##### Table of Contents

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UNITED STATES

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 1, 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 .



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: 13,304,763 shares of common stock as of December 5, 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 November 1, 2003, February 1, 2003 and November 2, 2002                              |  | 3       
|         |  |                                                                                                                      
|         |  | Consolidated Statement of Operations for the thirteen & thirty-nine weeks ended November 1, 2003 and November 2, 2002 |  | 4       
|         |  |                                                                                                                      
|         |  | Consolidated Statement of Cash Flows for the thirty-nine weeks ended November 1, 2003 and November 2, 2002            |  | 5       
|         |  |                                                                                                                      
|         |  | Notes to Consolidated Financial Statements                                                                            |  | 6       
|         |  |                                                                                                                      
|Item 2:  |  |                                                                                                                       |  |         
|         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 10      
|Item 3:  |  |                                                                                                                       |  |         
|         |  | Quantitative and Qualitative Disclosures about Market Risk                                                            |  | 12      
|Item 4:  |  |                                                                                                                       |  |         
|         |  | Controls and Procedures                                                                                               |  | 12      
|         |  |                                                                                                                      
|Part II: |  | Other Information                                                                                                     |  |         
|         |  |                                                                                                                      
|Item 1:  |  |                                                                                                                       |  |         
|         |  | Legal Proceedings                                                                                                     |  | 13      
|Item 2:  |  |                                                                                                                       |  |         
|         |  | Change in Securities                                                                                                  |  | 13      
|Item 3:  |  |                                                                                                                       |  |         
|         |  | Defaults by the Company upon its Senior Securities                                                                    |  | 13      
|Item 4:  |  |                                                                                                                       |  |         
|         |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 13      
|Item 5:  |  |                                                                                                                       |  |         
|         |  | Other Information                                                                                                     |  | 13      
|Item 6:  |  |                                                                                                                       |  |         
|         |  | Exhibits and Reports on Form 8-K                                                                                      |  | 14      



Exhibits



|     | 
|---- | 
|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)      |         |   |                  |   |         | (Unaudited)      | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- | 
|                                                                                                                                                                              |  | November 1, 2003 |         |   | February 1, 2003 |   |         | November 2, 2002 | 
|Assets                                                                                                                                                                        |  |                  |         |   |                  |   |         |                  | 
|Current assets:                                                                                                                                                               |  |                  |         |   |                  |   |         |                  | 
|Cash and cash equivalents                                                                                                                                                     |  | $                | 1,544   |   |                  | $ | 54,144  |                  | 
|Receivables, net                                                                                                                                                              |  |                  | 7,044   |   |                  |   | 6,079   |                  | 
|Merchandise inventories                                                                                                                                                       |  |                  | 84,771  |   |                  |   | 58,987  |                  | 
|Deferred income taxes                                                                                                                                                         |  |                  | 15,258  |   |                  |   | 4,161   |                  | 
|Other current assets                                                                                                                                                          |  |                  | 6,548   |   |                  |   | 5,280   |                  | 
|                                                                                                                                                                              |  |                  |         |   |                  |   |         |                  | 
|Total current assets                                                                                                                                                          |  |                  | 115,165 |   |                  |   | 128,651 |                  | 
|Deferred income taxes, net                                                                                                                                                    |  |                  | 5,091   |   |                  |   | 5,854   |                  | 
|Property and equipment, net                                                                                                                                                   |  |                  | 50,300  |   |                  |   | 39,720  |                  | 
|Intangible assets, net                                                                                                                                                        |  |                  | 4,191   |   |                  |   | 4,413   |                  | 
|Other assets                                                                                                                                                                  |  |                  | 7,610   |   |                  |   | 1,954   |                  | 
|                                                                                                                                                                              |  |                  |         |   |                  |   |         |                  | 
|                                                                                                                                                                              |  | $                | 182,357 |   |                  | $ | 180,592 |                  | 
|                                                                                                                                                                              |  |                  |         |   |                  |   |         |                  | 
|Liabilities and Shareholders Equity                                                                                                                                          |  |                  |         |   |                  |   |         |                  | 
|Current liabilities:                                                                                                                                                          |  |                  |         |   |                  |   |         |                  | 
|Short-term borrowings                                                                                                                                                         |  | $                |        |   |                  | $ |        |                  | 
|Accounts payable                                                                                                                                                              |  |                  | 27,001  |   |                  |   | 10,720  |                  | 
|Other current liabilities                                                                                                                                                     |  |                  | 26,137  |   |                  |   | 33,197  |                  | 
|                                                                                                                                                                              |  |                  |         |   |                  |   |         |                  | 
|Total current liabilities                                                                                                                                                     |  |                  | 53,138  |   |                  |   | 43,917  |                  | 
|Other long-term liabilities                                                                                                                                                   |  |                  | 14,934  |   |                  |   | 13,809  |                  | 
|Long-term obligation under capital lease                                                                                                                                      |  |                  | 1,985   |   |                  |   | 2,110   |                  | 
|Commitments and contingencies                                                                                                                                                 |  |                  |         |   |                  |   |         |                  | 
|Shareholders equity:                                                                                                                                                         |  |                  |         |   |                  |   |         |                  | 
|Preferred stock, $0.001 par value:                                                                                                                                            |  |                  |         |   |                  |   |         |                  | 
|Authorized - 2,000,000 shares; issued and outstanding - 0 shares at November 1, 2003, February 1, 2003 and November 2,
2002                                                   |  |                  |         |   |                  |   |         |                  | 
|Common stock, $0.001 par value:                                                                                                                                               |  |                  |         |   |                  |   |         |                  | 
|Authorized 50,000,000 shares; issued and outstanding  13,304,763 shares at November 1, 2003, 12,780,256 shares at February
1, 2003 and 12,771,895 shares at November 2, 2002 |  |                  | 13      |   |                  |   | 8       |                  | 
|Additional paid-in capital                                                                                                                                                    |  |                  | 58,351  |   |                  |   | 52,221  |                  | 
|Accumulated other comprehensive loss                                                                                                                                          |  |                  | (1,031  | ) |                  |   | (1,031  | )                | 
|Retained earnings                                                                                                                                                             |  |                  | 55,014  |   |                  |   | 69,605  |                  | 
|Treasury stock, at cost-3,616 shares at November 1, 2003, February 1, 2003 and November 2, 2002                                                                               |  |                  | (47     | ) |                  |   | (47     | )                | 
|                                                                                                                                                                              |  |                  |         |   |                  |   |         |                  | 
|Total shareholders equity                                                                                                                                                    |  |                  | 112,300 |   |                  |   | 120,756 |                  | 
|                                                                                                                                                                              |  |                  |         |   |                  |   |         |                  | 
|                                                                                                                                                                              |  | $                | 182,357 |   |                  | $ | 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 Weeks Ended |        |   | Thirty-nine Weeks Ended |  
|--------------------------------------------------- |  | -------------------- | ------ | - | ----------------------- | -
|                                                    |  | November 1, 2003     |        |   | November 2, 2002        |  
|Net sales                                           |  | $                    | 73,657 |   |                         | $
|Cost of sales                                       |  |                      | 51,993 |   |                         |  
|                                                    |  |                      |        |   |                         |  
|Gross profit                                        |  |                      | 21,664 |   |                         |  
|Selling, general and administrative expenses        |  |                      | 30,903 |   |                         |  
|Gain on curtailment of retiree medical plan         |  |                      |       |   |                         |  
|                                                    |  |                      |        |   |                         |  
|Loss from operations                                |  |                      | (9,239 | ) |                         |  
|Interest expense, net                               |  |                      | 298    |   |                         |  
|                                                    |  |                      |        |   |                         |  
|Loss before taxes                                   |  |                      | (9,537 | ) |                         |  
|Income tax benefit                                  |  |                      | (3,672 | ) |                         |  
|                                                    |  |                      |        |   |                         |  
|Net Loss                                            |  | $                    | (5,865 | ) |                         | $
|                                                    |  |                      |        |   |                         |  
|Basic/ diluted loss per share:                      |  |                      |        |   |                         |  
|Net Loss                                            |  | $                    | (0.45  | ) |                         | $
|                                                    |  |                      |        |   |                         |  
|Weighted average shares outstanding  basic/diluted |  |                      | 13,158 |   |                         |  
|                                                    |  |                      |        |   |                         |  



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



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##### Table of Contents

BROOKSTONE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                             |  | Thirty-Nine Weeks Ended |        
|---------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                             |  | November 1, 2003        |        
|Cash flows from operating activities:                                        |  |                         |        
|Net loss                                                                     |  | $                       | (14,591
|Adjustments to reconcile net loss to net cash used for operating activities: |  |                         |        
|Depreciation and amortization                                                |  |                         | 8,990  
|Gain on curtailment of retiree medical plan                                  |  |                         |       
|Amortization of debt issuance costs                                          |  |                         | 166    
|Deferred income taxes                                                        |  |                         | (10,334
|Related tax benefits on exercise of stock options                            |  |                         | 1,879  
|Increase in other assets                                                     |  |                         | (5,761 
|Increase in other long-term liabilities                                      |  |                         | 1,125  
|Changes in working capital:                                                  |  |                         |        
|Accounts receivable, net                                                     |  |                         | (965   
|Merchandise inventories                                                      |  |                         | (25,784
|Other current assets                                                         |  |                         | (1,227 
|Accounts payable                                                             |  |                         | 16,281 
|Other current liabilities                                                    |  |                         | (7,060 
|                                                                             |  |                         |        
|Net cash used for operating activities                                       |  |                         | (37,281
|                                                                             |  |                         |        
|Cash flows from investing activities:                                        |  |                         |        
|Expenditures for property and equipment                                      |  |                         | (19,348
|                                                                             |  |                         |        
|Net cash used for investing activities                                       |  |                         | (19,348
|                                                                             |  |                         |        
|Cash flows from financing activities:                                        |  |                         |        
|Borrowings from revolving credit agreement                                   |  |                         |       
|Payments for capitalized lease                                               |  |                         | (125   
|Payment for debt issuance costs                                              |  |                         | (102   
|Proceeds from exercise of stock options                                      |  |                         | 4,256  
|                                                                             |  |                         |        
|Net cash provided by financing activities                                    |  |                         | 4,029  
|                                                                             |  |                         |        
|Net decrease in cash and cash equivalents                                    |  |                         | (52,600
|Cash and cash equivalents at beginning of period                             |  |                         | 54,144 
|                                                                             |  |                         |        
|Cash and cash equivalents at end of period                                   |  | $                       | 1,544  
|                                                                             |  |                         |        



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 thirty-nine week period ended November 1, 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 second quarter of 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 thirty-nine 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 $1.9 million for the thirty-nine week period ended
November 1, 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 second quarter of 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 sites www.Brookstone.com and www.GardenersEden.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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##### Table of Contents

The tables below disclose segment net sales and pre-tax loss for the thirteen-week and thirty-nine week periods ended
November 1, 2003 and November 2, 2002 (in thousands).



|Thirteen-weeks:     |  | Net Sales       |         | Pre-tax Income (Loss) |  
|------------------- |  | --------------- | ------- | --------------------- | -
|                    |  | November 1,2003 |         | November 2,2002       |  
|Reportable segment: |  |                 |         |                       |  
|Retail              |  | $               | 60,247  |                       | $
|Direct Marketing    |  |                 | 13,410  |                       |  
|Reconciling items:  |  |                 |         |                       |  
|Interest expense    |  |                 |        |                       |  
|Interest income     |  |                 |        |                       |  
|                    |  |                 |         |                       |  
|Consolidated:       |  | $               | 73,657  |                       | $
|                    |  |                 |         |                       |  
|                    |  |                
|Thirty-nine weeks:  |  | Net Sales       |         | Pre-tax Income (Loss) |  
|                    |  | November 1,2003 |         | November 2,2002       |  
|Reportable segment: |  |                 |         |                       |  
|Retail              |  | $               | 177,551 |                       | $
|Direct Marketing    |  |                 | 37,537  |                       |  
|Reconciling items:  |  |                 |         |                       |  
|Interest expense    |  |                 |        |                       |  
|Interest income     |  |                 |        |                       |  
|                    |  |                 |         |                       |  
|Consolidated:       |  | $               | 215,088 |                       | $
|                    |  |                 |         |                       |  



|8. | In the third quarter of Fiscal 2003, the Board of Directors approved a 3-for-2 stock split in the form of a 50 percent stock dividend which was paid on September 23, 2003 to
shareholders of record as of September 2, 2003. All common shares and per share amounts in these financial statements reflect the stock split.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Basic and diluted earnings per share (EPS) were calculated for the thirteen-week and thirty-nine week periods ended November 1, 2003 and November 2, 2002
as follows:



|                                                     |  | Thirteen Weeks Ended |        |   | Thirty-Nine Weeks Ended |  
|---------------------------------------------------- |  | -------------------- | ------ | - | ----------------------- | -
|                                                     |  | November 1,2003      |        |   | November 2,2002         |  
|Net loss                                             |  | $                    | (5,865 | ) |                         | $
|                                                     |  |                      |        |   |                         |  
|Weighted average number of common shares outstanding |  |                      | 13,158 |   |                         |  
|Effect of dilutive securities:                       |  |                      |        |   |                         |  
|Stock options                                        |  |                      |       |   |                         |  
|                                                     |  |                      |        |   |                         |  
|Weighted average number of common shares as adjusted |  |                      | 13,158 |   |                         |  
|                                                     |  |                      |        |   |                         |  
|Net loss per share  basic/diluted                   |  | $                    | (0.45  | ) |                         | $
|                                                     |  |                      |        |   |                         |  



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For the thirteen-week and thirty-nine week periods ended November 1, 2003, antidilutive shares of 493,011
and 380,869 are excluded from the computations of diluted earnings per share. For the thirteen-week and thirty-nine week periods ended November 2, 2002, antidilutive shares of 1,037,916 and 898,160 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 plus the applicable percentage (0.50%, 0.25%, or 0%) or the Eurodollar
rate for the applicable period plus the applicable percentage (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, four airport locations in Atlanta and one airport in Las Vegas under three separate Joint
Venture arrangements. The Company has a 70% ownership interest in the Chicago venture, a 49% ownership interest in the Atlanta venture and an 80% ownership interest in the Las Vegas 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 $225 thousand, which is the Companys equity investment reduced by distributable cash from the joint venture.



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



During the third quarter, the Board of Directors approved the Award of 8,625 shares of restricted stock to Officers of the Company under the provisions of
the 1999 Equity Incentive Plan. These awards require the Officer to purchase and hold stock of the Company. The award provides stock equal to 50% of the amount the officer purchased up to a maximum amount as specified in each award. These shares
vest ratably over a four-year period commencing with the date of the award, September 10, 2003 and, as such, compensation expense will be recorded over this period.



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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 thirty-nine week periods ended November 1, 2003 and November 2, 2002 would
have been increased to the pro forma amounts indicated below:



|                                                                                                                       |  | Thirteen-weeks  |        |   | Thirty-nine weeks |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | ----------------- | -
|                                                                                                                       |  | November 1,2003 |        |   | November 2,2002   |  
|Net loss - as reported                                                                                                 |  | $               | (5,865 | ) |                   | $
|Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax
effects |  |                 | (200   | ) |                   |  
|Add: Stock based employee compensation expense included in reported net income, net of related tax effects             |  |                 | 3      |   |                   |  
|                                                                                                                       |  |                 |        |   |                   |  
|Net loss - pro forma                                                                                                   |  | $               | (6,062 | ) |                   | $
|                                                                                                                       |  |                 |        |   |                   |  
|Net loss per share  basic/diluted                                                                                     |  |                 |        |   |                   |  
|As reported                                                                                                            |  | $               | (0.45  | ) |                   | $
|Pro forma                                                                                                              |  | $               | (0.46  | ) |                   | $



|12. | 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.



9



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##### Table of Contents

|Item 2: |  | 
|------- |  | 



Managements Discussion and Analysis of

Financial Condition and Results of Operations for

the Thirteen-Week and Thirty-Nine Week Periods Ended November 1, 2003



Results of Operations



For the thirteen-week and thirty-nine week periods ended November 1, 2003,
net sales increased 17.2% and 12.8% respectively over the comparable periods last year. For the quarter, retail sales increased $10.0 million or 19.8% over the comparable period last year. Year to date retail sales increased $22.3 million or 14.4%
over the comparable period last year. Same store sales increased 15.9% for the quarter and 9.9% for the year to date period ended November 1, 2003 generating $7.8 million and $15.1 million in increased retail sales, respectively. The remaining
retail sales increase of $2.2 million for the quarter and $7.2 million for the year resulted primarily from the opening of 18 new stores less two store closings subsequent to the third quarter of Fiscal 2002. The total number of stores open at the
end of the thirty-nine week period ended November 1, 2003 was 270 versus 254 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 Massage,
Lighting, Personal Care and Optical categories. Direct marketing sales for the thirteen-week period ended November 1, 2003 increased 6.9% over the comparable period last year on an 8.1% reduction in circulation. Year-to-date, direct marketing sales
increased 5.7% on relatively unchanged catalog circulation. These increases resulted primarily from increased sales from the Brookstone.com website and the Brookstone catalog.



For the thirteen-week period ended November 1, 2003, gross profit as a percentage of net sales increased 310 basis points to
29.4% versus 26.3% for the comparable period last year due to a decrease of 210 basis points in occupancy costs as a result of leveraging same store sales, improved product purchase margins of 60 basis points resulting from increased penetration of
proprietary products and a decrease of 40 basis points in order postage expense. For the thirty-nine week period ended November 1, 2003 gross profit as a percentage of net sales increased 260 basis points to 29.3% versus 26.7% for the comparable
period last year due to a decrease of 130 basis points in occupancy costs as a result of leveraging same store sales, improved product purchase margins of 100 basis points resulting from increased penetration of proprietary products and a decrease
of 30 basis points in order postage expense.



For the thirteen
week period ended November 1, 2003, selling, general and administrative expenses as a percentage of net sales decreased 90 basis points to 42.0% versus 42.9% for the comparable period last year primarily due to leveraging fixed expenses as a result
of increased sales in the third quarter of 2003 as compared to the same period in 2002. For the thirty-nine week period ended November 1, 2003, selling, general and administrative expenses as a percentage of net sales increased 60 basis points to
40.1% versus 39.5% for the comparable period last year primarily as a result of the settlement of legal matters in the second quarter of 2003.



During the second quarter of 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 thirty-nine week periods ended November 1, 2003 was $298 thousand and $609 thousand respectively compared to $340 thousand and $965 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 as a result of being in a more favorable pricing tier within the
Companys revolving credit agreement in Fiscal 2003 as compared to Fiscal 2002.



As a result of the foregoing, the Company reported a net loss of $5.9 million, or $0.45 per basic and diluted share for the thirteen-week period ended November 1, 2003, as compared to a net loss of $6.7 million, or
$0.52 per basic and diluted share, for the comparable period last year. For the thirty-nine week period ended November 1, 2003 the Company reported a net loss of $14.6 million, or $1.13 per basic and diluted share (after reflecting one-time legal
settlements of $1.1 million or $0.05 per basic and diluted share) as compared to a $15.4 million net loss, or $1.21 per basic and diluted share (after reflecting a one time gain of $642 thousand or $0.03 per basic and diluted share related to the
curtailment of the Companys retiree medical plan), for the comparable period last year.



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Financial Condition



For the thirty-nine week period ended November 1, 2003, net cash used by
operating activities totaled $37.3 million, primarily as a result of the net loss, the purchase of inventory 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 thirty-nine weeks of Fiscal 2003, representing the purchase of property and equipment, amounted to $19.3 million, including approximately $4.1 million on the distribution center expansion and
approximately $1.2 million on the new headquarters facility. Cash from financing activities during the thirty-nine week period of Fiscal 2003 amounted to $4.0 million, primarily as a result of proceeds from the exercise of stock options.



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.



Merchandise inventories increased to $84.8 million at November 1, 2003 compared to $59.0 at February 1, 2003 reflecting merchandise purchases to support the holiday selling season. Merchandise inventories at November
1, 2003 increased approximately 7% over the comparable period last year to support the additional store base in 2003.



Other current assets increased approximately 24.0% to $6.5 million from $5.3 million at February 1, 2003 primarily as a result of increased prepaid rent
due to the additional store base in 2003, prepaid rent related to seasonal stores to open during the 2003 holiday season and prepaid income taxes.



Receivables increased approximately 15.9% to $7.1 million at November 1, 2003 from $6.1 million at February 1, 2003 primarily reflecting increased credit
card receivables. Other assets increased approximately $5.7 million to $7.6 million at November 1, 2003 from $2.0 million at February 1, 2003 primarily as a result of the costs incurred to produce catalogs for the fourth quarter.



Accounts payable increased $16.3 million to $27.0 million from $10.7 million
at February 1, 2003 primarily reflecting the purchase of merchandise inventories.



The Companys capital expenditures for the thirty-nine week period ended November 1, 2003 were principally related to the opening of new stores, remodeling of existing stores and the expansion of the
Companys distribution facility. Through November 1, 2003, the Company opened 13 stores (12 Brookstone stores and one Gardeners Eden store) and anticipates opening a total of 18 new stores, including eight airport locations, in the current
fiscal year. For the fiscal year, the Company has remodeled a total of 13 stores. All new stores and remodels in fiscal 2003 have reflected the new store format that was developed in Fiscal 2002. As of the end of the third quarter, the Company spent
approximately $4.1 million on the distribution center expansion and anticipates spending approximately $6 million in total on this expansion in Fiscal 2003. Construction of the expansion was substantially completed in November 2003. During Fiscal
2003, the Company also began 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. Through November 1, 2003, the Company has expended approximately $1.2 million on the new headquarters facility.



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 1, 2003, the Company had no borrowings outstanding under its revolving credit agreement as compared to $9.3 million at November 2, 2002. 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



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Amendment, the adjusted interest rates on the facility, at the Companys option, are: the agent banks base lending rate plus the applicable
percentage (0.50%, 0.25% or 0%), or the Eurodollar rate for the applicable period plus the applicable percentage (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.



The Company believes that cash on hand, anticipated cash
generated from operations and available borrowings will be sufficient to finance its capital requirements throughout the remainder of 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 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 second quarter of 2003.



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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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 second quarter of 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
|------- |  | ---------------------------------------------------



None



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



None



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



| | A) | 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 November 5, 2003 furnished a press release reporting sales results for the third quarter ended November 1, 2003



Current Report on Form 8-K dated November 19, 2003 furnished
a press release reporting financial results for the third quarter ended November 1, 2003.



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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                                                                                                                                                                      
|                  |  |  | 
|December 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)



15