolidated Financial Statements

(Unaudited)



|1. |  | The results of the twenty-six week period ended August 2, 2003 are not necessarily indicative of the results for the full fiscal year. The Companys business, like the business
of retailers in general, is subject to seasonal influences. Historically, the Companys fourth fiscal quarter, which includes the winter holiday selling season, has produced a disproportionate amount of the Companys net sales and
substantially all of its income from operations. The Company expects that its business will continue to be subject to such seasonal influences.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | As of June 11, 2002, the Board of Directors approved an amendment to the eligibility requirement of the Retiree Health Plan (The Plan). This amendment restricts regular
full time associates from continuing to accrue points towards eligibility if those associates have not accumulated a minimum of 10 years of services as of December 31, 2002. As a result, during the quarter ended August 3, 2002, the Company recorded
a gain on curtailment of $642 thousand, which is stated separately on the Statement of Operations.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and practices consistently applied in the
United States of America. In the opinion of the Company, these financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations for the
periods reported. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying
unaudited consolidated financial statements be read in conjunction with the annual financial statements and notes thereto which may be found in the Companys Fiscal 2002 annual report on Form 10K.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | Accumulated other comprehensive loss has historically related to the minimum pension liability and is disclosed in the accompanying consolidated balance sheets. Total comprehensive
loss was equal to the net loss disclosed for the thirteen-week and twenty-six week periods presented.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The exercise of stock options, which have been granted under the Companys stock option plans, gives rise to compensation, which is includable in the taxable income of the
optionees and deductible by the Company for tax purposes upon exercise. Such compensation reflects an increase in the fair market value of the Companys common stock subsequent to the date of grant. For financial reporting purposes, the tax
effect of this deduction is accounted for as a credit to additional paid-in capital rather than as a reduction of income tax expense. Such exercises resulted in a tax benefit of approximately $167 thousand for the twenty-six week period ended August
2, 2003 and is reflected in the Companys operating cash flow.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | In March of 2002, the Company was served with a lawsuit brought in California superior court in Los Angeles as a class action on behalf of current and former managers and assistant
managers of the Companys California stores, alleging that they were improperly classified as exempt employees. The lawsuit sought damages including overtime pay, restitution and attorneys fees. On August 15, 2003, a settlement agreement was
finalized in the amount of $1.5 million for this matter. As a result of this settlement and settlement of other ongoing routine legal matters, a charge of $1.1 million was recorded during the thirteen-week period ended August 2, 2003.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. |  | Business conducted by the Company is segmented into two distinct areas determined by the method of distribution channel. The retail segment is comprised of all full-year stores in
addition to all temporary stores and kiosks. Retail product distribution is conducted directly through the store location. The direct marketing segment is comprised of three catalog titles (Hard-to-Find Tools,Brookstone Catalog and
Gardeners Eden), the Internet site www.Brookstone.com and sales to corporate customers. Direct marketing product distribution is conducted primarily through the Companys direct marketing customer sales and contact center and
distribution facility located in Mexico, Missouri and a third party distribution warehouse. Both segments of the Company sell similar products, although not all Company products are fully available within both segments.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All costs directly attributable to the direct marketing segment are charged
accordingly while all remaining operating costs are charged to the retail segment. The Companys management does not review assets by segment.



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The tables below disclose segment net sales and pre-tax loss for the thirteen-week and twenty-six week periods ended
August 2, 2003 and August 3, 2002 (in thousands).



|Thirteen-weeks:     |  | Net Sales     |         | Pre-tax Income (Loss) |  
|------------------- |  | ------------- | ------- | --------------------- | -
|                    |  | August 2,2003 |         | August 3,2002         |  
|Reportable segment: |  |               |         |                       |  
|Retail              |  | $             | 66,470  |                       | $
|Direct Marketing    |  |               | 14,004  |                       |  
|Reconciling items:  |  |               |         |                       |  
|Interest expense    |  |               |        |                       |  
|Interest income     |  |               |        |                       |  
|                    |  |               |         |                       |  
|Consolidated:       |  | $             | 80,474  |                       | $
|                    |  |               |         |                       |  
|                    |  |              
|Twenty-six weeks:   |  | Net Sales     |         | Pre-tax Income (Loss) |  
|                    |  | August 2,2003 |         | August 3,2002         |  
|Reportable segment: |  |               |         |                       |  
|Retail              |  | $             | 117,304 |                       | $
|Direct Marketing    |  |               | 24,127  |                       |  
|Reconciling items:  |  |               |         |                       |  
|Interest expense    |  |               |        |                       |  
|Interest income     |  |               |        |                       |  
|                    |  |               |         |                       |  
|Consolidated:       |  | $             | 141,431 |                       | $
|                    |  |               |         |                       |  



|8. |  | Basic and diluted earnings per share (EPS) were calculated for the thirteen-week and twenty-six week periods ended August 2, 2003 and August 3, 2002 as follows:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                     |  | Thirteen WeeksEnded |        |   | Twenty-Six WeeksEnded |  
|---------------------------------------------------- |  | ------------------- | ------ | - | --------------------- | -
|                                                     |  | August 2,2003       |        |   | August 3,2002         |  
|Net loss                                             |  | $                   | (2,315 | ) |                       | $
|                                                     |  |                     |        |   |                       |  
|Weighted average number of common shares outstanding |  |                     | 8,588  |   |                       |  
|                                                     |  |                     |        |  
|Effect of dilutive securities:                       |  |                     |        |   |                       |  
|Stock options                                        |  |                     |       |   |                       |  
|                                                     |  |                     |        |   |                       |  
|Weighted average number of common shares as adjusted |  |                     | 8,588  |   |                       |  
|                                                     |  |                     |        |   |                       |  
|Net loss per share  basic/diluted                   |  | $                   | (0.27  | ) |                       | $
|                                                     |  |                     |        |   |                       |  



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For the thirteen-week and twenty-six week periods ended August 2, 2003, antidilutive shares of 245,485
and 204,183 were excluded from the computations of diluted earnings per share. For the thirteen-week and twenty-six week periods ended August 3, 2002, antidilutive shares of 155,260 and 148,224 respectively were excluded from the computations of
diluted earnings per share.



|9. |  | During the second quarter of 2003, the Company amended certain terms of the Amended and Restated Credit Agreement (the Amendment). The Amendment includes an extension of
the expiration date from February 21, 2005 to February 21, 2006. The Companys requirement to have no more than $10 million in borrowings (excluding letters of credit) outstanding for more than 30 consecutive days during the December
15thto April 30thtime frames was reduced to $7 million. Additionally, the Amendment changed the fixed charge coverage ratios that determine which of four different levels of fees and applicable margin rates to be
charged on applicable borrowings. Under the Amendment, the adjusted interest rates on the facility, at the Companys option, are: the agent banks base lending rate, the agent banks base lending rate plus 0.50% or 0.25%, or the
Eurodollar rate for the applicable period plus 2.00%, 1.75%, 1.50% or 1.25%. In addition, the Company is obligated to pay a fee of 0.625%, 0.50%, or 0.375% on the unused portion of the commitment, 1.00%, 0.875%, 0.75%, or 0.625% on the documentary
letters of credit and 2.125%, 1.875%, 1.625% or 1.375% on the standby letters of credit. The Amendment also adjusted certain capital expenditure restrictions, including a reduction to $14 million in aggregate spending allowed for the new
distribution facility in either Fiscal 2003 or Fiscal 2004 and allows for up to $10 million in aggregate spending for the new headquarters facility in either Fiscal 2003 or Fiscal 2004.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. |  | Joint Ventures
|--- |  | --------------



The Company operates two of its airport locations in Chicago and four airport locations in Atlanta under two separate Joint Venture arrangements. The
Company has a 70% ownership interest in the Chicago venture and a 49% ownership interest in the Atlanta venture.



The Company has reviewed the requirements of FASB Interpretation No. 46 (FIN 46) Consolidation of Variable Interest Entities and
has determined that it is reasonably possible that the Atlanta Joint Venture qualifies as a Variable Interest Entity (VIE). The maximum exposure to loss under this agreement is believed to approximate $206 thousand, which is the
Companys equity investment reduced by distributable cash from the joint venture.



During the quarter ended August 2, 2003, the Company did not invest in any new variable interest entities.



|11. |  | Stock-Based Compensation
|--- |  | ------------------------



The Company has stock option plans in effect that provide for the issuance of non-qualified and incentive stock options. Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation,as amended by Statement of Accounting Standards No. 148 (SFAS 148), permits the Company to follow the measurement provisions of APB
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees. Stock Options have historically been granted at or above the market price on the date of the grant, therefore, no compensation expense has been
recognized under APB No. 25. Had compensation cost for the Companys stock-based incentive compensation plans been determined based on the fair value at the grant dates of awards under those plans, consistent with the methodology prescribed by
SFAS No. 123, as amended by SFAS No. 148, the Companys net loss and related net loss per share for the thirteen and twenty-six week periods ended August 2, 2003 and August 3, 2002 would have been increased to the pro forma amounts indicated
below:



8



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##### Table of Contents

|                                                                                                                       |  | Thirteen-weeks |        |   | Twenty-six weeks |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | -
|                                                                                                                       |  | August 2,2003  |        |   | August 3,2002    |  
|Net loss - as reported                                                                                                 |  | $              | (2,315 | ) |                  | $
|Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax
effects |  |                | (189   | ) |                  |  
|                                                                                                                       |  |                |        |   |                  |  
|Net loss - pro forma                                                                                                   |  | $              | (2,504 | ) |                  | $
|                                                                                                                       |  |                |        |   |                  |  
|Net loss per share  basic/diluted                                                                                     |  |                |        |   |                  |  
|As reported                                                                                                            |  | $              | (0.27  | ) |                  | $
|Pro forma                                                                                                              |  | $              | (0.29  | ) |                  | $



|12. |  | Subsequent Event
|--- |  | ----------------



On August 20, 2003, the Companys Board of Directors approved a 3-for-2 stock split effected in the form of a 50 percent stock dividend. The stock
dividend will be paid on September 23, 2003, to shareholders of record as of September 2, 2003. The pro-forma effect on the August 2, 2003 balance sheet (in thousands) is to reduce Paid in Capital by $4 and increase Capital Stock by $4. Common stock
shares outstanding (in thousands), giving retroactive effect to the stock split, at August 2, 2003, February 1, 2003 and August 3, 2002 are 12,896, 12,780 and 12,772, respectively. Pro forma net loss per share, giving retroactive effect to the stock
split, are as follows (shares in thousands).



|                                                                                                                                                                                                                                                                                                                                         |  | Thirteen-weeks |        |   | Twenty-six weeks |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | -
|                                                                                                                                                                                                                                                                                                                                         |  | August 2,2003  |        |   | August 3,2002    |  
|Net loss per common share:                                                                                                                                                                                                                                                                                                               |  |                |        |   |                  |  
|                                                                                                                                                                                                                                                                                                                                         |  |                |        |  
|Basic/Diluted                                                                                                                                                                                                                                                                                                                            |  | $              | (0.18  | ) |                  | $
|                                                                                                                                                                                                                                                                                                                                         |  |                |        |  
|Shares used in per share calculations (in thousands):                                                                                                                                                                                                                                                                                    |  |                |        |   |                  |  
|Basic/Diluted                                                                                                                                                                                                                                                                                                                            |  |                | 12,882 |   |                  |  
|                                                                                                                                                                                                                                                                                                                                        
|The pro-forma effect on net loss per share, had compensation cost for the Companys stock-based incentive compensation plans been
determined based on the fair value at the grant dates of awards under those plans, consistent with the methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, would have been as follows:
|                                                                                                                                                                                                                                                                                                                                         |  |                |        |  
|Net loss per share  basic/diluted                                                                                                                                                                                                                                                                                                       |  |                |        |   |                  |  
|Pro forma                                                                                                                                                                                                                                                                                                                                |  | $              | (0.19  | ) |                  | $



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|13. |  | Commitments and contingencies
|--- |  | -----------------------------



Effective as of April 18, 2003 the Company entered into a change-in-control agreement with the Companys Chairman, President and Chief Executive
Officer. The agreement provides certain benefits to Mr. Anthony in the event that his employment with the Company is terminated as a result of a change-in-control as defined therein. The maximum contingent liability related to this agreement is
approximately $3.0 million, in addition to a reimbursement payment to eliminate the effect of any excise taxes associated with this payment. The Company has also entered into an amended employee agreement with the Companys Chairman, President
and Chief Executive Officer, which provides for certain severance benefits for a period of 24 months.



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##### Table of Contents

BROOKSTONE, INC.

Item 2

Managements Discussion and Analysis of

Financial Condition and Results of Operations for

the Thirteen-Week and Twenty-Six Week Periods Ended August 2, 2003



Results of Operations



For the thirteen-week and twenty-six week periods ended August 2, 2003, net sales increased 13.0% and 10.6% respectively
over the comparable periods last year. For the quarter, retail sales increased $7.9 million or 13.4% over the comparable period last year. Year to date retail sales increased $12.4 million or 11.8% over the comparable period last year. Same store
sales increased 7.8% for the quarter and 7.0% for the year to date period ended August 2, 2003 generating $4.6 million and $7.3 million in increased retail sales, respectively. The remaining retail sales increase of $3.3 million for the quarter and
$5.1 for the year primarily resulted from the opening of 17 new stores less two store closings subsequent to the second quarter of Fiscal 2002. The total number of stores open at the end of the twenty-six week period ended August 2, 2003 was 263
versus 248 at the end of the comparable period in Fiscal 2002. Driving the retail store increases were strong sales performances and successful new product introductions in Audio, Massage, Kitchen, Bedding and Home Comfort. Direct marketing sales
for the thirteen-week period ended August 2, 2003 increased 10.9% over the comparable period last year on a 12.5% increase in circulation. Year-to-date, direct marketing sales increased 5.1% on an 8% increase in catalog circulation. These increases
resulted primarily from increased sales from the Brookstone.com website and the Brookstone catalog.



For the thirteen-week period ended August 2, 2003, gross profit as a percentage of net sales increased 300 basis points to 33.1% versus 30.1% for the
comparable period last year due to an improvement in product purchase margins of 170 basis points, a decrease of 100 basis points in occupancy costs as a result of leveraging same store sales and a decrease of 30 basis points in order postage
expense. For the twenty-six week period ended August 2, 2003 gross profit as a percentage of net sales increased 250 basis points to 29.3% versus 26.8% for the comparable period last year due to an improvement in product purchase margins of 130
basis points, a decrease of 90 basis points in occupancy costs as a result of leveraging same store sales and a decrease of 30 basis points in order postage expense.



For the thirteen week period ended August 2, 2003, selling, general and administrative expenses as a percentage of net sales
increased 190 basis points to 37.5% versus 35.6% for the comparable period last year. For the twenty-six week period ended August 2, 2003, selling, general and administrative expenses as a percentage of net sales increased 120 basis points to 39.1%
versus 37.9% for the comparable period last year. The basis point increases in the current year are primarily a result of the $1.1 million charge related to the settlement of the California class action lawsuit and other routine legal matters that
were accrued for during the quarter.



During the quarter ended
August 3, 2002, the Company recorded a gain of $642 thousand related to the curtailment of the Companys retiree medical plan (see Note 2 of the Notes to Consolidated Financial Statements).



Net interest expense for the thirteen-week and twenty-six week periods ended
August 2, 2003 was $181 thousand and $311 thousand respectively compared to $318 thousand and $625 thousand during the comparable periods last year. The decreases in net interest expense resulted primarily from a combination of increased interest
income due to the Companys improved cash position in Fiscal 2003 and reduced interest expense due to a lower interest rate within the Amended and Restated Credit Agreement in Fiscal 2003 as compared to Fiscal 2002.



As a result of the foregoing, the Company reported a net loss of $2.3
million, or $0.27 per basic and diluted share (after reflecting one-time legal settlements of $1.1 million or $0.08 per basic and diluted share) for the thirteen-week period ended August 2, 2003, as compared to a net loss of $2.2 million (after
reflecting a one time gain of $642 thousand or $0.05 per basic and diluted share related to the curtailment of the Companys retiree medical plan), or $0.26 per basic and diluted share, for the comparable period last year. For the twenty-six
week period ended August 2, 2003 the Company reported a net loss of $8.7 million, or $1.02 per basic and diluted share as compared to an $8.8 million net loss, or $1.04 per basic and diluted share, for the comparable period last year.



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Financial Condition



For the twenty-six week period ended August 2, 2003, net cash used by
operating activities totaled $14.6 million, primarily as a result of the net loss and a decrease in other current liabilities resulting primarily from the payment of income taxes and accrued incentive compensation. Cash used for investment
activities during the first twenty-six weeks of Fiscal 2003, representing the purchase of property and equipment, amounted to $11.2 million. Cash from financing activities during the twenty-six week period of Fiscal 2003 amounted to $700 thousand,
primarily as a result of proceeds from the exercise of stock options.



For the twenty-six week period ended August 3, 2002, net cash used by operating activities totaled $11.4 million, primarily as a result of the net loss and the payment of income taxes, partially offset by a decrease in accounts receivable.
Cash used for investment activities during the first twenty-six weeks of Fiscal 2002, representing the purchase of property and equipment, amounted to $1.7 million. Cash from financing activities during the twenty-six week period of Fiscal 2002
amounted to $325 thousand, resulting primarily from the exercise of stock options, partially offset by payment of debt issuance costs and capitalized lease payments.



Merchandise inventories decreased to $55.5 million at August 2, 2003 compared to $59.0 at February 1, 2003 and compared to
$56.5 million at August 3, 2002. The Company anticipates that inventory levels at the end of the third quarter of 2003 will be higher than the comparable period last year as a result of the West Coast stock workers labor situation in 2002 which
resulted in lower than normal inventory levels in 2002.



Other
current assets increased approximately 14% to $6.0 million from $5.3 million at February 1, 2003 primarily as a result of increased insurance premiums and increased prepaid expenses primarily related to computer system maintenance and support.



The Companys capital expenditures for the twenty-six
week period ended August 2, 2003 were principally related to the opening of six stores (five Brookstone stores and one Gardeners Eden store), the remodeling of five stores and construction related to stores anticipated to open in the third and
fourth quarters of fiscal 2003. The Company anticipates opening approximately 18 to 20 new stores, including up to nine airport locations, and to remodel between 10 to 15 stores in Fiscal 2003, all in the new store format that was developed in
Fiscal 2002. Additionally, the Company began the planned expansion of its distribution center in the first quarter of Fiscal 2003. As of the end of the second quarter, the Company has spent approximately $2.2 million on this expansion and
anticipates spending approximately $7.0 million in total on this expansion in Fiscal 2003. Construction is expected to be completed in the third quarter of Fiscal 2003 in order to be ready to receive goods for the holiday season. During Fiscal 2003,
the Company will also begin construction of a new corporate headquarters building. The Company anticipates the new facility to cost between $8 and $10 million with the majority of spending to occur in Fiscal 2004 and anticipates the new facility
will be ready for occupancy in the third quarter of Fiscal 2004.



The Company maintains a revolving credit agreement to finance inventory purchases, which historically peak in the third quarter in anticipation of the winter holiday selling season. At August 2, 2003 and at August 3, 2002 the Company had no
borrowings outstanding under its revolving credit agreement. During the second quarter of 2003, the Company amended certain terms of the Amended and Restated Credit Agreement (the Amendment). The Amendment includes an extension of the
expiration date from February 21, 2005 to February 21, 2006. The Companys requirement to have no more than $10 million in borrowings (excluding letters of credit) outstanding for more than 30 consecutive days during the December 15thto April 30thtime frames was reduced to $7 million. Additionally, the Amendment changed the fixed charge coverage ratios that determine which of four different levels of fees and applicable margin rates to be charged on applicable
borrowings. Under the Amendment, the adjusted interest rates on the facility, at the Companys option, are: the agent banks base lending rate, the agent banks base lending rate plus 0.50% or 0.25%, or the Eurodollar rate for the
applicable period plus 2.00%, 1.75%, 1.50% or 1.25%. In addition, the Company is obligated to pay a fee of 0.625%, 0.50%, or 0.375% on the unused portion of the commitment, 1.00%, 0.875%, 0.75%, or 0.625% on the documentary letters of credit and
2.125%, 1.875%, 1.625% or 1.375% on the standby letters of credit. The Amendment also adjusted certain capital expenditure restrictions, including a reduction to $14 million in aggregate spending allowed for the new distribution facility in either
Fiscal 2003 or Fiscal 2004 and allows for up to $10 million in aggregate spending for the new headquarters facility in either Fiscal 2003 or Fiscal 2004.



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The Company believes that cash on hand, anticipated cash generated from operations and available
borrowings will be sufficient to finance its capital requirements throughout Fiscal 2003. Additionally in Fiscal 2003, the Company anticipates funding approximately $525 thousand for its obligation under its defined pension plan. Presently, the
Company is investigating various financing options available as alternatives to funding the distribution center expansion and the construction of the new corporate headquarters.



Other Matters



In March of 2002, the Company was served with a lawsuit brought in California superior court in Los Angeles as a class
action on behalf of current and former managers and assistant managers of the Companys California stores, alleging that they were improperly classified as exempt employees. The lawsuit sought damages including overtime pay, restitution and
attorneys fees. On August 15, 2003, a settlement agreement was finalized in the amount of $1.5 million for this matter. As a result of this settlement and settlement of other ongoing routine legal matters, a charge of $1.1 million was recorded
during the thirteen-week period ended August 2, 2003.



Subsequent to the second quarter of Fiscal 2003, the Board of Directors approved a 3-for-2 stock split in the form of a 50 percent stock dividend to be paid on September 23, 2003 to shareholders of record as of September 2, 2003. The
Company announced the addition of Michael Luce as President and Chief Executive Officer of Gardeners Eden. On September 4, 2003, the Company launched its www.GardenersEden.com website.



Outlook: Important Factors and Uncertainties



Statements in this quarterly report which are not historical facts,
including statements about the Companys confidence or expectations, plans for opening new stores, capital needs and liquidity and other statements about the Companys operational outlook, are forward-looking statements subject to risks
and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, risks of changing market conditions in the overall economy and
the retail industry, consumer demand, the availability of appropriate real estate locations and the ability to negotiate favorable lease terms in respect thereof, customer response to the Companys direct marketing initiatives, availability of
products, availability of adequate transportation of such products and other factors detailed from time to time in the Companys annual and other reports filed with the Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligations to publicly release any revisions to these forward-looking statements or reflect events or circumstances after the
date hereof.



Item 3: Quantitative and Qualitative Disclosures about Market Risk



The Companys exposure to interest rate fluctuations is minimal due to the Companys use of short-term borrowings and cash flows to fund
operations and capital improvements rather than long-term borrowings. The Company does not currently use derivative financial instruments and management does not foresee or expect any significant changes in its current management strategy.



Item 4: Controls and Procedures



There were no significant changes in the Companys internal controls or in any other factors that could significantly affect the Companys internal controls, and there were no corrective actions taken with regard to any
significant deficiencies or material weaknesses in the Companys internal controls, subsequent to the date of the most recent evaluation of the Companys internal controls by the principal executive officer and principal financial officer.



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##### Table of Contents

PART II



Other Information



|Item 1: |  | LEGAL PROCEEDINGS
|------- |  | -----------------



In March of 2002, the Company was served with a lawsuit brought in California superior court in Los Angeles as a class action on behalf of current and
former managers and assistant managers of the Companys California stores, alleging that they were improperly classified as exempt employees. The lawsuit sought damages including overtime pay, restitution and attorneys fees. On August 15, 2003,
a settlement agreement was finalized in the amount of $1.5 million for this matter. As a result of this settlement and settlement of other ongoing routine legal matters, a charge of $1.1 million was recorded during the thirteen-week period ended
August 2, 2003.



Brookstone is also involved in various routine
legal proceedings incidental to the conduct of its business. The Company does not believe that any of these legal proceedings will have a material adverse effect on Brookstones financial condition or results of operations.



|Item 2: |  | CHANGES IN SECURITIES
|------- |  | ---------------------



None



|Item 3: |  | DEFAULT UPON SENIOR SECURITIES
|------- |  | ------------------------------



None



|Item 4: |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------



| | A) |  | The 2003 Annual Meeting of Stockholders of the Company was held on June 10, 2003.
| | -- |  | ---------------------------------------------------------------------------------



| | B) |  | The following persons were elected Directors at the 2003 Annual Meeting for a one-year term expiring at the 2004 Annual Meeting of Stockholders.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|                   |  | For       |  | Withheld 
|------------------ |  | --------- |  | ---------
|Michael F. Anthony |  | 6,583,518 |  | 1,468,263
|Mone Anathan, III  |  | 7,954,344 |  | 97,437   
|Michael L. Glazer  |  | 7,953,041 |  | 98,740   
|Kenneth E. Nisch   |  | 6,610,867 |  | 1,440,914
|Andrea M. Weiss    |  | 7,955,416 |  | 96,365   



| | C) |  | The appointment of PricewaterhouseCoopers LLP as the independent accountants to examine the financial statements of the Company and its subsidiaries for the fiscal year ending
January 31, 2004 was ratified.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|For       |  | Against |  | Abstain
|--------- |  | ------- |  | -------
|8,019,481 |  | 32,300  |  | 0      



|Item 5: |  | OTHER INFORMATION
|------- |  | -----------------



None



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##### Table of Contents

|Item 6: |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



| | A) |  | 10.36 Amendment No. 1 to Amended and Restated Credit Agreement (filed herewith)
| | -- |  | -------------------------------------------------------------------------------



| | 10.37 |  | Employment Agreement dated August 1, 2003 between the Company and Michael Luce (filed herewith).
| | ----- |  | ------------------------------------------------------------------------------------------------



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



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



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



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



| | B) |  | Reports on Form 8-K
| | -- |  | -------------------



Current Report on Form 8-K dated August 6, 2003 furnished a press release reporting sales results for the second quarter ended August 2, 2003



Current Report on Form 8-K dated August 20, 2003 furnished a press
release reporting financial results for the second quarter ended August 2, 2003, a 3-for-2 Stock Split and the settlement of outstanding litigation with regard to the California class action lawsuit.



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Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.





|                   |  | BROOKSTONE, INC.(Registrant)                                                     
|------------------ |  | ---------------------------------------------------------------------------------
|                   | 
|                   |  | /s/ Philip W. Roizin                                                             
|September 16, 2003 |  | (Signature)                                                                      
|                   | 
|                   |  | Philip W. Roizin                                                                 
|                   |  | Executive Vice President, Finance and Administration, Treasurer and Secretary    
|                   |  | (Principal Financial Officer and duly authorized to sign on behalf of registrant)



16