<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 2, 1997
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)
(425) 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 [X] NO [ ]
THE REGISTRANT HAD 7,069,098 SHARES OF COMMON STOCK, $0.01 PAR VALUE,
OUTSTANDING AT August 2, 1997.
<PAGE> 2
GARDEN BOTANIKA, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION .................................................................. 3
ITEM 1 - FINANCIAL STATEMENTS ........................................................ 3
Balance Sheets .............................................................. 11
Statements of Operations .................................................... 12
Statements of Cash Flows .................................................... 13
Notes to Financial Statements .............................................. 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................. 3
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................................. 7
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 .......................................................... 9
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ........................................... 9
Exhibit 11 - Calculation of Earnings Per Common and
Common Equivalent Share .................................................... 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS -
The unaudited balance sheet as of August 2, 1997, audited balance sheet
as of February 1, 1997 and unaudited statements of operations and cash flows of
Garden Botanika, Inc. (the "Company") for the quarterly and six-month periods
ended August 2, 1997 and August 3, 1996 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 Annual Report on Form 10-K
dated April 18, 1997, which has previously been filed with the Securities and
Exchange Commission.
Certain statements in this discussion constitute "forward-looking
statements" and involve risks, uncertainties and other factors which may cause
the Company's actual performance to be materially different from the performance
expressed or implied by such statements. Such factors include, among others: (a)
the performance of its newer stores, including its larger Color Studio stores
and those stores in less developed markets; (b) fluctuations in comparable store
sales; (c) competition; (d) the Company's ability to identify and respond to
emerging industry trends, including the ability to successfully develop and
introduce new products and to maintain inventory levels appropriate for demand;
(e) the Company's ability to obtain targeted sales volumes through competitive
pricing at acceptable gross margins and to bring its mail order operations to
profitability; and (f) other factors set forth in the Company's Annual Report on
Form 10-K dated April 18, 1997 and other filings with the Securities and
Exchange Commission. 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 August 2, 1997
are not necessarily indicative of the results to be expected for the full fiscal
year. In each of the past three fiscal years, 45% to 49% 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 others, 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, shifts in the timing of promotions and catalog mailings and changes in
the Company's product mix. Primarily as a result of the large number of newer
stores in less developed markets and the effects of pricing changes and other
costs associated with its 1997 re-merchandising program, the Company expects to
incur larger net losses during the first three quarters of fiscal 1997 than
those incurred during the comparable period of fiscal 1996.
The Company had 269 stores in operation at August 2, 1997 compared to
186 stores at August 3, 1996 and 253 stores at February 1, 1997. The average age
of the Company's stores at August 2, 1997 was 25 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 2, 1997 AND AUGUST
3, 1996.
During the second quarter of fiscal 1997, the Company implemented a
number of significant merchandising initiatives that it has collectively termed
the "1997 Re-merchandising Program." The long-term purpose of the 1997
Re-merchandising Program is to increase the sales productivity and profitability
of the Company's stores. The primary elements of the program include: (a)
doubling the color range of the cosmetics assortment in the Company's
traditional stores, (b) introduction of new cosmetics tester fixtures in many of
those stores, (c) introduction of additional floor display fixtures and
improvements to visual merchandise presentation in virtually all stores, (d)
more competitive pricing on a wide range of toiletries products and (e)
elimination of a large number of less productive items from the Company's
customary assortment. A concerted effort was also begun during the second
quarter to clear these discontinued products from stock, and this effort will
continue through at least the first half of the third quarter. The relationship
of the 1997 Re-merchandising Program to the Company's second quarter results of
operations and its financial position at August 2, 1997 is included in the
discussion which follows.
Net Sales. Net sales for the second quarter of fiscal 1997 were $24.87
million, compared to net sales of $16.92 million for the comparable prior
period, an increase of 47%. Store net sales increased $8.29 million, or 54%,
during the quarter, primarily due to the increase in the number of stores,
combined with a 10% increase in comparable store sales (sales for stores open at
least one complete fiscal year). The 10% increase in comparable store sales for
the quarter was driven by increases of 11% in May, 12% in June and 6% in July,
when the Company did not mail its traditional store catalog due to its clearance
efforts. In the second quarter of fiscal 1996, comparable store sales increased
4%, consisting of increases of 5% in May and 4% in both June and July.
Mail order net sales declined $356,000, or 25%, in the second quarter
of fiscal 1997 versus the comparable prior period. This decline was primarily
attributable to a planned reduction in mail order catalog circulation as the
Company significantly reduced the level of prospecting for new customers and
focused its primary efforts on its more productive and cost effective list of
customers who have previously purchased from its mail order catalogs.
Gross Margin. The dollar amount of gross margin increased $1.28
million, or 19%, from the second quarter of fiscal 1996, reflecting the effect
of the 47% increase in net sales. As a percentage of net sales, gross margin,
which is net of buying and occupancy costs, was 32.5% in the second quarter of
fiscal 1997 versus 40.2% in the comparable prior period. Approximately half of
this decline was attributable to the effect of relatively fixed store occupancy
costs in the Company's newer classes of stores, which generally have lower sales
volumes. An additional 35% of this decline was attributable to reduced product
margin, reflecting both the Company's new toiletries pricing strategy and its
program to clear discontinued items from stock in connection with the 1997
Re-merchandising Program. The new toiletries strategy will continue to reduce
gross margin relative to past levels in future periods, while the effect of the
clearance program is expected to lessen during September.
Operating Expenses.
Stores and Catalog. The dollar amount of store and catalog
expenses increased by $2.76 million, or 40%, from the comparable prior period,
primarily as a result of the increase in the number of stores. As a percentage
of net sales, store and catalog expenses declined to 38.6% from 40.4% in the
second quarter of fiscal 1996. Store expenses increased in both absolute dollars
(due to the 83 new stores opened since the end of second quarter 1996) and as a
percentage of net sales (reflecting the initially lower sales volume of the
Company's newer classes of stores and the expenses associated with the 1997
Re-merchandising Program). The increase in store expenses was partially offset
by a significant decline in mail order expenses, both in absolute dollars and as
a percentage of net sales, reflecting the planned reduction in mail order
circulation.
4
<PAGE> 5
General and Administrative. The dollar amount of general and
administrative expenses increased by $653,000, or 33%, from the comparable prior
period, primarily reflecting the effect of corporate and field level
infrastructure added since the end of second quarter 1996 to support the
Company's expansion. As a percentage of net sales, general and administrative
expenses declined to 10.7% from 11.9% in the second quarter of fiscal 1996,
reflecting improved expense leverage associated with sales growth.
Preopening and Facility Relocation Expense. Preopening and facility
relocation expense ("Preopening Expense") was $81,000, or 0.3% of net sales, in
the second quarter of fiscal 1997, during which the Company opened 10 stores. In
the second quarter of fiscal 1996, when the Company opened 24 stores, Preopening
Expense was $252,000, or 1.5% of net sales.
Operating Loss. For the reasons explained above, the Company's
operating loss increased 85%, from $2.30 million to $4.27 million, in the
respective quarters. As a percentage of net sales, the second quarter operating
loss increased to 17.1% from 13.6% in the comparable prior period.
Interest Income, Net. Net interest income during the second quarter of
fiscal 1997 was $103,000, or 0.4% of net sales, compared to net interest income
of $314,000, or 1.9% of net sales, during the comparable prior period. This
change reflects the effect of the Company's net use of cash in both its
expansion program and the 1997 Re-merchandising Program, as well as in its
routine operations, on the amount of funds available for temporary investment.
Income Tax Provision. The Company did not record an income tax provision
for the second quarter of either fiscal 1997 or fiscal 1996 due to its pre-tax
losses.
Net Loss and Per Share Data. For the reasons explained above, the
Company's net loss increased 109% from $1.99 million, or $0.31 per share, during
the second quarter of fiscal 1996 to $4.16 million, or $0.59 per share, during
the second quarter of fiscal 1997. There were approximately 7.07 million common
and common equivalent shares outstanding for the second quarter of fiscal 1997,
compared to approximately 6.49 million shares for the comparable prior period,
an increase of 9% related to the Company's May 1996 initial public offering.
(b) COMPARISON OF THE SIX-MONTH PERIODS ENDED AUGUST 2, 1997 AND AUGUST
3, 1996.
Net Sales. Net sales for the first six months of fiscal 1997 were
$48.79 million, compared to net sales of $33.56 million for the comparable prior
period, an increase of 45%. Store net sales increased $16.13 million, or 54%,
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 six months
of fiscal 1996, comparable store sales increased 7%.
Mail order net sales declined $943,000, or 26%, in the first six months
of fiscal 1997 versus the comparable prior period. This decline was primarily
attributable to a planned reduction in mail order catalog circulation as the
Company significantly reduced the level of prospecting for new customers and
focused its primary efforts on its more productive and cost effective list of
customers who have previously purchased from its mail order catalogs.
Gross Margin. The dollar amount of gross margin increased $2.97
million, or 21%, from the first six months of fiscal 1996, reflecting the effect
of the 45% increase in net sales. As a percentage of net sales, gross margin was
34.5% versus 41.2% in the comparable prior period. The decline in gross margin
as a percentage of net sales reflected primarily the effect of relatively fixed
store occupancy costs in the Company's newer classes of stores, as well as the
Company's change in toiletries pricing and its program to clear discontinued
items from stock in connection with the 1997 Re-merchandising Program.
5
<PAGE> 6
Operating Expenses.
Stores and Catalog. The dollar amount of store and catalog
expenses increased by $5.32 million, or 38%, from the comparable prior period,
primarily as a result of the increase in the number of stores. As a percentage
of net sales, store and catalog expenses declined to 39.4% from 41.4% in the
second quarter of fiscal 1996. Store expenses increased in both absolute dollars
(due to the 83 new stores opened since the end of second quarter 1996) and as a
percentage of net sales (reflecting both the initially lower sales volume of the
Company's newer classes of stores and the expenses associated with the 1997
Re-merchandising Program). The increase in store expenses was partially offset
by a significant decline in mail order expenses, both in absolute dollars and as
a percentage of net sales, reflecting the planned reduction in mail order
circulation.
General and Administrative. The dollar amount of general and
administrative expenses increased by $1.12 million, or 27%, from the comparable
prior period, primarily reflecting the effect of infrastructure added since the
end of second quarter 1996 to support the Company's expansion. As a percentage
of net sales, general and administrative expenses declined from 12.3% to 10.8%,
with the change reflecting improved expense leverage associated with sales
growth.
Preopening and Facility Relocation Expense. Preopening Expense was
$104,000, or 0.2% of net sales, in the first six months of fiscal 1997, during
which the Company opened 16 stores, completed the relocation and expansion of
one of its existing stores and finalized preopening costs associated with the 39
stores opened in the fourth quarter of fiscal 1996. In the comparable prior
period, when the Company opened 34 stores and relocated and expanded its primary
warehouse/distribution facility and one existing store, Preopening Expense was
$606,000, or 1.8% of net sales.
Operating Loss. For the reasons explained above, the Company's
operating loss increased 62%, from $4.80 million to $7.76 million, in the
respective six-month periods. Expressed as a percentage of net sales, the
operating loss increased to 15.9% from 14.3% in the comparable prior period.
Interest Income, Net. Net interest income during the first six months
of fiscal 1997 was $375,000, or 0.8% of net sales, compared to net interest
income of $131,000, or 0.4% of net sales, during the comparable prior period.
The increase reflected the availability of more cash for investment in the
current period due to the Company's May 1996 initial public offering and a
higher level of holiday season sales in fiscal 1996.
Income Tax Provision. The Company did not record an income tax provision
for the first six months of either fiscal 1997 or fiscal 1996 due to its pre-tax
losses.
Net Loss and Per Share Data. For the reasons explained above, the
Company's net loss increased 58% from $4.67 million, or $0.89 per share, during
the first six months of fiscal 1996 to $7.39 million, or $1.04 per share, during
the comparable 1997 period. There were approximately 7.07 million weighted
average common and common equivalent shares for the first six months of fiscal
1997, compared to approximately 5.23 million shares for the comparable 1996
period, an increase of 35% attributable to the Company's May 1996 initial public
offering.
LIQUIDITY AND CAPITAL RESOURCES -
The Company began fiscal 1997 with cash and cash equivalents of $7.21
million and short-term investments of $20.43 million. During the first six
months of the year, $19.66 million of short-term investments were liquidated to
fund: (a) the Company's net loss ($3.72 million net of depreciation and
amortization); (b) an $8.61 million increase in inventory primarily to support a
commitment to higher in-stock and customer service levels and the 1997
Re-merchandising Program; and (c) $9.70 million of fixed asset additions,
related primarily to store openings and the 1997 Re-merchandising Program.
6
<PAGE> 7
Following the liquidation of short-term investments and uses of cash
described above, the Company ended the second quarter with cash and cash
equivalents of $2.51 million and short-term investments of $765,000.
The Company has a $5.00 million working capital credit facility, which
expires on September 30, 1997. Negotiations for the renewal of this facility are
currently taking place. While the Company did not access its bank credit line
during the second quarter, it expects to utilize the line during the third and
fourth quarters as it completes its 1997 store expansion program and builds
inventory in preparation for the holiday season. The Company believes that its
current cash and short-term investment balance, combined with cash flow from
operations and borrowings under the re-negotiated credit facility, will be
sufficient to satisfy its currently anticipated working capital and capital
expenditure requirements through fiscal 1997. The Company's capital requirements
may vary significantly from those anticipated, however, depending particularly
upon such factors as operating results; the number, type 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 may be required
to seek additional sources of funds to support its expansion program and/or its
ongoing operations in fiscal 1998. There can be no assurance that such funds, if
required, will be available on satisfactory terms. Failure to obtain such
financing could delay or prevent the Company's further expansion or impair its
future business, financial condition and operating results.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
The Company does not have investments in derivatives or financial
instruments at this time.
7
<PAGE> 8
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS -
See Item 3 of the Company's Form 10-K dated April 18, 1997, which is
incorporated by this reference herein.
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 July 2, 1997
in Bellevue, Washington. Shareholders of record at the close of business on May
2, 1997 were entitled to notice of and to vote at the Annual Meeting. On the
record date, there were 7,069,098 shares of Common Stock issued and outstanding.
At the Annual Meeting, there were present in person or by proxy shareholders
holding an aggregate of 6,662,154 shares, representing 94.24% of the shares
eligible to vote, thereby constituting a quorum.
All matters presented for vote received the required majority approval
and had the following total, for, against and withheld votes as noted below:
1. To elect two directors in Class 1 for terms expiring at the 1998
Annual Meeting of Shareholders, two directors in Class 2 for terms expiring at
the 1999 Annual Meeting of Shareholders and two directors in Class 3 for terms
expiring at the 2000 Annual Meeting of Shareholders:
<TABLE>
<CAPTION>
For Votes/ Withheld Votes
(% of Voted) (% of Voted)
---------- ---------------
<S> <C> <C>
To elect nominees in Class 1:
Damon H. Ball ...... 6,626,499 35,655
99.46% 0.54%
Gerald R. Gallagher 6,629,449 32,705
99.51% 0.49%
To elect nominees in Class 2:
William B. Randall . 6,630,679 31,475
99.53% 0.47%
Dale J. Vogel ..... 6,631,249 30,905
99.54% 0.46%
To elect nominees in Class 3:
Jeffrey H. Brotman . 6,632,399 29,755
99.55% 0.45%
Michael W. Luce ... 6,629,714 32,440
99.51% 0.49%
</TABLE>
8
<PAGE> 9
2. To approve an increase in the number of shares authorized to be
issued under the terms of the Company's 1992 Combined Incentive and Nonqualified
Stock Option Plan (the "Employee Plan") from 398,217 shares of Common Stock to
1,089,038 shares of Common Stock:
<TABLE>
<CAPTION>
% of
Votes Quorum Voted
----- ------------
<S> <C> <C>
For........................... 3,860,824 57.95%
Against...................... 789,623 11.85%
Abstain...................... 20,352 0.31%
Broker Non-votes......... 1,991,355 Not applicable
</TABLE>
3. To ratify the selection of Arthur Andersen LLP as the Company's
independent public auditors for the current fiscal year:
<TABLE>
<CAPTION>
Votes % of Voted
----- ------------
<S> <C> <C>
For........................... 6,640,324 99.67%
Against...................... 11,926 0.18%
Abstain...................... 9,904 0.15%
</TABLE>
ITEM 5 - OTHER INFORMATION -
On June 30, 1997, the Company's Vice President of Real Estate and
Construction, Jeffrey C. Mason, announced his resignation, which was effective
July 16, 1997. Mr. Mason had been the beneficiary of a Stock Option Agreement
and Payment Obligation with the Company (the "Mason Agreement") which, as a
consequence of his resignation, has been canceled and is no longer of any force
or effect. Because the Company only plans to open approximately 30 new stores in
fiscal 1997, of which 19 have already been opened (compared to a total of 101
stores opened in fiscal 1996), there are no immediate plans to replace Mr.
Mason. Mr. Mason's duties have been assumed, for the present, by the Company's
Senior Vice President of Operations, Michael Fisher.
Following shareholder approval of the increase in the number of shares
authorized to be issued under the Employee Plan on July 2, 1997 as described in
Item 4 above, the Compensation Committee of the Board of Directors authorized
the granting of options to purchase a total of 276,868 shares of Common Stock at
an exercise price of $6.125 per share to approximately 300 individuals under the
Employee Plan in connection with fiscal 1996 performance reviews. These options
will vest at the rate of 25% per year over a period of four years. Also on July
2, options to purchase a total of 6,355 shares of Common Stock were
automatically granted to non-employee directors under the Company's 1996
Director's Nonqualified Stock Option Plan. Under the terms of that plan, these
options will vest monthly in equal amounts over a one-year period.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
11 Calculation of Earnings Per Common and Common Equivalent Share
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the second quarter of
fiscal 1997.
9
<PAGE> 10
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.
GARDEN BOTANIKA, INC.
Registrant
September 8, 1997 /s/ Michael W. Luce
Date ----------------------------------------------
Michael W. Luce
President and Chief Executive Officer
(Principal Executive Officer)
September 8, 1997 /s/ Myron E. Kirkpatrick
Date ---------------------------------------------
Myron E. Kirkpatrick
Vice President-Finance, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
10
<PAGE> 11
GARDEN BOTANIKA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
AUGUST 2, FEBRUARY 1,
1997 1997
-------------- ------------
(AMOUNTS IN THOUSANDS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $2,512 $ 7,205
Short-term investments .................................................... 765 20,426
Inventories ............................................................... 27,550 18,940
Prepaid expenses:
Rent ................................................................... 1,418 1,238
Other .................................................................. 1,725 1,793
Receivable from lessors ................................................... 1,531 2,633
Other ..................................................................... 113 727
--------- ---------
Total current assets ................................................. 35,614 52,962
Property and equipment:
Leasehold improvements .................................................... 56,601 51,431
Furniture and equipment ................................................... 13,541 9,016
Equipment under capital lease ............................................. 261 261
--------- ---------
70,403 60,708
Less accumulated depreciation and amortization ............................ (13,831) (10,168)
--------- ---------
Net property and equipment ............................................. 56,572 50,540
Other assets ................................................................. 21 21
--------- ---------
Total assets ......................................................... $92,207 $103,523
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances ................................... $5,678 $6,600
Accounts payable .......................................................... 4,353 7,438
Accrued salaries, wages and benefits ...................................... 1,345 1,366
Accrued sales tax ......................................................... 434 442
Other ..................................................................... 791 801
--------- ---------
Total current liabilities ............................................ 12,601 16,647
Deferred rent and other ...................................................... 2,507 2,420
--------- ---------
Total liabilities .................................................... 15,108 19,067
Commitments
Shareholders' equity:
Preferred Stock, $.01 par value;
10,000,000 shares authorized; none issued and outstanding .............. -- --
Common Stock, $.01 par value;
36,092,374 shares authorized; 7,069,098 issued and outstanding ......... 98,543 98,513
Accumulated deficit ....................................................... (21,444) (14,057)
--------- ---------
Total shareholders' equity ........................................... 77,099 84,456
Total liabilities & shareholders' equity ............................. $92,207 $103,523
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 12
GARDEN BOTANIKA, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
----------------------- ------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................. $24,873 $16,916 $48,791 $33,563
Cost of sales (including
buying and occupancy
costs) ................. 16,798 10,123 31,980 19,724
-------- -------- -------- --------
Gross margin .......... 8,075 6,793 16,811 13,839
Operating expenses:
Stores and catalog ....... 9,599 6,835 19,219 13,903
General and administrative 2,660 2,007 5,250 4,133
Preopening and facility
relocation expenses ... 81 252 104 606
-------- -------- -------- --------
Operating loss ........ (4,265) (2,301) (7,762) (4,803)
Interest income, net ..... 103 314 375 131
-------- -------- -------- --------
Net loss .............. $(4,162) $(1,987) $(7,387) $(4,672)
======== ======== ======== ========
Net loss per share ....... $(0.59) $(0.31) $(1.04) $(0.89)
Weighted average common and
common equivalent shares .. 7,069 6,487 7,069 5,225
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 13
GARDEN BOTANIKA, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
-----------------------
AUGUST 2, AUGUST 3,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,387) $(4,672)
-------- --------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 3,663 2,126
Loss on retirement of property and equipment -- 98
Changes in assets and liabilities:
Inventories (8,610) (1,285)
Prepaid rent and other assets 1,604 (480)
Accounts payable and checks drawn in excess of bank balances (4,007) (1,074)
Accrued expenses (39) 402
Deferred rent and other 87 321
-------- --------
Total adjustments (7,302) 108
-------- --------
Net cash used by operating activities (14,689) (4,564)
-------- --------
Cash flows from investing activities:
Redemption of short-term investments 19,661 --
Additions to property and equipment (9,695) (7,255)
-------- --------
Net cash provided (used by) investing activities 9,966 (7,255)
-------- --------
Cash flows from financing activities:
Sale of stock -- 56,191
Payments on note payable to bank -- (2,540)
Other, net 30 51
-------- --------
Net cash provided by financing activities 30 53,702
-------- --------
(Decrease) increase in cash and cash equivalents (4,693) 41,883
Cash and cash equivalents, beginning of period 7,205 1,308
-------- --------
Cash and cash equivalents, end of period $2,512 $43,191
======== ========
Supplemental disclosures:
Cash paid for interest $ -- $303
Cash paid for income taxes $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 14
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 2, 1997 (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 Annual Report on Form 10-K dated April 18, 1997, 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 August 2, 1997 are
not necessarily indicative of the results to be expected for the full fiscal
year. In each of the past three fiscal years, 45% to 49% 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 others, 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, shifts in the timing of promotions and catalog mailings and changes in
the Company's product mix.
4. On July 2, 1997, shareholders approved an increase from 398,217 to 1,089,038
in the number of shares authorized to be issued under the Company's 1992
Combined Incentive and Nonqualified Stock Option Plan (the "Employee Plan").
Following that approval, on July 2, the Compensation Committee of the Board of
Directors authorized the granting of options to purchase a total of 276,868
shares of common stock at an exercise price of $6.125 per share to approximately
300 individuals under the Employee Plan in connection with fiscal 1996
performance reviews. These options will vest at the rate of 25% per year over a
period of four years. Also on July 2, options to purchase a total of 6,355
shares of common stock were automatically granted to non-employee directors
under the Company's 1996 Director's Nonqualified Stock Option Plan. Under the
terms of that plan, these options will vest monthly in equal amounts over a
one-year period.
5. The Company's Vice President of Real Estate and Construction, Jeffrey C.
Mason, resigned his position with the Company effective July 16, 1997. Mr. Mason
had been the beneficiary of a Stock Option Agreement and Payment Obligation with
the Company (the "Mason Agreement") which, as a consequence of his resignation,
has been canceled and is no longer of any force or effect.
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
11 Calculation of Earnings Per Common and Common Equivalent Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
GARDEN BOTANIKA, INC.
CALCULATION OF EARNINGS
PER COMMON AND COMMON EQUIVALENT SHARE
(EXHIBIT 11)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
-------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
---------------------- ------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY:
Earnings -
Net earnings (loss) applicable to common
and common equivalent shares $(4,162) $(1,987) $(7,387) $(4,672)
======= ======= ======= =======
Shares -
Weighted average common shares outstanding 7,069 5,797 7,069 3,033
Weighted average preferred shares outstanding (1) -- 690 -- 2,192
Net effect of stock options, based on treasury stock method
using average market price (2) -- -- -- --
------- ------- ------- -------
Weighted average common and common equivalent shares 7,069 6,487 7,069 5,225
======= ======= ======= =======
Primary earnings (loss) per common and
common equivalent share $(0.59) $(0.31) $(1.04) $(0.89)
======= ======= ======= =======
</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 six months of either fiscal 1997 or fiscal 1996, as
their effect would have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET AS OF 8/2/97, AUDITED BALANCE SHEET AS OF 2/1/97 AND
UNAUDITED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE QUARTERLY PERIODS
ENDED 8/2/97 AND 8/3/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED 8/2/97.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> MAY-04-1997
<PERIOD-END> AUG-02-1997
<CASH> 2,512
<SECURITIES> 765
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 27,550
<CURRENT-ASSETS> 35,614
<PP&E> 70,403
<DEPRECIATION> 13,831
<TOTAL-ASSETS> 92,207
<CURRENT-LIABILITIES> 12,601
<BONDS> 0
0
0
<COMMON> 98,543
<OTHER-SE> (21,444)
<TOTAL-LIABILITY-AND-EQUITY> 92,207
<SALES> 24,873
<TOTAL-REVENUES> 24,873
<CGS> 16,798
<TOTAL-COSTS> 12,259
<OTHER-EXPENSES> 81
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (103)
<INCOME-PRETAX> (4,162)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,162)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,162)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> 0
</TABLE>
