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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended May 3, 2003

OR

For the transition period from                          to                         

Commission file number  0-21406.

Brookstone, Inc.

(Exact name of registrant as specified in its charter)

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: 8,582,596 shares of common stock as of June 6, 2003.

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BROOKSTONE, INC.

Index to Form 10-Q

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BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

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)

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)

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

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BROOKSTONE, INC.

Notes to Consolidated Financial Statements

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

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The tables below disclose segment net sales and pre-tax loss for the thirteen-week period ended May 3, 2003 and May 4, 2002 (in thousands).

For the thirteen-week period ended May 3, 2003, antidilutive shares of 168,722 were excluded from the computations of diluted earnings per share. For the thirteen-week period ended May 4, 2002, antidilutive shares of 455,402 were excluded from the computations of diluted earnings per share.

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

The Company has reviewed the requirements of FASB Interpretation No. 46 (“FIN 46”) “Consolidation of Variable Interest Entities” and has determined that it is reasonably possible that the Atlanta Joint Venture qualifies as a Variable Interest Entity (“VIE”). The maximum exposure to loss under this agreement is believed to approximate $246 thousand, which is the Company’s equity investment reduced by distributable cash from the joint venture.

During the quarter ended May 3, 2003, the Company did not invest in any new variable interest entities.

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In April 2003, the Financial Accounting Standards Board issued Financial Accounting Standard No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (“FAS 149”). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company has reviewed this Statement and believes it will have no material impact on the consolidated financial statements.

In May 2003, the Financial Accounting Standards Board issues Financial Accounting Statement No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“FAS 150”). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and is effective at the beginning of the first interim period beginning after June 15, 2003 for all other financial instruments. The Company has reviewed this Statement and believes it will have no material impact on the consolidated financial statements.

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 loss per share for the quarter ended May 3, 2003 and May 4, 2002 would have been increased to the pro forma amounts indicated below:

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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 $2.9 million, in addition to a reimbursement payment to eliminate the effect of any excise taxes associated with this payment. The Company has also entered into an amended employee agreement with the Company’s Chairman, President and Chief Executive Officer, which provides for certain severance benefits for a period of 24 months.

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BROOKSTONE, INC.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations for

The Thirteen-week Period Ended May 3, 2003

Results of Operations

For the thirteen-week period ended May 3, 2003, net sales increased 7.6% over the comparable period last year. Retail sales for the thirteen-week period increased $4.5 million, or 9.8%, to $50.8 million as compared to $46.3 million for the same period last year. Same store sales increased 5.9% over the comparable period last year generating $2.7 million in increased retail sales. The remaining $1.8 million of the retail sales increase resulted primarily from the opening of 14 new stores less one store closing subsequent to the first quarter of Fiscal 2002. The total number of stores open at the end of the thirteen-week period ended May 3, 2003 was 261 versus 248 at the end of the comparable period in Fiscal 2002. Driving the quarter’s retail sales increases were strong sales performances and successful new product introductions in Audio, Wine, Home Comfort, Kitchen, Personal Accessories, Lighting and Tools categories. Direct marketing sales for the thirteen-week period ended May 3, 2003 remained relatively flat at $10.1 million as compared to $10.3 million for the same period in Fiscal 2002, on a slight decrease in catalog circulation.

For the thirteen-week period ended May 3, 2003, gross profit as a percentage of net sales increased 150 basis points to 24.3% versus 22.8% for the comparable period last year. Improved product purchase margins in Fiscal 2003 resulted in an improvement of 60 basis points in gross profit as a percent of net sales. Occupancy costs as a percent of net sales decreased 60 basis points primarily resulting from the increase in same store sales. Order postage expense decreased 30 basis points as a percent of net sales.

Selling, general and administrative expenses as a percentage of net sales increased 40 basis points for the thirteen-week period ended May 3, 2003 to 41.2% versus 40.8% for the comparable period last year as a result of increased costs to support the base business.

Net interest expense for the thirteen-week period ended May 3, 2003 was $131 thousand compared to $307 thousand for the comparable period last year. This decrease resulted primarily from increased interest income due to the Company’s improved cash position and higher interest rates in Fiscal 2003 as compared to the same period in Fiscal 2002.

As a result of the foregoing, the Company reported a net loss of $6.4 million, or $0.75 per basic and diluted share, for the thirteen-week period ended May 3, 2003, as compared to a $6.5 million net loss, or $0.78 per basic and diluted share, for the comparable period last year.

Financial Condition

For the thirteen-week period ended May 3, 2003, net cash used by operating activities totaled $21.3 million, primarily reflecting the net loss and the payment of income taxes and accrued incentive compensation which are included in other current liabilities. Cash used for investment activities during the thirteen-week period of Fiscal 2003, representing the purchase of property and equipment amounted to approximately $3.0 million. Cash used for financing activities during the thirteen-week period of Fiscal 2003 amounted to $433 thousand primarily as a result of proceeds from the exercise of stock options partially offset by capitalized lease payments.

For the thirteen-week period ended May 4, 2002, net cash used by operating activities totaled $13.7 million, reflecting primarily the net loss, the purchase of inventory and the payment of income taxes which is included in other current liabilities. Cash used for investment activities during the thirteen-week period of Fiscal 2002, representing the purchase of property and equipment amounted to approximately $1.1 million. Cash used for financing activities during the thirteen-week period of Fiscal 2002 amounted to $56 thousand primarily as a result of proceeds from the exercise of stock options offset by payments for debt issuance costs and capitalized lease payments.

Merchandise inventories remained relatively flat at $59.9 million at May 3, 2003 compared to $59.0 at February 1, 2003, but rose approximately 4% when compared to the quarter ended May 4, 2002. The Company

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anticipates that inventory levels will continue to be higher in Fiscal 2003 than the comparable periods last year to support retail store growth. In addition, as a result of the SARS epidemic, the Company may further accelerate the receipt of goods into the second and third quarters from the fourth quarter in order to mitigate any potential impact on product flow from China.

Receivables increased approximately 14% to $6.9 million for the thirteen-week period ended May 3, 2003 as compared to the balance of $6.1 million at February 1, 2003. This increase is primarily the result of increased credit card receivables and increased amounts due from vendors for merchandise returns. Other current assets increased approximately 16% to $6.1 million from $5.3 million at February 1, 2003 primarily as a result of the timing of prepaid insurance payments due to a change in the effective dates for several insurance policies from May 1^st to April 1^st. Other assets increased $1.8 million to $3.8 million as compared to $2.0 million at February 1, 2003 principally as a result of costs associated with catalogs to be mailed in the beginning of the second quarter.

The Company’s capital expenditures for the thirteen-week period ended May 3, 2003 were principally related to the opening of three stores (two Brookstone stores and one Gardeners Eden store) and construction related to stores anticipated to open in the upcoming fiscal quarter. The Company anticipates opening approximately 15 to 20 new stores, including up to seven airport locations, and to remodel between 10 to 15 stores in Fiscal 2003. Additionally, the Company began the planned expansion of its Distribution Center in the first quarter of Fiscal 2003. The Company anticipates spending approximately $7.0 million on this expansion in Fiscal 2003 and that construction will be completed in the third quarter of Fiscal 2003 in order to be ready to receive goods for the holiday season.

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 May 3, 2003 and at May 4, 2002 the Company had no borrowings outstanding under its revolving credit agreement.

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

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 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. While the Company continues to vigorously defend the allegations brought against it, it has entered into settlement negotiations with legal counsel for the plaintiffs and may choose to settle this matter.

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.

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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.

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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PART II

Other Information

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 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. While the Company continues to vigorously defend the allegations brought against it, it has entered into settlement negotiations with legal counsel for the plaintiffs and may choose to settle this matter.

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.

None

None

None

None

Exhibit 99.1 Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

Exhibit 99.2 Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

Current Report on Form 8-K dated May 13, 2003 furnished a press release reporting sales results for the first quarter ended May 3, 2003

Current Report on Form 8-K dated May 21, 2003 furnished a press release reporting financial results for the first quarter ended May 3, 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.

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CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael F. Anthony, certify that:

1)    I have reviewed this quarterly report on Form 10Q of Brookstone, Inc;

2)    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)    The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5)    The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:

6)    The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: June 10, 2003

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CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Philip W. Roizin, certify that:

1)    I have reviewed this quarterly report on Form 10Q of Brookstone, Inc;

2)    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)    The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

5)    The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:

6)    The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: June 10, 2003

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