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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
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)
<TABLE>
<S> <C>
WASHINGTON 91-1464962
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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8624 - 154TH AVENUE NE
REDMOND, WASHINGTON 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(425) 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)
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. [ ]
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant on April 27, 1998, was $10,464,832. The
aggregate market value was computed by reference to the closing 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 6,439,897
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 27, 1998.
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 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III and Part IV
of this Form 10-K.
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FORWARD-LOOKING STATEMENTS
Certain statements within the following description of the business of
Garden Botanika, Inc. ("Garden Botanika" or the "Company") and elsewhere in this
Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause actual results, performance or achievements of the Company or its
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the Company's losses and lack of
profitability to date; fluctuations and/or declines in comparable store sales
results; competition; and the Company's ability to successfully implement
strategies in new channels of distribution.
PART I
ITEM 1. BUSINESS
GENERAL
Garden Botanika develops, manufactures, distributes and sells 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 primarily through its 280
Company-owned and -operated specialty retail stores in 41 states nationwide and
through the Company's catalog. In addition, the Company has begun limited
commercial sales through third-party retailers and intends to explore new
channels of distribution in order to increase sales and brand awareness. The
Company believes that its 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 shopping experience, which the Company provides through its upscale
store design, customer service and the visual presentation of its products and
signage. The Company believes that the strength of its brand in the markets in
which it competes most successfully will provide opportunities to develop new
products, sales in new channels of distribution and a broader customer base.
Garden Botanika's marketing and merchandising efforts have historically
targeted working women who may have purchased skin care and cosmetic products
from mall-based department stores and who ideally utilize quality personal care
products both on a daily basis and as an affordable luxury item. The Company
believes these women appreciate value pricing without having to sacrifice high
quality and service, and that working women increasingly will be looking to
personal care products to mitigate the impact of aging. Garden Botanika also
believes that its marketing strategy has attracted a broad cross-section of
other consumers beyond its primary target, including younger customers who are
attracted to the Company's hands-on merchandising approach. The Company is
seeking to extend its customer base by means of its promotional activities,
third-party commercial sales, television shopping channels, international
licensing opportunities and an expanded hotel amenities program.
After opening 66 and 101 stores in fiscal years 1995 and 1996,
respectively, the Company slowed its rate of growth significantly, opening only
27 stores in fiscal 1997 and planning to open only one store in fiscal 1998. The
average performance of the 167 stores opened in fiscal 1995 and 1996 has been
substantially below historical experience and the Company's expectations, which
the Company believes is the result of such stores being geographically dispersed
and not having sufficient market penetration to benefit effectively from the
Garden Botanika brand, as well as the result of facing intense competition from
Bath and Body Works, the Body Shop and other specialty retailers and mass
merchandisers. In fiscal 1998, the Company plans to review the productivity of
each store in its real estate portfolio with the view toward closing certain
stores that fail to meet performance standards. The Company currently
contemplates that approximately 12 stores will be closed in fiscal 1998,
although the exact number may differ depending upon the results of its review
and other factors, such as the possible emergence of a buyer for one or more of
the Company's stores. Garden Botanika achieved average annual sales per square
foot of $324 in fiscal 1997, at the end of which the average age of its stores
was
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32 months. The Company's comparable store sales increased 16%, 7% and 1% during
fiscal 1995, 1996 and 1997, 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 shopping channels and 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.
MERCHANDISING
Product Quality. Garden Botanika's strict ingredient policy, using
botanical extracts and natural plant oils, 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.
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. 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 appeal of the
Company's merchandise assortment. 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. For example, the Spa Botanika line is intended to offer affordable
luxury items such as body polishers, muds, soaks, tonics and special shampoos,
and the Prefix line 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 or seasonal trends, such as its Transparencies
line of bright and fresh fragrances and its Gardener Botanika seasonal line of
intensive skin care for those with active, outdoor lifestyles. The Company
intends to introduce new specialty branded product lines in the future on a
regular basis and will replace older product lines with new ones in accordance
with customer demand. In addition, in the second and third quarters of fiscal
1997, the Company discontinued approximately 30% of its basic assortment,
primarily in less popular sizes, with the long-term goal of improving inventory
turnover.
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. In addition, the
Company regularly monitors the price levels of comparable products offered by
its competitors, including specialty retailers, and Garden Botanika is committed
to making pricing adjustments to
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ensure that its products remain competitive. For instance, in fiscal 1997, the
Company significantly lowered the pricing of its basic toiletries (bath, body
and hair care) in an effort to attract customers from its direct mall-based
competitors. Short-term promotional offerings of particular products are
intended to provide greater savings and generate additional sales.
With commercial sales, such as sales of specially bundled products to
Costco Wholesale or television shopping channels, the pricing of the Company's
products for purchase by the ultimate consumer may be subject to the policies of
others. Generally, the Company expects that sales of its products to the general
public by third parties would be at a discount over the Company's prices at its
retail locations, and, as a result, sales by the Company to third party
wholesalers may have a substantially different margin structure than retail
sales in Company-owned stores. To date, the Company believes that the reduced
margins required for commercial sales are justified by their potential volume,
the lack of associated expense in operational costs at the retail store level
and the opportunity to enhance brand awareness.
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. 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. Bundled discounts have also characterized the Company's offerings to
Costco Wholesale and Home Shopping Network.
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, market by market, 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 was introduced to capitalize on a market trend for
bright and fresh fragrances (in contrast, for instance, to more heavy
traditional floral scents). The Company believes that its ability to develop,
test and market new products helps reinforce the appealing, fresh nature of the
Garden Botanika brand.
In October 1995, Garden Botanika acquired a manufacturing facility that,
depending on seasonal needs, employs 20 to 30 persons in Oceanside, California.
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.
STORE ENVIRONMENT
The Company seeks to offer an attractive store environment that showcases
its product offerings and promotes product testing and trial by its customers.
Garden Botanika's brightly lit stores were designed to project an upscale
atmosphere and to reinforce the Company's distinctive brand image. Since opening
its first store in August 1990, Garden Botanika has refined and improved its
store design to position itself and establish a distinctive image in the
marketplace. The current design of the Company's stores incorporates neutral
white fixtures with merchandise displays and product arrangements that allow for
self-selection. In August 1996, Garden Botanika opened its first store
incorporating a Color Studio into its 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 colors and products to
suit each particular customer. Twelve of the 101 new stores opened in fiscal
1996, and 23 of the 27 new stores opened in fiscal 1997, contained Color
Studios, and five stores were remodeled in the last two fiscal years to become
Color Studio stores.
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In the second quarter of fiscal 1997, to encourage hands-on interaction
with the merchandise and strengthen the visual appeal of its stores, the Company
undertook a major remerchandising effort. As part of that effort, Garden
Botanika doubled the color range of the cosmetics assortment in its traditional
stores, introduced new floor cosmetics testers in many stores, and increased
merchandise presentation fixturing in order to create a sense of abundance. The
Company also eliminated a large number of stock items to improve inventory
turnover.
From fiscal 1991 to fiscal 1997, excluding the Color Studio stores, the
average size of the new stores opened in each fiscal year increased from 765 to
1,217 square feet to accommodate the Company's expanding product assortment and
merchandising displays. The 23 Color Studio stores opened in fiscal 1997
averaged 1,762 square feet per store.
MARKETING
The Company's marketing strategy is to create brand awareness through
high-value promotional offerings, positive experiences with the Company's
products, and exploiting alternate channels of distribution, such as a hotel
amenities program that can help build recognition of the "Garden Botanika" name.
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 and bright
in-store displays. To an increasing extent, the Company has made use of, and
continues to explore, channels of distribution outside mall-based specialty
retail stores. Examples of such channels of distribution include commercial
sales to Costco Wholesale for resale through its membership warehouses and
appearances on Home Shopping Network.
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, to reduce mailing and printing costs, the Company
significantly decreased prospect mailings and focused its efforts on the more
productive house file of established and active mail-order customers. As
expected, the strategy also resulted in significantly lower mail-order sales
from reduced circulation. The Company currently intends to limit future
prospecting mailings and will seek to maintain its list of mail-order customers
at its present size.
To a large extent, the Company relies on its store locations and signage,
its colorful visual presentations of products, and word-of-mouth advertising to
attract prospective customers into its stores. Garden Botanika offers
value-priced bundles of many of its most popular products on a regular basis to
promote trial use. In addition, the Company seeks to be viewed as a responsible
member of its community and has sponsored holiday donations to CARE, a worldwide
hunger relief effort.
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STORE LOCATIONS
In selecting store sites, the Company has generally sought 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. The following map shows the number of stores in each
state as of April 27, 1998:
[LOGO]
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 store operations within her region and who reports to the
Company's Vice President -- Stores. The Company's 27 district managers report to
the regional directors and frequently visit the cluster of approximately eight
to 15 stores within their respective geographic areas to monitor 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 five to seven 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 seven to nine hourly sales associates. 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 offices.
Training and Compensation. Approximately 20 hours of training per month are
allocated for each store to train employees, with an emphasis on product
knowledge, merchandising standards and operating guidelines, which include
customer service and sales techniques. 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
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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. Training
bulletins and a Company newsletter 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 1997, the Company's largest supplier, Randall Products
International, accounted for approximately 12% of the Company's purchases, and
approximately 62% 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 Canada, the Far East and Germany, with the majority of those purchases
consisting of finished accessories and packaging. 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. The Company has not experienced any significant difficulty
and, provided suppliers can be assured of payment, does not anticipate any
significant difficulty in obtaining satisfactory or adequate sources of supply.
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.
STORE 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.
The Company leases distribution facilities, consisting of approximately 110,000
square feet, in Ontario, California. Merchandise is delivered by suppliers to
these 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 bi-weekly 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 to both store and 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
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visits, while also offering Garden Botanika's mail-order customers a
comprehensive assortment of products. 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.
The Company's overall catalog strategy focused, first, on the acquisition
of 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 mailed only to the most productive
segments of its active store customer lists and significantly decreased prospect
mailings for mail-order sales, thus focusing its marketing efforts on the more
productive house file of active mail-order customers. While this resulted in
lower circulation and reduced mail-order sales, the strategy also significantly
reduced overall mailing and printing costs and was implemented to improve the
Company's goal of achieving profitability. In fiscal 1997, the Company prepared
and circulated 10 editions of its catalog, which averaged 26 pages, two shorter
folios and a postcard, with total mailings of approximately 16.8 million. While
this is roughly comparable to the total number of mailings in fiscal 1996, last
year's mailings were more heavily weighted to retail store customers with less
emphasis on mail-order sales. Despite this shift in emphasis, retail store
mailings on a per-store basis actually declined from fiscal 1996 to fiscal 1997,
on account of the 40% increase in store months of operations in 1997. It is
likely that the relative reduction in the number of catalogs mailed per store
contributed to the slower rate of growth in both total and comparable store
sales in 1997, but the Company believes the impact of reduced per-store mailings
on retail store sales cannot be determined with accuracy.
COMMERCIAL SALES
Garden Botanika recently organized a commercial sales division to actively
pursue opportunities in new channels of distribution, including sales through
selected retailers, television retailing, international licensing and the
expansion of its hotel amenities program. In December 1997, the Company
completed its first significant commercial sale, consisting of a bundled
selection of color cosmetics, for resale by Costco Wholesale through selected
membership warehouse stores. Because of the initial success of this program, the
Company intends to pursue sales to Costco Wholesale, including planned sales of
bundled Transparencies and Natural Color Cosmetics products in the spring of
1998. Home Shopping Network has also placed an experimental order for Garden
Botanika products that the Company understands will be marketed in three
one-half hour time periods later this spring. Finally, the Company recently
signed a licensing agreement with a new supplier in the hotel amenities
industry, which it believes will increase its opportunities in this area, and is
actively exploring international licensing opportunities. In addition to
providing additional sales overall, the Company believes that commercial sales
to third parties can help build Garden Botanika's brand recognition and improve
overall profitability.
The Company has no current intention to offer through commercial sales in
the United States the same full array of its products that is available in its
Company-owned stores or through its mail-order catalog. As a consequence, the
Company expects that customers introduced to Garden Botanika products through a
third party, and wishing to make additional purchases of greater variety, will
be directed to purchase particular products directly from the Company.
MANAGEMENT INFORMATION SYSTEMS
Garden Botanika's management information systems include integrated store,
distribution 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
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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. The Company also has
installed (i) a computerized warehouse management system at its distribution
center, which tracks and directs, as needed, inventory, warehouse space and
labor resources; and (ii) an integrated manufacturing information system, which
is designed to interface with its basic retail information system. This latter
system monitors work-in-progress, projects inventory requirements from third-
party suppliers and better allows 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 size and maintain a competitive industry position.
The Company is addressing the need to ensure that its operations will not
be adversely impacted by software or other system failures related to the year
2000. The Company's outside vendors that supply its management information
systems have represented to the Company that they have made the necessary
modifications to their computer systems, applications and business processes,
which the Company has acquired, or will acquire, as it obtains updated versions
of its software packages. The costs associated with this effort are expected to
be incurred through 1999 and are not expected to have a material impact on the
Company's financial condition in any given year. However, no assurances can be
given that the Company will be able to completely identify or address all year
2000 compliance issues, or that third parties with whom the Company does
business will not experience system failures as a result of the year 2000 issue,
nor can the Company fully predict the consequences of noncompliance.
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, Victoria's Secret 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 sites, and, should the Company again become active
in opening new stores, there can be no assurance that management will be able to
secure suitable sites on satisfactory terms.
Management believes that the primary elements of competition in its
business are quality, price, customer service, brand recognition and market
penetration. The Company also believes that successful competition in the
personal care industry depends on both the regular introduction of new and
appealing products and customer acceptance of its store environment.
EMPLOYEES
At April 27, 1998, the Company employed approximately 2,400 persons, of
whom approximately 2,200 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 27, 1998, the Company employed approximately 200 non-store employees in
its corporate headquarters, its distribution center, manufacturing division and
in different parts of the country as regional or district managers.
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None of the Company's employees are covered by collective bargaining
agreements, and management believes that its relations with its employees are
satisfactory.
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 Transparencies, 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 ("FDA") and the Federal Trade Commission ("FTC") in the United
States, as well as various other federal, state and local regulatory
authorities. In the event of international sales, the Company may also be
subject to the regulatory authority of a foreign jurisdiction. 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. 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. In February 1998, the Company announced its intention to close
approximately 12 under-performing stores during fiscal 1998, and one such store
has already been closed. In addition to estimated asset write-offs of $1.89
million for anticipated store closings, the Company has reserved approximately
$1.31 million for closing expenses associated with extracting itself from lease
obligations. On a regular basis, the Company reviews the performance of each of
its stores and is currently seeking to restructure the rent or obtain other
relief, either long- or short-term, for some of its most unprofitable stores. As
current leases expire, assuming relationships with landlords remain good, the
Company believes that it will be able either to obtain lease renewals for
present store locations, if desired, or to obtain leases for equivalent or
better locations in the same general area. To date, the Company has not had any
experience renewing leases for existing locations.
In addition to its stores, the Company currently leases approximately
20,971 square feet of office space in two buildings in Redmond, Washington for
its corporate headquarters and catalog call and customer service center. The
Company also leases approximately 110,000 square feet in Ontario, California as
its principal distribution and basket fabrication facility. To support its
manufacturing capabilities, the Company entered a
9
<PAGE> 11
lease for an 8,700 square-foot building and storage facility in Oceanside,
California. The Company believes that its facilities are adequate for its
business as currently conducted.
ITEM 3. LEGAL PROCEEDINGS
The Company is 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 January 31, 1998.
10
<PAGE> 12
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>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1996:
Second quarter (from May 22, 1996)........................ $35.000 $11.750
Third quarter............................................. $16.875 $ 7.875
Fourth quarter............................................ $12.000 $ 7.750
FISCAL 1997:
First quarter............................................. $10.875 $ 5.125
Second quarter............................................ $ 6.625 $ 4.325
Third quarter............................................. $ 6.875 $ 3.875
Fourth quarter............................................ $ 5.063 $ 1.938
FISCAL 1998:
First quarter (through April 27, 1998).................... $ 2.188 $ 1.375
</TABLE>
The last sale price of the Company's Common Stock on April 27, 1998, as
reported on the Nasdaq National Market, was $1.625 per share.
As of April 27, 1998, there were 216 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
proposed line of credit, the terms of the Company's bank line of credit would
prohibit the payment of cash dividends to holders of Common Stock without the
lender's consent.
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1994 1995 1996(1) 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SQUARE FOOT AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Net sales........................ $12,569 $27,510 $55,339 $ 92,465 $114,591
Cost of sales (including buying
and occupancy costs).......... 7,794 15,521 31,448 52,551 73,846
------- ------- ------- -------- --------
Gross margin.................. 4,775 11,989 23,891 39,914 40,745
Operating expenses:
Stores and catalog(2)......... 4,093 8,956 18,746 35,544 39,524
General and administrative.... 2,759 3,917 6,041 8,871 10,919
Preopening and facility
relocation expenses........... 417 733 798 1,426 397
Provision for store closings..... -- -- -- -- 3,200
Impairment loss on long-lived
assets........................ -- -- -- -- 2,600
------- ------- ------- -------- --------
Operating loss................... (2,494) (1,617) (1,694) (5,927) (15,895)
Interest income, net............. 140 230 30 994 315
------- ------- ------- -------- --------
Net loss......................... $(2,354) $(1,387) $(1,664) $ (4,933) $(15,580)
======= ======= ======= ======== ========
Basic loss per share(3).......... $ (0.88) $ (0.43) $ (0.44) $ (0.80) $ (2.20)
Cash dividends declared per
common share.................. -- -- -- -- --
Weighted average common
shares(000's)(3).............. 2,676 3,209 3,756 6,146 7,069
Capital expenditures............. $ 3,865 $11,439 $16,800 $ 24,225 $ 14,161
SELECTED OPERATING DATA:
Stores open at period-end........ 41 86 152 253 280
Average square footage of stores
opened during period.......... 951 1,077 1,256 1,362 1,693
Sales per square foot(4)......... $ 484 $ 535 $ 458 $ 387 $ 324
Average store age (in months).... 16 16 18 20 30
Comparable store sales
increase(5)................... 18% 34% 16% 7% 1%
Number of catalogs
mailed(000's)(2).............. -- 2,311 5,021 15,933 16,753
BALANCE SHEET DATA (AT PERIOD-END):
Working capital.................. $12,522 $ 1,415 $ 2,662 $ 36,315 $ 19,690
Total assets..................... $21,910 $25,518 $47,137 $103,523 $ 87,837
Note payable to bank............. -- -- $ 2,540 -- --
Shareholders' equity............. $19,542 $18,183 $33,117 $ 84,456 $ 68,936
</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 13, 23, 41, 86 and 253 in fiscal years 1993 through 1997,
respectively.
12
<PAGE> 14
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 opening its first store in August 1990, Garden Botanika has opened
281 stores across the country, closing one store in February 1998, and has
established itself as a market presence in core markets in the Pacific
Northwest, California and parts of the East Coast. From 1990 to the Company's
initial public offering in May 1996, the Company pursued an aggressive growth
strategy, which was fueled by double-digit comparable store sales increases of
18%, 34% and 16% for the fiscal years 1993 through 1995, respectively, as well
as private financings that raised a total of $42.24 million. The most rapid
period of expansion occurred in 1995 and 1996, when the Company opened 66 and
101 stores, respectively. The 167 stores opened in those years performed
significantly below historical experience and the Company's expectations, which
the Company believes was due, at least in part, to the fact that such stores
were geographically widely dispersed from other Garden Botanika stores and thus
did not have sufficient market penetration to effectively build and benefit from
the Garden Botanika brand. These new units, representing approximately 60% of
the Company's store base, adversely affected the performance of the Company as a
whole. Brand awareness and name recognition were slow to develop in many new
markets, a disproportionate number of which consisted of only one or two stores,
and competition from Bath and Body Works, the Body Shop, Victoria's Secret and
other specialty retailers and mass merchandisers increased substantially.
Comparable store sales increased only 7% in fiscal 1996.
In 1997, in an effort to boost sales, the Company undertook an extensive
remerchandising program with the goal of increasing store level productivity and
improving inventory turnover. As part of this program, the Company narrowed its
product assortment, eliminating approximately 275 core SKUs (or 30% of the
total) by eliminating certain product types and reducing the number of sizes in
which others were offered. In order to move discontinued inventory, the Company
held clearance sales, adversely impacting same store sales and gross margin. In
order to make the Garden Botanika shopping experience more customer-friendly,
the Company also invested approximately $2 million as part of a strategy to
soften and enhance the appearance of its stores. In addition, the Company
focused its catalog mailings on its most productive list of existing mail-order
customers, reducing the use of the catalog for customer prospecting in new
markets. By narrowing catalog distribution and condensing the catalog itself,
the Company significantly reduced catalog-related expenses as circulation and
pages mailed fell by 40% and 56%, respectively. As a result of the
remerchandising campaign and narrowed catalog operations, same store sales only
increased 1% in fiscal 1997, including a 4% decline in the fourth quarter, the
first quarterly same-store sales decline in the Company's history. In past
years, the productivity of each class of the Company's stores has generally
improved as they have matured, but recent declines have included the Company's
older classes of stores.
In order to reverse declining same store sales trends and attempt to
achieve profitability in 1998 and beyond, the Company intends to refocus its
efforts on building brand loyalty, brand image and brand awareness. The Company
has developed a three-pronged strategy designed to improve performance both at
the store and corporate levels. Garden Botanika intends (i) to drive same store
sales with, among other things, an emphasis on value pricing and gift
strategies, the leveraging of the success of the Color Studio concept for color
cosmetics and the increased use of its customer database to refocus store
advertising efforts; (ii) to further reduce operating expenses to improve
profitability; and (iii) to leverage the Garden Botanika brand by making use of
new channels of distribution. 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 1998.
13
<PAGE> 15
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; Failure to Achieve Profitability. During fiscal
years 1995 through 1997, respectively, the Company incurred net losses of $1.66
million, $4.93 million and $15.58 million. As of the end of fiscal 1997, the
Company had an accumulated deficit of $29.64 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 stores, the level of competition, the
Company's ability to cost-effectively close or restructure the rent of some of
its most unprofitable stores and its success in identifying and responding to
emerging trends in the personal care products industry. The Company's
achievement of profitability, if any, will depend upon a number of additional
factors, including the Company's ability to (i) create brand awareness and
attract customers 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) succeed in entering new channels
of distribution. 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 and general economic conditions affecting consumer confidence and
spending. There can be no assurance that the Company will achieve targeted sales
and profitability levels in the future, or that the Company can achieve
profitability.
Dependence on Line of Credit; Limited Resources. Like many mall-based
specialty retailers, the Company experiences substantial seasonal fluctuations
in its sales and operating results, with its largest sales volumes in the months
of November and December. The Company currently expects to incur losses during
the first three quarters of 1998 and will need to borrow under a line of credit
to finance its inventory build-up and increasing operating costs prior to the
holiday season. On April 2, 1998, the Company received a commitment letter from
Foothill Capital Corporation under which Foothill agrees to provide the Company
with a three-year $10.00 million revolving line of credit, subject to certain
operating covenants and financial conditions. The Company and the lender are in
the process of completing a formal agreement, but there can be no assurance that
an agreement will be completed or that it will provide the Company with adequate
funding. The most recent report of the Company's independent public accountants
was qualified with the assumption that the Company will continue as a going
concern and noted matters, primarily relating to the uncertainty of adequate
funding, that may raise substantial doubt as to the Company's ability to
continue as a going concern. Limitations on the Company's borrowing ability and
access to funding generally may also limit the Company's ability to pursue
certain business initiatives that it might otherwise undertake in an effort to
increase sales. The Company's limited resources, and increases in the amount or
ages of accounts payable, may also cause vendors to restrict its use of vendor
credit terms, generally 30 to 60 days, to finance merchandise inventory costs.
The Company's inability to obtain an adequate, meaningful line of credit and/or
use vendor credit terms could have a substantial adverse impact on the Company's
financial condition.
Declines in Comparable Store Sales. A variety of factors affect the
Company's comparable store sales, including, among others: the retail sales
environment and the level of competition; the Company's ability to execute its
business strategy efficiently; acceptance of new product introductions; the
timing of holidays, promotional events and the mailing of the Company's
catalogs; and general economic and competitive conditions. The Company recently
has experienced monthly comparable store sales declines and the first quarterly
decline in the Company's history in the fourth quarter of fiscal 1997. The
Company's comparable store sales decreased 9% in November 1997 and increased by
2% the following month, followed by a comparable store decrease of 19% in
January 1998, resulting in a 4% overall comparable store sales decline in the
fourth quarter of 1997 and a 1% increase for the fiscal year. This trend has
continued in February and March of 1998, as comparable store sales declined,
respectively, 14% and 13%. The Company does not expect
14
<PAGE> 16
comparable store sales to increase as in past years, and there can be no
assurance that comparable store sales for any particular period will not
decrease.
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", shopping channels 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 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 and will not adversely affect sales of the Company's
preexisting products. The Company also competes generally for store sites, and,
in the event the Company seeks to open new stores, there can be no assurance
that it will be able to secure suitable sites on satisfactory terms.
Turnover and Dependence on Key Personnel. The Company has experienced
significant turnover among its corporate staff and senior management, including
the resignations in fiscal 1997 and 1998 of the Company's Senior Vice
President -- Operations, Chief Financial Officer and Vice President of Real
Estate. The Company has elected not to replace any of these individuals at the
present time, all of whose duties have been assumed by others. The Company
remains 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; 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,
respectively. There can be no assurance that the Company will be able to
motivate, attract and retain key employees and qualified personnel in the
future.
Commercial Sales Strategy. In fiscal 1998, the Company plans to focus
significant efforts on building its commercial sales division, which will be
responsible for overseeing and developing, among other things, the Company's
hotel amenities program, its sales to third-party retailers such as Costco
Wholesale, television shopping channel sales and international licensing
opportunities, if any. The Company has little historical experience with such
new channels of distribution and limited management and financial resources to
develop them. It is also anticipated that the financial return from certain
commercial sales opportunities, such as the expansion of Garden Botanika's
amenities program and the introduction of international sales, may take time to
develop. Sales in new channels of distribution will generally be made at
significantly lower margins than sales made through the Company's stores,
although the elimination of store-level costs significantly decreases the
expenses associated with such sales. The Company believes that the development
of new channels of distribution will build brand awareness and benefit retail
store sales. It is possible, however, that sales in new
15
<PAGE> 17
channels of distribution may compete indirectly with retail store sales with
higher margins. There can be no assurance that commercial sales in new channels
of distribution will justify the costs associated with their development and
marketing or that they will not adversely impact the Company's retail store
sales.
Remerchandising Strategy. In 1997, in an effort to boost sales, the Company
undertook an extensive remerchandising program with the goal of increasing store
level productivity and improving inventory turnover. As part of this program,
the Company undertook to soften and enhance the appearance of the Company's
stores and narrowed its product assortment, eliminating approximately 275 SKUs
(or 30% of the total) by eliminating certain product types and reducing the
number of sizes in which others were offered. In addition, the Company increased
the number of fixtures in its stores, which required additional inventory to
create the desired sense of abundance. This additional inventory must be carried
at additional cost to the Company. The Company intends to continue to experiment
with its stores' appearance and merchandising direction and to eliminate certain
of its less popular product lines with the goal of attracting a broader customer
base and increasing productivity overall. There can be no assurance, however,
that these efforts will be successful or that certain changes will not have an
adverse effect on sales in those markets in which the Company has established a
loyal customer base.
Ability to Manage Operations. In order for the Company to operate
successfully, management will be required to anticipate the changing demands of
the Company's operations and adapt systems and procedures accordingly. There can
be no assurance that the Company will anticipate all of the changing demands
that its expanding operations, including the anticipated growth of its
commercial sales division, 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
could adversely affect the Company's business, financial condition and operating
results.
Reliance on Management Information Systems Vendors. The Company currently
relies on three outside vendors, two of which are related, 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 current
operations and anticipated future growth, 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 1998. 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. This practice was greatly reduced in fiscal 1997, and, in
fiscal 1998, the Company intends to continue to focus on smaller mailings to its
house file of active mail-order customers. While this strategy is expected to
result in significant savings, there can be no assurance that it 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.
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. In fiscal 1998, the Company intends to continue reduced mailings of
catalogs 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 generate sufficient sales to make store operations profitable. Apart from
its catalog and related mailings,
16
<PAGE> 18
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.
Volatility of Stock Price. The market price of the Company's Common Stock
has been subject to significant downward fluctuations, primarily in response to
the Company's comparable store sales and overall operating results. 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 1997, approximately 62% 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 12% 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, failure or unwillingness of one or more
principal vendors to continue to supply the Company 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. In addition, in the event
of international sales, the Company could become subject to the regulatory
requirements of a foreign jurisdiction, which may differ substantially from
those of the United States and whose impact on such sales are uncertain.
Compliance with international, 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, the possibility of malicious tampering
with the Company's products and the unforeseen discovery of harmful effects in
one or more of the ingredients used in 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.
17
<PAGE> 19
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)
----------------------------------
FEB. 3, FEB. 1, JAN. 31,
1996(2) 1997 1998
------- ------- --------
<S> <C> <C> <C>
Net sales (in thousands)................. $55,339 $92,465 $114,591
======= ======= ========
Net sales................................ 100.0% 100.0% 100.0%
Cost of sales (including buying and
occupancy costs)....................... 56.8 56.8 64.4
------- ------- --------
Gross margin............................. 43.2 43.2 35.6
Operating expenses:
Stores and catalog..................... 33.9 38.4 34.5
General and administrative............. 10.9 9.6 9.5
Preopening and facility relocation
expenses............................... 1.4 1.5 0.3
Provision for store closings............. -- -- 2.8
Impairment loss on long-lived assets..... -- -- 2.3
------- ------- --------
Operating loss........................... (3.1) (6.4) (13.9)
Interest income, net..................... 0.1 1.1 0.3
------- ------- --------
Net loss................................. (3.0)% (5.3)% (13.6)%
======= ======= ========
</TABLE>
- ---------------
(1) Percentage amounts may not total 100% due to rounding.
(2) The fiscal year ended February 3, 1996 was a 53-week year.
FISCAL 1997 VS FISCAL 1996
General. The Company operated 280 stores at the end of fiscal 1997,
compared to 253 stores at the end of fiscal 1996. There were 3,212 store months
of operations during fiscal 1997 versus 2,290 store months in the prior period,
an increase of 40%. The average age of the Company's stores increased from 20
months to 30 months.
Net Sales. Net sales for fiscal 1997 were $114.59 million, compared to net
sales of $92.47 million for fiscal 1996. The increase of $22.12 million, or 24%,
in net sales was due primarily to (i) the 40% increase in store months of
operations during the year and (ii) a 1% increase in comparable store sales over
the prior year. Positive factors were also partially offset by a 41% decline in
mail-order sales, resulting primarily from a planned reduction in catalog
circulation.
Annual sales per square foot in the 253 stores open at the beginning of
fiscal 1997 declined by 16%, to $324, during the period, due primarily to an 8%
increase in average square footage per store that was not accompanied by a
corresponding increase in sales and the effect of 167 newer stores, which
initially have lower than average sales, opened in geographically dispersed
markets during fiscal 1995 and 1996.
The Garden Botanika catalog is used as the Company's primary marketing
vehicle by both the store and mail-order divisions. In order to control its
advertising costs in fiscal 1997, the Company mailed a total of approximately
16.8 million catalogs, compared to approximately 15.9 million catalogs mailed in
fiscal 1996, an increase of only 6% compared to the 40% increase in store months
of operations. With the relative reduction in the number of catalogs mailed, the
Company's mail-order sales declined to 4% of total sales in fiscal 1997 from 8%
in the prior year. It is also likely that the relative reduction in the number
of catalogs mailed contributed to the slower rate of growth in both total and
comparable store sales.
Gross Margin. Gross margin declined as a percentage of net sales from 43.2%
in fiscal 1996 to 35.6% in fiscal 1997. This decline reflected primarily the
effects of: (i) relatively fixed store occupancy costs (especially in the
Company's newer classes of stores) in a period of declining comparable store
sales, (ii) the Company's 1997 change in toiletries pricing, (iii) its program
to clear discontinued items from stock in connection with its
18
<PAGE> 20
1997 remerchandising program and (iv) markdowns to stimulate sales and reduce
inventory levels during the fourth quarter. The dollar amount of gross margin
increased by $831,000, or 2%, primarily as a result of the 24% increase in
sales.
Operating Expenses
Stores and Catalog. Store and catalog expenses, including distribution,
declined as a percentage of net sales from 38.4% in fiscal 1996 to 34.5% in
fiscal 1997. This decline was primarily attributable to the reduction in catalog
circulation discussed above (see Net Sales). The dollar amount of store and
catalog expenses increased by $3.98 million, or 11%, over the prior year,
primarily as a result of the 40% increase in store months of operations.
General and Administrative. General and administrative expenses, at 9.5% of
net sales, were basically unchanged from the fiscal 1996 level of 9.6%. The
dollar amount of general and administrative expenses increased by $2.05 million,
or 23%, from the prior year to support the 40% increase in store months of
operations and the 24% increase in 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 $397,000, or 0.3% of
net sales, in fiscal 1997, when the Company opened 27 new stores, relocated
three existing stores and finalized Preopening Expenses associated with stores
opened in the fourth quarter of fiscal 1996. The Company incurred Preopening
Expenses of $1.43 million, or 1.5% of net sales, during the prior year, when it
opened 101 new stores, relocated or committed to the relocation of five existing
stores and relocated certain of its warehouse, distribution and mail-order
fulfillment operations.
Provision for Store Closings. In early February 1998, the Company announced
its intention to close approximately 12 under-performing stores during fiscal
1998. A charge of $3.20 million was recorded to cover estimated asset writeoffs
and closure expenses. Of this amount, $1.89 million reduced property and
equipment, while the remaining $1.31 million is shown as a reserve for store
closing expenses to be incurred in future months. The first of the 12 stores was
closed during February.
Impairment Loss on Long-Lived Assets. At the conclusion of the 1997 holiday
season, the Company reviewed the asset values of individual stores in accordance
with Statement of Financial Accounting Standards No. 121. As a result of that
review, a charge of $2.60 million was recorded at the end of the fourth quarter
to recognize potential impairment of long-lived assets. This amount reduced
property and equipment.
All stores opened prior to fiscal 1997 were included in the impairment
review, which then concentrated on the approximately 100 stores, opened
primarily during fiscal 1996, with negative fiscal 1997 store level contribution
margin. The initial evaluation identified 26 stores, exclusive of the 12
previously identified for closure, whose net book value at January 31, 1998
exceeded the undiscounted cash flow expected to be produced over their remaining
lease terms. An impairment charge was recorded for each of these 26 stores equal
to the difference between its current net book value and the estimated fair
value of those assets as measured by the discounted cash flow expected to be
produced over the remaining lease term.
The determination of impairment for any given store is highly sensitive to
assumptions regarding future performance. Therefore, there can be no assurance
that a future deterioration in performance will not require an additional
impairment charge for one or more of these 26 stores, or that a future charge
may not be necessary for other stores. Due to the heavy concentration of sales
in the fourth quarter of each fiscal year, the Company does not believe it is
meaningful to make impairment determinations on an interim basis during the
fiscal year.
Operating Loss. For the reasons explained above, the fiscal 1997 loss from
operations increased 168%, to $15.90 million, from $5.93 million in the prior
year. Expressed as a percentage of net sales, the Company's loss from operations
increased from 6.4% to 13.9%, reflecting primarily (i) the effects of slower
growth in comparable store sales, (ii) the cost, both in terms of gross margin
and operating expenses, of remerchandising
19
<PAGE> 21
programs designed to improve the Company's competitive position and bring its
inventory levels into line with fourth quarter and anticipated future sales and
(iii) charges to provide for the costs of anticipated store closings and
potential impairment of historical property and equipment values.
Interest Income, Net. Net interest income during fiscal 1997 was $315,000,
or 0.3% of net sales, compared to $994,000, or 1.1% of net sales, during the
prior year. This change reflected the effect of the Company's net use of cash in
its 1997 expansion and remerchandising programs, as well in its routine
operations during the first nine months of the year. Interest expense was
$92,000 in fiscal 1997 and $321,000 in fiscal 1996.
Income Taxes. The Company did not record an income tax benefit for either
fiscal 1997 or fiscal 1996. Net operating loss carryforwards of $8.18 million at
January 31, 1998 begin to expire in 2005, and the amount 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 1997, the
Company's net loss increased 216%, to $15.58 million, or $2.20 per weighted
average common share, from $4.93 million, or $0.80 per share, in fiscal 1996.
The net loss also increased as a percentage of net sales, from 5.3% in fiscal
1996 to 13.6% in the current year, with the negative effects of slower growth in
comparable store sales, the cost of programs designed to improve the Company's
competitive position and bring its inventory levels into line and significant
charges for store closings and asset impairment being further magnified by the
significant reduction in interest income.
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.
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 for the 152 stores open at the beginning of
fiscal 1996 declined by 16%, to $387, during the period, due primarily to an 8%
increase in average square footage per store and the effect of the 111 newer
stores, which initially have lower than average sales, opened during fiscal 1994
and 1995.
In fiscal 1995 and 1996, the 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.
20
<PAGE> 22
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 stores 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 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 mail-order 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 mail-order 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 due to its pre-tax losses.
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 weighted
average common 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 fiscal 1996, 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.
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 39% to 45% during the past three
fiscal years) 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 fall below its expectations
during November and December, the Company's business, financial condition and
annual operating results are adversely affected. The Company's quarterly results
of operations may also fluctuate significantly as a result of a variety of other
factors, including the timing of new store openings, net sales contributed by
new stores, increases or decreases in comparable store sales, adverse weather
conditions, shifts
21
<PAGE> 23
in the timing of holidays, shifts in the timing of promotions and catalog
mailings and changes in the Company's product mix.
<TABLE>
<CAPTION>
FISCAL QUARTER(1)
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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 (loss) income......................... $ (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 (loss) income......................... $(2,685) $(1,987) $(3,780) $ 3,519
FISCAL 1997:
Net sales................................. $23,918 $24,873 $21,284 $44,516
% of full year......................... 20.9% 21.7% 18.6% 38.8%
Gross margin.............................. $ 8,736 $ 8,075 $ 5,695 $18,239
% of full year......................... 21.4% 19.8% 14.0% 44.8%
Net loss.................................. $(3,225) $(4,162) $(5,918) $(2,275)
</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
Cash Flow for Fiscal 1997
The Company began fiscal 1997 with cash and cash equivalents totaling $7.21
million and short-term investments of $20.43 million. During the first three
quarters of the year, all short-term investments were liquidated to fund (a) the
Company's net loss, (b) fixed asset additions related primarily to store
openings and the 1997 remerchandising program and (c) an increase in inventory
to support a commitment to higher in-stock and customer service levels. In the
fourth quarter, the Company borrowed against its U.S. Bank credit line of credit
to complete its 1997 store expansion program and build up inventory levels for
the holiday season. The maximum amount borrowed during this time was $7.82
million; the interest rate on all borrowings was 9.0%. All borrowings were
repaid during December, and the Company ended fiscal 1997 with cash and cash
equivalents totaling $8.59 million and no short-term investments or bank
borrowings. Due to its fourth quarter loss, the Company was in violation of the
tangible net worth covenant of its credit line at January 31, 1998. U.S. Bank
has indicated its willingness to provide the Company with a forbearance letter
stating that it will not take any action with respect to the Company's
violation. However, U.S. Bank will not permit further borrowings under the
Company's existing $5.00 million credit line until the violation is cured, and
there is no present likelihood that this will occur or that borrowing will be
necessary prior to expiration of the line on May 31, 1998.
On April 2, 1998, the Company received a commitment letter from Foothill
Capital Corporation ("Foothill"), under which Foothill agrees, subject to
certain financial conditions and the satisfactory completion of loan
documentation, to provide the Company with a three-year, $10.00 million
revolving line of credit for general corporate purposes. Credit available under
the Foothill line at any time during this period would generally be a variable
percentage (ranging from 55% to 65%) of eligible finished goods inventory. This
22
<PAGE> 24
line, which would be secured by the assets of the Company, would bear interest
at prime plus 0.5%, with a LIBOR rate available on certain borrowings, at the
Company's option. The minimum interest rate on any borrowings under the line
would be 7.00%. As a result of negotiations since April 2, 1998, in order to
access the Foothill credit line, the Company would be required to maintain
certain financial covenants, including covenants relating to earnings and
limitations on losses that would vary from quarter to quarter. Future capital
expenditures, including those for store expansion, would be limited in
accordance with a business plan to be approved by Foothill. The Company's Board
of Directors has authorized management to proceed in negotiations for the
Foothill credit line on the terms proposed.
Future Cash Flow Plans and Expectations
The Company's future plans call for the opening of one new store in fiscal
1998, which has already occurred, and anticipates total capital expenditures of
approximately $2.60 million, based on the one planned store opening, certain
store remodels and updates to existing stores, and improvements to existing
distribution, manufacturing and central office facilities that support
operations. They Company's average net capital expenditure for the 27 new stores
opened in fiscal 1997 was approximately $305,000 per store, after deducting the
construction allowances paid by lessors. The average Preopening Expense for each
of these stores was approximately $10,000. In addition, other working capital
requirements, consisting primarily of the purchase of inventory, averaged
approximately $41,500 per store. 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, subject to its meeting certain financial conditions and
the satisfactory completion of loan documentation, the Company may finance 55%
to 65% of its inventory under the terms a credit line with Foothill, for which
the Company has received a commitment letter.
The Company believes that its cash balance at the end of fiscal 1997,
combined with its cash flow from operations and borrowings under its anticipated
new credit facility, will be sufficient to satisfy its currently anticipated
working capital and capital expenditure requirements through fiscal 1998. The
Company's capital requirements, and its ability to obtain financing, may vary
significantly from those anticipated, however, depending particularly on
operating results and other factors. The Company may be required to seek
additional sources of funds to support its ongoing operations in fiscal 1998,
and there can be no assurance that such funds, if required, will be available on
satisfactory terms. Failure to obtain such financing could 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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
pronouncement established new standards for computing and presenting earnings
per share for entities with publicly held common stock. The Company adopted SFAS
No. 128 in the fourth quarter of fiscal 1997. The adoption did not have a
significant effect on the Company's earnings per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
Not applicable.
23
<PAGE> 25
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 January 31, 1998.
24
<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 1998 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
Susan M. Detmer 43 Vice President - Brand Development
John A. Garruto 45 Vice President - Research and Product Development
Jeffrey M. Hare 33 Vice President - Distribution Services
George W. Newman 49 Vice President - Controller
Susan M. Walker 38 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.
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.
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 Products
International, which was founded by a Director of the Company, from 1989 to
1991.
Jeffrey M. Hare has been the Company's Vice President - Distribution
Services since April 1997. In previous positions with the Company, Mr. Hare has
been continuously responsible for the Company's warehouse, outbound freight and
gift assembly functions since October 1991. In addition, Mr. Hare assumed
responsibility for the Company's catalog fulfillment operations when the Company
introduced its mail-order catalog in 1994. Prior to joining Garden Botanika,
from 1983 to 1991, Mr. Hare held various positions with Precor USA, an exercise
equipment manufacturer, including the position of Production Manager.
25
<PAGE> 27
George W. Newman has been the Company's Vice President - Controller since
January 1998 and was its Controller since joining the Company in February 1996.
Mr. Newman is currently acting in the capacity of the Company's Chief Financial
Officer. Prior to joining the Company, Mr. Newman was employed as Controller at
Pacific Linen, Inc., a regional soft lines retailer, from January 1995 to
February 1996. From 1979 to 1994, Mr. Newman was employed at The Kobacker
Company, a national footwear retailer where, among other positions, he served as
Controller.
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 1998 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 1998 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 1998 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, under the
heading "Certain Relationships and Related Transactions."
26
<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 -- January 31, 1998 and February 1, 1997..... F-3
Statements of Operations -- For the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996... F-4
Statements of Shareholders' Equity -- For the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996...................................................... F-5
Statements of Cash Flows -- For the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996... F-6
Notes to Financial Statements............................. F-7
Selected Quarterly Financial Data (Unaudited) -- For the
fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996 -- See Note (9) of Notes to Financial
Statements................................................ F-15
</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 January 31,
1998.
27
<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 28, 1998.
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 28, 1998, on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JEFFREY H. BROTMAN Chairman, Secretary and Director
- --------------------------------------------------------
Jeffrey H. Brotman
/s/ MICHAEL W. LUCE President, Chief Executive Officer and
- -------------------------------------------------------- Director (Principal Executive Officer)
Michael W. Luce
/s/ GEORGE W. NEWMAN Vice President -- Controller
- -------------------------------------------------------- (Principal Accounting Officer)
George W. Newman
/s/ GERALD R. GALLAGHER Director
- --------------------------------------------------------
Gerald R. Gallagher
/s/ WILLIAM B. RANDALL Director
- --------------------------------------------------------
William B. Randall
/s/ DALE J. VOGEL Director
- --------------------------------------------------------
Dale J. Vogel
</TABLE>
28
<PAGE> 30
GARDEN BOTANIKA, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Arthur Andersen, Independent Auditors............. F-2
Balance Sheets -- January 31, 1998 and February 1, 1997..... F-3
Statements of Operations -- For the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996... F-4
Statements of Shareholders' Equity -- For the fiscal years
ended January 31, 1998, February 1, 1997 and February 3,
1996...................................................... F-5
Statements of Cash Flows -- For the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996... F-6
Notes to Financial Statements -- For the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996... F-7
Selected Quarterly Financial Data (Unaudited) -- For the
fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996 -- 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 January 31, 1998 and February 1, 1997, and the
related statements of operations, shareholders' equity and cash flows for the
fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996.
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
January 31, 1998 and February 1, 1997, and the results of its operations and its
cash flows for the fiscal years ended January 31, 1998, February 1, 1997 and
February 3, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has incurred significant net losses since its inception. The Company is in the
process of completing an agreement for a new line of credit to finance its
operations during fiscal 1998. There can be no assurance that the agreement will
be completed or that it will provide the Company with adequate funding for the
next fiscal year. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Seattle, Washington
April 24, 1998
F-2
<PAGE> 32
GARDEN BOTANIKA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,594 $ 7,205
Short-term investments.................................... -- 20,426
Inventories............................................... 23,747 18,940
Prepaid expenses:
Rent................................................... 1,640 1,238
Other.................................................. 1,033 1,793
Receivable from lessors................................... 550 2,633
Other..................................................... -- 727
-------- --------
Total current assets.............................. 35,564 52,962
Property and equipment:
Leasehold improvements.................................... 53,030 51,431
Furniture and equipment................................... 16,420 9,016
Equipment under capital lease............................. 261 261
-------- --------
69,711 60,708
Less accumulated depreciation and amortization............ (17,456) (10,168)
-------- --------
Net property and equipment............................. 52,255 50,540
Other assets................................................ 18 21
-------- --------
Total assets...................................... $ 87,837 $103,523
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances................... $ 6,055 $ 6,600
Accounts payable.......................................... 5,818 7,438
Accrued salaries, wages and benefits...................... 1,536 1,366
Reserve for store closing expenses........................ 1,311 --
Accrued sales tax......................................... 398 442
Other..................................................... 756 801
-------- --------
Total current liabilities......................... 15,874 16,647
Deferred rent and other..................................... 3,027 2,420
-------- --------
Total liabilities................................. 18,901 19,067
Commitments
Shareholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; none issued and outstanding................ -- --
Common Stock, $.01 par value; 36,092,374 shares
authorized; 7,069,098 issued and outstanding........... 98,573 98,513
Accumulated deficit....................................... (29,637) (14,057)
-------- --------
Total shareholders' equity........................ 68,936 84,456
-------- --------
Total liabilities & shareholders' equity.......... $ 87,837 $103,523
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 33
GARDEN BOTANIKA, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................... $114,591 $92,465 $55,339
Cost of sales (including buying and occupancy costs).... 73,846 52,551 31,448
-------- ------- -------
Gross margin....................................... 40,745 39,914 23,891
Operating expenses:
Stores and catalog.................................... 39,524 35,544 18,746
General and administrative............................ 10,919 8,871 6,041
Preopening and facility relocation expenses............. 397 1,426 798
Provision for store closings............................ 3,200 -- --
Impairment loss on long-lived assets.................... 2,600 -- --
-------- ------- -------
Operating loss..................................... (15,895) (5,927) (1,694)
Interest income, net.................................... 315 994 30
-------- ------- -------
Net loss........................................... $(15,580) $(4,933) $(1,664)
======== ======= =======
Basic loss per share, giving effect to the conversion of
all preferred shares to common........................ $ (2.20) $ (0.80) $ (0.44)
Weighted average common shares, giving effect to the
conversion of all preferred shares to common.......... 7,069 6,146 3,756
</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 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
Deferred compensation...... -- -- -- 60 -- 60
Net loss................... -- -- -- -- (15,580) (15,580)
------ -------- ----- ------- -------- --------
Balance, January 31, 1998.... -- $ -- 7,069 $98,573 $(29,637) $ 68,936
====== ======== ===== ======= ======== ========
</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
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(15,580) $ (4,933) $ (1,664)
-------- -------- --------
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................ 7,869 5,153 2,908
Reserves for store closings and asset impairment..... 4,489 -- --
Loss on retirement of property and equipment......... 88 422 --
Changes in assets and liabilities:
Inventories........................................ (4,807) (8,764) (4,543)
Prepaid rent....................................... (402) (443) (416)
Other assets....................................... 1,490 (499) (1,117)
Accounts payable and checks drawn in excess of bank
balances........................................ (2,165) 5,284 3,674
Accrued expenses................................... 81 987 (38)
Reserve for store closing expenses................. 1,311 -- --
Deferred rent and other............................ 607 1,353 484
-------- -------- --------
Total adjustments............................... 8,561 3,493 952
-------- -------- --------
Net cash used by operating activities........... (7,019) (1,440) (712)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment..................... (14,161) (24,225) (16,800)
Redemption (purchase) of short-term investments......... 20,426 (20,426) --
Decrease (increase) in receivable from lessors.......... 2,083 (1,708) (1,230)
Other................................................... -- -- (25)
-------- -------- --------
Net cash provided (used by) investing
activities.................................... 8,348 (46,359) (18,055)
-------- -------- --------
Cash flows from financing activities:
Sale of stock........................................... -- 56,191 16,432
Advances on note payable to bank........................ 16,325 11,958 13,856
Payments on note payable to bank........................ (16,325) (14,498) (11,316)
Other................................................... 60 45 65
-------- -------- --------
Net cash provided by financing activities....... 60 53,696 19,037
-------- -------- --------
Increase in cash and cash equivalents, net................ 1,389 5,897 270
Cash and cash equivalents, beginning of period............ 7,205 1,308 1,038
-------- -------- --------
Cash and cash equivalents, end of period.................. $ 8,594 $ 7,205 $ 1,308
======== ======== ========
Supplemental disclosures:
Cash paid for interest.................................. $ 92 $ 302 $ 82
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
JANUARY 31, 1998
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 January 31,
1998, Garden Botanika operated 280 retail locations in 41 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 results of
operations beginning October 31, 1995.
The Company has only a limited operating history, and over 45% of its 280
stores had been open for less than 24 months at January 31, 1998. In addition,
the Company has announced plans to close approximately 12 stores during 1998.
The Company's future operations are subject to risks inherent in an emerging
business. The principal risk factors relate to the ability of the Company to
increase comparable store sales and achieve profitability in its highly
competitive environment, develop alternate channels of distribution, increase
brand awareness and maintain sufficient capital to fund operations and introduce
new products.
The Company has incurred net losses of $1.66 million, $4.93 million and
$15.58 million in fiscal 1995, 1996 and 1997, and has accumulated a deficit of
$29.64 million since inception. 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 stores, the
level of competition, and the Company's ability to cost-effectively close or
restructure the rent of some of its most unprofitable stores and its success in
identifying and responding to emerging trends in the personal care products
industry.
The Company expects to incur losses during the first three quarters of
fiscal 1998 and will need to borrow under a line of credit to finance its
inventory build-up and increased operating costs prior to the holiday season. As
discussed in Note 5, the Company received a commitment letter from a lender for
a line of credit up to $10.00 million. The Company and the lender are in the
process of completing a formal agreement. There can be no assurance that the
agreement will be completed or that it will provide the Company with adequate
funding for the next fiscal year. These factors, when considered in the
aggregate, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
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 (ended February 3, 1996) 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
F-7
<PAGE> 37
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 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 January 31, 1998 and
February 1, 1997, respectively, $200,000 and $1.27 million of advertising was
reported as assets. Advertising expense was $7.93 million, $9.57 million and
$3.34 million in fiscal years 1997, 1996 and 1995, 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 1997, 1996 and 1995 were $219,000, $1.13 million and $754,000,
respectively. Depreciation and amortization expense was $7.87 million, $5.15
million and $2.91 million, for fiscal years 1997, 1996 and 1995, respectively.
In February 1998, the Company announced its intention to close
approximately 12 under-performing stores during the coming year. A charge of
$3.20 million was recorded as of January 31, 1998 to cover estimated asset
writeoffs and closure expenses. Of this amount, $1.89 million reduced property
and equipment, while the remaining $1.31 million is shown as a reserve for store
closing expenses to be incurred in future months.
F-8
<PAGE> 38
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At the conclusion of the 1997 holiday season, the Company reviewed the
asset values of individual stores in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121. As a result of that review, a charge of
$2.60 million was recorded at the end of the fourth quarter to recognize
potential impairment of long-lived assets at 26 stores not previously identified
for closure. This amount reduced property and equipment. All stores opened prior
to fiscal 1997 were included in the impairment review, which then concentrated
on the approximately 100 stores, opened primarily during fiscal 1996, with
negative fiscal 1997 store level contribution margin. The initial evaluation
identified 26 stores, exclusive of the 12 previously identified for closure,
whose net book value at January 31, 1998 exceeded the undiscounted cash flow
expected to be produced over their remaining lease terms. An impairment charge
was recorded for each of these 26 stores equal to the difference between its
current net book value and the estimated fair value of those assets as measured
by the discounted cash flow expected to be produced over the remaining lease
term.
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; Adoption of Financial
Accounting Standards Board Statement No. 128
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This pronouncement established new standards for
computing and presenting earnings per share for entities with publicly held
common stock. The Company adopted SFAS No. 128 in the fourth quarter of fiscal
1997. The adoption did not have a significant effect on the Company's earnings
per share.
For each of fiscal years 1997, 1996 and 1995, outstanding stock options and
warrants to purchase common stock were excluded from the annual earnings per
share calculation because their effect would have been anti-dilutive. The number
of "in the money" options and warrants thus excluded from the earnings per share
calculation was 25,424 in 1997, 440,953 on a full-year equivalent basis in 1996
and 267,994 on a full-year equivalent basis in 1995.
Reclassifications
Certain reclassifications have been reflected in the financial statements
in order to conform prior years to the current year presentation.
F-9
<PAGE> 39
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories at fiscal year-end were composed of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Finished products held for sale.......................... $16,498 $12,814
Raw materials and components............................. 7,249 6,126
------- -------
Total inventories...................................... $23,747 $18,940
======= =======
</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 $184,000, $218,000
and $184,000, and rent expense was $14.99 million, $10.46 million and $5.68
million for fiscal years 1997, 1996 and 1995, respectively.
Future minimum rental payments under operating leases are (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- --------
<S> <C>
1998........................................................ $ 14,470
1999........................................................ 14,706
2000........................................................ 14,989
2001........................................................ 15,167
2002........................................................ 15,138
Thereafter.................................................. 48,072
--------
Total future minimum rental payments.............. $122,542
========
</TABLE>
The Company has announced its intention to close approximately 12 stores
during fiscal 1998, and closed the first of these stores in February. The store
closure process, which will involve negotiation with landlords regarding
individual properties, may result in changes to the future minimum rental
commitments shown above.
5. LINE OF CREDIT
The Company's existing $5.00 million credit line with U.S. Bank expires on
May 31, 1998. There were no borrowings under this line at January 31, 1998, nor
have there been any subsequent borrowings as of April 27, 1998. The Company was
in violation of the $75.00 million tangible net worth covenant of the credit
agreement at January 31, 1998. U.S. Bank has indicated its willingness to
provide the Company with a forbearance letter stating that it will not take any
action with respect to the Company's violation. However, U.S. Bank will not
permit further borrowings until that violation is cured, and there is no present
likelihood that this will occur or that borrowing will be necessary prior to
expiration of the line.
On April 2, 1998, the Company received a commitment letter from Foothill
Capital Corporation, under which Foothill agrees, subject to certain financial
conditions and the satisfactory completion of loan documentation, to provide the
Company with a three-year, $10.00 million revolving line of credit for general
corporate purposes. Credit available under the Foothill line at any time during
this period would generally be a variable percentage (ranging from 55% to 65%)
of eligible finished goods inventory. This line, which would be secured by the
assets of the Company, would bear interest at prime plus 0.5%, with a LIBOR rate
available on certain borrowings at the Company's option. The minimum interest
rate on any borrowings under the line would be 7.00%. As a result of
negotiations since April 2, 1998, in order to access the Foothill credit line,
the
F-10
<PAGE> 40
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company would be required to maintain certain financial covenants, including
covenants relating to earnings and limitations on losses that would vary from
quarter to quarter. Future capital expenditures, including those for store
expansion, would be limited in accordance with the Company's business plan. The
Company's Board of Directors has authorized management to proceed with
negotiations for the Foothill credit line on the terms proposed.
During fiscal years 1997, 1996 and 1995, the Company incurred interest
expense of $92,000, $321,000 and $105,000, respectively.
6. INCOME TAXES
The components of the Company's deferred tax accounts at fiscal year-end,
assuming a 35% statutory tax rate, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Net operating loss carryforward......................... $ 8,180 $ 3,632
Depreciation............................................ (1,456) (620)
Inventory............................................... 870 813
Deferred rent........................................... 1,020 691
Reserves not currently deductible....................... 2,503 473
Other................................................... 226 87
Valuation allowance..................................... (11,343) (5,076)
-------- -------
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 $8.18 million carryforward benefit at January 31, 1998, $6.31 million is
subject to a usage limitation of $425,000 per year.
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 January 31, 1998, the Company had two stock-based compensation plans
(the 1992 Plan and the 1996 Plan, each as described below). The Company had also
made an option grant outside these plans (the "IBC Options" as described below).
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
these fixed stock option plans and the non-plan grant. 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 and the IBC Options,
consistent with the method of SFAS No. 123, the
F-11
<PAGE> 41
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company's fiscal 1997 and 1996 reported net losses and basic losses per share
would have been increased to the amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C> <C>
Net loss (in thousands)........ As reported.................... $(15,580) $(4,933)
Pro forma SFAS No. 123......... $(17,427) $(5,751)
Basic loss per share........... As reported.................... $ (2.20) $ (0.80)
Pro forma SFAS No. 123......... $ (2.47) $ (0.94)
</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>
1997 1996
------------------ ------------------
<S> <C> <C>
Risk-free interest rate......................... 6.35% to 6.44% 5.88% to 6.41%
Expected life................................... 6 years to 8 years 6 years to 8 years
Dividend rate................................... 0% 0%
Expected volatility............................. 90% 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, as amended at the 1997 Annual Meeting of Shareholders,
incentive or non-qualified stock options to purchase 1,089,038 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 non-qualified stock options may be greater than or
less than fair market value. All options outstanding at January 31, 1998 vest on
schedules of four to five years and terminate after 10 years and two days. At
that date, 247,279 shares were available for future grant under the amended 1992
Plan.
Under the terms of the 1996 Plan, 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.
At January 31, 1998, 58,054 shares were available for future grant 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 January 31, 1998, 11,439 of these options were
exercisable.
F-12
<PAGE> 42
GARDEN BOTANIKA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- -------------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE(1) SHARES PRICE(1) SHARES PRICE(1)
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... 273,333 $11.16 268,581 $11.52 131,950 $ 9.28
Previously granted options brought
under 1992 Plan by shareholder
approval........................ 447,735 $ 8.63
Granted........................... 283,223 $ 6.13 25,000 $ 7.88 145,210 $13.51
Exercised......................... (2,156) $11.45 (2,342) $ 8.43
Canceled.......................... (164,573) $ 8.61 (18,092) $11.84 (6,237) $11.73
--------- -------- --------
Outstanding, end of year.......... 839,718 $ 8.61 273,333 $11.16 268,581 $11.52
========= ======== ========
Exercisable, end of year.......... 225,503 104,105 55,386
Weighted average fair value of
options granted during year..... $ 5.03 $ 6.33 $ 11.06
</TABLE>
- ---------------
(1) Weighted average
The following table summarizes information regarding all fixed stock
options outstanding at January 31, 1998:
<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 7.7 years $ 1.97 11,439 $ 1.97
$6.13 to $9.83 729,795 8.4 years $ 7.84 181,092 $ 8.78
$13.77 109,923 7.1 years $13.77 44,411 $13.77
------- -------
$1.97 to $13.77 865,142 8.2 years $ 8.42 236,942 $ 9.38
======= =======
</TABLE>
- ---------------
(1) Weighted average
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 12%, 11% and 12% of merchandise purchases during fiscal years
1997, 1996 and 1995, respectively, were from a supplier whose president is a
director of the Company. As of January 31, 1998 and February 1, 1997,
respectively, $656,000 and $698,000 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 BASIC
NET AVERAGE EARNINGS
NET GROSS INCOME COMMON (LOSS) PER
SALES(1) MARGIN(1) (LOSS)(1) SHARES(1) Share(2)
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
FISCAL 1997
First quarter................. $23,918 $ 8,736 $(3,225) 7,069 $(0.46)
Second quarter................ $24,873 $ 8,075 $(4,162) 7,069 $(0.59)
Third quarter................. $21,284 $ 5,695 $(5,918) 7,069 $(0.84)
Fourth quarter................ $44,516 $18,239 $(2,275) 7,069 $(0.32)
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 7,067 $ 0.50
FISCAL 1995
First quarter................. $ 9,532 $ 4,084 $ (827) 3,682 $(0.22)
Second quarter................ $10,138 $ 4,212 $ (836) 3,683 $(0.23)
Third quarter................. $10,671 $ 4,170 $(1,986) 3,683 $(0.54)
Fourth quarter................ $24,998 $11,425 $ 1,985 3,963 $ 0.50
</TABLE>
- ---------------
(1) In thousands.
(2) Interim per share amounts may not accumulate to annual amounts.
During the past three fiscal years, the Company has only been profitable in
two fiscal quarters. In the fourth quarter of fiscal 1996, diluted weighted
average common shares and earnings per weighted average common share were 7.14
million and $0.49, respectively. In the fourth quarter of fiscal 1995, the
comparable amounts were 4.05 million weighted average common shares and $0.49
per share, respectively.
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.
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.
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.
10.29 Distribution Agreement with Hunter Packaging Ltd. dated
October 20, 1997
10.30 License and Distribution Agreement with Hunter Packaging
Ltd. dated March 19, 1998
10.31 Commitment Letter with Foothill Capital Corporation dated
April 2, 1998, as amended
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.
** Incorporated by reference to exhibits filed with Registrant's Report on Form
10-K for fiscal 1996, as filed April 18, 1997.
<PAGE> 1
EXHIBIT 10.29
DISTRIBUTION AGREEMENT
THIS AGREEMENT, dated as of October 20, 1997, is between Garden
Botanika, Inc. ("Garden Botanika") and Hunter Packaging Ltd. ("Hunter").
Garden Botanika sells a high-quality retail product line under the
trademark "Garden Botanika." Garden Botanika owns or has rights (i) to certain
formulations and graphics for such products and (ii) the Garden Botanika
Trademarks listed on Schedule A, as well as owning valuable goodwill associated
with, and which stems from, the Garden Botanika Trademarks. Garden Botanika and
Hunter desire to make certain arrangements under which Garden Botanika will
license Hunter the right to manufacture and sell certain of its products (the
"Garden Botanika Products") to the Westin Hotel Company.
It is therefore agreed as follows:
1. Appointment of Hunter as Distributor.
Subject to the terms and conditions of this Agreement, including without
limitation the restrictions of Section 2 below, Garden Botanika hereby appoints
Hunter as a distributor to the Westin Hotel Company (the "Westin") of the Garden
Botanika Products listed or to be listed on Schedule B, which may be amended by
the parties from time to time, as approved by Garden Botanika for manufacture
and sale by Hunter in accordance with this Agreement.
2. Restrictions on Hunter.
(a) During the term of this Agreement, Hunter shall not take any of the
following actions:
(i) sell any of the Garden Botanika Products under any trademark
other than the Garden Botanika Trademarks or use the same formula for
any other product;
(ii) use any of Garden Botanika's designs, packaging, labeling or
formulas on any other product other than in the manufacture and sale of
the Garden Botanika Products as permitted herein;
(iii) sell any of the Garden Botanika Products to anyone other
than the Westin;
(iv) use the name Garden Botanika in its company name, the name
of a division or any other name under which Hunter conducts its business
or otherwise use any names, marks or symbols of Garden Botanika,
including but not limited to the Garden Botanika Trademarks or any
names, marks or symbols which are similar thereto or which might tend to
confuse, deceive or mislead purchasers or prospective purchasers. The
words "names, marks or symbols" as used in this section include, but
<PAGE> 2
are not limited to, corporate and private names, trademarks, symbols,
designations, indicia, slogans, other means of identifying products of
Garden Botanika or Hunter; or
(v) distribute or sell Garden Botanika Products in a form of
packaging other than that specifically approved by Garden Botanika for
such products.
3. Manufacture.
Garden Botanika hereby grants to Hunter the right to manufacture Garden
Botanika Products or to have such Garden Botanika Products manufactured for
Hunter solely for the purpose of supplying the Westin. Upon request, Garden
Botanika shall promptly furnish Hunter with the formulations and specifications
of the Garden Botanika Products to be manufactured and the specifications for
the packaging required for such Garden Botanika Products, except that Garden
Botanika reserves the right to withhold the formulations and specifications of
any specific Garden Botanika Product that it does not approve for manufacture
and sale by Hunter in accordance with this Agreement. Hunter shall supply Garden
Botanika with samples of the formulations of the Garden Botanika Products so
produced, including packaging and labels, in order that Garden Botanika may
determine that such products reasonably conform to its formulations and
specifications. Hunter or its manufacturer may produce such number of the
approved Garden Botanika Products as may be necessary or appropriate to effect
the distribution provided for in this Agreement. Hunter agrees that such
formulations and specifications are the sole property of Garden Botanika and
agrees to maintain said formulations and specifications in the strictest of
confidence and to exert its best efforts to safeguard said formulations and
specifications for the exclusive benefit of Garden Botanika.
4. Trademark, Etc.
(a) Grant of License. Garden Botanika hereby grants to Hunter the right,
during the term of this Agreement, to use the Garden Botanika Trademarks and the
packaging, formulations and specifications furnished to Hunter by Garden
Botanika in the manufacture, labeling and selling of the Garden Botanika
Products, solely in accordance with the provisions of this Agreement, with the
right to sublicense a manufacturer or manufacturers, (such sublicensee to have
the right only to manufacture Garden Botanika Products for sale to Hunter). The
Garden Botanika Trademarks may be used by Hunter only on or in connection with
the Garden Botanika Products. If requested by Garden Botanika, signs, labels,
packaging materials, advertisements, product coverings and other written
materials bearing the Garden Botanika Trademarks shall display either the "R" or
the "TM" notice of trademark registration, depending on which notice of
trademark registration Garden Botanika instructs Hunter to display. The Garden
Botanika Trademarks shall be applied in compliance with all applicable laws and
regulations and as Garden Botanika may reasonably request. Hunter recognizes
that Garden Botanika has all rights, title and interest in and to the Garden
Botanika Trademarks, including the goodwill of the business symbolized thereby,
and Hunter shall at any time, whether during or after the term of this
Agreement, execute any documents reasonably requested by Garden Botanika to
confirm its ownership rights. Hunter further agrees to use the
2
<PAGE> 3
Garden Botanika Trademarks only in conformance with the trademark guidelines and
standards furnished to Hunter by Garden Botanika.
(b) Quality of Products.
(1) All Garden Botanika Products manufactured by or for Hunter
shall be manufactured (i) strictly in accordance with the formulations and
manufacturing standards furnished to Hunter by Garden Botanika, and (ii)
utilizing only ingredients and packaging components which are approved by Garden
Botanika and obtained from suppliers approved by Garden Botanika.
(2) Hunter shall furnish to Garden Botanika, and shall cause its
manufacturers to furnish to Garden Botanika, "batch" samples of the each of the
formulated Garden Botanika Products for its testing and approval. Hunter also
agrees to perform microbiological testing on all batches of Garden Botanika
Products in a manner customary in the industry and as reasonably requested by
Garden Botanika and to periodically submit copies of its test documentation to
Garden Botanika. Garden Botanika shall receive advance notice of production
schedules and, upon three business days' notice, have the right to be present
and audit the manufacturing process.
(c) Similar Trademarks. During the term of this Agreement and for a
period of five (5) years thereafter, Hunter shall not use for any product
similar to any of the Garden Botanika Products any trademark, trade name,
symbol, trade dress, label or package bearing any resemblance to the Garden
Botanika Trademarks or any of the packaging or labels used by
Hunter on the Garden Botanika Products.
5. Royalties and Expenses.
(a) In consideration of the rights granted to Hunter by Garden Botanika,
Hunter shall pay to Garden Botanika a royalty of two percent (2%) of Hunter's
"gross sales" of all Garden Botanika Products. Hunter shall pay the royalty
within thirty (30) days after shipment of the Garden Botanika Products. For the
purposes of this Agreement, "gross sales" shall mean the total sales of the
Garden Botanika Products, less freight and returns, but without any deduction
for commissions or selling expenses; provided, further, that such gross sales
and royalty may be calculated in accordance with the attached Schedule C, as may
be amended from time to time. The parties recognize and agree that freight
charges may be deducted from total sales in amounts actually occurred or as a
reasonable percentage of total sales, in accordance with Hunter's standard
procedures and subject to Garden Botanika's right of audit in Section 6. Payment
of royalties for gross sales in any one month shall be on standard terms of net
30 days as of the end of the month in which such sales occurred.
(b) In further consideration of the rights granted to Hunter by Garden
Botanika, Hunter agrees in good faith not to shift fees and costs required by
the Westin to Garden Botanika and to cooperate with Garden Botanika in decisions
concerning their mutual benefit, including, if appropriate and with Hunter's
prior consent, the allocation and payment of
3
<PAGE> 4
reasonable expenses required to be paid by the Westin in connection with
Hunter's provision of Garden Botanika's amenities program.
(c) Payments not postmarked by the due date shall be accompanied by an
additional interest amount equal to 1-1/2% for each 30 days past due or portion
thereof.
6. Reports; Right of Audit.
(a) During the term of this Agreement, Hunter shall furnish Garden
Botanika with the following items at the times specified below:
(i) Hunter shall send Garden Botanika a statement with each
royalty check showing the gross invoice value of all Garden Botanika
Products shipped under this Agreement during the royalty period and the
calculation of the royalties to be paid for such period; and
(ii) Within ninety (90) days after the end of each calendar year,
Hunter shall send to Garden Botanika a statement certified by Hunter's
independent public accountants, verifying its gross sales of Garden
Botanika Products during such year, a reconciliation to the amount
actually paid and payment for any remaining balance due for year.
(b) Hunter shall permit Garden Botanika, at Garden Botanika's expense,
upon at least three (3) business days prior notice, to examine its relevant
books and records during its regular business hours for the purpose of verifying
the statements given by Hunter to Garden Botanika pursuant to this Section 6 and
Hunter's compliance with Section 5, including, if applicable, the reasonableness
of the percentage applied to total sales for deducting freight costs. If such
examination discloses that the gross sales reported by Hunter for any payment
period are understated by any amount, or if the percentage applied to total
sales for deducting freight costs results in an overstatement of freight costs
by more than five percent (5%), Hunter shall pay Garden Botanika the full amount
of the resulting underpayment of royalties, if any, plus the costs actually
incurred by Garden Botanika for the examination.
7. Confidentiality.
Each party acknowledges that during the term of this Agreement, it may
have access to or become acquainted with various trade secrets and confidential
proprietary information of the other, including, but not limited to, the
formulations, specifications, marketing plans and new product ideas relating to
the Garden Botanika Products which they furnish to each other or which are
discussed by either party. Neither party shall use the trade secrets or
proprietary information obtained from the other party for any purpose other than
for the sale of the Garden Botanika Products in accordance with this Agreement.
Neither party shall disclose any such trade secrets or proprietary information
to anyone except their respective employees, subcontractors or their successors
and assigns who in their judgment have a need to know the information in order
for each party to carry out this Agreement. Each of Hunter and Garden
4
<PAGE> 5
Botanika shall use its best efforts to prevent any further disclosure by its
employees or subcontractors, including obtaining confidentiality agreements from
them.
8. Term of Agreement.
Unless sooner terminated in accordance with the provisions of Section 9,
the term of this Agreement shall commence on the date first above written and
shall continue in full force and effect for the period from December 1, 1997 to
December 31, 2001 and, thereafter, may be terminated by Garden Botanika by
providing Hunter with ninety (90) days' written notice; provided, however, that
this Agreement shall terminate automatically in the event Hunter is no longer
retained by the Westin for the purchase of Garden Botanika Products.
9. Termination.
In addition to any other rights that Garden Botanika may have under this
Agreement, Garden Botanika may terminate this Agreement, as follows:
(a) without prior written notice or legal action by Garden Botanika:
(i) if Hunter makes any assignment of assets or business for the
benefit of creditors, or if a trustee or receiver is appointed to
administer or conduct its business or affairs, or if it enters into any
proceeding in bankruptcy, reorganization or arrangement, or if it enters
into any other proceeding under any law for the relief of creditors;
provided, however, that if any matter covered by this Section 9 (a) is
affected without being voluntarily initiated by Hunter, Hunter shall
have a period of sixty (60) days to cause such matter to be terminated,
and if the matter is terminated within the sixty (60) day period, no
termination of rights shall result under this section, or
(ii) if Hunter commits a material breach of Section 4(b)(1)
relating to quality control; provided that "material breach" is
understood to include (x) material deviations in the quality of products
or packaging and (y) deviations in a material amount of products, or
products with packaging, that do not meet quality standards that, in the
case of each of (x) and (y) are shipped for sale and are not recalled
and removed from distribution), as well as (z) repeated failures to meet
quality standards in accordance with subparagraph (c) below;
(b) if Hunter commits a breach of any of the terms or condition of this
Agreement, by giving Hunter at least ninety (90) days notice of termination and
an opportunity to cure (which notice shall set forth with specificity the
alleged breach) except in the case of subparagraphs 9 (i) through (ii) below, as
to which the notice and cure period shall not be applicable:
(i) Hunter fails to comply with the confidentiality provisions
contained in Section 7; or
5
<PAGE> 6
(ii) Hunter fails to comply with the provisions of Section 4 (a)
or (c) relating to Garden Botanika Trademarks; and
(c) subject to Paragraph (a) (ii) (z) above, if Hunter commits a breach
of Section 4(b)(1) relating to quality control, by giving Hunter at least
fourteen (14) days notice of termination and an opportunity to cure, so long as
it is understood that the meaning of "cure" is to include that any products, or
products with packaging, that do not meet quality standards are recalled and
removed from distribution and no such further products are shipped until such
cure is effectively made.
Upon termination or expiration of this Agreement, Hunter shall not be
entitled to termination payments, compensations, reimbursement or damages on
account of any loss of prospective profits on anticipated sales or on account of
expenditures, including for advertising, promotion or for manufacturing
facilities, investments, leases, or other commitments relating to the business
of Hunter, including without limitation, damages claimed by reason of Hunter'
reliance on further continuance of this Agreement. The termination of this
Agreement shall not discharge either party from its obligation to pay any sums
due to the other party hereunder.
10. Relationship of Parties.
The relationship between Garden Botanika and Hunter under this Agreement
is solely that of licensor and licensee. Hunter is not the agent of Garden
Botanika for any purpose and has no right to bind Garden Botanika nor shall
Hunter hold itself out as having any such authority.
11. Force Majeure.
Neither party shall be responsible for any failure or delay in the
performance of acts contemplated by this Agreement due to circumstances beyond
its control, including, without limitation, acts of God, fires, floods, wars,
labor disputes or embargoes.
12. Infringement.
(a) If any action is known to Hunter to be threatened or brought against
Garden Botanika and/or Hunter based, in whole or in part, on the terms and
provisions of this Agreement or the Garden Botanika Trademarks, Hunter shall
promptly notify Garden Botanika, and Garden Botanika shall respond to such
threat or defend such action in any manner and on any terms Garden Botanika
shall, in its sole discretion, deem appropriate. Garden Botanika shall bear all
attorneys' fees and costs of any response or action relating to the matters
described in Section 12 (a) and (b) hereof, and Hunter shall cooperate fully
with Garden Botanika in connection with any such response or action.
(b) In the event that any infringement of the Garden Botanika Trademarks
comes to the attention of Hunter, then Hunter shall promptly notify Garden
Botanika of such infringement. Garden Botanika shall be entitled in its sole
discretion to take whatever steps it
6
<PAGE> 7
deems necessary to stop such infringement and/or recover damages therefor.
Hunter will fully cooperate and assist Garden Botanika in any such prosecution
of such action. Any damages recovered in any such action shall be applied as
follows: first, to reimbursement of Garden Botanika for costs and expenses
incurred in connection therewith; and second, divided proportionately between
the parties in accordance with the relative damages suffered by each.
13. Indemnity.
(a) Hunter shall indemnify and hold Garden Botanika harmless from and
against any claim, suit, loss, liability, damage or expense, including
attorneys' fees and costs, that may be sustained or incurred by Garden Botanika
as a result of or in connection with the breach of any representation, warranty
or covenant made by Hunter in this Agreement.
(b) Garden Botanika assumes no liability to Hunter or any of its
sublicensees or other third parties with respect to claims of any nature arising
from defects in the Garden Botanika Products manufactured or sold by Hunter or
its sublicensees under the Garden Botanika Trademarks, with the exception of
products manufactured by Garden Botanika. Hunter shall indemnify and hold Garden
Botanika harmless from and against any claim, suit, loss, liability, damage or
expense, including reasonable attorneys' fees and costs, that may be sustained
or incurred through claims of third parties against Garden Botanika arising out
of, or in connection with Hunter, manufacture, distribution, sale or other
disposition of the Garden Botanika Products, except (i) any claim that the use
of the Garden Botanika Trademarks or the manufacture, use or sale of the Garden
Botanika Products infringes upon any patent, trademark, trade secret or other
proprietary right, or misappropriates any trade secret of any third party, or
(ii) insofar as any such claims may arise from (a) any products manufactured by
Garden Botanika, (b) any breach of this Agreement by Garden Botanika, (c) any
invalidity or defect in the title of Garden Botanika to the Garden Botanika
Trademarks or the packaging, formulations or specifications furnished to Hunter
by Garden Botanika hereunder, not caused by any act or default of Hunter, or (d)
the instructions given to Hunter by Garden Botanika, provided such instructions
have been properly carried out by Hunter.
14. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of Washington applicable to agreements made and to be
performed in Washington. In the event any dispute arising hereunder cannot be
resolved by mutual agreement, any legal action thereafter prosecuted or
initiated under this Agreement shall be brought in the Superior Court of King
County, State of Washington. The parties to this Agreement waive any other
choice of law, jurisdiction or venue rights which they might otherwise have.
(b) Notices. Any notice or other communications under this Agreement
shall be in writing and shall be considered given when mailed by registered
mail, return receipt requested, to the parties at the following addresses (or at
such other address as a party may specify by notice to the other):
7
<PAGE> 8
Garden Botanika
8624 154th Avenue N.E.
Redmond, Washington 98052
Hunter Packaging Ltd.
2380 South Service Road
Oakville, Ontario
Canada L6L 5M9
(c) Waiver. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
(d) Complete Agreement. This Agreement contains a complete statement of
all the arrangements between the parties and cannot be changed or terminated
orally.
(e) Headings. The headings in this Agreement are solely for convenience
of reference and shall not affect its interpretation.
GARDEN BOTANIKA, INC.
By: /s/ MICHAEL W. LUCE
------------------------------------
Its: President
HUNTER PACKAGING LTD.
By: /s/ JOHN D. HUNTER
-------------------------------------
Its: President
8
<PAGE> 1
EXHIBIT 10.30
LICENSE AND DISTRIBUTION AGREEMENT
THIS AGREEMENT, dated as of March 19, 1998, is between Garden Botanika,
Inc. ("Garden Botanika") and Hunter Packaging Ltd. ("Hunter").
Garden Botanika sells a high-quality retail product line under the
trademark "Garden Botanika." Garden Botanika owns or has rights (i) to certain
formulations and graphics for such products and (ii) to the Garden Botanika
Trademarks listed on Schedule A, as well as owning valuable goodwill associated
with, and which stems from, the Garden Botanika Trademarks. Garden Botanika and
Hunter desire to make certain arrangements under which Garden Botanika will
license Hunter the right to manufacture and sell certain of its products to the
Lodging Industry.
It is therefore agreed as follows:
1. Appointment of Hunter as Distributor.
Subject to the terms and conditions of this Agreement, including the
limitations and restrictions of Section 2 below, Garden Botanika hereby appoints
Hunter as the exclusive distributor of the Garden Botanika products listed on
Schedule B (the "Licensed Garden Botanika Products"), except as otherwise
provided herein, to hotels, motels, inns, resorts, spas, timeshares, cruise
lines, railway lines and airlines (the "Lodging Industry"), located or operating
in the Western Hemisphere. Schedule B may be amended from time to time with the
mutual consent of the parties. Subject to the restrictions of Section 2 below,
Garden Botanika further (i) appoints Hunter as its nonexclusive distributor of
Licensed Garden Botanika Products to the Lodging Industry located or operating
outside of the Western Hemisphere, and (ii) recognizes and acknowledges that
Hunter may make use of second-tier or intermediary distributors, such as Cysco
Corporation) in carrying out the terms of this Agreement.
2. Separate Westin Agreement; Limitations and Restrictions on
Hunter and Garden Botanika.
(a) The parties understand and agree that they are also parties to a
separate agreement dated as of October 20, 1997 (the "Westin Agreement") under
the terms of which Hunter has been given the right to solicit, distribute and
sell certain Garden Botanika products to the Westin Hotel Company or for use in
hotels, motels, inns or resorts controlled by the Westin Hotel Company
(collectively, the "Westin"). Hunter specifically acknowledges and agrees that
the distributorship granted by the terms of this Agreement is separate and apart
from any understanding, now or in the future, regarding the supply of amenities
to the Westin and that the exclusivity granted by this Agreement shall be
limited to the extent that Hunter or an alternative distributor may be employed
by Garden Botanika to supply the Westin with amenities bearing Garden Botanika
trademarks. Either this Agreement or the Westin
<PAGE> 2
Agreement may be enforced, amended, terminated or otherwise acted upon by the
parties in accordance with its terms without affecting the terms of the other
agreement.
(b) Hunter shall not sell or agree to sell Licensed Garden Botanika
Products for use outside of the Western Hemisphere without Garden Botanika's
prior written consent, which consent shall not be unreasonably withheld;
provided, however, that Garden Botanika shall retain the right, unless it
provides prior written consent waiving this right in whole or in part, to
terminate Hunter's distribution of Licensed Garden Botanika Products at any one
or more locations outside of the Western Hemisphere, for any reason, upon ninety
(90) days written notice. The parties understand and agree that nothing in this
Agreement shall preclude Garden Botanika from granting an exclusive license to a
party other than Hunter in one or more countries outside of the Western
Hemisphere, provided 90-days advance notice is given with respect to any country
in which Hunter is then doing business; and, provided further that Garden
Botanika has not waived its right to grant such a license in the particular
instance at issue.
(c) Hunter shall not ship Licensed Garden Botanika Products to any
second-tier or intermediate distributor unless that distributor first enters a
distribution agreement, the terms of which shall be substantially similar to
this Agreement (excluding, however, license rights) and which shall be approved
by Garden Botanika.
(d) During the term of this Agreement, Hunter shall not take any of the
following actions:
(i) sell any of the Licensed Garden Botanika Products under any
trademark other than the Garden Botanika Trademarks or use the same
formula for any other product;
(ii) use any of Garden Botanika's designs, packaging, labeling or
formulas in the manufacture or sale of any product other than in the
manufacture and sale of the Licensed Garden Botanika Products as
permitted herein;
(iii) sell any of the Licensed Garden Botanika Products to anyone
who is not in the Lodging Industry or for any purpose other than
distribution within such industry, unless such sale is approved in
advance in writing by Garden Botanika, in its sole discretion; or
(iv) use the name "Garden Botanika" in its company name, in the
name of a division or in any other name under which Hunter conducts its
business, or otherwise use any names, marks or symbols of Garden
Botanika, including but not limited to the Garden Botanika Trademarks
(or any names, marks or symbols which are similar thereto) which might
tend to confuse, deceive or mislead purchasers or prospective
purchasers. The words "names, marks or symbols" as used in this section
include, but are not limited to, corporate and private names,
trademarks, symbols, designations,
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<PAGE> 3
indicia, slogans and other means of identifying the products of Garden
Botanika or Hunter.
(e) During the term of this Agreement, except as provided by Section
2(a) above, Garden Botanika shall not appoint any other person or entity as a
distributor of products manufactured by Garden Botanika or bearing Garden
Botanika Trademarks to be sold for use as amenities by the Lodging Industry in
the Western Hemisphere.
3. Best Efforts of Hunter.
Hunter shall at all times during the term of this Agreement maintain an
adequate sales force and use its reasonable best efforts, in each case to
promote the distribution and sale of Licensed Garden Botanika Products to the
Lodging Industry.
4. Manufacture.
Garden Botanika hereby grants to Hunter the right to manufacture the
Licensed Garden Botanika Products or to have such products manufactured for
Hunter. Upon request, Garden Botanika shall promptly furnish Hunter with the
formulations and specifications of the Licensed Garden Botanika Products to be
manufactured and the specifications for the packaging required for such Licensed
Garden Botanika Products, except that Garden Botanika reserves the right to
withhold the formulations and specifications of any specific Licensed Garden
Botanika Product that it does not approve for manufacture and sale by Hunter in
accordance with this Agreement. Hunter shall supply Garden Botanika with samples
of the formulations of the Licensed Garden Botanika Products so produced,
including packaging and labels, in order that Garden Botanika may determine that
such products reasonably conform to its formulations and specifications. Hunter
or its manufacturer may produce such number of the approved Licensed Garden
Botanika Products as may be necessary or appropriate to effect the distribution
provided for in this Agreement. Hunter agrees that such formulations and
specifications are the sole property of Garden Botanika and agrees to maintain
said formulations and specifications in the strictest of confidence and to exert
its reasonable best efforts to safeguard said formulations and specifications
for the exclusive benefit of Garden Botanika.
5. Trademark, Etc.
(a) Grant of License. Garden Botanika hereby grants to Hunter the right,
during the term of this Agreement, to use the Garden Botanika Trademarks and the
packaging, formulations and specifications furnished to Hunter by Garden
Botanika in the manufacture, labeling and selling of the Licensed Garden
Botanika Products, solely in accordance with the provisions of this Agreement,
with the right to sublicense a manufacturer or manufacturers, (such sublicensee
to have the right only to manufacture Licensed Garden Botanika Products for sale
to Hunter). The Garden Botanika Trademarks may be used by Hunter only on or in
connection with the Licensed Garden Botanika Products. If requested by Garden
Botanika, signs, labels, packaging materials, advertisements, product coverings
and other written
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<PAGE> 4
materials bearing the Garden Botanika Trademarks shall display either the "R" or
the "TM" notice of trademark registration, depending on which notice of
trademark registration Garden Botanika instructs Hunter to display. The Garden
Botanika Trademarks shall be applied in compliance with all applicable laws and
regulations and as Garden Botanika may reasonably request. Hunter recognizes
that Garden Botanika has all rights, title and interest in and to the Garden
Botanika Trademarks, including the goodwill of the business symbolized thereby,
and Hunter shall at any time, whether during or after the term of this
Agreement, execute any documents reasonably requested by Garden Botanika to
confirm its ownership rights. Hunter further agrees to use the Garden Botanika
Trademarks only in conformance with the trademark guidelines and standards
furnished to Hunter by Garden Botanika.
(b) Quality of Products.
(i) All Licensed Garden Botanika Products manufactured by or for
Hunter shall be manufactured (x) strictly in accordance with the formulations
and manufacturing standards furnished to Hunter by Garden Botanika, and (y)
utilizing only ingredients and packaging components which are approved by Garden
Botanika and obtained from suppliers approved by Garden Botanika.
(ii) Hunter shall furnish to Garden Botanika, and shall cause its
manufacturers to furnish to Garden Botanika, "batch" samples of the each of the
formulated Garden Botanika Products for its testing and approval. Hunter also
agrees to perform microbiological testing on all batches of Garden Botanika
Products in a manner customary in the industry and as reasonably requested by
Garden Botanika and to periodically submit copies of its test documentation to
Garden Botanika. Garden Botanika shall receive advance notice of production
schedules and, upon three business days' notice, have the right to be present
and audit the manufacturing process.
(c) Similar Trademarks. During the term of this Agreement and for a
period of five (5) years thereafter, Hunter shall not use for any product
similar to any of the Garden Botanika Products (i) any trademark, trade name,
symbol, trade dress, label or package bearing any resemblance to the Garden
Botanika Trademarks, or (ii) any of the packaging or labels used
by Hunter on the Licensed Garden Botanika Products.
6. Royalties and Expenses.
(a) In General. In consideration of the rights granted to Hunter by
Garden Botanika, subject to Section 6(b) below, Hunter shall pay to Garden
Botanika a royalty of five percent (5.0%) of Hunter's "gross sales" of all
Licensed Garden Botanika Products; provided, however, that the parties recognize
and acknowledge that, for competitive reasons, specific accounts may require a
different royalty structure, and the parties, by mutual written consent, may
modify royalty obligations with respect to such specific accounts. For the
purposes of this Agreement, "gross sales" shall mean the total sales, income or
revenue received in connection with Garden Botanika Products sold or licensed by
Hunter or any licensee, whether for cash or credit without reserve for failure
to collect and without any deduction for commissions or
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<PAGE> 5
selling expenses, adjusted by the exclusion or deduction of (i) freight, if and
only if Hunter's prices are not F.O.B. Hunter's manufacturing site, and, (ii)
refunds to or returns from customers, if originally included in gross sales;
provided, further, that such gross sales and royalty may be calculated in
accordance with the attached Schedule C, if any, as may be amended from time to
time. The parties recognize and agree that freight charges may be deducted from
total sales in amounts actually incurred or as a reasonable percentage of total
sales, in accordance with Hunter's standard procedures and subject to Garden
Botanika's right of audit in Section 7. Payment of royalties for gross sales in
any one month shall be on standard terms of net 30 days as of the end of the
month in which such sales occurred.
(b) Minimum Royalties. In the event sales do not generate sufficient
royalties in accordance with Section 6(a) above to produce the following minimum
royalty amounts, Hunter agrees to pay the following minimum royalties,
regardless of sales, for the periods indicated below:
<TABLE>
<CAPTION>
CONTRACT YEARS MINIMUM ROYALTIES
<S> <C>
Year 1 U.S. $175,000
Year 2 U.S. $200,000
Year 3 U.S. $225,000
Year 4 U.S. $250,000
</TABLE>
The commencement of the first contract year for which minimum royalties
are to be paid shall begin six months from the date of this Agreement, and each
subsequent contract year shall run sequentially thereafter so that the minimum
royalty of the fourth contract year shall be paid 54 months from the date of
this Agreement. Payment of the minimum royalties owed shall be made no later
than 45 days after the last day of the applicable period.
(c) Late Payments. Payments not postmarked by the due date shall be
accompanied by an additional interest amount equal to 1-1/2% for each 30 days
past due or portion thereof.
7. Reports; Right of Audit.
(a) During the term of this Agreement, Hunter shall furnish Garden
Botanika with the following items at the times specified below:
(i) Hunter shall send Garden Botanika a statement with each
royalty check showing the gross invoice value of all Licensed Garden
Botanika Products shipped under this Agreement during the royalty
period, the calculation of the royalties to be paid for such period and
an itemization of freight costs, if any, deducted from sales when
pricing is other than F.O.B. Hunter's manufacturing site; and
(ii) Within ninety (90) days after the end of each calendar year,
Hunter shall send to Garden Botanika a statement certified by Hunter's
independent auditors,
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<PAGE> 6
verifying its gross sales of Licensed Garden Botanika Products during
such year, a recalculation of the royalties to be paid to Garden
Botanika for such year, a reconciliation to the amounts actually paid
and payment for any remaining balance due for the year.
(b) Hunter shall permit Garden Botanika, at Garden Botanika's expense,
upon at least three (3) business days prior notice, to examine its relevant
books and records during its regular business hours for the purpose of verifying
the statements given by Hunter to Garden Botanika pursuant to this Section 7 and
Hunter's compliance with Section 6, including, if applicable, the reasonableness
of the percentage applied to total sales for deducting freight costs. If such
examination discloses that the gross sales reported by Hunter for any payment
period are understated by any amount, or if the percentage applied to total
sales for deducting freight costs results in an overstatement of freight costs
by more than five percent (5%), Hunter shall pay Garden Botanika the full amount
of the resulting underpayment of royalties, if any, plus the costs actually
incurred by Garden Botanika for the examination.
8. Marketing.
(a) In General. In order to promote the maximum distribution of the
Licensed Garden Botanika Products to the Lodging Industry, Garden Botanika and
Hunter shall reasonably cooperate with each other on the marketing,
merchandising and sales techniques and in the use of promotional materials for
the sale of the Licensed Garden Botanika Products. Hunter may use advertising,
or other marketing and promotional material, for distribution in connection with
the Licensed Garden Botanika Products that it reasonably believes is consistent
with the upscale image of the Licensed Garden Botanika Products, unless Garden
Botanika disapproves of same, in its sole discretion, upon written notice to
Hunter.
(b) Approval of Advertising and Packaging Requirements. Hunter agrees to
submit proposed advertising and packaging to Garden Botanika reasonably in
advance of its submission for use for the prior written approval of Garden
Botanika, which approval shall not be withheld unreasonably and which approval
or disapproval shall be communicated to Hunter by Garden Botanika within five
business days of receipt. If Hunter has not been contacted within such five
business days, then the particular submission will be considered approved. It is
understood and agreed that Hunter may, at its option, include its telephone
number on Licensed Garden Botanika Products, in which case Hunter shall promptly
refer any and all inquiries about Garden Botanika Licensed Products directly to
Garden Botanika, so long as Hunter's telephone number does not appear directly
on a consumer product.
9 . Inquiries.
Garden Botanika shall promptly turn over to Hunter all inquiries to
Garden Botanika from the Lodging Industry with respect to any of the Licensed
Garden Botanika Products. Hunter shall promptly and diligently respond to all
such inquiries.
10. Restriction.
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<PAGE> 7
Except in connection with amenities programs involving the Westin, Garden
Botanika shall not sell any Garden Botanika Products or products bearing Garden
Botanika Trademarks to any distributor, wholesaler or other intermediary that
Garden Botanika has reason to believe will resell such products to the Lodging
Industry (as defined herein) in the Western Hemisphere.
11. Confidentiality.
Each party acknowledges that during the term of this Agreement,
it may have access to or become acquainted with various trade secrets and
confidential proprietary information of the other, including, but not limited
to, the formulations, specifications, marketing plans and new product ideas
relating to the Licensed Garden Botanika Products which they furnish to each
other or which are discussed by either party. Neither party shall use the trade
secrets or proprietary information obtained from the other party for any purpose
other than for the sale of Garden Botanika products in accordance with this
Agreement or the Westin Agreement. Neither party shall disclose any such trade
secrets or proprietary information to anyone except their respective employees,
subcontractors or their successors and assigns who in their judgment have a need
to know the information in order for each party to carry out this Agreement or
the Westin Agreement. Each of Hunter and Garden Botanika shall use its best
efforts to prevent any further disclosure by its employees or subcontractors,
including obtaining confidentiality agreements from them.
12. Term of Agreement.
Unless sooner terminated in accordance with the provisions of Section
13, the term of this Agreement shall commence on the date first above written
and shall continue in full force and effect for a period of 54 months.
13. Termination by Garden Botanika.
In addition to any other rights that Garden Botanika may have under this
Agreement, Garden Botanika may terminate this Agreement for cause, as follows:
(a) without prior written notice or legal action by Garden Botanika:
(i) if Hunter makes any assignment of assets or business for the
benefit of creditors, or if a trustee or receiver is appointed to
administer or conduct its business or affairs, or if it enters into any
proceeding in bankruptcy or reorganization (other than an offering of
its stock for sale to the public), or if it enters into any other
proceeding under any law for the relief of creditors; provided, however,
that if any matter covered by this Section 13(a)(i) is affected without
being voluntarily initiated by Hunter, Hunter shall have a period of
sixty (60) days to cause such matter to be terminated, and if the matter
is terminated within the sixty (60) day period, no termination of rights
shall result under this section;
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<PAGE> 8
(ii) if Hunter commits a material breach of Section 5(b)(i)
relating to quality control; provided that "material breach" is
understood to mean (x) material deviations in the quality of products or
packaging and (y) deviations in a material amount of products, or
products with packaging, that do not meet quality standards that, in the
case of each of (x) and (y) are shipped for sale and are not recalled
and removed from distribution, as well as (z) repeated failures in any
one year to meet quality standards under the terms of subparagraph (b)
below;
(iii) if Hunter commits a material breach of the confidentiality
provisions contained in Section 11; or
(iv) if Hunter fails to pay minimum royalties when due as
provided by Section 6;
(b) subject to subparagraph (a) (ii) (z) above, if Hunter commits a
breach of Section 5(b)(i) relating to quality control that is not otherwise a
"material breach" as defined under Section 13(a)(ii) above, by giving Hunter at
least fourteen (14) days notice of termination and an opportunity to cure,
provided that products not meeting quality standards are promptly recalled and
removed from distribution; or
(c) if Hunter commits a breach of any of the other terms or conditions
of this Agreement, by giving Hunter at least ninety (90) days notice of
termination and an opportunity to cure (which notice shall set forth with
specificity the alleged breach).
14. Termination by Hunter.
In addition to any other rights that Hunter may have under this
Agreement, Hunter may terminate this Agreement, without prior written notice or
legal action by Hunter, if Garden Botanika makes any assignment of assets or
business for the benefit of creditors, or if a trustee or receiver is appointed
to administer or conduct its business or affairs, or if it enters into any
proceeding in bankruptcy or reorganization (other than an offering of its stock
for sale to the public), or if it enters into any other proceeding under any law
for the relief of creditors, or if it ceases to do business using the name
"Garden Botanika" for any reason; provided, however, that if any matter covered
by this Section 14 is affected without being voluntarily initiated by Garden
Botanika, Garden Botanika shall have a period of sixty (60) days to cause such
matter to be terminated, and if the matter is terminated within the sixty (60)
day period, no termination of rights shall result under this section.
15. Effect of Termination.
Upon termination or expiration of this Agreement, Hunter:
(a) shall have three (3) months from the date of termination to sell out
its then-existing inventory of products bearing the Garden Botanika Trademarks
and shall account for,
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<PAGE> 9
and pay royalties on, all such sales not later than thirty (30) days after the
close of the three (3) month period; provided, however, that Licensed Garden
Botanika Products that fail to meet the quality standards of Section 5(b)(i)
shall be destroyed and not sold;
(b) shall not be entitled to termination payments, compensations,
reimbursement or damages on account of any loss of prospective profits on
anticipated sales or on account of expenditures, including for advertising,
promotion or for manufacturing facilities, investments, leases, or other
commitments relating to the business of Hunter, including without limitation,
damages claimed by reason of Hunter's reliance on further continuance of this
Agreement. The termination of this Agreement shall not discharge either party
from its obligation to pay any sums due to the other party hereunder, including,
but not limited to, any amounts awarded by judicial determination or binding
arbitration for wrongful termination; and
(c) shall, in the event of early termination for cause by Garden
Botanika pursuant to Section 13, owe Garden Botanika the minimum royalties
payable over the balance of the unexpired term of the Agreement, in addition to
any accrued but unpaid royalties.
16. Relationship of Parties.
The relationship between Garden Botanika and Hunter under this Agreement
is solely that of licensor and licensee. Hunter is not the agent of Garden
Botanika for any purpose and has no right to bind Garden Botanika nor shall
Hunter hold itself out as having any such authority, and Garden Botanika is not
the agent of Hunter for any purpose and has no right to bind Hunter nor shall
Garden Botanika hold itself out as having any such authority.
17. Force Majeure.
Neither party shall be responsible for any failure or delay in the
performance of acts contemplated by this Agreement due to circumstances beyond
its control, including, without limitation, acts of God, fires, floods, wars,
labor disputes or embargoes.
18. Infringement.
(a) If any action is known to Hunter to be threatened or brought against
Garden Botanika and/or Hunter based, in whole or in part, on the terms and
provisions of this Agreement or the Garden Botanika Trademarks, Hunter shall
promptly notify Garden Botanika, and Garden Botanika shall respond to such
threat or defend such action in any manner and on any terms Garden Botanika
shall, in its sole discretion, deem appropriate. Garden Botanika shall bear all
attorneys' fees and costs of any response or action relating to the matters
described in Section 18 (a) and (b) hereof, and Hunter shall cooperate fully
with Garden Botanika in connection with any such response or action.
(b) In the event that any infringement of the Garden Botanika Trademarks
comes to the attention of Hunter, then Hunter shall promptly notify Garden
Botanika of such infringement. Garden Botanika shall be entitled in its sole
discretion to take whatever steps it
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<PAGE> 10
deems necessary to stop such infringement and/or recover damages therefor.
Hunter will fully cooperate and assist Garden Botanika in any such prosecution
of such action. Any damages recovered in any such action shall be applied as
follows: first, to reimbursement of Garden Botanika for costs and expenses
incurred in connection therewith; and second, divided proportionately between
the parties in accordance with the relative damages suffered by each.
(c) In the event Garden Botanika becomes aware of any infringement of
the Garden Botanika Trademarks and fails to take action or commence proceedings
within sixty (60) days of having received written notice thereof from Hunter,
then Hunter, at its expense, shall have the right to initiate and pursue such
action. Any damages recovered in any such action shall be applied as follows:
first, to reimbursement of Hunter for costs and expenses incurred in connection
therewith; and second, divided proportionately between the parties in accordance
with the relative damages suffered by each.
19. Indemnity.
(a) Hunter shall indemnify and hold Garden Botanika harmless from and
against any claim, suit, loss, liability, damage or expense, including
attorneys' fees and costs, that may be sustained or incurred by Garden Botanika
as a result of or in connection with the breach of any representation, warranty
or covenant made by Hunter in this Agreement (except to the extent caused by the
negligent or willful misconduct or actions of Garden Botanika).
(b) Garden Botanika assumes no liability to Hunter or any of its
sublicensees or other third parties with respect to claims of any nature arising
from defects in the Licensed Garden Botanika Products manufactured or sold by
Hunter or its sublicensees under the Garden Botanika Trademarks, with the
exception of products manufactured by Garden Botanika. Hunter shall indemnify
and hold Garden Botanika harmless from and against any claim, suit, loss,
liability, damage or expense, including reasonable attorneys' fees and costs,
that may be sustained or incurred through claims of third parties against Garden
Botanika arising out of, or in connection with Hunter's manufacture,
distribution, sale or other disposition of the Licensed Garden Botanika
Products, except (i) any claim that the use of the Garden Botanika Trademarks or
the manufacture, use or sale of the Licensed Garden Botanika Products infringes
upon any patent, trademark, trade secret or other proprietary right, or
misappropriates any trade secret of any third party, or (ii) insofar as any such
claims may arise from (a) any products manufactured by Garden Botanika, (b) any
breach of this Agreement by Garden Botanika, (c) any invalidity or defect in the
title of Garden Botanika to the Garden Botanika Trademarks or the packaging,
formulations or specifications furnished to Hunter by Garden Botanika hereunder,
not caused by any act or default of Hunter, or (d) the instructions given to
Hunter by Garden Botanika, provided such instructions have been properly carried
out by Hunter.
20. Miscellaneous.
(a) Power and Authority. Each of the parties hereto represent and
warrant that it has the requisite power and authority to execute, enter and
perform this Agreement in accordance with its terms.
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(b) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of Washington applicable to agreements made and to be
performed in Washington. In the event any dispute arising hereunder cannot be
resolved by mutual agreement, any legal action thereafter prosecuted or
initiated under this Agreement shall be brought in the Superior Court of King
County, State of Washington. The parties to this Agreement waive any other
choice of law, jurisdiction or venue rights which they might otherwise have.
(c) Fees and Expenses. In the event of any dispute or litigation
pursuant to this Agreement, the prevailing party in such action shall be
entitled to its fees, costs and expenses, including reasonable attorneys' fees
and court costs. Except as otherwise provided under the terms of this Agreement,
each party shall bear its own legal and accounting expenses in connection with
the transactions contemplated hereby.
(d) Notices. Any notice or other communications under this Agreement
shall be in writing and shall be considered given when mailed by registered
mail, return receipt requested, to the parties at the following addresses (or at
such other address as a party may specify by notice to the other):
Garden Botanika
8624 154th Avenue N.E.
Redmond, Washington 98052
U.S.A.
Hunter Packaging Ltd.
2380 South Service Road
Oakville, Ontario
Canada L6L 5M9
(e) Waiver. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
(f) Enurement. This Agreement shall enure for the benefit of and be
binding upon the parties hereto and their successors and permitted assigns,
provided that neither party may assign this Agreement without the consent of the
other except when such assignment is by operation of law pursuant to a merger or
amalgamation with an affiliate.
(g) Complete Agreement. This Agreement contains a complete statement of
all the arrangements between the parties and cannot be changed or terminated
orally.
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(h) Headings. The headings in this Agreement are solely for convenience
of reference and shall not affect its interpretation.
GARDEN BOTANIKA, INC.
By: /s/ Michael W. Luce
-------------------------------------
Its: President
-------------------------------
HUNTER PACKAGING LTD.
By: /s/ John D. Hunter
-------------------------------------
Its: President
---------------------------------
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<PAGE> 1
EXHIBIT 10.31
[ FOOTHILL CAPITAL CORPORATION - LOGO ]
[ 11111 Santa Monica Boulevard - Suite 1500 ]
[ Los Angeles, California 90025-3333 ]
[ A NORWEST Company ]
April 2, 1998
Mr. George Newman
Acting Chief Financial Officer
Garden Botanika, Inc.
8624 154th Avenue NE
Redmund, Washington 98052
Dear Mr. Newman:
In accordance with our recent discussions, Foothill Capital Corporation
("Lender") is pleased to issue this financing commitment to Garden Botanika,
Inc. ("Borrower"). Subject to the satisfactory completion of each of the
conditions contained herein, the financing would be as follows:
1. Maximum Amount: $10,000,000.
a. Revolving Line of Credit ("the line"): Lender would make revolving
advances to Borrower up to an amount equal to the result of: (i) the
lesser of (x) the Maximum Amount, (y) 55%, from January 1 through
September 30, or 65% from October 1 through December 31 (however, the
advance rate shall reduce by 2.5% percentage points per week beginning
the first week of December until the advance rate reaches 55%) of the
lower of cost or market value of finished goods inventory, net of
customary reserves as determined by Lender in accordance with its
standard credit policies; and (z) 85% of the net liquidation value of
retail inventory as determined by Great American/Hilco Appraisal &
Valuation Services.
2. Interest Rate:
The rate of interest charged on the loans would be at Borrower's option:
(i) one-half of one percent (0.50%) above the present and future Prime
Rate, or (ii) three percentage points (3.00%) above the London Interbank
Offered Rate ("LIBOR"). The Prime Rate shall be defined as the present
and future Prime Rate publicly announced as being charged from time to
time by Norwest Bank Minnesota, N.A. Interest would be calculated on the
basis of a three hundred sixty (360) day year and actual days elapsed
<PAGE> 2
and would be payable monthly in arrears. At no time would the interest
charged be less than seven percent (7.00%). A Default Rate would be
determined prior to Closing.
The Eurodollar rate shall be the rate at which Norwest is offered
deposits of U.S. dollars in the London interbank market ("LIBOR")
adjusted by the reserve percentage prescribed by governmental
authorities as determined by Lender. Lender's obligation to provide
Eurodollar rate loans shall be subject to, but not limited to (i) up to
five (5) Eurodollar loans shall be available at any time: (ii) in the
event of a default under the Line, all Eurodollar loans shall be
suspended; (iii) all Eurodollar loans shall be available in interest
periods of thirty (30) days, sixty (60) days or ninety (90) days, as
selected by Borrower; (iv) the minimum amount of each Eurodollar loan
shall be in an amount not less than $1,000,000 and in integral multiples
of $500,000 in excess thereof; and (v) Borrower shall be responsible for
any Eurodollar contract breakage fees or other associated costs, as
determined by Lender.
3. Collections:
Collections would be remitted to one or more concentration accounts that
would be assigned to and in form satisfactory to Lender. However, the
dominion of cash collections shall be retained by Borrower until the
occurrence of any of the following: a) an event of default under the
loan agreement, b) excess availability (i.e., formula availability as
determined in paragraph 1a) less outstanding loan balance is less than
$2,500.000 or, c) the outstanding loan balance exceeds $5,000,000.
Irrespective of the cash dominion, all collections would be subject to a
one business day clearance charge.
4. Fees and Expenses:
a. Commitment Fee: In consideration of Lender's issuance of this
commitment letter, Borrower shall pay to Lender a fee (the
"Commitment Fee") in an amount of $25,000. The Commitment Fee
shall be due and payable by wire transfer concurrently with
Borrower's acceptance of this commitment letter. The Commitment
fee shall be fully earned and non-refundable when this commitment
letter is accepted by Borrower.
b. Closing Fee: A fee equal to one-half of one percent (0.5%) of the
Maximum Amount would be fully earned at loan closing and payable
one-quarter of one percent (0.25%) on the first anniversary of
closing and one-quarter of one percent (0.25%) on the second
anniversary of closing.
c. Foothill Expenses: Borrower would agree to reimburse Lender for
all of Lender's out-of-pocket costs and expenses relating to this
financing transaction, including, but not limited to, search
fees, title search and insurance fees, filing and recording fees,
attorneys fees and expenses, and examination and appraisal fees
(collectively, "Foothill Expenses").
5. Loan Maturity and Prepayment:
<PAGE> 3
The Line would mature three years from the initial loan closing
("Maturity"). Termination of the loan prior to maturity would result in
a prepayment fee equal to three percent (3.0%) of the Maximum Amount if
occurring within one year of the closing date, two percent (2.0%) if
occurring within the second year of the closing date and one percent
(1.0%) if occurring thereafter. In the event that early termination is
the direct result of an acquisition or change of control of Borrower, a
prepayment fee would be 50% of such fee as determined above.
6. Purpose:
The purpose of this financing would be to provide for the general
corporate needs of Borrower.
7. Financial Examination and Appraisal Fees:
Borrower would be obligated to pay to Lender a fee of $650 per day per
examiner for financial examinations and out-of-pocket costs of inventory
appraisals for each such examination and appraisal performed by Lender
or its agents.
8. Collateral:
As collateral for all of Borrower's present and future obligations to
Lender, including those arising under the Line, Lender would be granted
first priority perfected liens or security interests in and to
Borrower's now owned or hereafter acquired accounts, chattel paper,
contract rights, documents, equipment, fixtures, general intangibles
(including, without limitation, all causes of action, copyrights,
deposit accounts, licensing agreements, patents, trademarks, and trade
names), instruments, inventory, investment property, leases, real
property, securities (including the stock of subsidiaries), and the
proceeds of all of the foregoing, wherever located. The foregoing is
collectively referred to as the "Collateral."
9. Financial Covenants:
A tangible net worth covenant would be established to allow for a
reduction to tangible net worth of $6,000,000 as measured from 1/31/98
to 1/31/99. Lender would also measure tangible net worth on a quarterly
basis during fiscal 1998 and for periods beyond 1/31/99 which would be
based upon a discount to projected operating performance. Maximum
capital expenditure and new store opening limits would also be
established based upon Borrower's business plan.
10. Conditions Precedent:
The following would be conditions precedent to Lender's obligation to
extent credit to Borrower:
<PAGE> 4
a. Borrower, including each of the entities composing Borrower, would
need to be a corporation in good standing in the jurisdiction of its
incorporation and qualified to do business in any other jurisdiction
where such qualification is necessary or appropriate to its business;
b. The Line would need to be made pursuant to, and subject to, the terms
of loan agreements, and other financing documents (the "Loan Documents")
executed and delivered by Borrower on or prior to the Closing Date. The
Loan Documents would contain various representations, warranties, and
covenants (affirmative and negative) as are customary, in Lender's
experience, for a transaction of this type.
c. Borrower would need to have executed and/or delivered, or caused to
be delivered, to Lender prior to the Closing Date, such security
agreements, financing statements, fixture filings, deeds of trust,
mortgages, and chattel mortgages, title insurance policies and
endorsements, depositary account agreements, copies of leases, landlord
waiver, bailee agreements, and other agreements affecting the
Collateral, insurance certificates and endorsements, and other
documentation relative to the liens and security interest in the
Collateral as Lender reasonably may request (the "Security Documents").
Each of the Loan Documents and the Security Documents (the "Documents")
would be governed by the law of the State of California and would need
to be in form and substance reasonably satisfactory to Lender and its
counsel;
d. The financing statements, fixture filings, and other Documents
related to perfection of Lender's interests in the Collateral would need
to have been filed or recorded in all appropriate jurisdictions and,
with respect to financing statements, Lender would need to have received
searches reflecting its filings of record;
e. There would need to have not occurred any material adverse change in
Borrower's financial condition or any material adverse change in the
value of the Collateral;
f. Lender would need to have received such opinions of Borrower's
counsel and such advice of Lender's local counsel as Lender would
reasonably require, which opinions and/or advice would need to be
satisfactory to Lender and its counsel as to both form and substance.
Such opinions of Borrower's counsel would include, but not be limited
to, opinions as to Borrower's corporate existence. Borrower's power and
authority to enter into the Documents, the validity, binding effect, and
enforceability of each of the Documents, and the perfection of Lender's
liens and security interests in the Collateral;
g. Payment of all accrued and unpaid Foothill Expenses;
11. Brokers' Fees:
Any brokerage commission or finder's fees payable in connection with the
financing arrangement outlined herein will be payable by Borrower and
not by Lender. Borrower represents and warrants to Lender that it has
not incurred any obligation for a brokerage commission or a finder's fee
in connection with Borrower's transactions with Lender.
<PAGE> 5
Borrower agrees to indemnify, defend, and hold Lender harmless from and
against any claim of any broker or finder arising out of the financing
arrangement outlined herein.
12. Closing Date:
If the financing arrangement contemplated by this letter is not
consummated on or before May 6, 1998, then, without any requirement of
notice or other formality, no party hereto would have any obligation to
pursue the financing arrangement outlined in this letter. The date on
which the Documents are executed and all conditions precedent have been
met would be deemed the "Closing Date."
13. Complete Agreement; No Oral Modifications.
This commitment letter embodies the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all
prior proposals, negotiations, or agreements whether written or oral,
relating to the subject matter hereof including any letter of intent.
This letter may not be modified, amended, supplemented, or otherwise
changed, except by a document in writing signed by the parties hereto.
14. Governing Law; Jury Waiver.
This letter shall be deemed to have been made in the state of California
and the validity of this letter, and the construction, interpretation,
and enforcement hereof, and the rights of the parties hereto relating to
claims or causes of action arising in connection herewith shall be
determined under, governed by, and construed in accordance with the laws
of the state of California. Borrower and Lender hereby expressly waive
any right to trial by jury of any claim, demand, action, cause of
action, or proceeding arising under or respect to this letter, or in any
way related or incidental to the dealings of the parties hereto with
respect to this letter, or the transactions contemplated hereby, in each
case whether or now or hereafter arising, irrespective of whether
sounding in contract, tort, or otherwise. Borrower and Lender hereby
agree that any such claim, demand, action, cause of action, or
proceeding shall be decided by a court trial without a jury and that any
party hereto may file an original counterpart or a copy of this section
with any court as written evidence of the consent of the other party
hereto to waive its right to trial by jury.
15. Expense Deposit:
In connection with the requesting financing, Borrower understands that
it will be necessary for Lender to make certain financial, legal, and
collateral investigations and determinations. Borrower and Lender
acknowledge that Borrower previously has paid to Lender the sum of
$25,000 (the "Expense Deposit") as a deposit against the Foothill
Expenses that may be incurred by Lender. Lender will require an
additional $20,000 Expense Deposit. This Expense Deposit will be held by
Lender while making such investigations and determinations and will be
applied to Foothill Expenses as and when they are incurred. If Lender
concludes for any reason, that it will not make the financing outlined
herein available to Borrower, it will return the unused balance of the
Expense
<PAGE> 6
Deposit. As an illustration, the amount to be deducted from the Expense
Deposit may include costs and expenses incurred by auditors and
appraisers and in verifying Borrower's records, Lender's legal expenses
in connection with advice concerning the subject financing or with the
preparation of the Documents, and any filing and search fees. If, on the
other hand, Lender continues to be prepared to extend the credit
described herein to Borrower and Borrower declines for any reason, to
accept such financial accommodations from Lender, Lender shall be
entitled to retain the full amount of the Expense Deposit, irrespective
of the amount of the Foothill Expenses incurred. Lender's retention of
the balance of the Expense Deposit results from its reasonable endeavor
to estimate the added administrative costs incurred and the amount of
damage sustained by Lender as a result of Borrower's decision to decline
to accept the financing. If the financing is funded, the Expense Deposit
will be returned to Borrower after deducting all Foothill Expenses
actually incurred by Lender. Lender shall not be obligated to segregate
the Expense Deposit from its other funds and Borrower is not entitled to
receive interest on any portion of the Expense Deposit. Borrower hereby
agrees to pay to Lender the full amount of the Foothill Expenses
incurred in connection with the transaction contemplated hereby,
irrespective of the amount of the Expense Deposit and whether the
subject transaction actually is consummated. From time to time, Lender
shall be entitled to request, and Borrower shall be obligated to provide
supplements to the Expense Deposit to the extent that actual or
projected Foothill Expenses exceed the Expense Deposit.
16. Indemnification:
Borrower shall pay, indemnify, defend, and hold Lender, and each of its
officers, directors, employees, counsel, agents, and attorneys-in-fact
(each, an "Indemnified Person") harmless (to the fullest extent
permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all attorneys
fees and disbursements and other costs and expenses incurred in
connection therewith (as and when they are incurred and irrespective of
whether suit is brought), at any time asserted against, imposed upon, or
incurred by any of them in connection with or as a result of or related
to the execution, delivery, enforcement, or performance, of this
commitment letter or the transactions contemplated herein, and with
respect to any investigation, litigation, or proceeding related to this
commitment letter, (irrespective of whether any Indemnified Person is a
party thereto), or any act, omission, event or circumstance in any
manner related thereto. This provision shall survive the termination of
this letter.
We are very enthusiastic about the opportunity to finance the operations
of Garden Botanika, Inc. and believe that we can proceed very quickly to the
signing of the Documents and subsequent closing of the financing. If you wish to
proceed on the basis outlined above, please execute this letter in the space
provided below and return it to the undersigned no later than 12:00 p.m.,
California time, on or before April 7, 1998, which acceptance must be
accompanied by the payment of the Commitment Fee and the supplemental Expense
Deposit of $20,000. If you fail to do so by such date and time, this letter
shall expire automatically.
Very truly yours,
<PAGE> 7
FOOTHILL CAPITAL CORPORATION
/s/ SCOTT GLASSBERG
------------------------------------
Vice President
The foregoing terms and conditions are hereby accepted and agreed to as of April
7,1998, as amended as of April 27, 1998.
GARDEN BOTANIKA, INC.,
/s/ GEORGE W. NEWMAN
------------------------------------
Vice President & Controller
cc: David C. Hilton - Senior Executive Vice President / Foothill Capital
John F. Nickoll - Chairman / Foothill Capital
<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
------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
PRIMARY:
Earnings -
Net earnings (loss) applicable to common and common equivalent shares $(15,580) $(4,933) $(1,664)
======== ======= =======
Shares -
Weighted average common shares outstanding 7,069 6,146 265
Weighted average preferred shares outstanding (1) -- -- 3,491
Net effect of stock options, based on treasury stock method using average
market price (2) -- -- --
-------- ------- -------
Weighted average common and common equivalent shares 7,069 6,146 3,756
======== ======= =======
Primary earnings (loss) per common and common equivalent share $ (2.20) $ (0.80) $ (0.44)
======== ======= =======
</TABLE>
FULLY DILUTED:
Fully diluted earnings (loss) per share is not presented, as there were
no potentially dilutive securities.
NOTES:
(1) In connection with its initial public offering of common stock completed
on May 22, 1996, all of the Company's outstanding preferred stock
automatically converted to common on a one-for-one basis. Therefore,
losses per common and common equivalent share are based on the weighted
average number of common and preferred shares outstanding.
(2) In the calculation of weighted average common and common equivalent
shares, nonqualified stock options and warrants to purchase common stock
are considered common stock equivalents. Such options and warrants are
converted using the treasury stock method, which assumes that the shares
issuable upon exercise of the options or warrants were outstanding for
the full period. In accordance with generally accepted accounting
principles, no common stock equivalents are shown as their effect would
have been anti-dilutive for each period presented.
12
<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
Date of Filing: May 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AS OF JANUARY 31,1998 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 JANUARY 31, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 8,594
<SECURITIES> 0
<RECEIVABLES> 550
<ALLOWANCES> 0
<INVENTORY> 23,747
<CURRENT-ASSETS> 35,564
<PP&E> 69,711
<DEPRECIATION> (17,456)
<TOTAL-ASSETS> 87,837
<CURRENT-LIABILITIES> 15,874
<BONDS> 0
0
0
<COMMON> 98,573
<OTHER-SE> (29,637)
<TOTAL-LIABILITY-AND-EQUITY> 87,837
<SALES> 114,591
<TOTAL-REVENUES> 114,591
<CGS> 73,846
<TOTAL-COSTS> 50,443
<OTHER-EXPENSES> 397
<LOSS-PROVISION> 5,800
<INTEREST-EXPENSE> (315)
<INCOME-PRETAX> (15,895)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,895)
<EPS-PRIMARY> (2.20)
<EPS-DILUTED> (2.20)
</TABLE>
