10-Q 1 v65534e10-q.txt FORM 10-Q FOR PERIOD ENDED JULY 29, 2000. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER 0-27920 Garden Botanika, Inc. --------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Washington 91-1464962 ---------- ---------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)

8624 154th Avenue NE Redmond, Washington 98052 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (425) 881-9603 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _ INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES _ NO X - THE REGISTRANT HAD 7,069,098 SHARES OF COMMON STOCK, $0.01 PAR VALUE, OUTSTANDING AT JULY 29, 2000. 2 GARDEN BOTANIKA, INC. INDEX TO FORM 10-Q

2 3 PART I - FINANCIAL INFORMATION: ITEM 1 - FINANCIAL STATEMENTS - The unaudited balance sheet as of July 29, 2000, audited balance sheet as of January 29, 2000 and unaudited statements of operations and cash flows of Garden Botanika, Inc. (the "Company") for the six-month periods ended July 29, 2000 and July 31, 1999 are attached. Notes to the unaudited financial statements are also attached. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - This discussion should be read in conjunction with the "Management's Discussion and Analysis" section included in the Company's Annual Report on Form 10-K dated April 28, 2000, which has previously been filed with the Securities and Exchange Commission. Certain statements in this discussion constitute "forward-looking statements" and involve known and unknown risks, uncertainties and other factors that may cause the 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, court actions related to the Company's bankruptcy filing; 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 changes in its business strategies. On April 20, 1999 (the "Petition Date"), Garden Botanika filed a voluntary petition for relief under Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Western District of Washington at Seattle, Washington (the "Bankruptcy Court"), Case No. 99-04464 (the "Chapter 11 Case"). The Company's financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets, liquidation of liabilities and commitments in the normal course of business. The Chapter 11 Case, related circumstances and the losses from operations raise substantial doubt about the Company's ability to continue as a going concern. The appropriateness of reporting on a going-concern basis is dependent upon, among other things, confirmation of a plan of reorganization and future profitable operations (see "Liquidity and Capital Resources," "Legal Proceedings" and Note 1 to "Notes to Financial Statements"). Realization of the Company's assets and liquidation of its liabilities at their recorded amounts is subject to significant uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the accompanying financial statements. The financial statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts or the amounts and classification of liabilities that might be necessary as a consequence of a plan of reorganization. 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 2000. The Company expects to reorganize under Chapter 11 and propose a reorganization plan that provides for emergence from bankruptcy at an appropriate time. Following the grant by the Bankruptcy Court of its request, Garden Botanika and its Creditors' Committee have been given the exclusive right to file a reorganization plan through March 1, 2001 on a joint basis (the "Exclusive Period"), provided that, if the Company were to file a non-consensual plan during the Exclusive Period, the Company's Creditors' Committee would have the right to file a competing plan. The Bankruptcy Court may also grant a further request to extend the Exclusive Period. There can be no assurance, however, that the Company will propose a plan in a timely fashion or that, if re- 3 4 quested, the Bankruptcy Court will grant a further extension. After expiration of the Exclusive Period with any extensions, creditors of the Company and other parties-in-interest have the right to propose their own reorganization plans. Although management expects to file a reorganization plan that provides the means for satisfying claims and interests in the Company, there can be no assurance that a plan will be proposed or that, if proposed, it will be confirmed by the Bankruptcy Court or that, if confirmed, it will be consummated. At this time, it is not possible to predict the outcome of the Chapter 11 Case or its effects on the Company's business. The Company had 109 stores in operation at July 29, 2000 compared to 149 stores at July 31, 1999 and 148 stores at January 29, 2000. The average age of the Company's stores at July 29, 2000 was 67 months. The Company reports on a 52/53-week year, consisting of four 13-week quarters. The fiscal year ends on the Saturday nearest the end of January. RESULTS OF OPERATIONS - (a) COMPARISON OF THE QUARTERLY PERIODS ENDED JULY 29, 2000 AND JULY 31, 1999. Net Sales. Net sales for the second quarter of fiscal 2000 were $10.0 million, compared to net sales of $13.5 million for the comparable prior period, a decrease of 26%. Store net sales decreased $3.3 million, or 28%, during the quarter, primarily due to the decrease in the number of stores, combined with an 11% decrease in comparable store sales (sales for continuing stores open at least one complete fiscal year). The 11% decrease in comparable store sales for the quarter was driven by decreases of 15% in May, 7% in June and 11% in July. In the second quarter of fiscal 1999, comparable store sales decreased 9%, consisting of decreases of 8% in May, 11% in June and 9% in July. These decreases included a decrease in revenue recorded on the sale of annual memberships in the Company's discount-based customer loyalty program. Membership sales are amortized over the course of twelve months, and the recorded revenue in the second quarter of fiscal year 2000 was $580,000 consisting primarily of new membership sales of $422,000, compared to recorded revenue in the comparable period of the prior year of $753,000, consisting primarily of new membership sales of $591,000. The Company's combined mail order and Internet sales increased $45,000, or 7%, versus the comparable prior period. During the second quarter of fiscal 2000, the Company recorded sales at wholesale in the amount of $171,000. There were no sales at wholesale in the second quarter of fiscal 1999. Gross Margin. Gross margin decreased as a percentage of net sales from 35% in the second quarter of fiscal 1999 to 34% in the second quarter of fiscal 2000. This decrease primarily reflects the leveraging impact of fixed occupancy costs against lower average store volumes. The dollar amount of gross margin decreased by $1.2 million, or 26%, primarily as a result of the decrease in customer transactions due to the closure of stores. Operating Expenses. Stores and Catalog. Store and catalog expenses, including distribution, decreased by $979,000, or 21%, from the comparable prior period, primarily as a result of the decrease in the number of stores and reductions in advertising expense. As a percentage of net sales, store and catalog expenses increased to 37% in the second quarter of fiscal 2000, from 35% in the second quarter of fiscal 1999. General and Administrative. The dollar amount of general and administrative expenses decreased by $227,000, or 13%, from the comparable prior period. As a percentage of net sales, general and administrative expenses were 15% in the second quarter of fiscal 2000 and 13% in the comparable prior period. 4 5 Operating Loss. For the reasons explained above, the Company's operating loss increased by $27,000 or 2%, to $1.8 million as compared to the second quarter of fiscal 1999. As a percentage of net sales, the second quarter operating loss increased to 18% from 13% in the comparable prior period. Interest Income (Expense), Net. Net interest expense during the second quarter of fiscal 2000 was $5,000, compared to net interest expense of $16,000 during the comparable prior period. Reorganization Charges. During the quarter ended July 29, 2000, the Company incurred certain costs relating to the Chapter 11 bankruptcy proceedings. These costs include legal and other professional fees for the second quarter in the amount of approximately $202,000, compared to approximately $132,000 in the prior fiscal quarter. Income Tax Provision. Due to its pre-tax losses, the Company did not record an income tax provision for the second quarter of either fiscal 2000 or fiscal 1999. Net Loss and Per Share Data. The Company's net loss increased $86,000 or 4% from $1.9 million, or $0.27 per share, during the second quarter of fiscal 1999 to $2.0 million, or $0.29 per share, during the second quarter of fiscal 2000. The dollar increase in net loss was due to the factors discussed above. (b) COMPARISON OF THE SIX-MONTH PERIODS ENDED JULY 29, 2000 AND JULY 31, 1999. Net Sales. Net sales for the six-month period ended July 29, 2000 were $21.0 million, compared to net sales of $31.4 million for the comparable prior period, a decrease of 33%. Store net sales decreased $10.5 million, or 38%, during the six months, primarily due to the decrease in the number of stores, combined with a 10% decrease in comparable store sales (sales for continuing stores open at least one complete fiscal year). In the first six months of fiscal 1999, comparable store sales decreased 11%. These decreases also included a decrease in revenue recorded on the sale of annual memberships in the Company's discount-based customer loyalty program. Membership sales are amortized over the course of twelve months, and the recorded revenue in the first six months of fiscal year 2000 was $1.2 million consisting primarily of new membership sales of $869,000, compared to recorded revenue in the comparable period of the prior year of $1.5 million, consisting primarily of new membership sales of $1.2 million. The Company's combined mail order and Internet sales decreased $203,000, or 15%, versus the comparable prior period, based primarily on a planned reduction in the circulation of mailings in the first quarter of fiscal 2000. During the first half of fiscal 2000, the Company recorded sales at wholesale in the amount of $1.2 million primarily to the online retailer drugstore.com. There were no sales at wholesale in the first half of fiscal 1999. Gross Margin. Gross margin improved as a percentage of net sales from 33% in the first six months of fiscal 1999 to 35% in the first six months of fiscal 2000. This increase primarily reflects the impact of the closure of poorly performing stores with lower average margins than the Company's store base at the period end. The dollar amount of gross margin decreased by $2.9 million, or 29%, primarily as a result of the decrease in customer transactions due to the closure of stores. Operating Expenses. Stores and Catalog. Store and catalog expenses, including distribution, decreased by $5.0 million, or 40%, from the comparable prior period, primarily as a result of the decrease in the number of stores and reductions in advertising expense. As a percentage of net sales, store and catalog expenses decreased to 36% from 40% in the first six months of fiscal 1999, primarily due to the leveraging impact of the higher average sales of the Company's continuing store base, the reductions in advertising and the lower operating expense of sales at wholesale. 5 6 General and Administrative. General and administrative expenses decreased by $908,000, or 23%, from the comparable prior period, primarily reflecting the corporate expense reductions implemented primarily in the first quarter of fiscal 1999 through reductions in the Company's workforce. As a percentage of net sales, general and administrative expenses were 14% in the first six months of fiscal 2000 and 12% in the comparable prior period. Provision for Store Closing. During the first six months of fiscal 1999, the Company recorded a provision for store closure of $6.6 million to cover the estimated lease termination and other store exit costs associated with the closure of 95 poorly performing retail store locations and the rejection of leases in connection with the Company's reorganization plans. This amount was offset by approximately $1.1 million in deferred rent liability for the 95 rejected leases that had previously been recorded on the balance sheet. During the first six months of fiscal 2000, the Company closed 39 stores. Substantially all costs associated with these closings were provided prior to the first quarter of fiscal 2000. Operating Loss. For the reasons explained above, the Company's operating loss decreased 73%, from $11.4 million to $3.1 million, in the respective six-month periods. As a percentage of net sales, the first half operating loss decreased to 15% from 36% in the comparable prior period. Interest Income (Expense), Net. Net interest income during the first six months of fiscal 2000 was $31,000, or 0.2% of net sales, compared to net interest expense of $59,000, or 0.2% of net sales, during the comparable prior period. Reorganization Charges. During the six months ended July 29, 2000, the Company incurred certain costs relating to the Chapter 11 bankruptcy proceedings. These costs include legal and other professional fees through the end of the first half of fiscal 2000 in the amount of approximately $577,000, compared to approximately $932,000 in the prior fiscal period. Income Tax Provision. Due to its pre-tax losses, the Company did not record an income tax provision for the first six months of either fiscal 2000 or fiscal 1999. Net Loss and Per Share Data. The Company's net loss decreased 71% from $12.4 million, or $1.76 per share, during the first six months of fiscal 1999 to $3.6 million, or $0.51 per share, during the six months of fiscal 2000. The absolute dollar decrease in net loss was due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES - On April 23, 1999, the Company entered a Loan and Security Agreement (the "DIP Facility") with BankBoston Retail Finance Inc., which has since been succeeded by Fleet Retail Finance Inc. ("Fleet"). The DIP Facility is intended to provide Garden Botanika with the cash and liquidity to conduct its operations and pay for inventory during the course of the Chapter 11 Case. The DIP Facility, which was amended in the first quarter of fiscal 2000, consists of a revolving line of credit in the amount of $7.0 million, subject to a borrowing base calculated as the lesser of 70% of eligible inventory or 80% of the net liquidation value, except that, for the period from September 15 to December 15, the borrowing base is calculated as 90% of eligible inventory. A cash set-aside for the benefit of creditors of approximately $1.6 million is also a part of the borrowing base. The facility expires on the earlier of April 23, 2001 or the Company's emergence from bankruptcy. The DIP Facility, which is secured by the assets of the Company, bears interest at Fleet's prime lending rate plus one percent (1.0%). In addition, the Company is obligated to pay a facility fee of $3,000 monthly and an annual unused line fee of one quarter of one percent (0.25%) of the average unused portion of the line. The Company is required to maintain certain financial covenants, including covenants relating to earnings and limitations on losses that vary from month to month. The DIP Facility also contains restrictive covenants including, among other things, the mainte- 6 7 nance of inventory levels, limitations on the creation of additional indebtedness and a prohibition on the payment of dividends. Excess availability under the DIP Facility as of September 8, 2000 was $1.8 million. As of September 8, 2000, the Company had borrowed $2.7 million under the DIP Facility. The Company funded its net cash loss of $2.1 million (net loss before depreciation and amortization) in the first six months of fiscal 2000 primarily with existing cash of $2.4 million. While the Company did not access the DIP Facility during the second quarter of fiscal 2000, it did so in the third quarter of the year to build inventory in preparation for the holiday season and fund current operations. The Company believes that its cash balance at the end of the second quarter of fiscal 2000, combined with its cash flow from operations and borrowings under its DIP Facility, will be sufficient to satisfy its currently anticipated working capital and capital expenditure requirements through fiscal 2000. The Company's uses of capital for the remainder of fiscal 2000 are expected to include working capital for operating expenses and satisfaction of liabilities incurred subsequent to the Petition Date, expenditures related to maintaining its stores, interest payments on outstanding borrowings and costs associated with the Chapter 11 Case. The Company's future working capital requirements consist primarily of the purchase of inventory, which is expected to be maintained at the level of $55,000 per store, which is in addition to the raw materials and components held at the Company's manufacturing facility and at suppliers. 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's long-term liquidity and the adequacy of the Company's capital resources cannot be determined until a plan of reorganization has been developed and confirmed in connection with the Chapter 11 Case. As a debtor-in-possession, actions against the Company to collect pre-petition indebtedness are stayed and certain contractual obligations may not be enforced against the Company. With the approval of the Bankruptcy Court, certain of these obligations may be paid prior to the confirmation of a reorganization plan. To date, the Company has received approval to pay customary obligations associated with the daily operations of its business, including the timely payment of new inventory shipments, employee wages and other obligations. The ultimate amount of, and settlement terms for, the Company's pre-petition liabilities are subject to the approval of a plan of reorganization and, accordingly, the timing and form of settlement are not presently determinable. 7 8 PART II - OTHER INFORMATION: ITEM 1 - LEGAL PROCEEDINGS - On April 20, 1999, Garden Botanika filed a voluntary petition for relief under the Bankruptcy Code, Chapter 11, Title 11 of the United States Code, with the United States Bankruptcy Court for the Western District of Washington, Seattle, Washington 98101, Case No. 99-04464. Under Section 362 of the Bankruptcy Code, during the Chapter 11 Case, creditors and other parties in interest may not, without Bankruptcy Court approval: (i) commence or continue judicial, administrative or other proceedings against the Company that were or could have been commenced prior to commencement of the Chapter 11 Case, or recover a claim that arose prior to commencement of the case; (ii) enforce any pre-petition judgments against the Company; (iii) take any action to obtain possession of or exercise control over property of the Company or its estate; (iv) create, perfect or enforce any lien against the property of the Company; (v) collect, assess or recover claims against the Company that arose before the commencement of the case; or (vi) set off any debt owing to the Company that arose prior to the commencement of the case against a claim of such creditor or party in interest against the Company that arose before the commencement of the case. Although the Company is authorized to operate its business and manage its properties as a debtor-in-possession, it may not engage in transactions outside of the ordinary course of business without complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval. As a debtor-in-possession, the Company has the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory, pre-petition contracts and unexpired leases. Any damages resulting from rejection are treated as general unsecured claims in the reorganization case, subject to certain limitations under the Bankruptcy Code. Under the Bankruptcy Code, as a general matter, a creditor's claim is treated as secured only to the extent of the value of such creditor's collateral, and the balance of such creditor's claim is treated as unsecured. Generally, unsecured and undersecured debt does not accrue interest after the Petition Date. Pre-petition claims that were contingent or unliquidated at the commencement of the Chapter 11 Case are generally allowable against the Company in amounts to be fixed by the Bankruptcy Court or otherwise agreed upon. These claims, including without limitation those which arise in connection with the rejection of executory contracts and leases, are expected to be substantial. The Company has established certain reserves approximating what the Company believes will be its liability under some of these claims. Inherent in a successful plan of reorganization is a capital structure which permits the Company to generate sufficient cash flow after reorganization to meet its restructured obligations and fund the current obligations of the Company. Under the Bankruptcy Code, the rights and treatment of pre-petition creditors and stockholders may be substantially altered. At this time, it is not possible to predict the outcome of the Chapter 11 Case, in general, or the effects of the Chapter 11 Case on the business of the Company or on the interests of creditors. ITEM 2 - CHANGES IN SECURITIES - None 8 9 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS - None ITEM 5 - OTHER INFORMATION - None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - (a) Exhibits:

No reports on Form 8-K were filed during the second quarter of fiscal 2000. 9 10 SIGNATURES: Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GARDEN BOTANIKA, INC. Registrant September 11, 2000 /s/ William L. Lawrence, Jr. ------------------ ---------------------------------------------- Date William L. Lawrence, Jr. President and Chief Executive Officer (Principal Executive, Financial and Accounting Officer) 10 11 GARDEN BOTANIKA, INC. BALANCE SHEETS

The accompanying notes are an integral part of these financial statements. 11 12 GARDEN BOTANIKA, INC. STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these financial statements. 12 13 GARDEN BOTANIKA, INC. STATEMENTS OF CASH FLOWS (amounts in thousands)

The accompanying notes are an integral part of these financial statements. 13 14 GARDEN BOTANIKA, INC. NOTES TO FINANCIAL STATEMENTS JULY 29, 2000 (UNAUDITED) 1. The accompanying unaudited financial statements include the accounts of Garden Botanika, Inc. (the "Company"), a Washington corporation. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K dated April 28, 2000, which has previously been filed with the Securities and Exchange Commission. On April 20, 1999, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and is presently operating its business as a debtor-in-possession subject to the jurisdiction of the United States Bankruptcy Court for the Western District of Washington. The Company's financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets, liquidation of liabilities and commitments in the normal course of business. The Chapter 11 case, related circumstances and the losses from operations raise substantial doubt about the Company's ability to continue as a going concern. The appropriateness of reporting on a going-concern basis is dependent upon, among other things, confirmation of a plan of reorganization and future profitable operations. Realization of its assets and liquidation of its liabilities at their recorded amounts is subject to significant uncertainty. While under the protection of Chapter 11, the Company may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the accompanying financial statements. The financial statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts or the amounts and classification of liabilities that might be necessary as a consequence of a plan of reorganization. 2. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the amounts of revenues and expenses reported during the period. Actual results could differ from those estimates. 3. In the calculation of weighted average common and common equivalent shares, nonqualified stock options and warrants to purchase common stock are considered common stock equivalents. Such options and warrants are converted using the treasury stock method, which assumes that the shares issuable upon exercise of the options or warrants were outstanding for the full period. In accordance with generally accepted accounting principles, no common stock equivalents are shown for the second quarter of either fiscal 2000 or 1999, as their effect would have been anti-dilutive.

FULLY DILUTED: Fully diluted earnings (loss) per share is not presented, as there were no potentially dilutive securities. 4. The results of operations for the six months ended July 29, 2000 are not necessarily indicative of the results to be expected for the full fiscal year. In each of the past three fiscal years, 37% to 39% of the Company's annual net sales and all of its profits, if any, have been realized during its fourth fiscal quarter, particularly during the November and December holiday selling period. The Company expects this pattern to continue during the current fiscal year. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among others, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of holidays, shifts in the timing of promotions and catalog mailings and changes in the Company's product mix. 5. In fiscal 1999, the Company closed 104 stores and recorded a provision for closing an additional 39 stores in the amount of $8.4 million The provision consisted of $2.7 million to cover estimated asset writeoffs, $7.7 million for lease termination and other closure expenses offset by a credit of $2.0 million as a reduction of the deferred rent liability for stores closed and to be closed. All 39 of the additional stores identified for closure were closed in the first quarter of fiscal 2000. As of July 29, 2000, the Company has a liability for lease termination costs on the stores identified above in the amount of $8.7 million recorded as liabilities subject to compromise on the 14 15 balance sheet. The carrying value of the long-lived assets of the 104 stores closed in fiscal year 1999 was reduced under SFAS No. 121 in the fourth quarter of fiscal 1998 as impaired. 6. In the Chapter 11 case, substantially all unsecured liabilities as of the petition date are subject to compromise or other treatment under a plan of reorganization to be confirmed by the bankruptcy court after submission to any required vote by the affected parties. For financial reporting purposes, those liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Chapter 11 case have been segregated and classified as liabilities subject to compromise in the accompanying balance sheet. The ultimate amount of and settlement terms for such liabilities are subject to an approved plan of reorganization and are not presently determinable. Included in liabilities subject to compromise as of July 29, 2000 are pre-petition accounts payable of $9.7 million and estimated lease termination costs of $8.7 million. 15

GARDEN BOTANIKA INC 10-Q