<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 May 4, 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 June 17, 1996.
<PAGE> 2
GARDEN BOTANIKA, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION .......................................... 3
ITEM 1 - FINANCIAL STATEMENTS .................................. 3
Balance Sheet ......................................... 9
Statements of Operations .............................. 10
Statements of Cash Flows .............................. 11
Notes to Financial Statements ......................... 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ............................................ 3
PART II - OTHER INFORMATION ............................................. 6
ITEM 1 - LEGAL PROCEEDINGS ..................................... 6
ITEM 2 - CHANGES IN SECURITIES ................................. 6
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ....................... 6
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS ... 6
ITEM 5 - OTHER INFORMATION ..................................... 7
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ...................... 7
Exhibit 11 - Calculation of Earnings Per Common and
Common Equivalent Share ............................... 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS -
The unaudited balance sheet as of May 4, 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 periods ended May 4,
1996 and April 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 period ended May 4, 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 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 anticipates a larger net loss in each of its first three quarters of
fiscal 1996 as compared to the comparable quarters of fiscal 1995.
The Company had 162 stores in operation at May 4, 1996, compared to 92
stores at April 29, 1995 and 152 stores at February 3, 1996. The average age of
the Company's stores at May 4, 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 MAY 4, 1996 AND APRIL 29,
1995.
Net Sales. Net sales for the first quarter of fiscal 1996 were
$16,647,000, compared to net sales of $9,532,000 for the comparable prior
period, an increase of 75%. Store net sales increased $5,858,000, or 69%, during
the quarter, primarily due to the increase in the number of stores, combined
with a 9.1% increase in comparable store sales (sales for stores open at least
12 full fiscal months). The 9.1% increase in comparable store sales for the
quarter was driven by increases of 1.8%, 12.7% and 13.0% in February, March and
April, respectively. In the first quarter of fiscal 1995, comparable store sales
increased 26.3%, driven by increases of 39.0% in February, 22.0% in March and
20.6% in April. Management 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 will be negatively impacted by
the same calendar shift.
Catalog net sales increased $1,262,000, or 127%, versus the comparable
prior period. This increase was primarily attributable to a significant increase
in catalog circulation.
Gross Margin. The dollar amount of gross margin increased $2,962,000,
or 73%, from the first quarter of fiscal 1995, reflecting the effect of the 75%
increase in net sales. As a percentage of net sales, gross margin, which is net
of buying and occupancy costs, was 42.3% in the first quarter of fiscal 1996
versus 42.8% in the comparable prior period. The 50 basis point decline in gross
margin as a percentage of net sales reflected primarily the effect of occupancy
costs associated with the 76 new stores opened during fiscal 1995 and the first
quarter of fiscal 1996, combined with an increase in the Company's 1996
inventory shrinkage provision to the level actually experienced in 1995. The
effect of these factors was partially offset by significantly higher product
margins, which resulted 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 $3,394,000, or 92%, from the comparable prior period, primarily as
a result of increases in the number of stores and in catalog circulation versus
the comparable prior period. As a percentage of net sales, store and catalog
expenses increased from 38.5% in the first quarter of fiscal 1995 to 42.5% in
the first quarter of 1996, reflecting the effect of a planned increase in store
advertising to support new product introductions during the quarter.
General and Administrative. The dollar amount of general and
administrative expenses increased by $876,000, or 70%, from the comparable prior
period, primarily reflecting the effect of infrastructure additions made during
fiscal 1995 to support the Company's current and planned expansion. As a
percentage of net sales, general and administrative expenses declined from 13.1%
in the first quarter of fiscal 1995 to 12.8% in the first quarter of 1996,
reflecting improved expense leverage associated with sales growth.
Preopening Expense. Preopening expenses were $354,000, or 2.1% of net
sales, in the first quarter of fiscal 1996, during which the Company opened 10
stores and relocated and expanded its primary warehouse/distribution facility
and one existing store. In the comparable prior quarter, when the Company opened
six stores, preopening expense was $66,000, or 0.7% of net sales.
Operating Loss. For the reasons explained above, the Company's
operating loss increased 176%, from $906,000 to $2,501,000, in the respective
quarters. Expressed as a percentage of net sales, the first quarter operating
loss increased to 15.0% from 9.5% in the comparable prior period.
4
<PAGE> 5
Interest Income (Expense), Net. Net interest expense during the first
quarter of fiscal 1996 was $184,000, or 1.1% of net sales, compared to net
interest income of $79,000, or 0.8% of net sales, during the comparable prior
period. This change reflects the fact that the Company was in a net borrowing
position during the entire first quarter of fiscal 1996, whereas a portion of
the proceeds from its offering of Series C Convertible Preferred Stock in early
1995 was available for investment during the comparable prior period.
Income Tax Provision. The Company did not record an income tax
provision for either the first quarter of fiscal 1996 or fiscal 1995 due to its
pre-tax losses.
Net Loss and Per Share Data. The Company's net loss increased 225% from
$827,000, or $0.22 per share, during the first quarter of fiscal 1995 to
$2,685,000, or $0.68 per share, during the first quarter of fiscal 1996. The
increase in net loss was due to the factors discussed above. There were
approximately 3,963,000 Common and Common equivalent shares in the first quarter
of fiscal 1996, compared to approximately 3,706,000 shares in the first quarter
of fiscal 1995, an increase of approximately 7% attributable to the offering of
the Company's Series D Convertible Preferred Stock during fiscal 1995. The
Company's four series of Preferred Stock were converted into Common Stock upon
completion of its initial public offering in May 1996. For purposes of computing
loss per share, the Preferred Stock has been retroactively reclassified as
Common Stock.
LIQUIDITY AND CAPITAL RESOURCES -
The Company began fiscal 1996 with cash and cash equivalents totaling
$1,309,000 and short-term bank debt of $2,540,000. At May 4, 1996, the Company's
cash and cash equivalents were $902,000, while short-term bank borrowings were
$6,403,000. During this period, the Company exceeded the borrowing base
limitation of the working capital facility of its bank credit line. At the
Company's request, the bank waived this violation and adjusted the borrowing
base limitation in a manner calculated to permit the Company to access the full
$9,000,000 credit line through May 31, 1996, also adjusting the interest rate on
the working capital facility to prime plus 1.00% until that date. Immediately
following completion of its initial public offering of Common Stock in May 1996,
the Company repaid all borrowings and accrued interest owing under the bank
credit line.
Subsequent to the end of the first quarter, the Company completed its
initial public offering of 3,104,365 shares of Common Stock at $20 per share.
The initial public offering yielded estimated net proceeds of approximately
$56,391,000 to the Company. Of this amount, approximately $7,407,000 was
immediately used to repay all borrowings and accrued interest under the
Company's bank credit line, and the balance has been invested in short-term,
interest bearing investment grade securities pending future use in the Company's
expansion and brand development programs.
During the first quarter, the Company used $1,751,000 to finance its
operating activities and an additional $2,534,000 to fund new stores and the
relocation and expansion of its primary warehouse/distribution center facility
and one existing store. The primary source of funds for the Company's operating
and investing activities during the first quarter was its bank credit line.
During the quarter, borrowings under this line totaled $9,158,000 at interest
rates ranging from 8.25% to 11.25%, and repayments totaled $5,295,000.
RECENT DEVELOPMENTS -
See "LIQUIDITY AND CAPITAL RESOURCES" above for discussion of the
Company's initial public offering of Common Stock, completed during May 1996.
5
<PAGE> 6
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS -
None
ITEM 2 - CHANGES IN SECURITIES -
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES -
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS -
The Company's annual meeting of shareholders was held on March 29, 1996
in Bellevue, Washington. Shareholders of record at the close of business on
February 23, 1996 were entitled to notice of and to vote in person or by proxy
at the annual meeting. At the date of record, and prior to a reverse stock split
that was subsequently approved by shareholders, there were 2,112,659 shares of
Common Stock outstanding and 29,059,041 shares of Preferred Stock outstanding,
consisting of 10,092,374 shares of Series A Convertible Preferred Stock ("Series
A Stock"), 12,800,000 shares of Series B Convertible Preferred Stock ("Series B
Stock"), 4,000,000 shares of Series C Convertible Preferred Stock ("Series C
Stock") and 2,166,667 shares of Series D Convertible Preferred Stock ("Series D
Stock"). All matters presented for vote received the required majority approval,
including two-thirds majority approval, if applicable, and had the following
total, for, against and abstained votes as noted below:
(1) To approve amendments to the Company's Articles of Incorporation
that would take effect upon the effectiveness of the Registration Statement for
the Company's initial public offering in order to (i)implement a reverse stock
split; (ii) require conversion of Preferred Stock in the event of a public
offering with minimum net proceeds to the Company of $15,000,000; (iii) increase
the amount of authorized Preferred Stock; (iv) create a staggered Board of
Directors; (v) provide for the removal of directors only for "cause"; (vi) set
forth who can call special meetings of the shareholders; and (vii) set forth
special provisions for a merger, sale of assets or dissolution of the Company.
In addition, to approve a second set of amendments to the Company's Articles of
Incorporation that would, after all of the Company's Preferred Stock is
converted into Common, eliminate reference to Series A, B, C and D Stock,
because such series would cease to exist.
<TABLE>
<CAPTION>
Against Votes,
To approve Total Shares W/H Authority and
amendments................. Voted / (%) For Votes / (%) Abstained Votes
----------- --------------- ---------------
<S> <C> <C> <C>
Series A Stock . . . . . 9,439,040 9,439,040 0
94% 94%
Series B Stock . . . . . 11,772,600 11,772,600 0
92% 92%
Series C Stock . . . . . 3,711,572 3,711,572 0
93% 93%
Series D Stock . . . . . 2,008,678 2,008,678 0
93% 93%
Common Stock . . . . . . 1,870,256 1,870,256 0
89% 89%
</TABLE>
6
<PAGE> 7
(2) To approve and adopt the Company's 1996 Directors' Nonqualified
Stock Option Plan (the "Directors' Plan"), providing nonemployee directors with
an automatic grant of an option to purchase shares of Common Stock upon their
election or appointment to the Board of Directors and thereafter at each annual
meeting of the Board of Directors.
<TABLE>
<CAPTION>
W/H Authority and
To approve the Total Shares Against Abstained
Directors' Plan....... Voted / (%) For Votes / (%) Votes / (%) Votes / (%)
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
28,802,146 28,732,342 54,804 15,000
92% 92% .18% .05%
</TABLE>
(3) To elect the seven directors nominated by the Company to hold
office until the next annual meeting of shareholders and, in each case, until
his successor is elected and qualified. The seven directors nominated,
constituting the Company's entire Board of Directors, were Damon H. Ball,
Jeffrey H. Brotman, David A. Ederer, Gerald R. Gallagher, Michael W. Luce,
William B. Randall and Dale J. Vogel, and, following their successful election,
each continues in office.
<TABLE>
<CAPTION>
Against Votes,
To elect Total Shares W/H Authority and
directors........... Voted / (%) For Votes / (%) Abstained Votes
----------- --------------- ---------------
<S> <C> <C> <C>
28,802,146 28,802,146 0
92% 92%
</TABLE>
There were no other nominations, and all votes cast were cast in favor
of the entire slate of individuals nominated. There were no votes against,
withholding authority or abstaining with respect to individual directors.
(4) To ratify the selection of the Company's independent accountants,
Arthur Andersen LLP.
<TABLE>
<CAPTION>
Against Votes,
To ratify Total Shares W/H Authority and
Arthur Andersen..... Voted / (%) For Votes / (%) Abstained Votes
----------- --------------- ---------------
<S> <C> <C> <C>
28,802,146 28,802,146 0
92% 92%
</TABLE>
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 first quarter of
fiscal 1996.
7
<PAGE> 8
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
June 17, 1996 /s/ Michael W. Luce
- ------------- -------------------
Date Michael W. Luce
President and Chief Executive Officer
(Principal Executive Officer)
June 17, 1996 /s/ Myron E. Kirkpatrick
- ------------- ------------------------
Date Myron E. Kirkpatrick
Vice President-Finance, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
8
<PAGE> 9
GARDEN BOTANIKA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MAY 4, FEBRUARY 3,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 902,078 $ 1,308,533
Inventories 10,050,654 10,176,172
Prepaid expenses:
Rent 821,249 795,287
Other 1,123,067 1,307,787
Receivable from lessors 1,577,733 1,638,933
Other 274,277 346,360
------------ ------------
Total current assets 14,749,058 15,573,072
Property and equipment:
Leasehold improvements 33,632,331 31,362,255
Furniture and equipment 5,089,211 5,002,216
Equipment under capital lease 261,483 261,483
------------ ------------
38,983,025 36,625,954
Less accumulated depreciation and amortization (6,381,421) (5,450,792)
------------ ------------
Net property and equipment 32,601,604 31,175,162
Other assets 678,545 388,345
============ ============
Total assets $ 48,029,207 $ 47,136,579
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances $ 1,734,523 $ 3,615,854
Note payable to bank 6,403,000 2,540,000
Accounts payable 5,948,898 5,137,668
Accrued salaries, wages and benefits 1,154,643 780,155
Accrued sales tax 313,508 297,046
Other 775,930 540,497
------------ ------------
Total current liabilities 16,330,502 12,911,220
Deferred rent and other 1,252,407 1,109,280
------------ ------------
Total liabilities 17,582,909 14,020,500
Commitments
Shareholders' equity:
Preferred Stock, $.01 par value;
3,694,031 shares authorized, issued and outstanding 42,026,441 42,026,441
Common Stock, $.01 par value;
36,092,374 shares authorized; 268,546 issued and outstanding 229,271 214,271
Accumulated deficit (11,809,414) (9,124,633)
------------ ------------
Total shareholders' equity 30,446,298 33,116,079
Total liabilities & shareholders' equity $ 48,029,207 $ 47,136,579
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 10
GARDEN BOTANIKA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
[UNAUDITED]
QUARTER ENDED
---------------------------
MAY 4, APRIL 29,
1996 1995
------------ -----------
<S> <C> <C>
Net sales $ 16,647,496 $ 9,532,014
Cost of sales (including buying and occupancy costs) 9,601,164 5,447,917
------------ -----------
Gross margin 7,046,332 4,084,097
Operating expenses:
Stores and catalog 7,067,678 3,673,400
General and administrative 2,125,772 1,250,100
Preopening expenses 353,842 66,418
------------ -----------
Operating loss (2,500,960) (905,821)
Interest income (expense), net (183,821) 78,932
============ ===========
Net loss $ (2,684,781) $ (826,889)
============ ===========
Net loss per share, giving effect to the subsequent
conversion of all Preferred shares to Common $ (0.68) $ (0.22)
Weighted average Common and Common
equivalent shares 3,962,577 3,706,145
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE> 11
GARDEN BOTANIKA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
[UNAUDITED]
QUARTER ENDED
---------------------------
MAY 4, APRIL 29,
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,684,781) $ (826,889)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,009,170 593,195
Loss on retirement of property and equipment 98,155 --
Changes in assets and liabilities:
Inventories 125,518 (467,406)
Prepaid rent and other assets 1,841 213,386
Accounts payable and checks drawn in excess of bank balances (1,070,101) (3,464,562)
Accrued expenses 626,383 (418,770)
Deferred rent and other 143,127 174,916
----------- ------------
Total adjustments 934,093 (3,369,241)
Net cash used by operating activities (1,750,688) (4,196,130)
Cash flows from investing activities:
Additions to property and equipment (2,533,767) (1,943,220)
----------- ------------
Net cash used in investing activities (2,533,767) (1,943,220)
Cash flows from financing activities:
Sale of Preferred Stock -- 9,991,326
Advances on note payable to bank 9,157,986 --
Payments on note payable to bank (5,294,986) --
Other, net 15,000 50,425
----------- ------------
Net cash provided by financing activities 3,878,000 10,041,751
Increase (decrease) in cash and cash equivalents (406,455) 3,902,401
Cash and cash equivalents, beginning of period 1,308,533 1,038,373
----------- ------------
Cash and cash equivalents, end of period $ 902,078 $ 4,940,774
=========== ============
Supplemental disclosures:
Cash paid for interest $ 198,919 $ --
Cash paid for income taxes $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 12
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 4, 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 period ended May 4, 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 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. In connection with its initial public offering of Common Stock completed
subsequent to May 4, 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 number of Common and
Preferred shares outstanding.
5. Effective with the Company's initial public offering of Common Stock, its
Board of Directors and its shareholders approved, subsequent to May 4, 1996, 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.
6. During the quarter ended May 4, 1996, the Company exceeded the borrowing base
limitation of the working capital facility of its bank credit line. At the
Company's request, the bank waived this violation and adjusted the borrowing
base limitation in a manner calculated to permit the Company to access the full
$9,000,000 credit line through May 31, 1996, also adjusting the interest rate on
the working capital facility to prime plus 1.00% until that date. Following
comple-
12
<PAGE> 13
tion of its initial public offering of Common Stock in May 1996, the Company
immediately repaid all borrowings and accrued interest under the bank credit
line.
7. Subsequent to the end of the first quarter, the Company completed its initial
public offering of 3,104,365 shares of Common Stock, at $20 per share. The
initial public offering yielded estimated net proceeds of approximately
$56,391,000 to the Company. A pro forma condensed balance sheet as of May 4,
1996, reflecting the results of the initial public offering and subsequent
repayment of the Company's bank credit line, is shown below:
<TABLE>
<CAPTION>
MAY 4, 1996
-------------------------
ASSETS ACTUAL PRO FORMA
----------- -----------
<S> <C> <C>
Current assets $14,749,058 $64,737,247
Property and equipment, net 32,601,604 32,601,604
Other assets 678,545 678,545
----------- -----------
Total assets $48,029,207 $98,017,396
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $16,330,502 $ 9,927,502
Other liabilities 1,252,407 1,252,407
----------- -----------
Total liabilities 17,582,909 11,179,909
Commitments
Shareholders' equity 30,446,298 86,837,487
----------- -----------
Total liabilities and shareholders' equity $48,029,207 $98,017,396
</TABLE>
8. 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.
13
<PAGE> 1
GARDEN BOTANIKA, INC.
CALCULATION OF EARNINGS
PER COMMON AND COMMON EQUIVALENT SHARE
(EXHIBIT 11)
<TABLE>
<CAPTION>
[UNAUDITED]
QUARTER ENDED
----------------------------
MAY 4, APRIL 29,
1996 1995
----------- -----------
<S> <C> <C>
PRIMARY:
Earnings -
Net earnings (loss) applicable to Common
and Common equivalent shares $(2,684,781) $ (826,889)
=========== ===========
Shares -
Weighted average Common shares outstanding 268,546 262,986
Weighted average Preferred shares outstanding [1] 3,694,031 3,418,623
Net effect of stock options, based on treasury stock method
using average market price -- [2] 24,536[3]
=========== ===========
Weighted average Common and Common equivalent shares 3,962,577 3,706,145
=========== ===========
Primary earnings (loss) per Common and
Common equivalent share $ (0.68) $ (0.22)
=========== ===========
</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 subsequent to May 4, 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 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 the
first quarter 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).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET AS OF 5/4/96, AUDITED BALANCE SHEET AS OF 2/3/96 AND
UNAUDITED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE QUARTERLY PERIODS
ENDED 5/4/96 AND 4/29/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED 5/4/96.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> FEB-04-1996
<PERIOD-END> MAY-04-1996
<CASH> 902
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,051
<CURRENT-ASSETS> 14,749
<PP&E> 38,983
<DEPRECIATION> 6,381
<TOTAL-ASSETS> 48,029
<CURRENT-LIABILITIES> 16,331
<BONDS> 0
0
42,026
<COMMON> 229
<OTHER-SE> (11,809)
<TOTAL-LIABILITY-AND-EQUITY> 48,029
<SALES> 16,647
<TOTAL-REVENUES> 16,647
<CGS> 9,601
<TOTAL-COSTS> 9,193
<OTHER-EXPENSES> 354
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184
<INCOME-PRETAX> (2,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,685)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> 0
</TABLE>
