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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





---




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 November 2, 2002





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.





Brookstone, Inc.


(Exact name of registrant as specified in its charter)





Delaware

06-1182895(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification 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: 8,514,597 shares of common stock as of
December 6, 2002.





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BROOKSTONE, INC.


Index to Form 10-Q





Page No.Part I:    Financial InformationItem 1:Consolidated Balance Sheet as of November 2, 2002, February 2, 2002 and November 3, 2001

4Consolidated Statement of Operations for the thirteen & thirty-nine weeks ended November 2, 2002 and November 3, 2001

5Consolidated Statement of Cash Flows for the thirty-nine weeks ended November 2, 2002 and November 3, 2001

6Notes to Consolidated Financial Statements

7Item 2:Managements Discussion and Analysis of Financial Condition and Results of Operations

10Item 3:Quantitative and Qualitative Disclosures about Market Risk

12Item 4:Controls and Procedures

13Part II:     Other InformationItem 1:Legal Proceedings

14Item 2:Change in Securities

14Item 3:Defaults by the Company upon its Senior Securities

14Item 4:Submission of Matters to a Vote of Security Holders

14Item 5:Other Information

14Item 6:Exhibits and Reports on Form 8-K

14Signatures

15Exhibit 99.1    
Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

16Exhibit 99.2    
Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

17




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Exhibit 99.3    
Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

18Exhibit 99.4    
Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

19




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BROOKSTONE, INC.





CONSOLIDATED BALANCE SHEET


(In thousands, except share data)





(Unaudited)





(Unaudited)November 2, 2002


February 2, 2002


November 3, 2001AssetsCurrent assets:Cash and cash equivalents

$
1,971


$
28,928


$
1,573Receivables, net


5,020



8,170



6,799Merchandise inventories


79,539



55,629



87,054Deferred income taxes, net


13,626



3,447



13,568Other current assets


6,023



4,933



6,951Total current assets


106,179



101,107



115,945Deferred income taxes, net


4,352



4,536



3,689Property and equipment, net


40,092



45,058



48,097Intangible assets, net


4,501



4,812



4,949Other assets


5,399



1,592



6,100$
160,523


$
157,105


$
178,780Liabilities and Shareholders EquityCurrent liabilities:Short-term borrowings

$
9,300


$



$
35,470Accounts payable


21,861



11,232



27,248Other current liabilities


20,629



22,569



15,683Total current liabilities


51,790



33,801



78,401Other long-term liabilities


12,736



13,246



12,100Long-term obligation under capital lease


2,165



2,273



2,332Commitments and contingenciesShareholders equity:Preferred stock, $0.001 par value:Authorized2,000,000 shares; issued and outstanding0 shares at November 2, 2002, February 2, 2002 and November 3,
2001Common stock, $0.001 par value:Authorized 50,000,000 shares; issued and outstanding8,514,597 shares at November 2, 2002 and 8,369,720 shares at February 2, 2002
and November 3, 2001


8



8



8Additional paid-in capital


52,151



50,666



50,654Accumulated other comprehensive income


(447
)


(447
)


Retained earnings


42,167



57,605



35,332Treasury stock, at cost3,616 shares at November 2, 2002, February 2, 2002 and November 3, 2001


(47
)


(47
)


(47
)Total shareholders equity


93,832



107,785



85,947$
160,523


$
157,105


$
178,780





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




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BROOKSTONE, INC.





CONSOLIDATED STATEMENT OF OPERATIONS


(In thousands, except per share data)


(Unaudited)





Thirteen Weeks Ended


Thirty-nine Weeks EndedNovember 2, 2002


November 3, 2001


November 2, 2002


November 3, 2001Net sales

$
62,843


$
58,523


$
190,707


$
183,132Cost of sales


46,320



44,306



139,875



133,987Gross profit


16,523



14,217



50,832



49,145Selling, general and administrative expenses


26,944



28,339



75,409



76,031Gain on curtailment of retiree medical plan










(642
)


Loss from operations


(10,421
)


(14,122
)


(23,935
)


(26,886
)Interest expense, net


340



467



965



616Loss before taxes


(10,761
)


(14,589
)


(24,900
)


(27,502
)Income tax benefit


(4,089
)


(5,602
)


(9,462
)


(10,561
)Net Loss

$
(6,672
)

$
(8,987
)

$
(15,438
)

$
(16,941
)Basic/ diluted loss per share:Net loss

$
(0.78
)

$
(1.07
)

$
(1.82
)

$
(2.03
)Weighted average shares outstandingbasic/diluted


8,515



8,370



8,474



8,350








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)





Thirty-nine Weeks EndedNovember 2, 2002


November 3, 2001Cash flows from operating activities:Net loss

$
(15,438
)

$
(16,941
)Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization


8,957



8,189Gain on curtailment of retiree medical plan


(642
)


Amortization of debt issuance costs


180



119Deferred income taxes, net


(9,995
)


(9,962
)Related tax benefits on exercise of stock options


470



183Increase in other assets


(3,574
)


(3,624
)Increase in other long-term liabilities


132



345Changes in working capital:Accounts receivable, net


3,150



678Merchandise inventories


(23,910
)


(31,995
)Other current assets


(883
)


(2,921
)Accounts payable


10,629



13,726Other current liabilities


(1,940
)


(13,283
)Net cash used for operating activities


(32,864
)


(55,486
)Cash flows from investing activities:Expenditures for property and equipment


(3,680
)


(13,920
)Net cash used for investing activities


(3,680
)


(13,920
)Cash flows from financing activities:Borrowings from revolving credit agreement


9,300



35,470Payments for capitalized lease


(108
)


(82
)Payments for debt issuance costs


(620
)


Proceeds from exercise of stock options


1,015



194Net cash provided by financing activities


9,587



35,582Net decrease in cash and cash equivalents


(26,957
)


(33,824
)Cash and cash equivalents at beginning of period


28,928



35,397Cash and cash equivalents at end of period

$
1,971


$
1,573





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




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BROOKSTONE, INC.





Notes to Consolidated Financial Statements





|1. |  | The results of the thirty-nine week period ended November 2, 2002 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 second quarter, 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 2001 annual report on Form 10K.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | Total comprehensive income is composed of net income plus minimum pension liability. For the thirty-nine week period ended November 2, 2002 there was no change
in the accumulated other comprehensive income balance of $447 thousand. As of November 3, 2001 there was no minimum pension liability.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|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 $470 thousand for the thirty-nine week
period ended November 2, 2002 and is reflected in the Companys operating cash flow.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | In March, 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 seeks damages including overtime pay, restitution and attorneys fees. The Company has filed an
answer denying the allegations and opposing class certification. At the present time, no class has been certified, nor has there been any determination regarding exempt classification or the extent to which overtime pay may or may not be owed. The
Company is vigorously investigating and defending this litigation, but because the case is in the early stages, the financial impact to the Company, if any, cannot be predicted at this time.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|7. |  | Business conducted by the Company can be segmented into two distinct areas determined by the method of distribution channel. The retail segment is comprised of
all retail stores including 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 corporate sales. Direct marketing product distribution is
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | conducted through the Companys direct marketing call center and distribution facility located in Mexico, Missouri or by the Companys vendors. Both segments of the Company sell similar
products, although not all Company products are fully available within both segments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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





The tables below disclose segment net sales and pre-tax loss for the thirteen and thirty-nine week periods ended November 2, 2002 and
November 3, 2001 (in thousands).





Thirteen Weeks:





Net Sales

Pre-tax LossNovember 2, 2002

November 3, 2001

November 2, 2002


November 3, 2001Reportable segment:Retail

$
50,295

$
45,060

$
(10,410
)

$
(12,204
)Direct marketing


12,548


13,463


(11
)


(1,918
)Reconciling items:Interest expense








(387
)


(471
)Interest income








47



4Consolidated:

$
62,843

$
58,523

$
(10,761
)

$
(14,589
)





Thirty-nine Weeks:





Net Sales

Pre-tax LossNovember 2, 2002

November 3, 2001

November 2, 2002


November 3, 2001Reportable segment:Retail

$
155,206

$
147,437

$
(23,759
)

$
(22,923
)Direct marketing


35,501


35,695


(176
)


(3,963
)Reconciling items:Interest expense








(1,198
)


(1,034
)Interest income








233



418Consolidated:

$
190,707

$
183,132

$
(24,900
)

$
(27,502
)







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|8. |  | Basic and diluted earnings per share (EPS) were calculated for the thirteen and thirty-nine week periods ended November 2, 2002 and November 3, 2001 as follows:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------




Thirteen Weeks Ended


Thirty-nine Weeks EndedNovember 2, 2002


November 3, 2001


November 2, 2002


November 3, 2001Net loss

$
(6,672
)

$
(8,987
)

$
(15,438
)

$
(16,941
)Weighted average number of common shares outstanding


8,515



8,370



8,474



8,350Effect of dilutive securities:Stock options














Weighted average number of common shares as adjusted


8,515



8,370



8,474



8,350Net loss per sharebasic/diluted

$
(0.78
)

$
(1.07
)

$
(1.82
)

$
(2.03
)





For the thirteen and thirty-nine week periods ended November 2, 2002, antidilutive shares
of 691,944 and 598,773 respectively were excluded from the computations of diluted earnings per share. For the thirteen and thirty-nine week periods ended November 3, 2001, antidilutive shares of 757,112 and 683,735 respectively were excluded from
the computations of diluted earnings per share.





|9. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------




In November 2002 the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies relating to the guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the interpretation are effective for financial statements of interim or annual periods that end after December 15, 2002. The provisions for
initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The Company is currently evaluating the provisions of this interpretation to determine the impact of
adoption.




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BROOKSTONE, INC.





Managements Discussion and Analysis of


Financial Condition and Results of Operations for


the Thirteen and Thirty-nine Week Periods Ended November 2, 2002





Results of Operations





For the thirteen and thirty-nine
week periods ended November 2, 2002, net sales increased 7.4% and 4.1%, respectively, over the comparable periods last year. For the thirteen and thirty-nine week periods ended November 2, 2002 net retail sales increased 11.6% and 5.3%,
respectively. The third quarters retail sales increase is attributable to an increase of 7% in same store sales and the opening of 12 new stores since the third quarter of Fiscal 2001. Driving the quarters retail sales increases were
strong sales performances and successful new product introductions in stationary, audio, kitchen, personal accessories, wine and travel categories. The year to date retail sales increase is primarily the result of the opening of 12 new stores since
the third quarter of Fiscal 2001. This year to date increase was partially offset by the year to date same store sales decrease of 0.3% and the closing of two stores in the fourth quarter of Fiscal 2001 and one store in the first quarter of Fiscal
2002. The total number of stores open at November 2, 2002 was 254, versus 245 at November 3, 2001. Direct marketing sales for the thirteen and thirty-nine week periods ended November 2, 2002 decreased 6.8% and 0.5%, respectively, over the comparable
periods last year on planned reductions in circulation of 24% and 16%, respectively.





For the thirteen and
thirty-nine week periods ended November 2, 2002, gross profit as a percentage of net sales was 26.3% and 26.7%, respectively, versus 24.3% and 26.8% for the comparable periods last year. The increase in percentage for the quarter resulted from a
decrease of 210 basis points in net material costs. This net material decrease was partially offset by an increase of 10 basis points in order postage expense. The decrease in the year to date gross profit percentage resulted from increased
occupancy costs of 125 basis points related to the new stores opened since the third quarter of 2001 and to an increase in order postage expense of 35 basis points. The increases in occupancy and order postage expense were offset by decreased net
material costs of 150 basis points.





Selling, general and administrative expenses as a percentage of net sales for
the thirteen and thirty-nine week periods ended November 2, 2002 were 42.9% and 39.5%, respectively, versus 48.4% and 41.5%, respectively, for the comparable periods last year. For the quarter, reduced catalog costs associated with planned
reductions in circulation in the direct marketing channel contributed approximately 320 basis points to the decrease in percentage. Additionally, strong expense control in the retail store segment contributed the remaining 230 basis points of the
quarterly decrease. For the year, reduced catalog costs associated with planned reductions in circulation in the direct marketing channel contributed approximately 185 basis points to the decrease in percentage and strong retail store expense
control contributed the remaining 15 basis points of the decrease.





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 second quarter, the Company recorded a gain on curtailment of $642 thousand, which is stated separately on the Statement of Operations.





Net interest expense for the thirteen and thirty-nine week periods ended November 2, 2002 was $340 thousand and $965 thousand,
respectively, compared to $467 thousand and $616 thousand during the comparable periods last year. For the quarter, the Companys improved cash position resulted in a decrease in net interest expense due to decreased cash borrowings and
increased income from investments. The year-to-date increase in net interest expense is principally related to increased interest rates in the revolving credit agreement effective in Fiscal 2002 and to reduced income from investments due to lower
interest rates in the current fiscal year. These increases were partially offset by a decrease in the interest rate on the capital lease.





As a result of the foregoing, for the thirteen-week period ended November 2, 2002 the Company reported a net loss of $6.7 million, or $0.78 per basic and diluted share. These results represent a 27% reduction in net loss per
basic and diluted share as compared to a net loss of $9.0 million, or $1.07 per basic and diluted share, for the comparable period last year. For the thirty-nine week period ended November 2, 2002 the Company reported a net




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loss of $15.4 million, or $1.82 per basic and diluted share as compared to a $16.9 million net loss, or $2.03 per basic and diluted share, for the comparable period last year.





Financial Condition and Liquidity





For the thirty-nine week period ended November 2, 2002, net cash used by operating activities totaled $32.9 million, primarily as a result of the net loss, the payment of
income taxes and the purchase of inventory. Cash used for investment activities during the first thirty-nine weeks of Fiscal 2002, representing the purchase of property and equipment, amounted to $3.7 million. Cash from financing activities during
the thirty-nine week period of Fiscal 2002 amounted to $9.6 million, acquired primarily through borrowings under the Companys revolving credit agreement and to a lesser extent, proceeds from the exercise of stock options.





For the thirty-nine week period ended November 3, 2001, net cash used by operating activities totaled $55.5 million, reflecting
primarily the net loss, the payment of income taxes and the purchase of inventory. Cash used for investment activities during the thirty-nine week period of Fiscal 2001, representing the purchase of property and equipment amounted to $13.9 million.
Cash from financing activities during the thirty-nine week period of Fiscal 2001 amounted to $35.6 million, acquired primarily through borrowings under the Companys revolving credit agreement.





Merchandise inventories were $79.5 million at November 2, 2002 compared to $55.6 million at February 2, 2002. This higher inventory
position is attributable to inventory purchases to support the fourth quarter holiday selling period. At the end of the third quarter of Fiscal 2002, merchandise inventories were 8.6% lower than the comparable period in Fiscal 2001. Inventories at
the end of the third quarter were also less than projections due to the west coast longshoremen labor situation and the resulting delay and backlog in container movement. Sales to date were unaffected due to the Companys efforts in closely
monitoring stock availability and accelerating the receipt of certain key goods into the third quarter. In an effort to minimize any adverse impact from the longshoreman labor situation on fourth quarter holiday sales, the Company has proactively
redirected certain passage of goods to the east coast and has judiciously increased the use of airfreight.





Receivables decreased 38.6% to $5.0 million at November 2, 2002 compared to $8.2 million at February 2, 2002 as a result of the collection of landlord allowances and decreases in debit memos and trade receivables. The accounts
payable balance was $21.9 million at November 2, 2002 compared to $11.2 million at February 2, 2002.





The
Companys capital expenditures in the third quarter of Fiscal 2002 were principally related to the opening of six new stores, including two airport locations. For the year, the Company anticipates opening 15 new stores in total, approximately
half of which will be airport locations. Additionally, the Company has remodeled two stores during Fiscal 2002 and is currently reviewing several alternatives to increase its future distribution capacity.





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 November 2, 2002 the company had approximately $9.3 million in outstanding borrowings under its revolving credit agreement. At November 3, 2001, the Company had approximately $35.5 million in
outstanding borrowings under its revolving credit agreement.





The Company believes that available borrowings, cash
on hand and anticipated cash generated from operations will be sufficient to finance planned retail store openings, remodelings and other capital requirements throughout Fiscal 2002. Looking forward to the fourth quarter of the fiscal year, the
Company anticipates same store sales to grow in the mid single digit range and sales in the direct marketing channel to decrease while increasing productivity and restoring profitability in this segment. Overall, the Company anticipates earnings for
the fiscal year to range between $1.00 and $1.05 per diluted share as compared to $0.63 in the prior year, an increase in diluted earnings per share in excess of 59% as compared to Fiscal 2001.





Recent Accounting Pronouncements





In November 2002 the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation clarifies the requirements of FASB Statement No. 5, Accounting for




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Contingencies relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the interpretation are effective for
financial statements of interim or annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The
Company is currently evaluating the provisions of this interpretation to determine the impact of adoption.





Other Matters





The Companys fourth fiscal quarter, which includes the winter holiday
selling season, has historically produced a disproportionate amount of the Companys net sales and substantially all of its income from operations. Factored into this years sales and earnings projections, is the shortened holiday selling
period between Thanksgiving and Christmas of six less days versus the previous year.





The Company has taken
several measures to mitigate the effect of the west coast longshoremen labor situation on inventory levels and sales in the third and fourth quarters of Fiscal 2002. The Companys efforts in closely monitoring stock availability and
accelerating the receipt of certain key goods into the third quarter resulted in adequate inventory levels to support the third quarter sales demand. As the situation worsened, the Company proactively redirected certain passage of goods to the east
coast and judiciously increased the use of airfreight. The Company expects inventory levels in the fourth quarter to be higher than last year as certain inventory receipts for first quarter 2003 were accelerated into the fourth quarter when the
labor situation was still unresolved.





In March, 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 seeks damages
including overtime pay, restitution and attorneys fees. The Company has filed an answer denying the allegations and opposing class certification. At the present time, no class has been certified, nor has there been any determination regarding exempt
classification or the extent to which overtime pay may or may not be owed. The Company is vigorously investigating and defending this litigation, but because the case is in the early stages, the financial impact to the Company, if any, cannot be
predicted at this time.





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, the effectiveness of e-commerce technology, the 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. Words such as estimate,
project, plan, believe, feel, anticipate, assume, may, will, should, and similar words and phrases may identify forward looking statements.
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.




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Item 4:    Controls and Procedures





Within the 90 days prior to
the date of filing this Quarterly Report on Form 10Q, the Company carried out an evaluation, under the supervision and with the participation of the Companys Disclosure Committee and the Companys management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in
the Companys periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in the Companys internal controls or in other factors that could significantly affect internal controls, nor were any
corrective actions required with regard to significant deficiencies and material weaknesses.




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##### Table of Contents




PART II





Other Information





Item 1:    LEGAL PROCEEDINGS





In March, 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 seeks damages including overtime pay, restitution and attorneys fees. The Company has filed an answer denying the allegations and opposing class certification. At the present time, no class has been certified, nor has
there been any determination regarding exempt classification or the extent to which overtime pay may or may not be owed. The Company is vigorously investigating and defending this litigation, but because the case is in the early stages, the
financial impact to the Company, if any, cannot be predicted at this time.





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





None





Item 5:    OTHER INFORMATION





None





Item 6:    EXHIBITS AND REPORTS ON FORM 8-K





A)    Exhibits





Exhibit
99.1    Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002





Exhibit 99.2    Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002





Exhibit 99.3    Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-OxleyAct of 2002





Exhibit 99.4    Certification of Chief Financial Officer pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002





B)    Reports of Form 8-K





No reports on Form 8-K were filed during the period for which this report is filed.




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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)





December 17, 2002


/s/    Philip W. Roizin


(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)




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