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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 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)
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<S> <C>
WASHINGTON 91-1464962
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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8624 - 154TH AVENUE NE
REDMOND, WASHINGTON 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 881-9603
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
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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 _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. (X)
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant on April 10, 1997, was $35,324,436. The
aggregate market value was computed by reference to the average bid and asked
price of the stock on the Nasdaq National Market on such date. For the purposes
of this response, executive officers and directors are deemed to be the
affiliates of the Registrant and the holding by nonaffiliates was computed as
6,210,890 shares. In making such calculation, the Registrant does not determine
the affiliate or nonaffiliate status of any shareholder for any other purpose.
The Registrant had 7,069,098 shares of Common Stock, $0.01 par value,
outstanding at April 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission in connection with its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1 -- BUSINESS
GENERAL
Garden Botanika, Inc. ("Garden Botanika" or the "Company") is a rapidly
growing retailer of high quality, reasonably priced personal care products. The
Company's proprietary products encompass such categories as color cosmetics,
skin care, fragrances, bath and body care and related accessories and gifts.
Garden Botanika develops its branded products and distributes them for sale
through its 259 Company-owned and -operated specialty retail stores in 41 states
nationwide and the Company's catalog. Since it commenced operations in 1990, the
Company's primary goal has been to establish Garden Botanika as among the most
recognized and respected brands of personal care products in the markets in
which it competes. The Company believes that its strong brand identity is based
upon (i) high-quality products with botanically based formulations subject to
strict ingredient guidelines; (ii) its value-oriented pricing and promotional
strategies; and (iii) a high-quality store experience, which the Company
provides through its upscale store design, excellent customer service and the
visual presentation of its products and signage.
Garden Botanika's marketing and merchandising efforts primarily target 30-
to 45-year-old working women who have traditionally purchased skin care and
cosmetic products from mall-based department stores and who utilize quality
personal care products both on a daily basis and as an affordable luxury item.
The Company believes these women are seeking better pricing without having to
sacrifice high quality and service, and that increasingly they will be looking
to personal care products to mitigate the impact of aging. Garden Botanika also
believes that its marketing strategy has been successful in attracting a broad
cross-section of other consumers beyond its primary target. The Company is
seeking to capitalize on its broad appeal and to extend its customer base by
means of its promotional activities, wide gift assortments, new product
offerings and innovative visual displays.
After opening 167 stores in fiscal 1995 and 1996, which broadened the
Company's operations to include most major U.S. markets, the Company's plans
call for opening approximately 30 additional stores in fiscal 1997, with new
stores being concentrated in existing markets in order to increase local
awareness of the Garden Botanika brand. Garden Botanika achieved average annual
sales per square foot of $387 in fiscal 1996, at the end of which the average
age of its stores was 20 months. The Company's comparable store sales increased
34%, 16% and 7% during fiscal 1994, 1995 and 1996, respectively.
INDUSTRY OVERVIEW
The highly fragmented personal care products industry, which includes color
cosmetics, skin care, fine fragrances and bath and body care, has annual sales
nationwide in excess of $20 billion. Historically, a leading distribution
channel for such products has been mall-based department stores. The Company
believes that consumer preferences have shifted in recent years to favor
distribution channels offering generally lower prices and a less intimidating
sales environment, such as drugstores, mass merchandisers, television
"infomercials" and, to an increasing extent, specialty retailers.
The Company believes that, in targeting their respective market segments,
department stores on the one hand and the lower-priced mass distribution
channels on the other did not address or serve adequately a significant market
consisting of customers seeking a combination of quality products and reasonable
pricing. A number of specialty retailers, including Garden Botanika, have
addressed this market need by positioning themselves as alternatives to the
high-priced, high-quality designer brands offered by department stores and the
low-priced products sold by drugstores, mass merchandisers and supermarkets.
Within the personal care segment of specialty retailers, Garden Botanika has
sought to distinguish itself by its high-value, quality branded product
assortment, emphasizing color cosmetics, skin care and fine fragrance, and by
its customer service. The Company believes these qualities also allow it to
compete successfully for the personal care business of both department stores
and the mass outlets.
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MERCHANDISING
Product Quality. Garden Botanika develops its personal care products with
high-quality ingredients, using botanical extracts and natural plant oils in its
formulations. New products undergo appropriate quality and stability testing,
and the Company's policy is to utilize ingredients of the highest purity
available for use in personal care products. The Company's in-house quality
control activities exist alongside, and are run in conjunction with, its
manufacturing operations in Oceanside, California.
Garden Botanika's strict ingredient policy is a major factor underlying the
quality of the Company's products. Garden Botanika believes that botanical
ingredients are more appealing to its customers because they are perceived to be
safer and more effective than many synthetic substances. Garden Botanika also
believes that its customers value the Company's use of ingredients that have
been tested through centuries of historical use. The Company avoids the use of
petrochemical oils and comedogenic materials that can block pores and cause
blemishes, as well as many common allergens. Many of the ingredients that the
Company avoids, such as mineral oil and petrolatum, are used regularly by some
of its competitors. Garden Botanika's strict ingredient policy has also led to
the development and successful introduction of products and product lines that
the Company believes are unique in its industry. For example, the Company's
Natural Color line of color cosmetics is based on corn starch and natural plant
oils, instead of talc and mineral oil that are used in the products of some of
its competitors. Customer surveys and comments received on feedback forms
distributed by the Company demonstrate that Garden Botanika's customers
recognize the quality and efficacy of its products.
Product Assortment. While all Garden Botanika products feature a high level
of functional quality, care has also been taken to maintain a sense of variety
and fun in the Company's product assortment. Garden Botanika blends high-quality
personal care products with an array of colorful and novel impulse and gift
items, which is accomplished, in part, through the use of color, fragrance and
customization. For example, the Transparencies fragrance and bath assortment
uses the principle of a color multiplier (with a single product available in
various colors and fragrances) to create a strong visual impact. Garden Botanika
customers also enjoy the opportunity to develop personal fragrances that can be
blended into a dozen different products at each store's custom fragrance counter
or to have personalized gift baskets made at the point of purchase. An extensive
collection of complementary accessory items, ranging from overnight moisture
gloves to scented candles and potpourri, are color-coordinated with related
products in order to add to the broad appeal of the Company's merchandise
assortment. Complementary accessories are intended to engage the senses and
encourage customers to extend a personal care product selection to include a
larger family of products. The combination of sight, smell and touch is meant to
inspire add-on sales and heighten the customer's experience of Garden Botanika's
products and the ambiance of its stores.
In addition to offering conventional personal care lines such as cosmetics
and skin care, Garden Botanika has developed specialty branded product lines to
reinforce the uniqueness and expand the base of the Company's proprietary
products. These product lines include the Spa Botanika line, which is intended
to offer affordable luxury items such as body polishers, muds, soaks, tonics and
special shampoos; the Sun & Sport line, which treats skin exposure and fatigue
with specially formulated lotions and soaks, as well as offering water-resistant
sunblocks and self-tanning creams; the Botanika for Men line, which uses
ingredients specifically designed for men's skin, hair and shaving needs; and
the Prefix line, which is designed to correct a woman's skin and facial
imperfections before she applies her basic makeup. The Company also develops new
lines to capitalize on market trends, such as its Transparencies line of bright
and fresh fragrances and its Garden Botanika At Home line of home fragrance and
related products, such as scented candles and pomanders, that can extend the use
of a selected scent outside of the bath and throughout the home. The Company is
committed to the development of further extensions of its brand identity and
intends to introduce new specialty branded product lines in the future on a
regular basis.
Product Lines and Categories. More than 95% of the items available for sale
in the Company's stores and through its catalog are proprietary Garden Botanika
products. Since the Company began doing business in 1990, its principal product
categories have included skin care, bath products, body care and custom
fragrances. Color cosmetics, which were first offered in the fall of 1992, have
also become one of the Company's principal
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product categories. The Company tracks sales of its accessories and of its
custom- and ready-made gifts as distinct product categories and, together, these
categories have consistently accounted for approximately 15% of the Company's
sales. The Men's Care line, which was part of Garden Botanika's initial product
assortment, was expanded and re-introduced in 1996 as Botanika For Men. In
fiscal 1991, the Company began to expand its specialty branded products with,
among others, the Sun & Sport line. In fiscal 1993, the Company added the Spa
Botanika line to its list of specialty branded products. In fiscal 1996, in
addition to two new fine fragrances and the re-introduced men's line, the
Company added Prefix, a line of skin correctives and facial primers;
Transparencies, a line of personal care and related products featuring bright
and fresh scents; and Garden Botanika At Home, a distinctive line that extends
fragrance selections to include, among other products, candles, air fresheners
and pomanders, in addition to selected personal care products. In fiscal 1994,
the Company introduced its first fine fragrance, Vanilla Dawn; in 1996, it
introduced both Garden Botanika the Fragrance and Impetuous; and in April 1997,
it introduced Perspective, all of which are fine fragrances that the Company
markets as specialty brands. Specialty lines currently constitute approximately
20% of the Company's sales.
A description of the Company's principal product lines and categories is
set forth below.
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PRODUCT LINE/CATEGORY DESCRIPTION
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Color Cosmetics Eyeshadows, nail polish, lipsticks, foundations
and powders
Skin Care Cleansers, exfoliants, toning lotions, moisture
creams, eye treatments and masks
Bath and Body Care Bath oils, moisturizers, shower gels, soaps, body
scrubs and massage oils
Aromatics Hand and body lotions, bubble bath, shower gels
and shampoos
Transparencies Eau de Parfum, body lotions and body wash,
candles and potpourri
Custom Fragrances Perfume oils, colognes, shampoos, body lotions,
bath oil and bubble bath
Gift Baskets Prepackaged and custom assortments, primarily of
Aromatics and bath and body care products
Accessories Bath brushes and sponges, combs, spa gloves,
candles, massagers, potpourri, cassette tapes and
compact discs
Prefix Skin color corrector creams; lip pumice and lip
protectors; brow gels; and lash, lip and
eyeshadow primers
Hair Care Shampoos, color-enhancing shampoos, conditioning
rinses, styling gels and finishing sprays
Garden Botanika At Home Bath powders, hand and shower creams, scented
soaps and candles, pomanders and room spray
Spa Botanika Mineral soaks, mud masks, face tonics, body
washes, body cleansers and clarifying shampoos
Botanika For Men After-shave, face wash, shaving gel, shaving
creams, hair thickening shampoos and conditioners
Sun & Sport Body moisturizers and gels, sunblock, muscle
soak, self-tanning creams and sport shampoos
Fine Fragrance Vanilla Dawn; Garden Botanika the Fragrance;
Impetuous and Perspective
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Product Pricing. Garden Botanika is committed to providing high value to
its customers. The Company seeks to price its products at a substantial discount
to those offered at department stores for comparable products, and, as a result,
the Company's prices are often near the top of the range of prices for similar
products offered by drugstores, mass merchandisers and supermarkets. Promotional
offerings may provide greater savings to customers. As part of its pricing
policy, the Company regularly monitors the price levels of
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comparable products offered by its competitors, including specialty retailers,
and Garden Botanika is committed to making pricing adjustments to ensure that
its products remain competitive.
Packaging. The Company believes that attractive merchandise displays and
well-designed, aesthetically pleasing product packaging play an important role
in enhancing the image of its products and the Garden Botanika brand name. With
its basic toiletries (bath, skin, body and hair care), Garden Botanika generally
seeks to minimize layers in its packaging while maintaining a distinctive visual
image. While the packaging of each product classification shares certain common
elements, the graphic designs are unique to increase the ease of category
identification. The Company regularly bundles several related products together,
which are then offered at a discount from the purchase price of each item alone.
Such bundled discounts are characteristic of both the Company's promotions and
its gift lines. The Company's packaging has won several awards for both bottle
design and the graphic presentation of its labels.
NEW PRODUCT DEVELOPMENT
Garden Botanika is committed to the introduction of new products and
formulations on a regular basis. The Company also devotes substantial resources
to monitoring which products are becoming more or less important to its
customers and uses this information in its new product development efforts. For
example, soon after consumers showed interest in products containing alpha
hydroxy acids, the Company introduced its Skin Renewing treatment and lotion
with a fruit-based acid complex. Similarly, the Company's Transparencies line
has capitalized on a market trend for bright and fresh fragrances (in contrast,
for instance, to traditionally heavier floral scents). Garden Botanika continues
to tailor product offerings in response to customer comments, product rankings
and sales results. Since its inception, an average of approximately 25% of the
Company's product assortment offered in any one year was first introduced during
that year. The Company believes that its ability to develop, test and market new
products has been a key element to its success and that new product development
helps reinforce the appealing, fresh nature of the Garden Botanika brand.
In October 1995, the Company's new product development efforts were
enhanced with the acquisition of substantially all of the assets of Innovative
Biosciences Corporation ("IBC"), a personal care product manufacturer located in
Oceanside, California, and the employment by the Company of its principal
product developer and an additional research chemist. Prior to the acquisition,
IBC had been one of the Company's suppliers and had originated a majority of the
Company's proprietary formulas. The Company's control of its product development
and manufacturing capabilities allows for in-house research and development and
the introduction of new products more quickly and at a lower cost. In addition,
the laboratory capabilities acquired allow the Company to conduct quality
testing of the products it manufactures as well as those products produced for
Garden Botanika by outside suppliers.
In addition to its proprietary personal care products, the Company has
recently begun to offer a wider variety of accessories, ranging from towel racks
to stuffed animals and decorative baskets, that are intended to enrich and add
further to the color dimension of the Garden Botanika brand. Many accessories
are tied to holiday events and are meant to encourage seasonal giving. At the
same time, the addition to the Garden Botanika catalog of accessories with
higher price points is intended to increase the purchase price of the average
mail-order, thereby promoting profitability. Garden Botanika's merchandisers
seek popular accessories, which are generally obtained from third-party
suppliers, that will complement the Company's core product line.
STORE ENVIRONMENT
The Company seeks to offer a uniquely attractive store environment that
showcases its product offerings and promotes product testing and trial by its
customers. Garden Botanika's brightly lit stores are designed to project an
inviting, upscale atmosphere and to reinforce the Company's distinctive brand
image. The current design of the Company's stores incorporates neutral white
fixtures with merchandise displays and product arrangements that are designed to
allow for self-selection. Simply designed shelves showcase the Company's
products, which are segmented by function and product line. Brief descriptions
that highlight product benefits and ingredients are posted on shelves next to
each product and provide an information-rich environment. To
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further encourage hands-on interaction with the merchandise, the Company intends
to supplement shelf displays with additional floor displays and selling
stations, featuring selected products throughout its stores. In addition, Garden
Botanika's friendly and knowledgeable sales associates encourage customers to
sample products as well as educate customers concerning the benefits of the
products' ingredients.
In addition to providing product testers, Garden Botanika's stores feature
custom fragrance bars that allow customers to mix and match up to 65 fragrances
to develop their own personal fragrances. Stores also offer a wide assortment of
prominently displayed, specially priced starter selections to encourage product
trial by new customers. In addition, as new products and promotions are offered,
the Company tests reconfigurations of its store merchandise displays to maintain
the stores' fresh, contemporary look. In most stores, functional sinks allow
customers to test and handle certain of the Company's products. Management
generally believes that emphasizing in-store product experimentation encourages
customers to shop for an extended period and promotes impulse and add-on
purchases.
Since opening its first store in August 1990, Garden Botanika has
continually refined and improved its store design to position itself and
establish its distinctive image in the marketplace. In 1993, the Company won
"Retail Store of the Year" honors for small, non-apparel stores from Chain Store
Age for its store design. In July 1994, the Company introduced a new prototype
design for its stores and has incorporated many of these design elements in all
new store locations. When an appropriate opportunity exists, the Company may
relocate or upgrade an existing store. With an average store age of 20 months at
February 1, 1997, approximately 85% of the Company's stores were of the latest
prototype design.
In August 1996, Garden Botanika opened its first store incorporating a
Color Studio into its latest prototype design, with makeover stations and a
significantly expanded assortment of color cosmetics displayed to allow for
in-store experimentation and trial. The Company's staff for its Color Studio
stores includes sales associates with special training and expertise who can
demonstrate the latest make-up techniques and suggest the colors and products
that would suit each particular customer best. Twelve of the 101 new stores
opened in fiscal 1996 contained Color Studios, and two stores were remodeled in
fiscal 1996 to become Color Studio stores. Because of the initial success of
this new format, the Company anticipates that approximately 85% of the new
stores scheduled to open in fiscal 1997 will contain a Color Studio. The Company
believes that the higher cost of building and operating its Color Studio stores
will be justified by their higher sales productivity.
From fiscal 1991 to fiscal 1996, excluding the Color Studio stores, the
average size of the new stores opened in each fiscal year increased from 765 to
1,313 square feet to accommodate the Company's expanding product assortment and
merchandising displays. The 12 Color Studio stores opened in fiscal 1996
averaged 1,725 square feet per store.
The Company maintains a uniform high operating standard by requiring that
each store follow procedures set forth in store presentation manuals. Adherence
to these standards is monitored by monthly visits and detailed evaluations by
the district manager responsible for each store. As the Company opens new
stores, it hires additional district managers to allow for continued effective
supervision.
MARKETING
The Company's marketing strategy is to create brand awareness; encourage
trial purchases through high-value promotional offerings and bright, inviting
visual displays; educate prospective customers about the benefits of Garden
Botanika's products; and promote repeat business by reinforcing positive
experiences with the Company's products. Catalog operations have also been an
important element of Garden Botanika's efforts to create brand awareness and
encourage store visits. The Company typically uses its in-house mailing list of
store customers to target catalogs, direct-mail postcards and folios to support
promotions and new product introductions, which are reinforced with
point-of-sale materials. The Company also has developed a "Grand Opening"
catalog for use in new markets where it plans to open a store. For such markets,
the Company obtains a list of the households in the new store's primary trading
area that most closely match profiles of the Company's most active customers.
Catalogs and promotional materials are then mailed to approximately 10,000 of
these targeted customers to build brand awareness and enthusiasm for each new
store. The Company's in-house list of store customers currently consists of
approximately 2.5 million names.
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Garden Botanika also operates a mail-order division for sales to customers
who are outside of areas served by its stores, or who simply prefer to purchase
by mail or telephone. In fiscal 1996, the Company committed significant
resources in mailings to new prospects to build a "house file" of mail-order
customers. In fiscal 1997, the Company intends to significantly decrease
prospect mailings and focus its efforts on the more productive house file of
established and active mail-order customers. While this will result in lower
mail-order circulation and, the Company believes, lower mail-order sales, the
strategy is intended to significantly reduce mailing and printing costs and
thereby promote the Company's goal of overall profitability.
The Company also relies on highly visible store locations and signage, an
attractive store design, inviting visual presentations of its products, and
word-of-mouth advertising to attract prospective customers into its stores.
Brochures and information-rich displays that reinforce the association of the
Garden Botanika brand with high quality and value are also important aspects of
the Company's marketing strategy. Garden Botanika offers value-priced bundles of
many of its most popular products on a regular basis to promote trial use. These
and other in-store promotions account for approximately one-third of the
Company's sales. To build customer loyalty and develop repeat customers, the
Company offers a frequent-shopper program, the "Garden Club," whereby purchasers
of $100 in merchandise can receive a $10 credit toward the purchase of
additional products. In addition, the Company seeks to be viewed as a
responsible member of its community and sponsors a variety of public relations
activities, including holiday donations to CARE, a worldwide hunger relief
effort.
CUSTOMER SERVICE
Garden Botanika is committed to achieving customer satisfaction and to
building a loyal customer base by providing a high level of knowledgeable,
attentive and personalized customer service. The Company believes that educating
consumers about the benefits of its product offerings is a critical component of
its success, and management considers its sales associates' knowledge of the
Company's customers and products to be essential to its marketing approach and
customer satisfaction. To ensure knowledgeable, responsive sales associates, the
Company has devoted significant resources to developing and implementing
employee training and incentive programs. The Company trains its sales
associates to inform customers about new product offerings and to suggest
products that suit each customer's specific needs. The Company's return policy
permits customers who are not completely satisfied with their purchases to
return items for an exchange, credit or refund. The Company also monitors the
level of customer service on an on-going basis through various initiatives, such
as customer comment forms. In addition, the Company uses a professional service
to shop its stores anonymously and to prepare detailed reports on each store's
performance on a monthly basis.
STORE LOCATIONS
In selecting new store sites, the Company seeks high-traffic locations
within regional malls, generally ranging from 1,200 to 1,500 square feet for its
traditional stores and from 1,500 to 2,100 square feet for its newer Color
Studio format. Based on the broad appeal of its concept, the Company believes it
can open stores in a variety of markets. The Company conducts extensive analyses
of potential store sites and bases its selection on the performance of other
specialty retail tenants, the perceived strength of the mall's anchor stores,
the size of the mall and the demographics of the surrounding area. Although the
Company's current stores are located primarily in regional malls, it has also
opened two stores, on an experimental basis, in smaller neighborhood "strip
malls" in established markets for the convenience of its more frequent customers
and to attract customers who may not shop at the larger malls. The Company
intends to continue experimentation with neighborhood locations in fiscal 1997,
and, in addition, is evaluating other alternative locations.
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The following map and list of stores show the location of each of Garden
Botanika's 259 stores as of April 10, 1997:
U.S. MAP
ALABAMA(1)
Birmingham
ARIZONA (4)
Mesa
Phoenix
Tucson
Flagstaff
CALIFORNIA (31)
Arcadia
Brea
Burlingame
Carlsbad
Cerritos
Corte Madera
El Cajon
Escondido
Glendale
Laguna Beach
Lakewood
Los Angeles
Montebello
Montclair
Moreno Valley
National City
Newport Beach
Palm Desert
Palo Alto
Pleasanton
Redondo Beach
Riverside
San Diego
San Luis Obispo
Santa Ana
Santa Barbara
Santa Monica
Santa Rosa
Valencia
West Covina
Westminster
COLORADO (4)
Aspen
Aurora
Boulder
Littleton
CONNECTICUT (4)
Danbury
Glastonbury
Meriden
Waterford
DELAWARE (2)
Newark
Wilmington
FLORIDA (22)
Altamonte Springs
Boynton Beach
Brandon
Coral Springs
Fort Myers
Jacksonville
Melbourne
Miami(2)
Naples
Ocala
Ocoee
Orlando
Palm Beach Gardens
Panama City
Pembroke Pines
Plantation
Sanford
Sarasota
Tallahassee
Tampa(2)
GEORGIA (6)
Atlanta
Augusta
Columbus
Duluth
Kennesaw
Macon
ILLINOIS (10)
Aurora
Champaign
Chicago(2)
Joliet
Lincoln Park
Lombard
Skokie
Vernon Hills
West Dundee
INDIANA (9)
Bloomington
Fort Wayne
Greenwood
Indianapolis(2)
Lafayette
Merrilville
Mishawaka
Terra Haute
IOWA (5)
Cedar Falls
Cedar Rapids
Davenport
Iowa City
Sioux City
KANSAS(1)
Overland Park
KENTUCKY (3)
Bowling Green
Florence
Louisville
LOUISIANA (2)
Baton Rouge
Lafayette
MAINE (1)
South Portland
MARYLAND (7)
Annapolis
Baltimore
Bethesda
Laurel
Owings Mills
Pikesville
Wheaton
MASSACHUSETTS (9)
Berlin
Braintree
Brookline
Burlington
East Taunton
Holyoke
N. Attleboro
Natick
Peabody
MICHIGAN (4)
Grand Traverse
Lansing
Troy(2)
MINNESOTA (6)
Bloomington
Burnsville
Edina
Minneapolis
Minnetonka
Rochester
MISSISSIPPI (2)
Ridgeland
Tupelo
MISSOURI (3)
Columbia
Kansas City
St. Louis
NEBRASKA (1)
Omaha
NEVADA (2)
Henderson
Reno
NEW HAMPSHIRE (2)
Nashua
Salem
NEW JERSEY (11)
Deptford
Edison
Freehold
Hackensack
Lawrenceville
Livingston
Mays Landing
Paramus
Shrewsbury
Toms River
Westfield
NEW MEXICO (2)
Albuquerque(2)
NEW YORK (14)
Albany
Bay Shore
Buffalo
Clay
Garden City
Hicksville
Huntington Station
Johnson City
Lake Grove
Poughkeepsie
Rochester
Saratoga Springs
Syracuse
Yorktown Heights
NORTH CAROLINA (7)
Durham(2)
Fayetteville
High Point
Pineville
Rocky Mount
Wilmington
OHIO (9)
Akron
Beachwood
Cincinnati
Dayton
Elyra
Niles
North Olmstead
Parma
Youngstown
OKLAHOMA (2)
Oklahoma City (2)
OREGON (7)
Beaverton
Eugene
Portland(4)
Tigard
PENNSYLVANIA (15)
Allentown
Chestnut Hill
Exton
Harrisburg
King of Prussia
Lancaster
Langhorne
Media
North Wales
Philadelphia
Pittsburgh(2)
Scranton
Willow Grove
York
RHODE ISLAND (1)
Warwick
SOUTH CAROLINA (4)
Charleston
Columbia
Greenville
Spartanburg
SOUTH DAKOTA (1)
Sioux Falls
TENNESSEE (6)
Antioch
Goodlettsville
Knoxville
Memphis(3)
TEXAS (14)
Arlington
Cedar Park
Dallas(3)
Fort Worth
Houston(3)
Lewisville
San Antonio
Sugar Land
Tyler
Woodlands
UTAH (1)
Murray
VIRGINIA (7)
Arlington
Charlottesville
Chesapeake
Richmond(2)
Roanoke
Virginia Beach
WASHINGTON (13)
Bellevue
Bellingham
Everett
Kennewick
Lynnwood
Puyallup
Seattle(2)
Silverdale
Spokane
Tacoma
Tukwila
Vancouver
WISCONSIN (4)
Eau Claire
Greendale
Milwaukee(2)
8
<PAGE> 9
STORE OPERATIONS
Management and Employees. The Company's stores are organized into two
geographic regions (East and West), each of which has a regional director who is
responsible for the store operations within her region and who reports to the
Company's Vice President -- Stores. The Company's 25 district managers report to
the regional directors and frequently visit the cluster of approximately eight
to fifteen stores within their respective geographic areas to monitor financial
performance and ensure adherence to the Company's operating standards. The
typical staff of a Garden Botanika store consists of one store manager, one
assistant store manager and six to eight additional hourly sales associates,
most of whom work part-time. The typical Color Studio store staff includes a
second assistant store manager and a total of eight to 10 hourly sales
associates.
In order to maintain its high operating standards, the Company seeks to
recruit as its new store managers individuals who have a minimum of two years'
experience as a store manager in the specialty retail environment, and, at the
district manager level, the Company seeks individuals who have a minimum of
three years' comparable experience as a district manager. To allow increased
opportunities for promotion internally, the Company has instituted a Senior
Store Manager program, which allows individuals to work closely with a district
manager as a trainee. The Company intends for store employees to focus
substantially all of their efforts on customer service. As a consequence, the
Company has centralized as many administrative functions as possible, including
all buying, development of in-store merchandising displays, inventory
allocation, human resources and accounting functions, at its Redmond, Washington
corporate office.
Training and Compensation. New store employees typically receive
approximately 16 hours of initial training, with emphasis on product knowledge,
merchandising standards and operating guidelines, which include customer service
and sales techniques. Because of the wider product assortment and makeover
opportunities, an additional eight hours of training are given to all employees
of the Color Studio stores prior to opening. Store managers are also required to
complete a training program of approximately three weeks' duration, during which
they are instructed in the technical aspects of personal care products,
communication skills and employee relations. New store and district managers are
typically required to work alongside individuals in comparable positions for two
to three weeks before they are asked to perform their duties without direct
supervision. The Company has found that such hands-on training, together with
the use of detailed operating and training manuals, is a highly effective way to
introduce new managers to the Garden Botanika concept, and independent shopping
reports indicate the Company has been able to maintain its high store operating
standards throughout recent years of rapid expansion. Performance appraisals and
product manuals are also used to help ensure that sales associates are
thoroughly familiar with the Company's product offerings. Training bulletins are
distributed from the Company's headquarters on a regular basis to educate store
managers and sales associates about new products as they are introduced.
District managers participate in an incentive plan that ties compensation
awards to the achievement of specified sales and other financial performance
criteria, and each store manager receives a commission based on a percentage of
store sales. The Company also seeks to instill enthusiasm and dedication in its
sales associates through targeted promotions, including prizes for successful
sales efforts, and regularly solicits employee suggestions regarding store
operations.
SUPPLIERS AND PURCHASING
The Company deals with its suppliers principally on an order-by-order basis
and, with the exception of certain packaging orders, has no long-term purchase
contracts or other contractual assurance of continued supply or pricing with its
suppliers. In fiscal 1996, the Company's largest supplier, Randall
International, accounted for approximately 11% of the Company's purchases, and
approximately 65% of the Company's purchases of raw materials, finished
products, packaging and other supplies were obtained from its 15 largest
suppliers. During that time, a significant portion of the Company's merchandise
purchases originated from independent foreign manufacturers, located primarily
in the Far East, Canada and Germany, with the majority of those purchases
consisting of finished accessories and packaging. The Company has not
experienced and does not anticipate any significant difficulty in obtaining
satisfactory or adequate sources of supply.
9
<PAGE> 10
In October 1995, Garden Botanika acquired a manufacturing facility in
Oceanside, California that, depending on seasonal needs, employs between 20 to
30 persons. Because of its manufacturing capabilities, the Company now has
additional flexibility to introduce new products more quickly and supply various
quantities more efficiently than had been possible through outside suppliers.
The Company also uses its manufacturing capability for control over research and
new product development and for quality control testing of Garden Botanika
products produced both internally and by contract manufacturers. Based on the
current capabilities of its manufacturing division and available equipment, the
Company contemplates manufacturing approximately 20% of its production
requirements from its own facilities; however, this percentage may change
depending upon, among other things, the extent of further investment in the
Company's manufacturing capabilities.
The Company maintains its own central buying staff, which negotiates
payment terms and discounts and generally determines inventory allocation among
the stores. In many instances in which the Company does not manufacture products
itself, its ownership of substantially all of its formulas allows it to obtain
favorable pricing through competitive bidding. The Company's buyers consistently
utilize computerized management information systems to monitor the flow of
merchandise through its stores and seek to ensure that in-stock availability
will be maintained in accordance with customer demands and the specific
requirements of each store. However, because of the lead time required for
manufacturing and the unanticipated popularity of certain new product
introductions, the Company has occasionally experienced in-store shortages of
particular items.
DISTRIBUTION
Management believes that the Company's retail store distribution system
allows it to support a wide selection of inventory in its stores while
minimizing inventory requirements and maintaining effective inventory control.
In June 1996, the Company relocated and consolidated its distribution facilities
into a single facility, consisting of approximately 92,000 square feet, in
Ontario, California. The Company expects to obtain a 13-month lease extension
for this facility, which would expire July 1, 1998, and to expand its occupancy
under the same roof to occupy a total of 110,000 square feet commencing May 15,
1997.
Merchandise is delivered by suppliers to the Company's distribution
facilities, where relevant information is entered into the Company's
computerized management information system. Merchandise is then allocated to
stores on the basis of sales trends, historical patterns and anticipated
responses to special promotions. Inventory is typically shipped to stores on a
weekly or biweekly basis using an independent delivery service, thereby
providing each store with a steady flow of merchandise. The Company strives to
keep substantially all of its in-store inventory on display and available for
sale. The Company's information and control systems have enabled management to
manage store inventories and ensure better in-stock availability by tracking
local preferences and historical merchandise sales of each store.
CATALOG OPERATIONS
The Company's catalogs are distributed both to store and to mail-order
customers, using separate lists maintained by the Company. Each edition of the
catalog is used as an advertising piece to promote in-store visits, while also
offering Garden Botanika's mail-order customers a comprehensive assortment of
products. In addition, the catalog has been used successfully to introduce new
Garden Botanika stores to customers in markets where the Company has not
previously operated a store. The Garden Botanika catalog was first introduced by
the Company in the third quarter of fiscal 1994, and its success has been
measured, in part, by the sales increases experienced at the Company's stores in
the periods immediately following a catalog's "in-home" distribution date. In
1994, the Company won the "Gold Award" for the best new consumer catalog from
the American Catalog Awards, sponsored by Catalog Age, a leading industry
publication.
The Company's overall catalog strategy has been focused on the acquisition
of additional names and improved segmentation of prospective and active customer
files, so that mailings can be directed most effectively. In fiscal 1997, as the
second part of a two-year strategy, the Company intends to mail only to the most
productive segments of its active store customer lists and to significantly
decrease prospect mailings for
10
<PAGE> 11
mail-order sales, thus focusing its marketing efforts on the more productive
house file of established and active mail-order customers. While this will
result in lower circulation and is expected to reduce mail-order sales, the
strategy will also significantly reduce mailing and printing costs and is
intended to further improve the Company's goal of overall profitability. In
fiscal 1996, the Company prepared and circulated 11 editions of its catalog,
which averaged 32 pages with total mailings of approximately 15.9 million. This
compares with total mailings of approximately five million in fiscal 1995.
The Company's mail-order management staff includes a director and three
managers who handle the merchandise, call center and order fulfillment
functions. The Company began its mail-order operations by using a contract
company to manage its call center and order fulfillment functions but assumed
responsibility for these functions after the first year. The Company currently
uses a combination of in-house marketing support and an outside catalog design
agency to monitor the catalog production process and develop effective catalog
presentations, emphasizing functional information about the Company's products.
MANAGEMENT INFORMATION SYSTEMS
Garden Botanika's management information systems include fully integrated
store, distribution, manufacturing and financial systems. These systems utilize
UNIX-based minicomputers to run third-party software, and the Company currently
relies on two related outside vendors for both its software and the day-to-day
support of its systems. Sales information is updated daily in the sales audit
and merchandise reporting systems by polling transaction data from each store's
point-of-sale ("POS") terminals. The Company's POS system consists of registers
providing price look-up, scanning of bar-coded tickets and capture of credit
information and payroll hours. The POS system also tracks store-initiated
transfers, which are uploaded to the host system, and price changes, which are
downloaded into the POS devices. Nightly communication with the stores enables
the Company to receive store transfer and physical inventory details and updates
for the Company's in-house customer database. Information obtained from nightly
polling also results in automatic merchandise replenishment on a weekly or
biweekly basis in response to the specific SKU requirements of each store. The
Company evaluates information obtained through such reporting to implement
decisions regarding merchandising assortment, allocation and markdowns. In
addition, this information allows the Company to forecast purchasing
requirements for its distribution center based on the combination of recent
sales trends and historical purchase patterns. In fiscal 1996, the Company
successfully installed a computerized warehouse management system at its
distribution center, which tracks and directs, as needed, inventory, warehouse
space and labor resources. In fiscal 1996, the Company also acquired and
successfully installed an integrated manufacturing information system, which is
designed to interface with its basic retail information system. This new system
can monitor work-in-progress, project inventory requirements from third-party
suppliers and better allow the Company to place raw material and component
purchase orders as required. The Company believes that its management
information systems are an important factor in allowing it to efficiently
support its growth and maintain a competitive industry position.
COMPETITION
The personal care, make-up and fragrance businesses are highly competitive.
The Company's products compete directly against personal care, make-up,
fragrance and other functionally similar products sold through a variety of
channels, including department stores, drugstores, mass merchandisers,
supermarkets, telemarketing programs, television "infomercials" and catalogs.
The Company competes against a number of companies, many of which have
substantially greater resources and better name recognition than the Company and
which sell their products through broader distribution channels. Some department
stores have introduced less expensive product lines that the Company believes
compete more directly with its products.
The Company also competes directly against mall-based specialty retailers
of personal care and other products, including national and international chains
such as Bath and Body Works, The Body Shop International PLC and Crabtree &
Evelyn, as well as local and regional specialty retailers. The number of
specialty retail outlets selling personal care products has increased
significantly in recent years, and the lack of significant barriers to entry may
result in new competition, including possible imitators of the Company. In
addition to competing for customers, the Company also competes generally with
specialty retailers for store
11
<PAGE> 12
sites, and there can be no assurance that management will be able to continue to
secure suitable sites on satisfactory terms.
Management believes that the primary elements of competition in its
business are quality, price and level of customer service, and that Garden
Botanika is able to compete successfully on the basis of each of these factors.
The Company believes that successful competition in the personal care industry
also depends, in part, on the regular introduction of new and appealing products
and has devoted substantial resources to new product development.
EMPLOYEES
At April 10, 1997, the Company employed approximately 2,500 persons, of
whom approximately 2,275 were store employees. Of the latter, approximately 25%
were full-time employees and approximately 75% were part-time employees. The
number of part-time associates employed by the Company fluctuates depending on
seasonal needs and has reached as high as 3,400 during peak selling periods. At
April 10, 1997, the Company employed approximately 225 non-store employees in
its corporate headquarters, two distribution centers, manufacturing division and
in different parts of the country as regional or district managers.
None of the Company's employees are covered by collective bargaining
agreements, and management believes that its relations with its employees are
good.
TRADEMARKS
The name "Garden Botanika" is registered as a trademark with the United
States Patent and Trademark Office. Management believes that the "Garden
Botanika" name is an important element of the Company's marketing strategy.
Accordingly, the Company intends to maintain its mark and the related
registration. The Company also has a number of other registered trademarks,
including Sun & Sport, Garden Botanika Natural Color and the GB-and-design
stylized logo, as well as other pending applications for registration in the
United States, Canada and selected other foreign countries. The Company believes
that establishing and maintaining brand identities are important to the
Company's operations.
GOVERNMENTAL REGULATION
The Company and its products are subject to regulation by the Food and Drug
Administration (the "FDA") and the Federal Trade Commission (the "FTC") in the
United States, as well as various other federal, state and local regulatory
authorities. Such regulations relate principally to the ingredients, labeling,
packaging and marketing of the Company's products. The Company believes that it
is in substantial compliance with such regulations, as well as with applicable
federal, state, local and foreign rules and regulations governing the discharge
of materials hazardous to the environment. There are no significant capital
expenditures for environmental control matters either estimated in the current
fiscal year or expected in the near future.
ITEM 2 -- PROPERTIES
The Company currently leases all of its existing store locations and
expects that its policy of leasing, rather than owning, will continue as it
expands. The Company's store leases generally provide for initial lease terms of
five to 12 years. Management believes that these terms, in contrast to longer
lease terms, allow the Company flexibility to pursue various expansion
opportunities resulting from changing market conditions. Rent is generally the
greater of a percentage, ranging from 5% to 8%, of the store's sales volume or a
fixed minimum base rent. Lease rental payments are also subject to annual
increases for taxes, common area maintenance and insurance. See Notes to
Financial Statements.
As most of the Company's stores were opened during the last three years,
most of the store leases have at least seven more years under their current
terms. As current leases expire, the Company believes that it will be able
either to obtain lease renewals, if desired, for present store locations or to
obtain leases for equivalent or
12
<PAGE> 13
better locations in the same general area. To date, the Company has not had any
experience renewing leases for existing locations or experienced unusual
difficulty in securing leases for suitable locations for new stores.
In addition to its stores, the Company currently leases approximately
25,400 square feet of office space in three buildings in Redmond, Washington for
its corporate headquarters and catalog call and customer service center. The
Company also leases approximately 92,000 square feet in Ontario, California as
its principal distribution and basket fabrication facility and, beginning on May
15, 1997, expects to expand under the same roof to occupy approximately 110,000
square feet. To support its manufacturing capabilities, the Company entered a
lease for an 8,700 square-foot building and storage facility in Oceanside,
California. In addition, the Company maintains a small office facility of 1,300
square feet in Howard County, Maryland as the headquarters of its East Coast
regional operations.
ITEM 3 -- 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. A settlement agreement has been prepared by the parties, but it has
not been fully executed. In accordance with the proposed settlement agreement,
Garden Botanika has, among other things, changed elements of its merchandising
and package design for the Transparencies line. The proposed settlement
agreement 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.
The Company is also involved in various routine legal proceedings incident
to the ordinary course of its business. The Company believes that the outcome of
all pending legal proceedings in the aggregate will not have a material adverse
effect on its business, financial condition, liquidity or operating results.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the quarter
ended February 1, 1997.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since its initial public offering on May 22, 1996, the Company's Common
Stock has been traded on the Nasdaq National Market tier of the Nasdaq Stock
Market under the symbol "GBOT." The following table sets forth the high and low
closing sale prices of the Company's Common Stock for the fiscal quarters
indicated.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
--------------------------------------------------------------- ---- ---
<S> <C> <C>
FISCAL 1996:
Second quarter (from May 22, 1996)........................... $35 $11 3/4
Third quarter................................................ $16 7/8 $ 7 7/8
Fourth quarter............................................... $12 $ 7 3/4
FISCAL 1997:
First quarter (through April 10, 1997)....................... $10 7/8 $ 5 3/4
</TABLE>
The last sale price of the Company's Common Stock on April 10, 1997, as
reported on the Nasdaq National Market, was $5.875 per share.
As of April 10, 1997, there were 224 holders of record of the Company's
Common Stock.
The Company has not paid cash dividends since its inception. The Company
currently intends to retain all earnings, if any, for use in the expansion of
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future. Additionally, in the event the Company were to draw upon its
current bank line of credit, the terms of that line would prohibit the payment
of cash dividends to holders of Common Stock without the bank's consent.
13
<PAGE> 14
ITEM 6 -- SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
JAN. JAN.
30, JAN. 29, 28, FEB. 3, FEB. 1,
1993 1994 1995 1996(1) 1997
------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT AND PER
SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Net sales............................ $ 6,407 $ 12,569 $27,510 $55,339 $ 92,465
Cost of sales (including buying and
occupancy costs).................. 4,191 7,794 15,521 31,448 52,551
------- ------- ------- ------- -------
Gross margin......................... 2,216 4,775 11,989 23,891 39,914
Operating expenses:
Stores and catalog(2)............. 2,044 4,093 8,956 18,746 35,544
General and administrative........ 1,541 2,759 3,917 6,041 8,871
Preopening and facility relocation
expenses.......................... 110 417 733 798 1,426
------- ------- ------- ------- -------
Operating loss....................... (1,479) (2,494) (1,617) (1,694) (5,927)
Interest income, net................. 27 140 230 30 994
------- ------- ------- ------- -------
Loss before income tax provision..... (1,452) (2,354) (1,387) (1,664) (4,933)
Income tax provision................. -- -- -- -- --
------- ------- ------- ------- -------
Net loss............................. $(1,452) $ (2,354) $(1,387) $(1,664) $ (4,933)
======= ======= ======= ======= =======
Net loss per share(3)................ $ (1.03) $ (0.88) $ (0.43) $ (0.44) $ (0.80)
Cash dividends declared per common
share............................. -- -- -- -- --
Common and common equivalent shares
(000's)(3)........................ 1,416 2,676 3,209 3,781 6,146
Capital expenditures................. $ 1,889 $ 3,865 $11,439 $16,800 $ 24,225
SELECTED OPERATING DATA:
Stores open at period-end............ 23 41 86 152 253
Average square footage of stores
opened during period.............. 936 951 1,077 1,256 1,362
Sales per square foot(4)............. $ 498 $ 484 $ 535 $ 458 $ 387
Average store age (in months)........ 12 16 16 18 20
Comparable store sales increase(5)... 37% 18% 34% 16% 7%
Number of catalogs mailed
(000's)(2)........................ -- -- 2,311 5,021 15,933
BALANCE SHEET DATA (AT PERIOD-END):
Working capital...................... $ 2,193 $ 12,522 $ 1,415 $ 2,662 $ 36,315
Total assets......................... $ 7,293 $ 21,910 $25,518 $47,137 $103,523
Note payable to bank................. -- -- -- $ 2,540 --
Shareholders' equity................. $ 6,393 $ 19,542 $18,183 $33,117 $ 84,456
</TABLE>
- ---------------
(1) The fiscal year ended February 3, 1996 was a 53-week year.
(2) The Company commenced its catalog operations in the third quarter of fiscal
1994.
(3) Based on the number of common and preferred shares outstanding after giving
effect to the conversion of all Preferred Stock into Common Stock. See Notes
to Financial Statements.
(4) For stores open at beginning of period indicated.
(5) Stores enter the comparable store base upon completing one full fiscal year
of operation. The numbers of comparable stores used to compute such
percentages were 3, 13, 23, 41 and 86 in fiscal years 1992 through 1996,
respectively.
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<PAGE> 15
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis of Garden Botanika's results of
operations and financial condition should be read in conjunction with the
Financial Statements and Notes thereto included herein. The term "store months
of operations" refers to the aggregate number of full months during which stores
were open during a particular fiscal year and is used to compare the financial
results of various fiscal periods. The term "contribution margin" refers to
store level operating income, exclusive of buying costs.
GENERAL
Since Garden Botanika opened its first store in August 1990, the Company
has achieved a national presence and, as of April 10, 1997, markets its
proprietary branded personal care products through 259 Company-owned and
- -operated stores in 41 states and the Company's catalog.
The Company accelerated its store expansion program following the
introduction of a larger prototype store design in mid-1994. To date, the
Company's stores have averaged $324 of sales per square foot and a contribution
margin of 5.7% in their first full fiscal year of operation. More importantly,
however, the productivity of each class of the Company's stores has generally
improved as they have matured and as familiarity with the Garden Botanika brand
has increased. The 13 stores that have been in operation for five full fiscal
years averaged sales per square foot of $856 and a contribution margin of 26.8%
in their fifth full year of operation. Fifth year comparable store sales growth
at these 13 stores, six of which have been relocated within the same mall and/or
substantially remodeled, ranged from 3% to 50%. The Company has not closed any
stores.
During fiscal 1996, the Company opened 101 new stores, and its plans call
for approximately 30 additional stores to be opened in fiscal 1997. Of the 253
stores operated at February 1, 1997, approximately two-thirds had been open less
than 24 months, and over one-half were located in markets that the Company
considers significantly underdeveloped in terms of their potential for Garden
Botanika's long-term presence. The Company has found that the opening of
additional stores within existing, underdeveloped markets can increase sales by
enhancing awareness of the Garden Botanika brand. The large number of newer
stores and the large number of stores in underdeveloped markets are believed to
be significant factors in the Company's lower rate of comparable store sales
growth during fiscal 1996 and in the significant increase in its net loss over
the prior year. In order to increase market penetration and promote a higher
level of recognition of the Garden Botanika brand, management presently intends
to concentrate the majority of its new store openings in its underdeveloped
markets.
Of the 101 stores opened during fiscal 1996, 12 were of the Company's new
Color Studio format, which features an expanded assortment of color cosmetics
and makeover stations to allow for in-store experimentation and trial. In
addition, two of the four stores relocated and/or remodeled during the year were
converted to this format. Because of the initial success of the Color Studio
format, the Company anticipates that approximately 85% of its currently planned
fiscal 1997 openings will feature a Color Studio. At approximately 1,700 square
feet, these stores are approximately 30% larger than the Company's traditional
stores and are more costly to open. As a result of the trend toward larger
stores, as well as the addition of 167 stores in fiscal 1995 and 1996 that have
initially had lower sales productivity, sales per square foot have declined and
occupancy costs have risen as a percentage of net sales.
Historically, a key element of Garden Botanika's growth has been its
aggressive new product development program. During fiscal 1996, the Company
introduced over 500 new SKU's, approximately 65% of which are intended to be
part of the Company's on-going merchandise assortment. New product introductions
included two new product lines (Transparencies and Garden Botanika At Home), two
new fine fragrances (Garden Botanika the Fragrance and Impetuous) and a
re-introduction of its men's line as Botanika for Men. Management intends to
continue its aggressive new product development and introduction program in
fiscal 1997. In April 1997, the Company introduced Perspective, its fourth fine
fragrance.
Garden Botanika has also invested heavily in establishing and building its
mail-order business, commencing in the third quarter of fiscal 1994. In fiscal
1996, the Company's mail-order strategy included significant
15
<PAGE> 16
"prospecting" through widespread catalog distribution, using purchased lists of
names. During fiscal 1997, as the second part of a two-year strategy, management
expects the expenses associated with the Company's catalog distribution and
mail-order sales will decrease as the Company focuses the circulation of its
catalogs to past respondents and proven customers of the Company's products.
While this strategy of reduced mailings may also cause mail-order sales to
decline versus fiscal 1996 and reduce store visits by mail-order customers, the
net effect on the Company's overall profitability is expected to be positive.
Management believes that Garden Botanika's historical losses have been the
result of an aggressive store opening schedule, a young and geographically
dispersed store base, the development of a substantial corporate infrastructure
to support the Company's rapid growth and the establishment of its mail-order
operations. Management also believes that sales will increase as a result of the
further maturation of its store base, its market saturation efforts, its
emphasis on the Color Studio store format, its active new product development
program and its planned merchandising initiatives. Because of the seasonality of
its mall-based business, the Company has historically experienced net losses in
the first three quarters of each fiscal year and expects that this pattern will
continue in fiscal 1997.
Garden Botanika plans to continue its growth strategy in 1997 by seeking
increased sales and profitability in existing stores and, to a lesser extent, by
opening approximately 30 new stores, primarily in existing, but newer markets.
In the future, management expects the Company to continue to expand its market
share by increasing its store base and in-store productivity and by exploring
other potential channels of distribution. The Company has licensed Garden
Botanika products to be used as amenities in certain luxury hotels and resorts
and will continue to explore other new distribution opportunities domestically
and internationally as they arise.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
results of operations expressed as percentages of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-------------------------------
JAN.
28, FEB. 3, FEB. 1,
1995 1996(2) 1997
------- ------- -------
<S> <C> <C> <C>
Net sales (in thousands)...................... $27,510 $55,339 $92,465
------- ------- -------
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales (including buying and occupancy
costs)...................................... 56.4 56.8 56.8
------- ------- -------
Gross margin.................................. 43.6 43.2 43.2
Operating expenses:
Stores and catalog(3)....................... 32.6 33.9 38.4
General and administrative.................. 14.2 10.9 9.6
Preopening and facility relocation expenses... 2.7 1.4 1.5
------- ------- -------
Operating loss................................ (5.9) (3.1) (6.4)
Interest income, net.......................... 0.8 0.1 1.1
------- ------- -------
Net loss...................................... (5.0)% (3.0)% (5.3)%
======= ======= =======
</TABLE>
- ---------------
(1) Percentage amounts may not total 100% due to rounding.
(2) The fiscal year ended February 3, 1996 was a 53-week year.
(3) The Company commenced its catalog operations in the third quarter of fiscal
1994.
FISCAL 1996 VS FISCAL 1995
General. The Company operated 253 stores at the end of fiscal 1996,
compared to 152 stores at the end of fiscal 1995. There were 2,290 store months
of operations during fiscal 1996 versus 1,375 store months in the prior period,
an increase of 67%. The average age of the Company's stores increased from 18
months to 20 months.
16
<PAGE> 17
Net Sales. Net sales for fiscal 1996 were $92.47 million, compared to net
sales of $55.34 million for fiscal 1995. The increase of $37.13 million or 67%,
in net sales was due primarily to the following factors: (i) the 67% increase in
store months of operations during the year; (ii) an increase of 7% in comparable
store sales over the prior year, resulting primarily from an increase in the
number of customer transactions; and (iii) a 100% increase in mail-order sales,
resulting primarily from an increase in circulation. Annual sales per square
foot declined by 16%, to $387, during the period, due primarily to an 8%
increase in average square footage per new store and the effect of the 167 newer
stores, which initially have had lower than average sales, opened in
geographically dispersed markets during fiscal 1995 and 1996. In fiscal 1995 and
1996, sales directly attributable to the Company's mail-order operation
accounted for 7% and 8%, respectively, of the Company's total net sales. In
fiscal 1995 and 1996, the Company mailed approximately 5.0 million and 15.9
million catalogs, respectively, to store and mail-order customers.
Gross Margin. Gross margin as a percentage of net sales was unchanged from
fiscal 1995 at 43.2%. Merchandise margin improvement of approximately 200 basis
points was offset by an increase in store occupancy costs related primarily to
the 167 newest stores. The dollar amount of gross margin increased by $16.02
million, or 67%, as a result of the 67% increase in sales.
OPERATING EXPENSES
Stores and Catalog. Store and catalog expenses, including distribution,
increased as a percentage of net sales from 33.9% in fiscal 1995 to 38.4% in
fiscal 1996. Improved leverage on mail-order operating expenses and distribution
were more than offset by increases in advertising and other store operating
costs as the Company sought to increase sales in its newer stores in less
developed markets and felt the impact of generally slower sales growth in those
stores. The dollar amount of store and catalog expenses increased by $16.80
million, or 90%, over the prior year, primarily as a result of the 67% increase
in store months of operations and the increase in store advertising.
General and Administrative. General and administrative expenses declined as
a percentage of net sales from 10.9% in fiscal 1995 to 9.6% in fiscal 1996. This
decline reflected improved leverage associated with increases in total and
comparable store sales. The dollar amount of general and administrative expenses
increased by $2.83 million, or 47%, from the prior year to support the 67%
increases in store months of operations and net sales.
Preopening and Facility Relocation Expenses. Preopening and facility
relocation expenses ("Preopening Expenses") vary with the number of new stores
opened and the number of existing stores relocated during a particular period.
In addition, the one-time startup costs of new facilities and operations are
included in Preopening Expenses. Preopening Expenses were $1.43 million, or 1.5%
of net sales, in fiscal 1996, when the Company opened 101 new stores, relocated
or committed to the relocation of five existing stores and relocated its
warehouse, distribution and catalog fulfillment operations. The Company incurred
Preopening Expenses of $798,000, or 1.4% of net sales, during the prior year,
when it opened 66 new stores, relocated two existing stores and brought its
catalog customer service and fulfillment operations in-house.
Operating Loss. For the reasons explained above, the fiscal 1996 loss from
operations increased 250%, to $5.93 million, from $1.69 million in the prior
year. Expressed as a percentage of net sales, the Company's loss from operations
increased from 3.1% to 6.4%, reflecting both the effects of slower growth in
comparable store sales and the costs of programs designed to improve sales in
newer stores located primarily in less developed markets.
Interest Income, Net. Net interest income during fiscal 1996 was $994,000
or 1.1% of net sales, compared to $30,000 or 0.1% of net sales, during the prior
year. This change was due primarily to temporary investment of funds provided by
the Company's May 1996 initial public offering. Interest expense was $321,000 in
fiscal 1996 and $105,000 in fiscal 1995.
Income Taxes. The Company did not record an income tax benefit for either
fiscal 1996 or fiscal 1995. Net operating loss carryforwards of $3.63 million at
February 1, 1997 begin to expire in 2005, and the amount
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of such carryforwards that can be used in any one year is subject to limitation
based on the nature of past ownership changes. See Notes to Financial
Statements.
Net Loss. For the reasons explained above, during fiscal 1996, the
Company's net loss increased 196%, to $4.93 million, or $0.80 per common and
common equivalent share, from $1.66 million, or $0.44 per share, in fiscal 1995.
The net loss also increased as a percentage of net sales, from 3.0% in fiscal
1995 to 5.3% in the current year, with the negative effects of slower growth in
comparable store sales and the costs of programs designed to improve sales being
partially offset by increased interest income.
FISCAL 1995 VS FISCAL 1994
General. The Company operated 152 stores at the end of fiscal 1995,
compared to 86 stores at the end of fiscal 1994. There were 1,375 store months
of operations during fiscal 1995 versus 681 store months in the prior period, an
increase of 102%. The average age of the Company's stores increased from 16
months to 18 months.
Net Sales. Net sales for fiscal 1995 were $55.34 million, compared to net
sales of $27.51 million for fiscal 1994. The increase of $27.83 million, or
101%, in net sales was due primarily to the following factors: (i) the 102%
increase in store months of operations during the year; (ii) an increase of 16%
in comparable store sales over the prior year, resulting primarily from an
increase in the number of customer transactions; and (iii) having the Garden
Botanika catalog in operation for the full 53 weeks versus only 22 weeks in the
prior year. Annual sales per square foot declined by 14%, to $458, during the
period, due primarily to a 17% increase in average square footage per new store
and the effect of the 45 new stores, which initially have had lower than average
sales, opened during fiscal 1994 on a base of 41 stores. In fiscal 1994 and
1995, the sales directly attributable to the Company's mail-order operation
accounted for 3% and 7%, respectively, of the Company's total net sales. In
fiscal 1994 and 1995, the Company mailed approximately 2.3 million and 5.0
million catalogs, respectively.
Gross Margin. Gross margin as a percentage of net sales declined from 43.6%
in fiscal 1994 to 43.2% in fiscal 1995. Margin improvements attributable to
improved sourcing and increased buying power and to improved leverage on buying
costs were more than offset by increases in inventory shrinkage and occupancy
costs. The dollar amount of gross margin increased by $11.90 million, or 99%,
from the prior year, primarily as a result of increased sales.
OPERATING EXPENSES
Stores and Catalog. Store and catalog expenses, including distribution,
increased as a percentage of net sales from 32.6% in fiscal 1994 to 33.9% in
fiscal 1995. Improved leverage on store operating expenses and distribution
costs were more than offset by increased catalog costs, which were primarily
attributable to the start-up nature of the Company's catalog and the fact that
it was in operation for 53 weeks in fiscal 1995 compared to only 22 weeks in the
prior year. The dollar amount of store and catalog expenses increased by $9.79
million, or 109%, over the prior year, primarily as a result of the 102%
increase in store months of operations and costs associated with the catalog
operation.
General and Administrative. General and administrative expenses declined as
a percentage of net sales from 14.2% in fiscal 1994 to 10.9% in fiscal 1995.
This decline reflected the improved leverage associated with increases in total
and comparable stores sales. The dollar amount of general and administrative
expenses increased by $2.12 million, or 54%, from the prior year to support the
102% increase in store months of operations and the 101% increase in net sales.
Preopening and Facility Relocation Expenses. Preopening Expenses were
$798,000, or 1.4% of net sales, in fiscal 1995, when the Company opened 66 new
stores, relocated two existing stores and brought its catalog customer service
and fulfillment operations in-house. The Company incurred Preopening Expenses of
$733,000, or 2.7% of net sales, during the prior year, when it opened 45 stores
and relocated one existing store. The Company standardized its store-opening
process during 1995, generally improving control of costs related to the opening
of new stores.
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Operating Loss. For the reasons explained above, the fiscal 1995 loss from
operations increased 5%, to $1.69 million, from $1.62 million in the prior year.
Expressed as a percentage of net sales, however, loss from operations declined
from 5.9% to 3.1%, primarily as a result of improved leverage from increased
sales.
Interest Income, Net. Net interest income during fiscal 1995 was $30,000,
or 0.1% of net sales, compared to $230,000, or 0.8% of net sales, during the
prior year. This change was due primarily to a reduction in the amount of funds
available for temporary investment during fiscal 1995 and to the borrowings
against the Company's bank line of credit occasioned thereby. Interest expense
was $105,000 in fiscal 1995 and $15,000 in fiscal 1994.
Income Taxes. The Company did not record an income tax benefit for either
fiscal 1995 or fiscal 1994.
Net Loss. For the reasons explained above, during fiscal 1995, the
Company's net loss increased 20%, to $1.66 million, or $0.44 per common and
common equivalent share, from $1.39 million, or $0.43 per share in fiscal 1994.
Although the net loss increased in absolute dollars, it declined to 3.0% of net
sales from 5.0% in the prior year due to the improved operating expense leverage
resulting from the 101% increase in net sales, including a 16% increase in
comparable stores sales.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has experienced, and expects to continue to experience,
substantial seasonal fluctuations in its sales and operating results, which is
typical of many mall-based specialty retailers. As illustrated in the following
table, a disproportionate amount (ranging from 45% to 49%) of the Company's
annual net sales, and all of its profits, if any, have been realized during its
fourth fiscal quarter. The Company expects this pattern to continue during the
current fiscal year and anticipates that in subsequent years the fourth quarter
will continue to contribute disproportionately to its operating results,
particularly during November and December. In anticipation of increased sales
activity during the fourth quarter, the Company incurs significant additional
expenses, including the hiring of a substantial number of temporary employees to
supplement its permanent store staff. If, for any reason, the Company's sales
were to fall below its expectations during November and December, the Company's
business, financial condition and annual operating results would be adversely
affected. 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, shifts in the timing of promotions and catalog
mailings and changes in the Company's product mix.
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<TABLE>
<CAPTION>
FISCAL QUARTER(1)
-------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FISCAL 1994:
Net sales......................... $ 3,955 $ 4,521 $ 5,551 $13,483
% of full year................. 14.4% 16.4% 20.2% 49.0%
Gross margin...................... $ 1,545 $ 1,771 $ 2,178 $ 6,495
% of full year................. 12.9% 14.8% 18.2% 54.2%
Net income (loss)................. $ (665) $ (616) $(1,168) $ 1,062
FISCAL 1995:(2)
Net sales......................... $ 9,532 $10,138 $10,671 $24,998
% of full year................. 17.2% 18.3% 19.3% 45.2%
Gross margin...................... $ 4,084 $ 4,212 $ 4,170 $11,425
% of full year................. 17.1% 17.6% 17.5% 47.8%
Net income (loss)................. $ (827) $ (836) $(1,986) $ 1,985
FISCAL 1996:
Net sales......................... $16,647 $16,916 $17,681 $41,221
% of full year................. 18.0% 18.3% 19.1% 44.6%
Gross margin...................... $ 7,046 $ 6,793 $ 6,633 $19,442
% of full year................. 17.7% 17.0% 16.6% 48.7%
Net income (loss)................. $(2,685) $(1,987) $(3,780) $ 3,519
</TABLE>
- ---------------
(1) Percentage amounts may not total 100% due to rounding.
(2) Fiscal 1995 was a 53-week year. The 53rd week is included in fourth quarter
results.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Garden Botanika began fiscal 1996 with cash and cash equivalents totaling
$1.31 million, having previously raised net equity of $42.24 million, primarily
through four Convertible Preferred Stock offerings in fiscal years 1990 through
1995. Accumulated losses since inception had reduced net shareholders' equity to
$33.12 million at February 3, 1996.
From February 4, 1996 through receipt of funds from the Company's initial
public offering in late May, Garden Botanika's primary source of funds was its
bank credit line. During this time, the bank credit line included a $4.00
million revolving bridge facility and a $5.00 million revolving working capital
facility. The bridge facility, which bore interest at the bank's prime rate plus
3.00%, expired on September 30, 1996. The working capital facility, which is
subject to a borrowing base limitation and which bears interest at the bank's
prime rate (currently 8.5%) remains in effect and available to the Company until
its scheduled expiration on September 30, 1997. Following completion of the
Company's initial public offering in May 1996, credit line borrowings totaling
$6.25 million (at interest rates of 9.25% to 11.25%) were repaid from the
proceeds, and the Company has not borrowed against the credit line subsequent to
that time.
The Company contemplates that it will renew its credit facility in 1997 and
borrow against it to finance the purchase of inventory for the upcoming holiday
season. The terms of the Company's bank credit line, in the event it were to be
used, require the Company to maintain minimum tangible net worth of $32.00
million, a maximum ratio of indebtedness to capital of 0.7-to-1 and working
capital of at least $4.00 million. In addition, among other restrictions, the
Company is prohibited from paying dividends and assuming additional indebtedness
without the bank's prior written consent. The Company was in compliance with its
credit line covenants at February 1, 1997.
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<PAGE> 21
CASH FLOW FOR FISCAL 1996
During fiscal 1996, the Company used $696,000 in cash to finance its
operating activities. This cash was used primarily to fund an increase of $2.74
million in inventory (net of a related increase in accounts payable and checks
drawn in excess of bank balances), related primarily to store expansion.
The Company also used $47.10 million in cash (including a related reduction
in accounts payable) during the same period to fund new stores, to expand its
distribution and central office support facilities and systems, to fund a $1.71
million increase in receivables from store lessors (also related to new stores)
and to purchase short-term investments totaling $20.43 million.
The primary source of funds for the Company's operating and investing
activities through May 1996 was its bank credit line. Subsequent to that date,
these activities were funded by proceeds from the Company's initial public
offering.
FUTURE CASH FLOW PLANS AND EXPECTATIONS
The Company's plans call for opening approximately 30 additional stores in
fiscal 1997. Management expects that substantially all of these new stores will
be leased on terms generally comparable to those of existing store leases.
Whenever possible, the Company's real estate leasing department will negotiate
lessor construction allowances to partially defray the cost of leasehold
improvements. For fiscal 1997, the Company anticipates total capital
expenditures of approximately $16.00 million, based on (i) currently planned
store openings, (ii) the distribution, manufacturing and central office
facilities and systems necessary to support those openings and (iii) planned
updates to existing stores.
The Company's average expenditure for leasehold improvements, equipment,
furniture and fixtures for the 101 stores opened during fiscal 1996 was $203,000
after giving effect to lessor construction allowances. Average preopening
expense for these 101 stores was approximately $9,000. In addition, other
working capital requirements, consisting primarily of net inventory purchases,
averaged approximately $37,000 per store.
The Company expects that approximately 85% of its planned fiscal 1997
stores will be of its larger Color Studio format, with the remaining 15% of the
planned openings being of the Company's generally less costly traditional and
neighborhood strip mall store formats. Given this expected mix of openings, the
average fiscal 1997 cost for leasehold improvements, equipment, furniture and
fixtures for new stores (net of lessor construction allowances) is expected to
increase to approximately $248,000. The average inventory investment and
preopening cost for a new store is not expected to change significantly in
fiscal 1997. The Company also expects that, as it places additional emphasis on
maintaining inventory in-stock during 1997, inventory levels, which normally
vary during the year based on the timing of promotional events, new product
introductions and gift-giving periods, will generally increase from the levels
experienced during fiscal 1996.
On an ongoing basis, the Company expects to continue to be able to finance
a portion of its merchandise inventory costs by using vendor credit terms,
generally ranging from 30 to 60 days. In addition to such vendor financing, the
Company may also finance up to 25% of the cost of its merchandise inventory
during the months of January through March by borrowing against its $5.00
million working capital credit facility, if renewed as contemplated. During the
months of April through December, the percentage of merchandise inventory that
can be financed under this facility increases to 50%.
The Company believes that its cash and short-term investment balance at the
end of fiscal 1996, combined with cash flow from operations and borrowings under
its working capital 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 or to support 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
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<PAGE> 22
prevent the Company's planned expansion or impair its future business, financial
condition and operating results.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately predict the effect of inflation on
its future operations, it does not believe inflation has had a material effect
on net sales or results of operations. As its operations have expanded to the
present levels, the Company has been able to access larger vendors and to
realize certain economies of scale in its purchasing and distribution, thus
largely offsetting any raw material price increases.
ADOPTION OF ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This pronouncement requires companies to review long-lived assets and certain
intangible assets, and if the value of the assets is impaired, to record an
impairment loss. In adopting SFAS No. 121, the Company determined that it was
not necessary to record an impairment loss during fiscal 1996.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This pronouncement establishes the accounting and reporting
requirements, using a fair value-based method of accounting, for stock-based
employee compensation plans. Under the new standard, the Company may either
adopt the new fair value-based measurement method or continue the intrinsic
value-based method prescribed by Accounting Principles Board Opinion No. 25 and
provide pro forma disclosures of net income and earnings per share as if the
measurement provisions of SFAS No. 123 had been adopted. The Company has adopted
only the disclosure requirements of SFAS No. 123; therefore, the adoption will
have no effect on the Company's net earnings or cash flows.
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." This
pronouncement establishes new standards for computing and presenting earnings
per share for entities with publicly held common stock. The Company will be
required to adopt SFAS No. 128 in the fourth quarter of fiscal 1997. The
adoption will not have a significant effect on the Company's earnings per share.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
Garden Botanika does not provide forecasts of future financial performance.
Forward-looking statements in this Annual Report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, and,
in connection therewith, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected and in
the future could affect the Company's actual results and could cause such
results to differ materially from those expressed in forward-looking statements
made by or on behalf of the Company.
Historical Net Losses. During fiscal years 1994 through 1996, respectively,
the Company incurred net losses of $1.39 million, $1.66 million and $4.93
million. As of the end of fiscal 1996, the Company had an accumulated deficit of
$14.06 million, and there can be no assurance that the Company will generate
profits in future periods. The Company's future operating results will depend
upon a number of factors, particularly the performance of its existing and new
stores as each class matures, the level of competition and the ability of the
Company to successfully identify and respond to emerging trends in the personal
care products industry and to manage its future store expansion.
Achievement of Profitability. The Company's future operating results will
depend on its ability to operate its new and existing stores in a profitable
manner. The profitability of the Company's stores is dependent on a number of
factors, including the Company's ability to (i) create brand awareness and
attract customers in markets in which it has little or no prior experience, and
in stores and markets where it has not been profitable to date; (ii) obtain
targeted sales volumes through competitive pricing, while maintaining acceptable
gross margins; and (iii) manage operating expenses. The Company's future
operating results will also depend on many other factors that are beyond the
Company's control, including the level of mall traffic, competitive
circumstances and general economic conditions affecting consumer confidence and
spending. The Company expects to open new stores in certain markets in which it
is already operating, which could adversely
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<PAGE> 23
affect sales at existing stores. There can be no assurance that the Company's
stores will achieve targeted sales and profitability levels in the future.
New Stores and Larger Store Format. The Company opened its first store in
August 1990 and currently operates 259 stores. The Company, which opened 101
stores in the last fiscal year, currently plans to open approximately 30
additional stores in fiscal 1997, which represents a slower rate of growth than
in the Company's past and which may represent slower growth than one or more of
its competitors. In addition, approximately 85% of new stores in fiscal 1997 are
planned to be of the Company's new Color Studio format, with which it has only
limited experience. The Company's first Color Studio opened in late August 1996,
and, as of the end of the last fiscal year, the Company had opened 12 stores and
remodeled two existing stores in this new format. In fiscal 1996, the Company's
net investment to open a new store averaged approximately $235,000 for the 89
stores opened in its traditional format and approximately $360,000 for the 12
stores opened in its Color Studio format. The Company expects that the average
cost to open and operate a new store during fiscal 1997 will reflect the
substantially higher costs associated with building and operating its larger
Color Studio stores. There can be no assurance, however, that the Company will
successfully be able to open the planned number of new stores or operate its
larger new stores profitably.
Fluctuations in Comparable Store Sales Results. A variety of factors affect
the Company's comparable store sales results, including, among others, the
following: the retail sales environment; the timing of holidays, promotional
events and the mailing of the Company's catalogs; new store openings and new
product introductions; the Company's ability to execute its business strategy
efficiently; and general economic and competitive conditions. The Company
expects average comparable store sales to increase generally at lower rates than
in past years, and there can be no assurance that comparable store sales for any
particular period will not decrease. Of the Company's 253 stores in operation at
February 1, 1997, 167 stores, or 66%, had been open less than two years. As a
consequence, the results achieved by these stores to date may not be indicative
of future results for these stores or for other new stores.
Competition. The personal care, makeup and fragrance businesses are highly
competitive. The Company's products compete directly against functionally
similar products sold through a variety of retail channels, including department
stores, mass merchants, drugstores, supermarkets, telemarketing programs,
television "infomercials" and catalogs. The Company competes against a number of
companies that have substantially greater resources and better name recognition
than Garden Botanika and which sell their products through broader distribution
channels. Some department stores, which have historically offered personal care
products at higher price points than the Company, have introduced less expensive
product lines that may compete more directly with the Company's products. The
Company also competes directly against mall-based specialty retailers of
personal care and other products, including national and international chains
that are larger and that have grown more rapidly than the Company. In general,
there are no provisions in the Company's leases that limit or restrict competing
businesses from operating in malls in which the Company's stores are located.
The number of specialty retail outlets selling personal care products, either
exclusively or as an extension of a related brand (such as a clothing brand),
has increased significantly in recent years. This has led to an increasingly
competitive marketplace that the Company believes has had, and may continue to
have, an adverse effect on the Company's business, financial condition and
operating results, as well as on those of certain of its competitors. In
addition, the lack of significant barriers to entry may result in new
competition, including possible imitators of the Garden Botanika concept. Should
any of the Company's competitors reduce prices, the Company may be required to
implement price reductions in order to remain competitive, which could also have
an adverse impact on its business, financial condition and operating results.
The Company believes that success in the personal care industry depends, in
part, on the regular introduction of new and attractive products. In a
competitive environment, there can be no assurance (i) that the Company will
continue to be able to develop original products or (ii) that sales of new
products will justify the costs associated with their development and marketing,
or that such sales of new products will not adversely affect sales of the
Company's preexisting products. The Company also competes generally for store
sites, and there can be no assurance that it will be able to continue to secure
suitable sites on satisfactory terms.
Ability to Manage Growth. In order for the Company to operate successfully,
management will be required to anticipate the changing demands of the Company's
growing operations and adapt systems and
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<PAGE> 24
procedures accordingly. There can be no assurance that the Company will
anticipate all of the changing demands that its expanding operations will impose
on such systems. The Company will also need to continually evaluate the adequacy
of its management information systems, including its inventory control and
distribution systems. Failure to upgrade its information systems or unexpected
difficulties encountered with these systems during expansion could adversely
affect the Company's business, financial condition and operating results.
Reliance on Management Information Systems Vendors. The Company currently
relies on two related outside vendors for the software and day-to-day support
that form the basis of the Company's management information, distribution and
financial systems. While the Company believes that these vendors have sufficient
experience and commitment to their product lines to be relied upon for continued
support in developing, testing and implementing systems and controls that are
adequate to support the Company's store expansion plans and its distribution and
financial systems, it may have little control, apart from changing vendors, over
the level of systems maintenance and support it receives. In the event it were
to change information systems vendors, the Company could experience unforeseen
delays or interruptions in its access to information. Such problems, were they
to occur, could adversely affect the Company's business, financial condition and
operating results.
Mail-Order Strategy. In the third quarter of fiscal 1994, the Company
introduced the Garden Botanika catalog. One purpose of the catalog was to enable
the Company to effect mail-order sales and expand brand recognition in areas
where it had not opened stores. To date, the additional costs associated with
the Company's mail-order business have exceeded sales directly attributable to
that business, and the Company expects this to continue in fiscal 1997. In
fiscal 1996, the Garden Botanika catalog was distributed widely to prospective
mail-order customers in an effort to build a "house file" of proven customers
from the respondents. In fiscal 1997, the Company intends to reduce printing,
mailing and related mail-order expenses significantly as it focuses on smaller,
but more productive mailings to its house file of active mail-order customers.
While this strategy is expected to result in a significant decline in mail-order
sales, the Company contemplates that the direct operating expenses attributable
to the mail-order business will decline by a greater amount. However, there can
be no assurance that a reduction in mailings to mail-order customers will not
also reduce the frequency of in-store visits and have a negative impact on store
sales. There can also be no assurance that this strategy will lead to mail-order
profitability or that the planned reduction in mailings will not result in an
eventual decline in the size of the Company's active mail-order house file,
which, in turn, could lead to a long-term inability to generate sufficient
mail-order revenue to cover costs.
Store Advertising Expenses. The Company's store advertising program is
built primarily around the Garden Botanika catalog, which, in addition to its
role in mail-order sales, is mailed to certain active customers of existing
stores and, in a "Grand Opening" promotion, to prospective customers of newly
opened stores. During the latter part of 1996, the Company significantly
expanded the number of store catalogs mailed in an effort to stimulate sales,
particularly in newer stores in its less developed markets. In fiscal 1997, the
Company intends to reduce the number of catalogs mailed per store by focusing on
what it believes are or will be its most productive store customers in order to
justify the cost of the mailings. There can be no assurance that the Company's
more focused store advertising mailings will reduce expenses or generate
sufficient sales to make store operations profitable. Apart from its catalog and
related mailings, the Company does not advertise in the print or broadcast
media, as do many of its competitors. Postal rates, delivery charges and paper
and printing costs directly affect the cost of the Company's store advertising
program, as well as its mail-order business, and a significant increase in any
of these expenses could adversely affect the Company's overall business,
financial condition and operating results.
Dependence on Key Personnel. The Company is dependent upon the efforts of
its key officers and employees, including Michael W. Luce, President, Chief
Executive Officer and a director; Arlee J. Jensen, Senior Vice
President -- Merchandising and Marketing; C. Michael Fisher, Senior Vice
President -- Operations; and John A. Garruto, Vice President -- Research and
Product Development. Although the Company has employment agreements with certain
key officers, the loss of any of these individuals could adversely affect the
Company's business, financial condition and operating results. The Company has
obtained insurance on the lives of Mr. Luce and Ms. Jensen in the amounts of
$1.50 million and $1.00 million,
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respectively. There can be no assurance that the Company's existing management
team will be able to manage the Company's growth. In addition, the Company has
occasionally experienced relatively high turnover among its corporate staff and
management, and there can be no assurance that the Company will be able to
motivate, attract and retain key employees and qualified personnel in the
future.
Volatility of Stock Price. The market price of the Company's Common Stock
has been subject to significant fluctuations in response to the Company's
operating results and other factors. In addition, the stock market in recent
years has experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Common Stock.
Concentration of Suppliers. In fiscal 1996, approximately 65% of the
Company's purchases of raw materials, finished product, packaging and other
supplies were obtained from the Company's 15 largest suppliers, with the
Company's largest supplier accounting for approximately 11% of such purchases.
With the exception of certain packaging orders, the Company has no long-term
contracts or other contractual assurance of continued supply, pricing or access
to new products. The inability or failure of one or more principal vendors or a
material change in the Company's purchase terms could have a material adverse
effect on the Company's business, financial condition and operating results.
There can be no assurance that the Company will be able to acquire desired
materials in sufficient quantities on acceptable terms in the future.
Regulation and Potential Claims. The Company's advertising and product
labeling practices are subject to regulation by the FTC, and its cosmetic
manufacturing practices are subject to regulation by the FDA, as well as various
other federal, state and local regulatory authorities. Compliance with federal,
state and local laws and regulations, including laws and regulations pertaining
to the protection of the environment, has not had, and is not anticipated to
have, a material adverse effect on the competitive position of the Company.
Nonetheless, federal, state and local regulations in the United States that are
designed to protect consumers or the environment have had, and can be expected
to have, an increasing influence on product claims, manufacturing, contents and
packaging. In addition, if the Company were to expand its manufacturing
capabilities to include over-the-counter drug ingredients, it would become
subject to FDA registration and a higher degree of inspection and greater burden
of regulatory compliance than at present. The nature and use of personal care
products could give rise to product liability claims if one or more of Garden
Botanika's customers were to suffer adverse reactions following use of its
products. Such reactions could be caused by various factors, many of which are
beyond the Company's control, including hypoallergenic sensitivity and the
possibility of malicious tampering with the Company's products. In the event of
such an occurrence, the Company could incur substantial litigation expense,
receive adverse publicity and suffer a loss of sales.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is included in "Item
14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K," pages
(F-1) through (F-14).
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on auditing and
financial disclosure during the fiscal year ended February 1, 1997.
25
<PAGE> 26
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the following information regarding executive officers of the
Company, the information called for by this Item is incorporated by reference
from the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, under the
heading "Election of Directors."
With the exception of Messrs. Jeffrey H. Brotman, Chairman of the Board and
Secretary, and Michael W. Luce, President and Chief Executive Officer, the
executive officers and key employees of the Company are set forth below.
Information regarding Messrs. Brotman and Luce, who are also Directors of the
Company, can be found in the above-referenced Proxy Statement.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Arlee J. Jensen 49 Senior Vice President -- Merchandising and Marketing
C. Michael Fisher 50 Senior Vice President -- Operations
Susan M. Detmer 42 Vice President -- Brand Development
John A. Garruto 44 Vice President -- Research and Product Development
Myron E. Kirkpatrick 54 Vice President -- Finance, Chief Financial Officer and
Treasurer
Jeffrey C. Mason 34 Vice President -- Real Estate and Construction
Susan M. Walker 37 Vice President -- Stores
</TABLE>
ARLEE J. JENSEN has been the Company's Senior Vice
President -- Merchandising and Marketing since June 1995 and was its Vice
President -- Merchandising since the Company began operations in 1990. Prior to
joining Garden Botanika, Ms. Jensen was employed at Eddie Bauer from 1983 to
1989, where, from 1986 to 1989, she was Divisional Vice President -- Womenswear,
responsible for the women's segment of both the catalog and retail outlet
operations. Prior to 1983, Ms. Jensen was employed at Frederick & Nelson, a
Seattle-based department store chain, where she was Divisional Merchandise
Manager -- Women's Apparel, and at Meier and Frank, where she was Creative
Merchandising Director.
C. MICHAEL FISHER has been the Company's Vice President -- Operations since
October 1993 and was made a Senior Vice President in 1995. Prior to joining the
Company, Mr. Fisher was Chief Operating Officer of Imaginarium, Inc., a
mall-based specialty retailer, from 1988 to 1993. Prior to 1988, Mr. Fisher was
President of Vintan, Ltd., the Canadian subsidiary of General Nutrition Centers,
Inc., and spent 15 years with Sears Roebuck & Co. in various operating and
merchandising management positions.
SUSAN M. DETMER has been the Company's Vice President -- Brand Development
since October 1996. Prior to joining Garden Botanika, Ms. Detmer served as a
consultant to The Paul Allen Group and, from September 1994 to October 1995, was
the General Merchandise Manager for Egghead Computer, a national retailer. Prior
to that, from May 1993 to June 1994, Ms. Detmer was Executive Vice President of
Jay Jacobs, a national clothing retailer, where she was responsible for
merchandising and allocations. From February 1991 to May 1993, Ms. Detmer was
associated with American Retail Group ("ARG"), a U.S. division of an
international retailer, where in January 1993, she became a Vice President
responsible for the private-branded products for ARG's department store group.
From February 1991 to December 1992, she was a Vice President of Byrons, a
Florida-based retailing division of ARG. Jay Jacobs commenced reorganization
proceedings under Chapter 11 of the Federal Bankruptcy Code in May 1994.
JOHN A. GARRUTO has been the Company's Vice President -- Research and
Product Development since October 1995. From February 1991 to October 1995, Mr.
Garruto was Vice President -- Research and Development for Innovative
Biosciences Corporation, a manufacturer of personal care products sold to, among
others, Garden Botanika. Mr. Garruto held the same position with Randall
International, which was founded by a Director of the Company, from 1989 to
1991.
26
<PAGE> 27
MYRON E. KIRKPATRICK has been the Company's Vice President -- Finance,
Chief Financial Officer since April 1995 and was appointed Treasurer in 1996.
From May 1992 to April 1995, Mr. Kirkpatrick was employed at Eagle Hardware &
Garden, Inc. as Vice President -- Finance (later serving as Executive Vice
President -- Finance) and Chief Financial Officer. Mr. Kirkpatrick's retail
experience also includes five years as Vice President -- Corporate Controller
for Costco Wholesale Corporation (1984 to 1989) and six years in various
accounting and information systems capacities (including Vice President -- MIS
and Vice President -- Controller) with the Gold Circle Division of Federated
Department Stores (1975 to 1981).
JEFFREY C. MASON has been the Company's Vice President -- Real Estate and
Construction since February 1995. From January 1986 to January 1995, he was
Senior Vice President -- Real Estate for Merry-Go-Round Enterprises National
Retail Company, an apparel retailer, where he managed that company's retail
leasing responsibilities. In January 1994, Merry-Go-Round Enterprises commenced
reorganization proceedings under Chapter 11 of the Federal Bankruptcy Code.
SUSAN M. WALKER has been the Company's Vice President -- Stores since March
1996. Prior to joining the Company, Ms. Walker was employed by Zales Jewelers, a
national jewelry retailer, from 1980 to 1996, where, from 1993 to 1996, she was
a Director -- Stores, responsible for supervising 13 regional managers and 127
stores, as well as for recruiting, hiring and training all levels of store
personnel.
ITEM 11 -- EXECUTIVE COMPENSATION
The information called for by this Item is incorporated by reference from
the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, under the
heading "Executive Compensation."
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is incorporated by reference from
the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, under the
heading "Voting Securities and Principal Holders."
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is incorporated by reference from
the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, under the
heading "Certain Relationships and Related Transactions."
27
<PAGE> 28
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants............. F-2
Balance Sheets -- February 1, 1997 and February 3, 1996................... F-3
Statements of Operations -- For the fiscal years ended February 1, 1997,
February 3, 1996 and January 28, 1995................................... F-4
Statements of Shareholders' Equity -- For the fiscal years ended February
1, 1997, February 3, 1996 and January 28, 1995.......................... F-5
Statements of Cash Flows -- For the fiscal years ended February 1, 1997,
February 3, 1996 and January 28, 1995................................... F-6
Notes to Financial Statements............................................. F-7
Selected Quarterly Financial Data (Unaudited) -- For the fiscal years
ended February 1, 1997, February 3, 1996 and January 28, 1995 -- See
Note (9) of Notes to Financial Statements............................... F-14
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or because
the information is presented in the financial statements or notes
thereto.
3. EXHIBITS:
The required exhibits are included at the end of the Form 10-K Annual
Report and are described in the Exhibit Index immediately preceding
the first exhibit.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended February 1,
1997.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on April 18, 1997.
GARDEN BOTANIKA, INC.
By: /s/ MICHAEL W. LUCE
------------------------------------
Michael W. Luce
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on April 18, 1997, on behalf of
the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- ------------------------------------------------
<S> <C>
/s/ JEFFREY H. BROTMAN
- -----------------------------------------------
Jeffrey H. Brotman Chairman, Secretary and Director
/s/ MICHAEL W. LUCE
- ----------------------------------------------- President, Chief Executive Officer and Director
Michael W. Luce (Principal Executive Officer)
/s/ MYRON E. KIRKPATRICK Vice President -- Finance, Chief Financial
- ----------------------------------------------- Officer and Treasurer (Principal Accounting
Myron E. Kirkpatrick Officer)
/s/ DAMON H. BALL
- -----------------------------------------------
Damon H. Ball Director
/s/ GERALD R. GALLAGHER
- -----------------------------------------------
Gerald R. Gallagher Director
/s/ WILLIAM B. RANDALL
- -----------------------------------------------
William B. Randall Director
/s/ DALE J. VOGEL
- -----------------------------------------------
Dale J. Vogel Director
</TABLE>
29
<PAGE> 30
GARDEN BOTANIKA, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public Accountants....................... F-2
Balance Sheets -- February 1, 1997 and February 3, 1996............................. F-3
Statements of Operations -- For the fiscal years ended February 1, 1997, February 3,
1996 and January 28, 1995........................................................ F-4
Statements of Shareholders' Equity -- For the fiscal years ended February 1, 1997,
February 3, 1996 and January 28, 1995............................................ F-5
Statements of Cash Flows -- For the fiscal years ended February 1, 1997, February 3,
1996 and January 28, 1995........................................................ F-6
Notes to Financial Statements....................................................... F-7
Selected Quarterly Financial Data (Unaudited) -- For the fiscal years ended February
1, 1997, February 3, 1996 and January 28, 1995 -- See Note (9) of Notes to
Financial Statements............................................................. F-14
</TABLE>
FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or because the
information is presented in the financial statements or notes thereto.
F-1
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Garden Botanika, Inc.:
We have audited the accompanying balance sheets of Garden Botanika, Inc. (a
Washington corporation) as of February 1, 1997 and February 3, 1996, and the
related statements of operations, shareholders' equity and cash flows for the
fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garden Botanika, Inc. as of
February 1, 1997 and February 3, 1996, and the results of its operations and its
cash flows for the fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
March 11, 1997
F-2
<PAGE> 32
GARDEN BOTANIKA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FEBRUARY FEBRUARY
1, 3,
1997 1996
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 7,205 $ 1,308
Short-term investments............................................... 20,426 --
Inventories.......................................................... 18,940 10,176
Prepaid expenses:
Rent.............................................................. 1,238 795
Other............................................................. 1,793 1,308
Receivable from lessors.............................................. 2,633 1,639
Other................................................................ 727 347
-------- -------
Total current assets......................................... 52,962 15,573
-------- -------
Property and equipment:
Leasehold improvements............................................... 51,431 31,362
Furniture and equipment.............................................. 9,016 5,002
Equipment under capital lease........................................ 261 262
-------- -------
60,708 36,626
Less accumulated depreciation and amortization....................... (10,168) (5,451)
-------- -------
Net property and equipment................................... 50,540 31,175
-------- -------
Other assets........................................................... 21 389
-------- -------
Total assets................................................. $ 103,523 $ 47,137
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances.............................. $ 6,600 $ 3,616
Note payable to bank................................................. -- 2,540
Accounts payable..................................................... 7,438 5,138
Accrued salaries, wages and benefits................................. 1,366 780
Accrued sales tax.................................................... 442 297
Other................................................................ 801 540
-------- -------
Total current liabilities.................................... 16,647 12,911
-------- -------
Deferred rent and other................................................ 2,420 1,109
-------- -------
Total liabilities............................................ 19,067 14,020
-------- -------
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................ -- 42,027
Common Stock, $.01 par value; 36,092,374 shares authorized; 7,069,098
and 268,546 issued and outstanding................................ 98,513 214
Accumulated deficit.................................................. (14,057) (9,124)
-------- -------
Total shareholders' equity................................... 84,456 33,117
-------- -------
Total liabilities & shareholders' equity..................... $ 103,523 $ 47,137
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 33
GARDEN BOTANIKA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................. $92,465 $55,339 $27,510
Cost of sales (including buying and occupancy
costs).............................................. 52,551 31,448 15,521
------- ------- -------
Gross margin..................................... 39,914 23,891 11,989
Operating expenses:
Stores and catalog.................................. 35,544 18,746 8,956
General and administrative.......................... 8,871 6,041 3,917
Preopening and facility relocation expenses........... 1,426 798 733
------- ------- -------
Operating loss................................... (5,927) (1,694) (1,617)
Interest income, net.................................. 994 30 230
------- ------- -------
Net loss......................................... $(4,933) $(1,664) $(1,387)
======= ======= =======
Net loss per share, giving effect to the conversion of
all preferred shares to common...................... $ (0.80) $ (0.44) $ (0.43)
Weighted average common and common equivalent shares,
giving effect to the conversion of all preferred
shares to common.................................... 6,146 3,781 3,209
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 34
GARDEN BOTANIKA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- ---------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ -------- ------ ------- ----------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 29, 1994................ 2,910 $ 25,595 259 $ 21 $ (6,073) $19,543
Exercise of stock options.............. -- -- 3 28 -- 28
Net loss............................... -- -- -- -- (1,387) (1,387)
------ ------- ----- ------- -------- -------
Balance, January 28, 1995................ 2,910 25,595 262 49 (7,460) 18,184
Sale of Series C Preferred Stock....... 509 9,960 -- -- -- 9,960
Sale of Series D Preferred Stock....... 275 6,472 -- -- -- 6,472
Exercise of stock options.............. -- -- 3 19 -- 19
Issuance of Common Stock in connection
with acquisition.................... -- -- 4 131 -- 131
Deferred compensation.................. -- -- -- 15 -- 15
Net loss............................... -- -- -- -- (1,664) (1,664)
------ ------- ----- ------- -------- -------
Balance, February 3, 1996................ 3,694 42,027 269 214 (9,124) 33,117
Sale of Common Stock................... -- -- 3,104 56,191 -- 56,191
Conversion of Preferred Stock to
Common.............................. (3,694) (42,027) 3,694 42,027 -- --
Exercise of stock options.............. -- -- 2 24 -- 24
Deferred compensation.................. -- -- -- 57 -- 57
Net loss............................... -- -- -- -- (4,933) (4,933)
------ ------- ----- ------- -------- -------
Balance, February 1, 1997................ -- $ -- 7,069 $98,513 $ (14,057) $84,456
====== ======= ===== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 35
GARDEN BOTANIKA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (4,933) $ (1,664) $ (1,387)
-------- -------- --------
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Depreciation and amortization...................... 5,153 2,908 1,430
Loss on retirement of property and equipment....... 422 -- 62
Changes in assets and liabilities:
Inventories...................................... (8,764) (4,543) (3,070)
Prepaid rent..................................... (443) (416) (204)
Other assets..................................... (499) (1,117) (616)
Accounts payable and checks drawn in excess of
bank balances................................. 6,028 2,494 3,931
Accrued expenses................................. 987 (38) 788
Deferred rent and other.......................... 1,353 484 288
-------- -------- --------
Total adjustments............................. 4,237 (228) 2,609
-------- -------- --------
Net cash (used) provided by operating
activities.................................. (696) (1,892) 1,222
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment................... (24,225) (16,800) (11,439)
Purchase of short-term investments.................... (20,426) -- --
(Decrease) increase in construction accounts
payable............................................ (744) 1,180 (34)
Increase in receivable from lessors................... (1,708) (1,230) (251)
Other................................................. -- (25) --
-------- -------- --------
Net cash used by investing activities......... (47,103) (16,875) (11,724)
-------- -------- --------
Cash flows from financing activities:
Sale of stock......................................... 56,191 16,432 --
Advances on note payable to bank...................... 11,958 13,856 --
Payments on note payable to bank...................... (14,498) (11,316) --
Other................................................. 45 65 (18)
-------- -------- --------
Net cash provided (used) by financing
activities.................................. 53,696 19,037 (18)
-------- -------- --------
Increase (decrease) in cash and cash equivalents, net... 5,897 270 (10,520)
Cash and cash equivalents, beginning of period.......... 1,308 1,038 11,558
-------- -------- --------
Cash and cash equivalents, end of period................ $ 7,205 $ 1,308 $ 1,038
======== ======== ========
Supplemental disclosures:
Cash paid for interest................................ $ 302 $ 82 $ 15
Cash paid for income taxes............................ -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 36
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 1, 1997
1. ORGANIZATION
Garden Botanika, Inc. (the "Company") was incorporated in the State of
Washington in October 1989. The Company produces and markets proprietary,
botanically based personal care products. These products are sold at retail in a
chain of Company-owned and -operated specialty retail stores. As of February 1,
1997, Garden Botanika operated 253 retail locations in 40 states.
On October 30, 1995, in order to establish its initial in-house research
and development, quality control and manufacturing capabilities, the Company
purchased the principal assets of Innovative Biosciences Corporation of
Oceanside, California ("IBC"). IBC was in the business of formulating,
manufacturing and selling personal care products, including a number of such
products formulated and manufactured for the Company. The purchase price paid
for IBC's principal assets was approximately $156,000, which was paid in cash
and shares of the Company's Common Stock. The acquisition was accounted for as a
purchase and the operations of IBC have been included in the Company's results
of operations beginning October 31, 1995.
The Company has only a limited operating history, and approximately
two-thirds of its 253 stores had been open for less than 24 months at February
1, 1997. The Company's future operations are subject to risks inherent in an
emerging business. The principal risk factors relate to the need for additional
capital to finance further development and introduction of new products and
further store expansion, and to its ability to obtain satisfactory expansion
sites at terms favorable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's 52/53-week fiscal year ends on the Saturday nearest the end
of January. Fiscal 1995 was a 53-week year.
Estimates and Assumptions
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.
Cash and Cash Equivalents
The Company considers all short-term investments with maturities of 90 days
or less at the date of purchase to be cash equivalents. Cash includes all
depository accounts maintained at financial institutions, including amounts
invested in money-market mutual funds. The Company estimates that the fair value
of its financial instruments approximate their carrying value, and therefore no
separate disclosure of fair value is made.
The Company's cash management system provides for the reimbursement of all
major bank disbursement accounts on a daily basis. Checks issued but not yet
presented for payment to the bank are reflected as checks drawn in excess of
bank balances on the balance sheet.
Short-Term Investments
Short-term investments include highly liquid investments in United States
government obligations and other investment vehicles which have maturities of
more than 90 days at the date of purchase. The Company's
F-7
<PAGE> 37
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
policy is to classify these items as short-term investments rather than cash
equivalents if they are to be held to maturity or are restricted by agreement.
Inventory
Inventory is recorded at the lower of weighted average cost or net
realizable value.
Advertising
The Company expenses the production cost of advertising the first time the
advertising takes place, except for the costs of direct response advertising,
which are capitalized and amortized over the expected period of future benefit.
Direct response advertising consists primarily of mail-order catalog advertising
expenses. The capitalized costs of such advertising are amortized over a maximum
of 13 weeks following initial distribution of mail-order catalogs, based on
historical direct response revenue flows. Under this policy, as of February 1,
1997 and February 3, 1996, respectively, $1.27 million and $739,000 of
advertising was reported as assets on the balance sheet. Advertising expense was
$9.57 million, $3.34 million and $1.24 million in fiscal years 1996, 1995 and
1994, respectively.
Property and Equipment
Property and equipment are stated at cost and include the costs of
acquiring new store leases and leasehold improvements. Depreciation of equipment
under capital leases, furniture and fixtures is provided using the straight-line
method over estimated useful lives ranging from five to seven years. The costs
of acquiring new store leases and the costs of leasehold improvements are
capitalized and amortized over the shorter of the life of the lease or the
useful lives of the assets. Leasehold acquisition costs capitalized in fiscal
years 1996, 1995 and 1994 were $1.13 million, $754,000 and $569,000,
respectively. Depreciation and amortization expense was $5.15 million, $2.91
million and $1.43 million, for fiscal years 1996, 1995 and 1994, respectively.
Preopening and Facility Relocation Costs
Store preopening costs are expensed as incurred. The unamortized cost of
leasehold improvements related to facilities to be remodeled and/or relocated
are written off in the period in which the new lease is signed.
Deferred Rent
The Company expenses rent on a straight-line basis over the life of the
lease. During the initial years of a store lease, cash payments are typically
less than the straight-line rent expense. The differential is recorded as
deferred rent on the balance sheet.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109. Accordingly, deferred taxes are provided
to reflect temporary differences between financial and tax reporting. Deferred
tax assets and liabilities are measured based on enacted tax laws and rates. Due
to its net operating losses, the Company has not paid federal income taxes since
its inception.
Earnings per Common and Common Share Equivalent
For all periods presented, earnings per common and common share equivalent
are based on the number of common and preferred shares and, in periods of
profitability, share equivalents outstanding. Earnings per
F-8
<PAGE> 38
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
share amounts give retroactive effect to the conversion of preferred shares to
common and treat the preferred shares as if they were originally issued as
common, similar to a stock split.
Common share equivalents used in the calculation of earnings per share
include options to purchase common stock granted and outstanding under the
Company's employee and director stock option plans if such amounts are dilutive.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins,
43,856 common and common equivalent shares issued during the 12-month period
prior to the Company's initial public offering are included (using the treasury
stock method at the assumed public offering price) in the calculations for
fiscal years prior to 1996 as if they were outstanding for all periods
presented.
Adoption of Financial Accounting Standards Board ("FASB") Statement No. 121
The Company adopted SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," as of the year ended
February 1, 1997. In adopting SFAS No. 121, the Company determined that it was
not necessary to record an impairment loss during fiscal 1996.
Recent Accounting Pronouncement
In February 1997, FASB issued SFAS No. 128, "Earnings Per Share." This
pronouncement establishes new standards for computing and presenting earnings
per share for entities with publicly held common stock. The Company is required
to adopt SFAS No. 128 in the fourth quarter of fiscal 1997. The adoption will
not have a material effect on the Company's earnings per share.
Reclassifications
Certain reclassifications have been reflected in the financial statements
in order to conform prior years to the current year presentation.
3. INVENTORIES
Inventories at fiscal year-end were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Finished products held for sale........................ $12,814 $ 8,449
Raw materials and components........................... 6,126 1,727
------- -------
Total inventories.................................... $18,940 $10,176
======= =======
</TABLE>
4. LEASES
The Company is obligated under non-cancelable operating leases for its
retail store outlets. Lease terms range from five to 12 years with options to
renew at varying terms. The leases generally provide for contingent payments
based upon a percentage of sales. Contingent payments were $218,000, $184,000
and $134,000, and rent expense was $10.46 million, $5.68 million and $2.82
million for fiscal years 1996, 1995 and 1994, respectively.
F-9
<PAGE> 39
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum rental payments under operating leases are (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
-------------------------------------------------------- --------
<S> <C>
1997.................................................. $ 12,429
1998.................................................. 12,570
1999.................................................. 12,751
2000.................................................. 12,943
2001.................................................. 13,079
Thereafter............................................ 50,270
---------
Total future minimum rental payments.......... $114,042
=========
</TABLE>
5. LINE OF CREDIT
At February 1, 1997, the Company operated under a $5.00 million revolving
working capital line of credit provided by U.S. Bank of Washington, N.A. ("the
Bank"). This credit facility, which expires on September 30, 1997, bears
interest at the Bank's prime rate (currently 8.5%). Borrowings are limited to
25% of eligible inventory during the months of January through March and to 50%
of eligible inventory during the remainder of the year. At February 1, 1997, no
amounts were outstanding under this facility.
Borrowings under the Company's credit line are secured by the assets of the
Company. In addition, the Company is prohibited under the terms of the line from
paying dividends or incurring additional indebtedness without the Bank's prior
written consent, and is, among other requirements, required to maintain minimum
tangible net worth of $32.00 million, a maximum ratio of indebtedness to capital
of 0.7-to-1 and working capital of at least $4.00 million. As of February 1,
1997, the Company was in compliance with each of these covenants.
During fiscal years 1996, 1995 and 1994, the Company incurred interest
expense of $321,000, $105,000 and $15,000, respectively.
6. INCOME TAXES
The components of the deferred tax accounts at fiscal year-end, assuming a
35% statutory tax rate, were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net operating loss carryforward.......................... $ 3,632 $ 1,537
Depreciation............................................. (620) 764
Inventory................................................ 813 315
Deferred rent............................................ 691 369
Reserves not currently deductible........................ 473 152
Other.................................................... 87 (9)
Valuation allowance...................................... (5,076) (3,128)
-------- --------
Net deferred taxes............................. $ -- $ --
======== ========
</TABLE>
The Company has established a valuation allowance because the net deferred
tax asset does not meet the recognition criteria established by SFAS No. 109.
Deferred state taxes have not been disclosed, as amounts are not material.
The Company's net operating loss carryforward begins to expire in 2005. Of
the $3.63 million carryforward benefit at February 1, 1997, $1.36 million is
subject to an usage limitation of $896,000. This
F-10
<PAGE> 40
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
usage limitation will increase by an additional $250,000 each year thereafter
until the entire $1.36 million has been realized or expires.
7. SHAREHOLDERS' EQUITY
Common and Preferred Stock
On March 29, 1996, the Company's board of directors approved an approximate
1-to-7.87 reverse stock split. The accompanying financial statements have been
adjusted to reflect this action.
On May 22, 1996, the Company, in its initial public offering, issued
3,104,365 shares of Common Stock at $20.00 per share. Concurrent with the
initial public offering, all outstanding shares of Preferred Stock were
automatically converted to Common Stock.
Stock Compensation Plans
At February 1, 1997, the Company had two stock-based compensation plans
(the 1992 Plan and the 1996 Plan, each as described below). In addition, the
Company had made two other option grants outside these plans (the IBC Options
and the October 1996 Options, each also as described below). The Company applies
Accounting Principles Board Opinion No. 25 in accounting for these fixed stock
option plans and non-plan grants. Accordingly, with the exception of the IBC
Options (which were granted at an exercise price below the current market value,
thereby requiring recognition of compensation expense as described below), no
related compensation cost has been recognized. Had compensation cost been
determined based on the fair value at the grant dates for options awarded under
the 1992 Plan, the 1996 Plan, the IBC Options and the October 1996 Options,
consistent with the method of SFAS No. 123, the Company's fiscal 1996 and 1995
reported net losses and losses per share would have been increased to the
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C> <C>
Net loss (in thousands)......... As reported..................... $(4,933) $ (1,664)
Pro forma SFAS No. 123.......... $(5,751) $ (2,125)
Loss per share.................. As reported..................... $ (0.80) $ (0.44)
Pro forma SFAS No. 123.......... $ (0.94) $ (0.56)
</TABLE>
As specified by SFAS No. 123, the fair value of each fiscal 1995 and
subsequent option grant was estimated, by optionee group, as of the date of
grant using the Black-Scholes option pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
<S> <C> <C>
Risk-free interest rate....................... 5.88% to 6.41% 5.84% to 7.75%
Expected life................................. 6 years to 8 years 6 years to 8 years
Dividend rate................................. 0% 0%
Expected volatility........................... 80% 80%
</TABLE>
The Company's two fixed stock option plans are: (i) the 1992 Combined
Incentive and Non-Qualified Stock Option Plan (the "1992 Plan") and (ii) the
1996 Directors' Non-Qualified Stock Option Plan (the "1996 Plan"). Under the
terms of the 1992 Plan, incentive or non-qualified stock options to purchase
398,217 shares of the Company's Common Stock may be granted to employees,
directors, consultants and independent contractors of the Company. The exercise
price of incentive stock options may not be less than 100% of fair market value
at the date of grant, while the exercise price of nonqualified stock options may
be greater than or less than fair market value. All options outstanding at
February 1, 1997 vest on schedules of four to five years and terminate after 10
years and two days. At that date, 117,337 shares were available for future grant
under the 1992 Plan.
F-11
<PAGE> 41
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Under the terms of the 1996 Plan, approved by shareholders on March 29,
1996, non-qualified stock options to purchase 63,561 shares of the Company's
Common Stock may be granted to members of the Company's Board of Directors. The
1996 Plan provides that each non-employee director of the Company will
automatically be granted an option to purchase 1,271 shares of Common Stock upon
election or appointment to the board of directors and thereafter at each annual
meeting of the board of directors for so long as the individual continues to
serve as a director of the Company. The exercise price of these options must
equal the fair market value of the Company's Common Stock at the date of grant.
Options granted under the 1996 Plan vest monthly over a one-year period and
terminate after 10 years and two days. To date, no options have been granted
under the 1996 Plan.
As part of the agreement for the 1995 purchase of IBC, an owner of IBC
became Vice President -- Research and Product Development of the Company. In
connection with his employment, this individual was granted options to purchase
25,424 shares of the Company's Common Stock at an exercise price of $1.97 per
share (the "IBC Options"). In connection with the issuance of these options, the
Company recorded $300,000 of deferred compensation expense, which is being
amortized over the five-year option vesting period. The IBC Options terminate
after 10 years and two days. At February 1, 1997, 6,354 of these options were
exercisable.
On October 14, 1996, the Company's Board of Directors authorized and the
Compensation Committee approved the granting of non-qualified options (the
"October 1996 Options") to purchase 449,635 shares of Common Stock at $8.625
(the closing price of the Company's Common Stock on that date) to approximately
130 officers and employees of the Company in connection with annual performance
reviews. These options, which vest 25% per year over four years and which had a
weighted average fair value of $6.80, were not granted under the terms of the
Company's 1992 Plan. The Company intends to request shareholder approval of an
amendment to the 1992 Plan, increasing the number of authorized options and
bringing the October 1996 Options under its provisions.
A summary of the transactions and balances relating to the Company's two
fixed stock option plans (the 1992 Plan and the 1996 Plan) during fiscal years
1996, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE(1) SHARES PRICE(1) SHARES PRICE(1)
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year............. 268,581 $11.52 131,950 $ 9.28 98,253 $ 9.06
Granted.................................... 25,000 $ 7.88 145,210 $13.51 50,521 $ 9.83
Exercised.................................. (2,156) $11.45 (2,342) $ 8.43 (3,050) $ 9.34
Canceled................................... (18,092) $11.84 (6,237) $11.73 (13,774) $ 9.68
------- ------- -------
Outstanding, end of year................... 273,333 $11.16 268,581 $11.52 131,950 $ 9.28
======= ======= =======
Exercisable, end of year................... 104,105 55,386 29,886
Weighted average fair value of options
granted during year...................... $ 6.33 $ 11.06 (2)
</TABLE>
- ---------------
(1) Weighted average
(2) Not applicable; prior to SFAS No. 123 effective date.
F-12
<PAGE> 42
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information regarding all fixed stock
options outstanding at February 1, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
RANGE OF REMAINING ---------------------
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE(1) PRICE(1) NUMBER PRICE(1)
------------------------------ ------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$1.97......................... 25,424 8.7 years $ 1.97 6,354 $ 1.97
$7.87 to $9.83................ 598,603 8.9 years $ 8.73 79,078 $ 9.06
$13.77........................ 122,465 8.1 years $ 13.77 25,027 $ 13.77
------- -------
$1.97 to $13.77............... 746,492 8.8 years $ 9.33 110,459 $ 9.72
======= =======
</TABLE>
- ---------------
(1) Weighted average
In connection with the 1995 grant to an officer of options to purchase
9,533 shares of Common Stock, the Company has agreed to pay, at the end of the
five-year vesting period, the difference, if any, between the value of all
options granted and Common Stock issued to the officer and $1.00 million, except
that, if and to the extent the value of such options and Common Stock has
exceeded $670,000 at any time during the option period, the Company's obligation
shall be reduced. As of February 1, 1997, the Company had recorded a liability
of $399,000 related to this agreement. The Company's payment obligation may be
satisfied by accelerating existing options, granting additional options or
making a cash payment. The Company has a similar obligation in the event of a
change of control of the Company. In the event the officer is terminated without
cause during the option period, he is entitled to vested options upon
termination for shares having a value of $200,000 for each year or part of a
year in which he worked for the Company.
Warrants
In connection with the issuance of certain shares of Convertible Preferred
Stock, the Company's investment advisor received warrants to purchase 23,724
shares of Common Stock at $9.83 per share. These warrants expire in 1998.
8. RELATED PARTY TRANSACTIONS
Approximately 11%, 12% and 11% of merchandise purchases during fiscal years
1996, 1995 and 1994, respectively, were from a supplier whose president is a
director of the Company. As of February 1, 1997 and February 3, 1996,
respectively, $698,000 and $235,000 payable to this supplier was included in
accounts payable on the balance sheet.
F-13
<PAGE> 43
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
WEIGHTED NET INCOME
AVERAGE (LOSS) PER
COMMON AND COMMON AND
NET COMMON COMMON
NET GROSS INCOME EQUIVALENT EQUIVALENT
SALES(1) MARGIN(1) LOSS(1) SHARES(1) SHARE(2)
------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FISCAL 1996
First quarter............ $16,647 $ 7,046 $(2,685) 3,963 $ (0.68)
Second quarter........... $16,916 $ 6,793 $(1,987) 6,487 $ (0.31)
Third quarter............ $17,681 $ 6,633 $(3,780) 7,067 $ (0.53)
Fourth quarter........... $41,221 $19,442 $ 3,519 7,095 $ 0.50
FISCAL 1995
First quarter............ $ 9,532 $ 4,084 $ (827) 3,706 $ (0.22)
Second quarter........... $10,138 $ 4,212 $ (836) 3,707 $ (0.23)
Third quarter............ $10,671 $ 4,170 $(1,986) 3,707 $ (0.54)
Fourth quarter........... $24,998 $11,425 $ 1,985 4,066 $ 0.49
FISCAL 1994
First quarter............ $ 3,955 $ 1,545 $ (665) 3,208 $ (0.21)
Second quarter........... $ 4,521 $ 1,771 $ (616) 3,208 $ (0.19)
Third quarter............ $ 5,551 $ 2,178 $(1,168) 3,210 $ (0.36)
Fourth quarter........... $13,483 $ 6,495 $ 1,062 3,274 $ 0.32
</TABLE>
- ---------------
(1) In thousands.
(2) Interim per share amounts may not accumulate to annual amounts.
F-14
<PAGE> 44
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- --------------------------------------------------------------------------------
<S> <C>
3.3* Eighth Restated Articles of Incorporation.
3.4* Amended and Restated Bylaws.
4.1* Specimen Common Stock Certificate.
4.2 See Articles 4.2, 5 and 6 of Exhibit 3.1 and Articles 3 and 7 of Exhibit 3.4
which confirm certain rights of holders of Common Stock.
10.1* Employment Agreement by and between Garden Botanika, Inc. (formerly known as
American Body Care, Inc.) and Michael Luce, dated January 1, 1990.
10.2* Employment Agreement by and between Garden Botanika, Inc. and Jeffrey Mason,
dated November 18, 1994.
10.3* Hardware Purchase and Software License Agreement by and between Garden Botanika,
Inc. (formerly known as American Body Care, Inc.) and STS Systems, Ltd., dated
June 22, 1990.
10.3A* Addendum 65 to Hardware Purchase and Software License Agreement by and between
Garden Botanika, Inc. and STS Systems, Ltd., dated June 22, 1990.
10.4* Equipment Maintenance Agreement by and between Garden Botanika, Inc. (formerly
known as American Body Care, Inc.) and STS Systems, Ltd. dated June 22, 1990.
10.5* Software Maintenance Agreement by and between Garden Botanika, Inc. (formerly
known as American Body Care, Inc.) and STS Systems, Ltd., dated June 22, 1990.
10.6* Credit Agreement by and among U.S. Bank of Washington, National Association and
Garden Botanika, Inc. and Garden Botanika Direct, Inc., dated November 30, 1995.
10.7* Revolving Note in the amount of $5,000,000 dated November 30, 1995 in favor of
U.S. Bank of Washington, National Association.
10.8* Bridge Note in the amount of $4,000,000 dated November 30, 1995 in favor of U.S.
Bank of Washington, National Association.
10.9* Security Agreement dated November 30, 1995 by and between Garden Botanika, Inc.
and U.S. Bank of Washington, National Association.
10.10* Distribution Agreement by and between Garden Botanika, Inc. and Essential
Amenities, Inc., dated November 2, 1995.
10.11* Corporate Headquarters lease agreement by and between Westpark "P" Limited
Partnership and Garden Botanika, Inc., dated October 8, 1992, as amended.
10.12* Corporate Headquarters expansion lease agreement by and between Teachers
Insurance & Annuity Association and Garden Botanika, Inc., dated September 27,
1995.
10.13* Ontario Distribution Facility lease agreement by and between Grumet-Goodrich
Corporation and Garden Botanika, Inc., dated December 16, 1992.
10.14* Fontana Distribution Facility lease agreement by and between the Tuffli Company
and Garden Botanika, Inc., dated June 29, 1995.
10.15* Garden Botanika, Inc. 1992 Combined Incentive and Nonqualified Stock Option Plan
(as amended through October 30, 1995).
10.16* 1996 Directors' Nonqualified Stock Option Plan.
10.17* Stock Option Agreement and Payment Obligation by and between Garden Botanika,
Inc. and Jeffrey Mason, dated January 4, 1995.
10.18* Option and Severance Agreement by and between Garden Botanika, Inc. and John
Garruto, dated October 30, 1995.
10.19* Warrant to Purchase 1,740 Shares of Common Stock, dated September 20, 1993, held
by DLJ First ESC L.L.C.
10.20* Warrant to Purchase 166 Shares of Common Stock, dated September 20, 1993, held
by DLJ Capital Corporation.
10.21* Warrant to Purchase 21,817 Shares of Common Stock, dated September 20, 1993,
held by DLJ Capital Corporation.
10.22* Asset Purchase and Sale Agreement by and among Garden Botanika, Inc., Innovative
Biosciences Corporation and its Shareholders, dated September 19, 1995, as
amended by Amendment Number 1 to Asset Purchase and Sale Agreement dated October
30, 1995.
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- --------------------------------------------------------------------------------
<S> <C>
10.23* Amended and Restated Investors Rights Agreement, by and among certain Investors
and Garden Botanika, Inc., dated November 1, 1995, as amended.
10.24* Standard Industrial Lease, between William D. Vogel and Garden Botanika, Inc.,
dated February 21, 1996.
10.24A Form of Standard Industrial Lease, between William D. Vogel and Garden Botanika,
Inc., dated April 14, 1997.
10.25* Corporate Headquarters Expansion Lease Agreement by and between Persis
Corporation and Garden Botanika, Inc., dated March 29, 1996.
10.26* U.S. Bank waiver letter, dated March 27, 1996.
10.27* U.S. Bank borrowing base amendment letter, dated April 11, 1996.
10.28* Letter of Understanding to Purchase by Garden Botanika from Momentis of System
Development and Maintenance Services dated March 28, 1996.
11 Calculation of Earnings Per Common and Common Equivalent Share
23.1 Consent of Independent Auditor.
27.1 Financial Data Schedule
99.1* Donaldson, Lufkin & Jenrette Securities Corporation question and answer
materials and related documents.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 333-1744) as declared effective May 22,
1996.
<PAGE> 1
EXHIBIT 24A
EXTENSION OF LEASE
AND
EXPANSION OF PREMISES
Reference is hereby made to that certain Standard Industrial Lease made by and
between William D. Vogel as "Lessor" and Garden Botanika Inc., a Washington
corporation as "Lessee" for the Premises commonly known as 4755 A&B Zinfandel
Court, Ontario, California 91761 (the westerly approximately 91,984 sq. ft. of
an approximately 110,184 sq. ft. industrial/distribution building), dated
February 21, 1996, with amendment(s) dated (None) (the "Lease").
This Extension is dated, for reference purposes only March 25, 1997 and is made
a part of the Lease as if it were included therein. The parties to the Lease now
agree as follows:
1. TERM. The Term of the Lease is extended for a period of Twelve (12) Months
beginning July 1, 1997 and expiring on June 30, 1998 (the "Extension
Term").
2. EXPANSION SPACE - PREMISES AND DATES DEFINED.
The easterly approximately 18,200 sq. ft. of the building containing
the Premises shall be called the "Expansion Space". Lessee agrees to lease
the Expansion Space from Lessor effective May 15, 1997 (or later if
necessary for Lessor to complete the items in Paragraph 3. below) (the
"Expansion Date"). Effective on the Expansion Date the Premises under this
Lease shall be amended to read:
"4755 Zinfandel Court, Ontario, California 91761, more particularly
described as a freestanding industrial/distribution building of
approximately 110,184 square feet".
3. EXPANSION SPACE - CONDITION AND REPAIRS.
In the Expansion Space Lessor at Lessor's expense shall a) repair the foil
ceiling insulation in the warehouse, b) clean and paint the interior of the
offices, c) recarpet the offices, d) clean or repaint the warehouse walls
as necessary, e) cut a properly framed 12'x14' (WxH) opening at the north
end of the demising wall between the existing Premises and the Expansion
Space, f) remove the existing chain link fence and gate in the parking
areas, g) deliver the interior and exterior of the expansion space in a
clean and broom-swept condition, h) place all electrical, plumbing, HVAC
and mechanical systems in the building in good operation condition and
repair; Lessee otherwise agrees to accept the Expansion Space in an "as-is"
condition (except that Lessee shall not be responsible for the existing
easterly demising wall in the building as to whether said wall has been
properly permitted and meets the building code requirements for the City of
Ontario).
4. RENT. The Rent shall be amended to be the new Rent as follows:
$36,360.72 per month for the period beginning on the Expansion Date and
ending June 30, 1997 (computed at $0.33/sf);
$37,462.56 per month for the period beginning July 1, 1997 and ending June
30,1998 (computed at $0.34/sf);
plus any state, county, and city Transaction Privilege Taxes as may apply.
5. SECURITY DEPOSIT. The current security deposit of $30,354.72 shall be
changed to $37,462.56, an increase of $7,107.84 which shall be paid to
Lessor on or before July 1, 1997.
<PAGE> 2
6. LESSOR. The Lessor is amended to be: "The William and Maureen Vogel Family
Trust".
Except as amended above, all other terms and conditions of the Lease shall
remain unchanged and in full force and effect.
LESSOR LESSOR
- ----------------------------------------- ----------------------------------
The William and Maureen Vogel Family Trust Garden Botanika Inc.,
a Washington corporation
Signed: Signed:
-------------------------------- --------------------------
William D. Vogel, Trustee Michael Fisher, Sr.
Vice President
Date: Date: Apri1 14, 1997
--------------------------------- ---------------------------
<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>
Fiscal Year Ended
----------------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
PRIMARY:
Earnings -
Net loss applicable to common and common
equivalent shares $(4,933) $(1,664) $(1,387)
======= ======= =======
Shares -
Weighted average common shares outstanding 6,146 265 260
Weighted average preferred shares outstanding (1) -- 3,491 2,910
Net effect of stock options, based on treasury stock method
using average market price (2) -- -- --
Common share equivalents (3) -- 25 39
------- ------- -------
Weighted average common and common equivalent shares 6,146 3,781 3,209
======= ======= =======
Primary loss per common and common equivalent share ($0.80) ($0.44) ($0.43)
======= ======= =======
</TABLE>
FULLY DILUTED:
Fully diluted 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 related to stock options are shown, as their
effect would have been anti-dilutive for each period presented.
(3) Pursuant to Securities and Exchange Commission Accounting Bulletins, 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).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, with the Company's previously filed
Registration Statement File No. 333-08717.
ARTHUR ANDERSEN LLP
Seattle, Washington
April 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AS OF FEBRUARY 1, 1997 AND AUDITED STATEMENT OF OPERATIONS FOR THE
YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED FEBRUARY 1, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 7,205
<SECURITIES> 20,426
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 18,940
<CURRENT-ASSETS> 52,962
<PP&E> 60,708
<DEPRECIATION> (10,168)
<TOTAL-ASSETS> 103,523
<CURRENT-LIABILITIES> 16,647
<BONDS> 0
0
0
<COMMON> 98,513
<OTHER-SE> (14,057)
<TOTAL-LIABILITY-AND-EQUITY> 103,523
<SALES> 92,465
<TOTAL-REVENUES> 92,465
<CGS> 52,551
<TOTAL-COSTS> 44,415
<OTHER-EXPENSES> 1,426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (994)
<INCOME-PRETAX> (4,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,933)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
