<PAGE> 1
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 August 3, 1996
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 0-27920
Garden Botanika, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Washington 91-1464962
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8624 154th Avenue NE
Redmond, Washington 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 881-9603
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 NO X
THE REGISTRANT HAD 7,066,942 SHARES OF COMMON STOCK, $0.01 PAR VALUE,
OUTSTANDING AT August 3, 1996.
<PAGE> 2
GARDEN BOTANIKA, INC.
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION____________________________________ 3
ITEM 1 - FINANCIAL STATEMENTS_____________________________ 3
Balance Sheets________________________________________ 10
Statements of Operations______________________________ 11
Statements of Cash Flows______________________________ 12
Notes to Financial Statements_________________________ 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS_______________________________________ 3
PART II - OTHER INFORMATION_______________________________________ 8
ITEM 1 - LEGAL PROCEEDINGS__________________________________ 8
ITEM 2 - CHANGES IN SECURITIES______________________________ 8
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES____________________ 8
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 8
ITEM 5 - OTHER INFORMATION__________________________________ 8
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K___________________ 8
Exhibit 11 - Calculation of Earnings Per Common and
Common Equivalent Share_______________________________ 16
2
<PAGE> 3
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS -
The unaudited balance sheet as of August 3, 1996, audited balance sheet as
of February 3, 1996 and unaudited statements of operations and cash flows of
Garden Botanika, Inc. (the "Company") for the quarterly and 26-week periods
ended August 3, 1996 and July 29, 1995 are attached. Notes to the unaudited
financial statements are also attached.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -
This discussion should be read in conjunction with the "Management's
Discussion and Analysis" section included in the Company's Prospectus dated May
22, 1996, contained in a Registration Statement on Form S-1 which has previously
been filed with the Securities and Exchange Commission.
When used in this discussion and in the context of future events, the
words "expects," "anticipates," "plans," "believes" and similar expressions are
intended to identify forward looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results or trends to
differ materially from those projected. See the "Risk Factors" section of the
Company's Prospectus. Readers are cautioned not to place undue reliance on these
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The results of operations for the quarterly and 26-week periods ended
August 3, 1996 are not necessarily indicative of the results to be expected for
the full fiscal year. Historically, 45% to 50% of the Company's annual net sales
and all of its profits, if any, have been realized during its fourth fiscal
quarter, particularly during the November and December holiday selling period.
The Company expects this pattern to continue during the current fiscal year. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of other factors, including, among other things, the timing
of new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays and changes in the Company's product mix. Primarily as a
result of the increasing number of recently opened stores and new product
initiatives, the Company incurred larger net losses in each of the first two
quarters of fiscal 1996, and anticipates a larger net loss in the third quarter,
as compared to the comparable quarters of fiscal 1995.
The Company had 186 stores in operation at August 3, 1996, compared to 104
stores at July 29, 1995 and 152 stores at February 3, 1996. The average age of
the Company's stores at August 3, 1996 was 20 months.
The Company reports on a 52/53-week year, consisting of four 13-week
quarters. The fiscal year ends on the Saturday nearest the end of January.
3
<PAGE> 4
RESULTS OF OPERATIONS -
(A) COMPARISON OF THE QUARTERLY PERIODS ENDED AUGUST 3, 1996 AND JULY 29,
1995.
Net Sales. Net sales for the second quarter of fiscal 1996 were
$16,916,000, compared to net sales of $10,138,000 for the comparable prior
period, an increase of 67%. Store net sales increased $5,858,000, or 61%, during
the quarter, primarily due to the increase in the number of stores, combined
with a 2% increase in comparable store sales (sales for stores open at least 12
full fiscal months). Comparable store sales increased 3%, 2% and 1% in May, June
and July, respectively. In the second quarter of fiscal 1995, comparable store
sales increased 29%, consisting of increases of 34% in May, 31% in June and 21%
in July. In view of the significant number of new products introduced during the
second quarter of fiscal 1996, the Company believes the 2% increase in
comparable store sales reflects some trade off of sales between existing and new
product lines. Management also believes that April and first quarter 1996 sales
were helped by an earlier Mothers' Day in comparison to fiscal 1995, and that,
as a consequence, May and second quarter 1996 sales were negatively impacted by
the same calendar shift.
Catalog net sales increased $916,000, or 175%, versus the comparable prior
period. This increase was primarily attributable to a significant increase in
catalog circulation as the Company continued to prospect for new mail order
customers.
Gross Margin. The dollar amount of gross margin increased $2,581,000, or
61%, from the second quarter of fiscal 1995, reflecting the effect of the 67%
increase in net sales. As a percentage of net sales, gross margin, which is net
of buying and occupancy costs, was 40.2% versus 41.5% in the comparable prior
period. The 130 basis point decline in gross margin as a percentage of net sales
reflected primarily the effect of occupancy costs associated with the 100 new
stores opened during fiscal 1995 and the first half of fiscal 1996. The effect
of this increase was partially offset by higher product margin, which management
believes resulted principally from improvement in initial markup and shifts in
product mix.
Operating Expenses.
Stores and Catalog. The dollar amount of store and catalog expenses
increased by $3,381,000, or 98%, from the comparable prior period, primarily as
a result of increases in the number of stores and in catalog circulation. As a
percentage of net sales, store and catalog expenses increased from 34.1% to
40.4%, reflecting the effects of planned increases in expenditures to support
continued development of the Company's catalog business, new store openings and
new product introductions, as well as the higher payroll and benefit rates (as a
percentage of sales) typically associated with newer, less productive stores.
General and Administrative. The dollar amount of general and
administrative expenses increased by $549,000, or 38%, from the comparable prior
period, primarily reflecting the effect of infrastructure additions made to
support the Company's current and planned expansion. As a percentage of net
sales, general and administrative expenses declined from 14.4% to 11.9%,
reflecting improved expense leverage associated with sales growth.
Preopening Expense. Preopening expense was $252,000, or 1.5% of net sales,
in the second quarter of fiscal 1996, during which the Company opened 24 stores.
In the comparable prior quarter, when the Company opened 12 stores, preopening
expense was $176,000, or 1.7% of net sales.
4
<PAGE> 5
Operating Loss. For the reasons explained above, the Company's operating
loss increased 163%, from $876,000 to $2,301,000, in the respective quarters.
Expressed as a percentage of net sales, the second quarter operating loss
increased to 13.6% from 8.6% in the comparable prior period.
Interest Income, Net. Net interest income during the second quarter of
fiscal 1996 was $315,000, or 1.9% of net sales, compared to net interest income
of $41,000, or 0.4% of net sales, during the comparable prior period. This
increase reflected the effect of proceeds from the Company's initial public
offering, which was completed during the second quarter, net of interest expense
incurred prior to the offering.
Income Tax Provision. The Company did not record an income tax
provision for the second quarter of either fiscal 1996 or fiscal 1995 due to
its pre-tax losses.
Net Loss and Per Share Data. The Company's net loss increased 138% from
$836,000, or $0.23 per share, during the second quarter of fiscal 1995 to
$1,987,000, or $0.31 per share, during the second quarter of fiscal 1996. The
increase in net loss was due to the factors discussed above. There were
approximately 6,487,000 Common and Common equivalent shares for the second
quarter of fiscal 1996, compared to approximately 3,707,000 shares for the
second quarter of fiscal 1995, an increase of approximately 75% attributable to
the offering of the Company's Series D Convertible Preferred Stock during fiscal
1995 and its initial public offering of Common Stock on May 22, 1996. The
Company's four series of Preferred Stock were converted into Common Stock upon
completion of its initial public offering. For purposes of computing loss per
share, the Preferred Stock has been retroactively reclassified as Common Stock.
(b) COMPARISON OF THE 26-WEEK PERIODS ENDED AUGUST 3, 1996 AND JULY 29,
1995.
Net Sales. Net sales for the first half of fiscal 1996 were $33,563,000,
compared to net sales of $19,670,000 for the comparable prior period, an
increase of 71%. Store net sales increased $11,716,000, or 65%, during the
period, primarily due to the increase in the number of stores, combined with a
6% increase in comparable store sales. In the first half of fiscal 1995,
comparable store sales increased 28%. Catalog net sales increased $2,178,000, or
143%, versus the comparable prior period. This increase was primarily
attributable to a significant increase in catalog circulation as the Company
continued to prospect for new mail order customers.
Gross Margin. The dollar amount of gross margin increased $5,543,000, or
67%, from the first half of fiscal 1995, reflecting the effect of the 71%
increase in net sales. As a percentage of net sales, gross margin, which is net
of buying and occupancy costs, was 41.2% versus 42.2% in the comparable prior
period. The 100 basis point decline in gross margin as a percentage of net sales
reflected primarily the effect of occupancy costs associated with the 100 new
stores opened during fiscal 1995 and the first half of fiscal 1996. The effect
of this increase was partially offset by higher product margins, which
management believes resulted principally from improvement in initial markup and
shifts in product mix.
5
<PAGE> 6
Operating Expenses.
Stores and Catalog. The dollar amount of store and catalog expenses
increased by $6,775,000, or 95%, from the comparable prior period, primarily as
a result of increases in the number of stores and in catalog circulation. As a
percentage of net sales, store and catalog expenses increased from 36.2% to
41.4%, reflecting primarily the effects of planned increases in expenditures to
support new store openings, new product introductions and continued development
of the Company's catalog business.
General and Administrative. The dollar amount of general and
administrative expenses increased by $1,424,000, or 53%, from the comparable
prior period, primarily reflecting the effect of infrastructure additions made
to support the Company's current and planned expansion. As a percentage of net
sales, general and administrative expenses declined from 13.8% to 12.3%,
reflecting improved expense leverage associated with sales growth.
Preopening Expense. Preopening expense was $606,000, or 1.8% of net sales,
in the first half of fiscal 1996, during which the Company opened 34 stores and
relocated and expanded its primary warehouse/distribution facility and one
existing store. In the comparable prior period, when the Company opened 18
stores, preopening expense was $242,000, or 1.2% of net sales.
Operating Loss. For the reasons explained above, the Company's operating
loss increased 169%, from $1,782,000 to $4,802,000, in the respective 26-week
periods. Expressed as a percentage of net sales, the operating loss increased to
14.3% from 9.1% in the comparable prior period.
Interest Income, Net. Net interest income during the first half of fiscal
1996 was $131,000, or 0.4% of net sales, compared to net interest income of
$120,000, or 0.6% of net sales, during the comparable prior period. The dollar
increase reflected the effect of proceeds from the Company's initial public
offering, which was completed on May 22, 1996, net of interest expense incurred
prior to that date.
Income Tax Provision. The Company did not record an income tax
provision for the first half of either fiscal 1996 or fiscal 1995 due to its
pre-tax losses.
Net Loss and Per Share Data. The Company's net loss increased 181% from
$1,663,000, or $0.45 per share, during the first half of fiscal 1995 to
$4,672,000, or $0.89 per share, during the first half of fiscal 1996. The
increase in net loss was due to the factors discussed above. There were
approximately 5,225,000 Common and Common equivalent shares for the first half
of fiscal 1996, compared to approximately 3,707,000 shares for the first half of
fiscal 1995, an increase of approximately 41% attributable to the offering of
the Company's Series D Convertible Preferred Stock during fiscal 1995 and its
initial public offering of Common Stock on May 22, 1996. The Company's four
series of Preferred Stock were converted into Common Stock upon completion of
its initial public offering. For purposes of computing loss per share, the
Preferred Stock has been retroactively reclassified as Common Stock.
6
<PAGE> 7
LIQUIDITY AND CAPITAL RESOURCES -
On May 22, 1996, the Company completed its initial public offering of
3,104,365 shares of Common Stock at $20 per share. The offering yielded net
proceeds to the Company of approximately $56,000,000. Of this amount,
approximately $7,400,000 was used to repay all borrowings and accrued interest
under the Company's bank credit line, and the balance was invested in
short-term, interest bearing investment grade securities for use in the
Company's expansion and brand development programs.
The Company opened 34 stores during the first half of fiscal 1996, and
currently expects to open approximately 66 additional stores by the end of the
fiscal year. In addition, the Company currently plans to open approximately 120
stores during fiscal 1997. All current stores are, and all presently planned
stores are expected to be, located in premises leased by the Company. The
Company estimates that the average cost to open a Garden Botanika store of the
current prototype (including net fixed assets, inventory and preopening
expenses) is approximately $240,000. The Company expects to finance the
remainder of its fiscal 1996 expansion program and its currently planned fiscal
1997 expansion program through a combination of proceeds from its initial public
offering, cash flow from operations and bank credit lines. The Company's capital
requirements may vary significantly from those anticipated, however, depending
particularly upon such factors as operating results, the number and timing of
new store openings, store development costs in the markets the Company enters
and the extent of lessor construction allowances received.
The Company's balance sheet at August 3, 1996 reflected a $48,679,000
(103%) increase in total assets since the fiscal year began on February 4. The
principal components of this change were: (a) an increase of $41,883,000 in cash
and cash equivalents resulting from the Company's May 1996 initial public
offering and (b) an increase of $5,031,000 in net property and equipment
relating to the 1996 store expansion program. The increase in total assets was
accompanied by: (w) a reduction of $3,212,000 in current liabilities, (x) a
reduction of $42,026,000 in Preferred Stock, (y) an increase of $98,268,000 in
Common Stock and (z) an increase of $4,672,000 in accumulated deficit, all
relating to payment of year-end liabilities for merchandise purchases and store
construction, the May 1996 initial public offering and subsequent repayment of
short-term bank debt, and operating losses for the first half of fiscal 1996.
7
<PAGE> 8
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS -
On July 23, 1996, Garden Botanika was named as defendant in a lawsuit
filed by The Gap, Inc. in the United States District Court for the Northern
District of California, alleging trade dress infringement and unfair competition
in the design, marketing and sale of the Company's Transparencies line of
personal care products. The parties have agreed in principle to settle this
action. In accordance with the proposed settlement agreement, Garden Botanika
will, among other things, change elements of its merchandising and package
design for the Transparencies line. The proposed settlement does not require
payment of monetary damages, and the Company does not believe that the lawsuit
or the proposed settlement has had or will have a material adverse effect on its
business.
ITEM 2 - CHANGES IN SECURITIES -
In connection with the Company's initial public offering, its Articles of
Incorporation were amended on May 21, 1996 to effect an approximate 1-to-7.87
reverse stock split. At the same time, an increase to 10,000,000 shares in the
amount of authorized Preferred Stock became effective and all of the Company's
then outstanding Preferred Stock automatically converted to Common Stock on a
one-for-one basis.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES -
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS -
None
ITEM 5 - OTHER INFORMATION -
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibit 11 (Calculation of Earnings Per Common and Common Equivalent
Share) is attached.
(b) No reports on Form 8-K were filed during the second quarter of fiscal
1996.
8
<PAGE> 9
SIGNATURES:
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GARDEN BOTANIKA, INC.
---------------------
Registrant
August 30, 1996 /s/ Michael W. Luce
- --------------- -------------------------------------
Date Michael W. Luce
President and Chief Executive Officer
(Principal Executive Officer)
August 30, 1996 /s/ Myron E. Kirkpatrick
- --------------- -------------------------------------
Date Myron E. Kirkpatrick
Vice President-Finance, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
9
<PAGE> 10
GARDEN BOTANIKA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 3, FEBRUARY 3,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43,191,234 $ 1,308,533
Inventories 11,461,661 10,176,172
Prepaid expenses:
Rent 852,447 795,287
Other 1,044,740 1,307,787
Receivable from lessors 2,739,579 1,638,933
Other 92,678 346,360
------------ ------------
Total current assets 59,382,339 15,573,072
Property and equipment:
Leasehold improvements 37,251,170 31,362,255
Furniture and equipment 6,191,742 5,002,216
Equipment under capital lease 261,483 261,483
------------ ------------
43,704,395 36,625,954
Less accumulated depreciation and amortization (7,498,142) (5,450,792)
------------ ------------
Net property and equipment 36,206,253 31,175,162
Other assets 227,463 388,345
------------ ------------
Total assets $ 95,816,055 $ 47,136,579
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances $ 2,287,858 $ 3,615,854
Note payable to bank -- 2,540,000
Accounts payable 5,391,980 5,137,668
Accrued salaries, wages and benefits 884,265 780,155
Accrued sales tax 315,101 297,046
Other 819,876 540,497
------------ ------------
Total current liabilities 9,699,080 12,911,220
Deferred rent and other 1,430,772 1,109,280
------------ ------------
Total liabilities 11,129,852 14,020,500
Commitments
Shareholders' equity:
Preferred Stock, $.01 par value;
10,000,000 and 3,694,031 shares authorized; 0 and 3,694,031
issued and outstanding -- 42,026,441
Common Stock, $.01 par value;
36,092,374 shares authorized; 7,066,942 and 268,546 issued
and outstanding 98,482,378 214,271
Accumulated deficit (13,796,175) (9,124,633)
------------ ------------
Total shareholders' equity 84,686,203 33,116,079
Total liabilities & shareholders' equity $ 95,816,055 $ 47,136,579
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 11
GARDEN BOTANIKA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------------------------------------
QUARTER ENDED 26 WEEKS ENDED
----------------------------- -----------------------------
AUGUST 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 16,915,921 $ 10,138,292 $ 33,563,417 $ 19,670,306
Cost of sales (including buying and occupancy costs) 10,122,901 5,926,067 19,724,065 11,373,984
------------ ------------ ------------ ------------
Gross margin 6,793,020 4,212,225 13,839,352 8,296,322
Operating expenses:
Stores and catalog 6,835,002 3,454,168 13,902,680 7,127,568
General and administrative 2,007,316 1,458,600 4,133,088 2,708,700
Preopening expenses 252,000 175,890 605,842 242,308
------------ ------------ ------------ ------------
Operating loss (2,301,298) (876,433) (4,802,258) (1,782,254)
Interest income, net 314,537 40,772 130,716 119,704
============ ============ ============ ============
Net loss $ (1,986,761) $ (835,661) $ (4,671,542) $ (1,662,550)
============ ============ ============ ============
Net loss per share, giving effect to the conversion
of all Preferred shares to Common $ (0.31) $ (0.23) $ (0.89) $ (0.45)
Weighted average Common and Common
equivalent shares 6,487,006 3,707,343 5,224,791 3,706,744
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 12
GARDEN BOTANIKA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
26 WEEKS ENDED
-------------------------------
AUGUST 3, JULY 29,
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,671,542) $(1,662,550)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 2,125,891 1,221,888
Loss on retirement of property and equipment 98,155 --
Changes in assets and liabilities:
Inventories (1,285,489) (1,037,978)
Prepaid rent and other assets (480,195) (322,066)
Accounts payable and checks drawn in excess of bank balances (1,073,684) (2,393,836)
Accrued expenses 401,544 (285,571)
Deferred rent and other 321,492 313,700
------------ -----------
Total adjustments 107,714 (2,503,863)
Net cash used by operating activities (4,563,828) (4,166,413)
Cash flows from investing activities:
Additions to property and equipment (7,255,137) (5,716,195)
------------ -----------
Net cash used by investing activities (7,255,137) (5,716,195)
Cash flows from financing activities:
Sale of stock 56,191,189 9,953,684
Payments on note payable to bank, net (2,540,000) --
Other 50,477 --
------------ -----------
Net cash provided by financing activities 53,701,666 9,953,684
Increase in cash and cash equivalents 41,882,701 71,076
Cash and cash equivalents, beginning of period 1,308,533 1,038,373
------------ -----------
Cash and cash equivalents, end of period $ 43,191,234 $ 1,109,449
============ ===========
Supplemental disclosures:
Cash paid for interest $ 303,207 --
Cash paid for income taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 13
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 3, 1996 (UNAUDITED)
1. The accompanying unaudited financial statements include the accounts of
Garden Botanika, Inc. (the "Company"), a Washington corporation. These financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and pursuant to the rules and
regulations of the Securities and Exchange Commission. While these statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for fair presentation of the results of the interim
period, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Prospectus dated May 22, 1996, contained in a
Registration Statement on Form S-1 which has previously been filed with the
Securities and Exchange Commission.
2. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the amounts of revenues and expenses reported during the period. Actual
results could differ from those estimates.
3. The results of operations for the quarterly and 26-week periods ended August
3, 1996 are not necessarily indicative of the results to be expected for the
full fiscal year. Historically, 45% to 50% of the Company's annual net sales and
all of its profits, if any, have been realized during its fourth fiscal quarter,
particularly during the November and December holiday selling period. The
Company expects this pattern to continue during the current fiscal year. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of other factors, including, among other things, the timing
of new store openings, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in the
timing of holidays and changes in the Company's product mix.
4. On May 22, 1996, the Company completed its initial public offering of
3,104,365 shares of Common Stock, at $20 per share. This offering yielded net
proceeds to the Company of approximately $56,000,000. Following completion of
this offering, the Company repaid all borrowings and accrued interest under its
bank credit line.
5. Effective with the Company's initial public offering, its Board of Directors
and its shareholders approved an amendment to the Company's Articles of
Incorporation to effect an approximate 1-to-7.87 reverse stock split. The
accompanying financial statements have been adjusted to reflect this action. At
the same time, an increase to 10,000,000 shares in the amount of authorized
Preferred Stock was also approved and has become effective. Also in connection
with the offering, all of the Company's outstanding Preferred Stock
automatically converted to Common on a one-for-one basis; therefore, losses per
Common and Common equivalent share are based on the number of Common and
Preferred shares outstanding.
13
<PAGE> 14
6. During 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. The Company plans to continue
to measure the compensation cost of stock option plans using the intrinsic
value method prescribed by APB Opinion No. 25 and, starting in 1996, to make
pro forma disclosures of net income and earnings per share as if the fair
value method of accounting prescribed by SFAS No. 123 had been applied.
14
<PAGE> 15
EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------- ----------- ------
11 Calculation of Earnings Per Common and Common
Equivalent Share 16
15
<PAGE> 1
GARDEN BOTANIKA, INC.
CALCULATION OF EARNINGS
PER COMMON AND COMMON EQUIVALENT SHARE
(EXHIBIT 11)
<TABLE>
<CAPTION>
(UNAUDITED)
-------------------------------------------------------------------
QUARTER ENDED 26 WEEKS ENDED
------------------------------ ------------------------------
AUGUST 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
PRIMARY:
Earnings -
Net earnings (loss) applicable to Common
and Common equivalent shares $ (1,986,761) $ (835,661) $ (4,671,542) $(1,662,550)
============ =========== ============ ===========
Shares -
Weighted average Common shares outstanding 5,796,912 264,184 3,032,729 263,585
Weighted average Preferred shares outstanding (1) 690,094 3,418,623 2,192,062 3,418,623
Net effect of stock options, based on treasury
stock method using average market price --(2) 24,536(3) --(2) 24,536(3)
------------ ----------- ------------ -----------
Weighted average Common and Common equivalent shares 6,487,006 3,707,343 5,224,791 3,706,744
============ =========== ============ ===========
Primary earnings (loss) per Common and
Common equivalent share $ (0.31) $ (0.23) $ (0.89) $ (0.45)
============ =========== ============ ===========
</TABLE>
FULLY DILUTED:
Fully diluted earnings (loss) per share is not presented, as there were no
potentially dilutive securities.
NOTES:
(1) In connection with its initial public offering of Common Stock completed
on May 22, 1996, all of the Company's outstanding Preferred Stock
automatically converted to Common on a one-for-one basis. Therefore,
losses per Common and Common equivalent share are based on the weighted
average number of Common and Preferred shares outstanding.
(2) In the calculation of weighted average Common and Common equivalent
shares, nonqualified stock options and warrants to purchase Common Stock
are considered Common Stock equivalents. Such options and warrants are
converted using the treasury stock method, which assumes that the shares
issuable upon exercise of the options or warrants were outstanding for
the full period. In accordance with generally accepted accounting
principles, no Common Stock equivalents are shown for either the second
quarter or the first 26 weeks of fiscal 1996, as their effect would have
been anti-dilutive.
(3) Pursuant to Securities and Exchange Commission Accounting Bulletins,
24,536 Common and Common equivalent shares issued during the 12-month
period prior to the Company's May 1996 initial public offering have been
included in the calculation as if they were outstanding for all periods
reported prior to the filing of the Registration Statement (using the
treasury stock method at the assumed initial public offering price).
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET AS OF 8/3/96, AUDITED BALANCE SHEET AS OF 2/3/96
AND UNAUDITED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE QUARTERLY
PERIODS ENDED 8/3/96 AND 7/29/96 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED 8/3/96.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> MAY-05-1996
<PERIOD-END> AUG-03-1996
<CASH> 43,191
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,462
<CURRENT-ASSETS> 59,382
<PP&E> 43,704
<DEPRECIATION> 7,498
<TOTAL-ASSETS> 95,816
<CURRENT-LIABILITIES> 9,699
<BONDS> 0
0
0
<COMMON> 98,482
<OTHER-SE> (13,798)
<TOTAL-LIABILITY-AND-EQUITY> 95,816
<SALES> 16,916
<TOTAL-REVENUES> 16,916
<CGS> 10,123
<TOTAL-COSTS> 8,842
<OTHER-EXPENSES> 252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (315)
<INCOME-PRETAX> (1,987)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,987)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,987)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0
</TABLE>
