<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

                   FOR THE FISCAL YEAR ENDED January 30, 1999

                                       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)

        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. [X]

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]



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THE AGGREGATE MARKET VALUE OF THE COMMON STOCK OF THE REGISTRANT HELD BY
NONAFFILIATES OF THE REGISTRANT ON MAY 12, 1999, WAS $2,914,309. THE AGGREGATE
MARKET VALUE WAS COMPUTED BY REFERENCE TO THE CLOSING PRICE OF THE STOCK ON THE
OTC BULLETIN BOARD 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 6,938,831 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 MAY 12, 1999.








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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, 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.

                                     PART I

ITEM 1 - BUSINESS -

CHAPTER 11 FILING

        Garden Botanika is a botanically-based cosmetics company that currently
operates 150 primarily mall-based retail stores in 31 states throughout the
United States. 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"). As a result of the Chapter 11 Case,
the Company is prohibited from paying, and creditors are prohibited from
attempting to collect, claims or debts arising prior to the Petition Date.
Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, the Company, as
debtor and debtor-in-possession, has continued to manage and operate its
business, subject to the supervision and orders of the Bankruptcy Court.

        The Company expects to reorganize under Chapter 11 and propose a
reorganization plan that provides for emergence from bankruptcy by or before
2001. Under the Bankruptcy Code, Garden Botanika has the exclusive right to file
a reorganization plan through August 18, 1999 (the "Exclusive Period"), and the
Bankruptcy Court may grant a 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 requested, the Bankruptcy Court will grant an extension.
After expiration of the Exclusivity 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. Reference is made to
Item 7--"Management's Discussion and Analysis of Results of Operations and
Financial Condition" and Report of Independent Accountants, which indicates
doubt about Garden Botanika's ability to continue as a going concern.

        In addition to operating its 150-store base (excluding one outlet
location, the "Retained Stores"), under authority of the Bankruptcy Court, the
Company closed five stores and engaged the services of a liquidator that has
been or is currently in the process of liquidating inventory at 90 other
Company-leased store locations having leases that the Company intends to reject
as part of its reorganization efforts. As a debtor-in-possession, the Company
has the right, subject to Bankruptcy Court approval and certain other
limitations, to assume or reject real estate leases, employment contracts,
personal property leases, service contracts and other executory pre-petition
contracts. In this context, "assumption" requires the Company, as a general
matter, to perform its obligations and cure all existing defaults under the
assumed contract or lease, and "rejection" means that the Company is relieved
from its obligations to perform further under the rejected con-




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tract or lease, but is subject to a claim for damages for the breach thereof,
subject to certain limitations contained in the Bankruptcy Code. Under Section
502 of the Bankruptcy Code, a lessor's claim for damages resulting from the
rejection of a real property lease is limited to the rent provided under such
lease, without acceleration, for the greater of one year or 15% of the remaining
term of the lease, not to exceed three years, following the earlier of the
Petition Date or the date on which the property is returned to the landlord.

GENERAL

        Garden Botanika offers a broad line of proprietary branded products
including color cosmetics, skin care, body care and fragrances. Management
believes that Garden Botanika's product line is unique in its use of natural
plant oils, botanical extracts and herbal infusions to create highly functional
and emotionally appealing products that have developed strong customer loyalty,
particularly on the East and West Coasts. Since its founding in 1990 and its
initial successes in opening stores in the Pacific Northwest and California, the
Company developed a recognized brand identity that led to its rapid national
expansion. 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 (iii) a high-quality
store experience, which the Company provides through its store design, customer
service and the visual presentation of its products and signage.

        Garden Botanika's marketing and merchandising efforts have targeted a
primary audience of 25- to 45-year-old women who seek an approachable
alternative to the department store cosmetics counter. Unlike traditional
cosmetic counters, the Company's stores invite experimentation and product trial
in an upscale atmosphere that is intended to be both friendly and fun. In many
markets, this environment has attracted a broad cross-section of consumers
beyond its primary target, including younger customers who are attracted to the
Company's "open sell" merchandising approach to cosmetics.

        After opening 167 stores in fiscal years 1995 and 1996, the Company
slowed its rate of growth significantly, opening only 27 stores in fiscal 1997.
The average performance of the Company's newer stores was substantially below
historical experience and the Company's expectations, which the Company believes
was 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 sought to close or obtain rent reduction for
approximately 80 stores that failed to meet certain performance standards. The
Company successfully closed 29 stores in fiscal 1998, and an additional seven
stores were closed in fiscal year 1999 prior to the Petition Date. Due, in part,
to the Company's inability to negotiate and fund out-of-court lease termination
settlements with landlords at some of its other unprofitable locations, the
Company filed its petition for reorganization with the Bankruptcy Court. On
April 30, 1999, the Bankruptcy Court granted the Company the authority to reject
leases at 95 store locations, leaving the Company with its base of 150 stores in
markets that management believes can be made profitable.

        Garden Botanika achieved average annual sales per square foot of $280 in
fiscal 1998, at the end of which the average age of its stores was 42 months. In
fiscal 1998, the Retained Stores achieved average annual sales per square foot
of $370, at the end of which the average age of these stores was 46 months. The
Company's comparable store sales increased 7% and 1% during fiscal 1996 and 1997
and declined 13% in fiscal 1998.

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.




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        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 (i) by its
high-value, quality branded product assortment, emphasizing color cosmetics,
skin care and fine fragrance and (ii) 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 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.

        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. Garden Botanika is committed to
making pricing adjustments to ensure that its products remain competitive.
Short-term promotional offerings of particular products are intended to provide
greater savings and generate additional sales.

        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.

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




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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 lotions with a fruit-based acid complex, and it
recently added an anti-aging Vitamin C Treatment to take advantage of newer
technologies. 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 can help 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 Company's laboratory
capabilities acquired allow for 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 its store
design to 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.
Twenty-six of the Company's 149 Retained Stores contain Color Studios and
average 1,733 square feet per store. Excluding the Color Studio stores, the
average size of the Company's Retained Stores is 1,123 square feet per store
with sizes ranging from 648 to 1,847 square feet.

STORE LOCATIONS

        In selecting store sites, the Company generally sought high-traffic
locations within regional malls, generally ranging from 1,000 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:


                             [MAP GRAPHIC OMITTED]



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MARKETING

        The Company's marketing strategy is to create brand awareness through
positive experiences with the Company's products, through its discount-based
customer loyalty program, through high-value promotional offerings, and by
exploiting alternate channels of distribution, such as a hotel amenities program
and an Internet website 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. The Company has begun to experiment with the form, contents
and frequency of its direct-mail retail advertising in an effort to be more cost
effective.

        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 and 1998, 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 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.

STORE OPERATIONS

        Management and Employees. The Company's stores are organized into three
geographic regions (East, Midwest 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 Director of Stores. The Company's district managers
report to the regional directors and frequently visit the cluster of
approximately ten 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 office.

        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 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




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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 can receive a commission based on a
percentage of store sales above certain pre-established target levels. 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 1998, the Company's largest supplier, Classic
Cosmetics, accounted for approximately 10% of the Company's purchases, and
approximately 60% 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 30% of its production requirements from
its own facilities. Provided suppliers can be assured of payment, the Company
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 and to 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, the unanticipated
popularity of certain new product introductions and other factors, 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 currently 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 visits, while also
offering Garden Botanika's mail-order customers a comprehensive assortment of



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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 could be directed most effectively. In the
first seven months of fiscal 1998, as the second part of a three-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. Beginning in September 1998 through the holiday season,
the Company mailed a re-launched catalog having more editorial space more deeply
into its active customer list. With more limited resources, the Company intends
to more narrowly focus its retail catalog mailings in the current year. In
fiscal 1998, the Company prepared and circulated nine editions of its catalog,
which averaged 41 pages, three shorter folios and two postcards, with total
mailings of approximately 19.44 million.

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 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 two 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 prod-




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ucts 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, Victoria's Secret, The Body
Shop 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. 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 May 12, 1999, the Company employed approximately 1,325 persons, of
whom approximately 1,200 were Retained 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 increased by as much as 40% during peak
selling periods. At May 12, 1998, the Company employed approximately 125
non-store employees in its corporate headquarters, its distribution center,
manufacturing division and in different parts of the country as regional or
district managers.

        None of the Company's employees are covered by collective bargaining
agreements, and management believes that its relations with its employees are
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 FDA and
the FTC in the United States, as well as various other federal, state and local
regulatory authorities. Such regulations relate principally to the ingredients,
labeling, packaging and marketing of the Company's products. The Company
believes that it is in substantial compliance with such regulations, as well as
with applicable federal, state, local and foreign rules and regulations
governing the discharge of materials hazardous to the environment. There are no
significant capital expenditures for environmental control matters either
estimated in the current fiscal year or expected in the near future.

ITEM 2 - PROPERTIES -

        The Company currently leases all of its existing store locations and
expects that its policy of leasing, rather than owning, will continue. 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




                                       10
<PAGE>   11

Company flexibility to respond to 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.

        In fiscal 1998 and 1999, prior to the Petition Date, the Company
negotiated 34 lease termination agreements and closed 36 stores. Under authority
granted by the Bankruptcy Court in the Chapter 11 Case, the Company and a
liquidator that it has retained have been or currently are in the process of
closing 95 additional stores, as well as one of two office buildings previously
used as part of the Company's Redmond, Washington corporate headquarters.

        As current leases expire, assuming relationships with landlords are
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. However, the Company's one experience
to date in attempting to renew a lease for an existing location resulted in
non-renewal and abandonment of that store location because of the increase in
rent sought by the landlord. There can be no assurance that lease renewals can
be obtained in the future on favorable terms.

        In addition to its stores, the Company currently leases approximately
5,600 square feet of office space 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 leases 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 -

CHAPTER 11 FILING

        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




                                       11
<PAGE>   12

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.

PLAN OF REORGANIZATION PROCEDURES

        For the Exclusive Period of 120 days after the date of the filing of a
voluntary Chapter 11 petition, a debtor has the exclusive right to propose and
file a reorganization plan with the Bankruptcy Court and an additional 60 days
within which to solicit acceptances to any plan so filed. The Bankruptcy Court
may increase or decrease the Exclusive Period for cause shown, and, as long as
the Exclusive Period continues, no other party may file a reorganization plan.
Given the magnitude of the operations of the Company and the number of
interested parties asserting claims that must be resolved in the Chapter 11
Case, the plan formulation process is complex. If a Chapter 11 debtor fails to
file its plan during the Exclusive Period or, after such plan has been filed,
fails to obtain acceptance of such plan from impaired classes of creditors and
equity security holders during the exclusive solicitation period, any party in
interest, including a creditor, an equity security holder or a committee of
creditors, may file a reorganization plan for such Chapter 11 debtor.

        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. Any reorganization plan is likely, however, to result in
a minimal, if any, distribution to existing shareholders.

        Generally, after a plan has been filed with the Bankruptcy Court, it
will be sent, with a disclosure statement approved by the Bankruptcy Court
following a hearing, to members of all classes of impaired creditors and equity
security holders for acceptance or rejection. Following acceptance or rejection
of any such plan by impaired classes of creditors and equity security holders,
the Bankruptcy Court, after notice and a hearing, would consider whether to
confirm the plan. Among other things, to confirm a plan the Bankruptcy Court is
required to find that (i) each impaired class of creditors and equity security
holders will, pursuant to the plan, receive at least as much as the class would
have received in a liquidation of the debtor and (ii) confirmation of the plan
is not likely to be followed by the liquidation or need for further financial
reorganization of the debtor or any successor to the debtor, unless the plan
proposes such liquidation or reorganization.

        To confirm a plan, the Bankruptcy Court generally is also required to
find that each impaired class of creditors and equity security holders has
accepted the plan by the requisite vote. If any impaired class of creditors or
equity security holders does not accept a plan but all of the other requirements
of the Bankruptcy Code are met, the proponent of the plan may invoke the
so-called "cram down" provisions of the Bankruptcy Code. Under these provisions,
the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of
the plan by an impaired class of creditors or equity security holders if certain
requirements of the Bankruptcy Code are met, including that (i) at least one
impaired class of claims has accepted the plan, (ii) the plan "does not
discriminate unfairly" and (iii) the plan "is fair and equitable with respect to
each class of claims or interests that is impaired under, and has not accepted,
the plan." As used by the Bankruptcy Code, the phrases "discriminate unfairly"
and "fair and equitable" have narrow and specific meanings unique to bankruptcy
law.

OTHER LEGAL PROCEEDINGS

        In the ordinary course of business, Garden Botanika is a party to
various legal actions which it believes are routine in nature and incidental to
the operation of its business. In the opinion of management, apart from claims
involved in the Chapter 11 Case, the outcome of the proceedings to which the
Company is currently a party will not have a material adverse effect upon its
operations or financial condition.





                                       12
<PAGE>   13

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 30, 1999.



                                       13
<PAGE>   14

                                     PART II


ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS -

        From its initial public offering on May 22, 1996 until February 1, 1999,
the Company's Common Stock was traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol "GBOT." The Common Stock was delisted from
the Nasdaq Stock Market on February 1, 1999. Since February 1, 1999, the
Company's Common Stock has been traded on the OTC Bulletin Board under the same
symbol. The following table sets forth the high and low closing sale prices of
the Company's Common Stock for the fiscal quarters indicated.

<TABLE>
<CAPTION>
           QUARTER                                      HIGH           LOW
           -------                                     -------        ------
<S>                                                    <C>            <C>
        FISCAL 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 .......................        $ 2.188        $1.375
          Second quarter ......................        $ 1.531        $0.813
          Third quarter .......................        $ 0.719        $0.219
          Fourth quarter ......................        $ 1.000        $0.375

        FISCAL 1999:
          First quarter .......................        $ 0.531        $0.219
          Second quarter (through May 12, 1999)        $ 0.469        $0.375
</TABLE>


        The last sale price of the Company's Common Stock on May 12, 1999, as
reported by the OTC Bulletin Board, was $0.42 per share.

        As of May 12 1999, there were 277 holders of record of the Company's
Common Stock.

        The Company has not paid, and has no current plans to pay in the
foreseeable future, dividends on its Common Stock. As detailed in Item 3--"Legal
Proceedings," the Company has filed for protection under Chapter 11 of the
Bankruptcy Code and the Company is precluded from paying dividends until such
case is concluded. Additionally, the terms of the Company's bank line of credit
prohibit the payment of cash dividends to holders of Common Stock without the
lender's consent.



                                       14
<PAGE>   15

ITEM 6 - SELECTED FINANCIAL DATA -

<TABLE>
<CAPTION>
                                                                              FISCAL YEAR ENDED
                                                   ---------------------------------------------------------------------------
                                                   JAN. 28,        FEB. 3,          FEB. 1,          JAN 31,          JAN 30,
                                                     1995          1996(1)           1997             1998             1999
                                                   --------        --------        ---------        ---------        ---------
                                                        (DOLLARS IN THOUSANDS EXCEPT PER SQUARE FOOT AND PER SHARE DATA)
<S>                                                <C>             <C>             <C>              <C>              <C>
RESULTS OF OPERATIONS DATA:
      Net sales .............................      $ 27,510        $ 55,339        $  92,465        $ 114,591        $ 102,815
      Cost of sales (including buying
        and occupancy costs) ................        15,521          31,448           52,551           73,846           71,817
                                                   --------        --------        ---------        ---------        ---------
      Gross margin ..........................        11,989          23,891           39,914           40,745           30,998
      Operating expenses:
        Stores and catalog ..................         8,956          18,746           35,544           39,524           39,136
        General and administrative ..........         3,917           6,041            8,871           10,919           12,021
      Preopening and facility relocation
        expenses ............................           733             798            1,426              397              323
      Provision for store closings and
         impairment loss on long-lived assets            --              --               --            5,800           27,400
      Interest income, net ..................           230              30              994              315              (92)
                                                   --------        --------        ---------        ---------        ---------
      Net loss ..............................      $ (1,387)       $ (1,664)       $  (4,933)       $ (15,580)       $ (48,034)
                                                   ========        ========        =========        =========        =========
      Basic and diluted loss per share(2)....      $  (0.43)       $  (0.44)       $   (0.80)       $   (2.20)       $   (6.79)
      Cash dividends declared per
       common share .........................            --              --               --               --               --
      Weighted average common
        shares (000's)(2) ...................         3,209           3,756            6,146            7,069            7,069
      Capital expenditures ..................      $ 11,439        $ 16,800        $  24,225        $  14,161        $   1,401

SELECTED OPERATING DATA:
      Stores open at period-end .............            86             152              253              280              252
      Average square footage of stores
       opened during period .................         1,077           1,256            1,362            1,693            2,058
      Sales per square foot(3) ..............      $    535        $    458        $     387        $     324              280
      Average store age (in months) .........            16              18               20               30               42
      Comparable store sales increase(4) ....            34%             16%               7%               1%             (13)%
      Number of catalogs mailed (000's) .....         2,311           5,021           15,933           16,753           19,441

BALANCE SHEET DATA (AT PERIOD-END):
      Working capital .......................      $  1,415        $  2,662        $  36,315        $  19,690        $   5,647
      Total assets ..........................      $ 25,518        $ 47,137        $ 103,523        $  87,837        $  42,087
      Note payable to bank ..................            --        $  2,540               --               --               --
      Shareholders' equity ..................      $ 18,183        $ 33,117        $  84,456        $  68,936        $  20,961
</TABLE>


(1)     The fiscal year ended February 3, 1996 was a 53-week year.

(2)     Based on the weighted average number of common and preferred shares
        outstanding after giving effect to the conversion of all Preferred Stock
        into Common Stock in fiscal 1996. See Notes to Financial Statements.

(3)     For stores open at beginning of period indicated.

(4)     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 41, 86, 152, 253 and 252 in fiscal years 1994 through
        1998, respectively.





                                       15
<PAGE>   16

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

        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. For further
discussion of the Chapter 11 proceedings, see Item 1--"Business--Chapter 11
Filing;" Item 3--"Legal Proceedings;" and Note 1 to Notes to Consolidated
Financial Statements. 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" and Note 1
to "Notes to Consolidated Financial Statements"). 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. 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 1999.

        From opening its first store in August 1990 to the Company's initial
public offering in May 1996, Garden Botanika pursued an aggressive growth
strategy, establishing itself as a leading market presence in core markets in
the Pacific Northwest, California and parts of the East Coast. This growth was
fueled by double-digit comparable store sales increases for the fiscal years
1993 through 1995. 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 these 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 these 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 stores,
representing approximately 66% of the Company's store base at the time,
adversely affected the performance of the Company as a whole, and comparable
store sales increased only 7% in fiscal 1996. 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, Victoria's Secret, the Body Shop and other specialty retailers and mass
merchandisers increased substantially.

        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, discontinuing 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 order to move discontinued inventory, the Company held
clearance sales, adversely impacting comparable store sales and margins. In
order to make the Garden Botanika shopping experience more customer-friendly,
the Company also invested over $2 million as part of a strategy to soften the
appearance of the Company's 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




                                       16
<PAGE>   17
catalog-related expenses as circulation and pages mailed fell by 40% and 56%,
respectively. As a result of the remerchandising campaign, the narrowed catalog
operations and other factors, same store sales only increased 1% in fiscal 1997,
including a 4% decline in the fourth quarter, the first quarterly comparable
store sales decline in the Company's history.

        In order to reverse declining trends in 1998, the Company sought to
increase comparable store sales with, among other things, an emphasis on value
pricing and gift strategies, the sale of memberships in the Company's new
discount shopping "Garden Club" program and, beginning in September, increased
circulation of an expanded retail catalog. The Company also sought to leverage
the Garden Botanika brand by making use of new channels of distribution, such as
licensing and direct commercial sales. In its efforts to achieve profitability,
the Company began to negotiate with landlords for rent concessions and/or lease
terminations at the Company's more poorly performing stores. The deterioration
of the Company's comparable store sales and the resulting limitations on its
resources restricted the Company in many of these efforts. With limited
resources to acquire inventory, the Company focused on acquiring promotional
items, and the in-stock position of everyday core product lines was, as
expected, adversely affected. In addition, the aggressive catalog marketing
program in the second half of the year increased advertising expense, while the
value-priced gift strategy and customer loyalty discounts added pressure on
gross margin. In order to reduce the rate of losses, the Company began to close
unprofitable stores, primarily in isolated markets in the South and Midwest.
Comparable store sales decreased 13% in fiscal 1998.


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; Bankruptcy Filing. During fiscal years 1996
through 1998, respectively, the Company incurred net losses of $4.93 million,
$15.58 million and $48.03 million. As of the end of fiscal 1998, the Company had
an accumulated deficit of $77.67 million, and there can be no assurance that the
Company will generate profits in future periods. The Company is currently
operating as a debtor-in-possession under Chapter 11 of the Bankruptcy Code,
subject to the Bankruptcy Court's jurisdiction. The Company's future operating
results will depend upon a number of factors, particularly Bankruptcy Court
actions relating to the Company's bankruptcy, the Company's ability to obtain
approval of and implement a plan of reorganization, the performance of its
stores, the level of competition 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) stimulate brand awareness and
attract customers in stores where it has not been profitable to date; and (ii)
obtain targeted sales volumes through attractive products and competitive
pricing, while maintaining acceptable gross margins.

        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 1999 and will need to borrow under a line of credit
to finance its current operations as well as its inventory build-up and
increasing operating costs prior to the holiday season. On April 23, 1999, the
Company entered a Loan and Security Agreement with BankBoston Retail Finance
Inc. ("BankBoston") under which BankBoston agreed to provide the Company, as a
debtor-in-possession and subject to the Bankruptcy Court's approval (which
approval has since been obtained), with a two-year $7.0 million revolving line
of credit, subject to certain operating covenants and financial conditions
(the "DIP Facility"). The maximum amount that can be advanced at any one time
under the DIP Facility is calculated as a percentage of the net liquidation
value of the Company's inventory. Operating restrictions under the DIP
Facility and other limitations on the Company's borrowing ability and access
to funding generally may also limit the Com-




                                       17
<PAGE>   18

pany's ability to pursue certain business initiatives that it might otherwise
undertake in an effort to increase sales. The Company's limited resources, and
the limited resources and/or unwillingness of its suppliers to continue doing
business with the Company after taking account of the circumstances surrounding
the Chapter 11 Case, could have further adverse impacts on the Company's
business.

        Declines in Comparable Store Sales. A variety of factors affect the
Company's comparable store sales, including, among others: the Company's ability
to obtain inventory and execute its business strategy efficiently; the retail
sales environment and the level of competition; acceptance of new product
introductions; the mailing of the Company's catalogs; and general economic and
competitive conditions. The Company experienced monthly and quarterly comparable
store sales declines throughout fiscal 1998 and to date in fiscal 1999. The
Company's comparable store sales decreased 13% in fiscal 1998. This trend has
continued in February, March and April of 1999, as comparable store sales
declined, respectively, 16%, 7% and 14%. There can be no assurance that
comparable store sales for any particular period will not continue to exhibit
decreases from prior years.

        Turnover and Dependence on Key Personnel. The Company has experienced
significant turnover among its senior management and corporate staff, including
the resignations in fiscal 1998 and 1999 of the Company's President and Chief
Executive Officer, Senior Vice President--Operations and Vice President of
Stores. The Company has elected to replace these individuals from within. The
Company is dependent upon the efforts of its current key officers and employees,
including Arlee J. Jensen, President, Chief Executive Officer and a director;
and George W. Newman, Vice President, Chief Financial Officer and a director.
The loss of either of these individuals could adversely affect the Company's
business, financial condition and operating results. The Company has obtained
insurance on the life of Ms. Jensen in the amount $1.00 million. There can be no
assurance that the Company will be able to attract, motivate or retain key
employees and qualified personnel in the future.

        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 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. 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 be able to develop original and attractive new 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.

        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 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




                                       18
<PAGE>   19

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.

        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 1999, the Company intends to further reduce the number of
catalogs mailed per store by focusing on what it believes are or will be its
most productive store customers in order to justify the cost of the mailings.
There can be no assurance that the Company's more focused store advertising and
reduced number of mailings will not result in further declines in comparable
store sales. Apart from its catalog and related mailings, the Company does not
advertise in the print or broadcast media, as do many of its competitors which
may put the Company at a competitive disadvantage. 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.

        Concentration of Suppliers. In fiscal 1998, approximately 60% 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 10% 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 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 on
a timely basis.

        Regulation and Potential Claims. The Company's advertising and product
labeling practices are subject to regulation by the Federal Trade Commission
(the "FTC"), and its cosmetic manufacturing practices are subject to regulation
by the Food and Drug Administration (the "FDA"), as well as various other
federal, state and local regulatory authorities. 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. The nature and use of
personal care and other products sold by the Company could also give rise to
product liability claims if one or more of Garden Botanika's customers were to
suffer adverse reactions or injury 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, defective manufacture by one or
more of the Company's suppliers, 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.



                                       19
<PAGE>   20

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. 1,         JAN. 31,          JAN. 30,
                                                             1997             1998              1999
                                                          ---------        ----------        ----------
<S>                                                       <C>              <C>               <C>
Net sales (in thousands) ...........................      $  92,465        $  114,591        $  102,815
                                                          =========        ==========        ==========

Net sales ..........................................          100.0%            100.0%            100.0%
Cost of sales (including buying and occupancy costs)           56.8              64.4              69.9
                                                          ---------        ----------        ----------
Gross margin .......................................           43.2              35.6              30.1
Operating expenses:
   Stores and catalog ..............................           38.4              34.5              38.1
   General and administrative ......................            9.6               9.5              11.7
Preopening and facility
   relocation expenses .............................            1.5               0.3               0.3
Provision for store closings and
   impairment loss on long-lived assets ............             --               5.1              26.6
                                                          ---------        ----------        ----------
Operating loss .....................................           (6.4)            (13.9)            (46.6)
Interest income, net ...............................            1.1               0.3              (0.1)
                                                          ---------        ----------        ----------
Net loss ...........................................           (5.3)%           (13.6)%           (46.7)%
                                                          =========        ==========        ==========
</TABLE>

----------

(1)     Percentage amounts may not total 100% due to rounding.


FISCAL 1998 VS. FISCAL 1997

        General. The Company operated 252 stores at the end of fiscal 1998,
compared to 280 stores at the end of fiscal 1997. There were 3,247 store months
of operations during fiscal 1998 versus 3,212 store months in the prior period,
an increase of 1%. The average age of the Company's stores increased from 30
months to 42 months.

        Net Sales. Net sales for fiscal 1998 were $102.82 million, compared to
net sales of $114.59 million for fiscal 1997. The decrease of $11.77 million, or
10.2%, in net sales was due primarily to a 13% decrease in comparable store
sales over the prior year, resulting from a decrease in the number of customer
transactions. Such decreases were partially offset by (i) the sale of annual
memberships in the Company's discount-based customer loyalty program and (ii)
commercial sales for the year in the amount of $940,000. Membership sales are
amortized over the course of twelve months, and the recorded revenue in fiscal
year 1998 was $1.0 million based on total membership sales of $2.7 million. The
decrease in sales was also affected by a 26.0% decline in mail-order sales,
resulting primarily from a planned reduction in catalog circulation.

        Annual sales per square foot in fiscal 1998 declined by 14.0%, to $280,
due primarily to the decrease in sales from fewer customer transactions.

        The Garden Botanika catalog is used as the Company's primary marketing
vehicle by both the store and mail-order divisions. In an effort to increase
sales in fiscal 1998, the Company mailed a total of approximately 19.4 million
catalogs, folios and postcards, compared to approximately 16.8 million catalogs



                                       20
<PAGE>   21

mailed in fiscal 1997, an increase of 15%. This was due to a 21% increase in
retail catalog mailings, partially offset by a 47% decrease in mail-order
mailings. Despite the larger decrease in mailings, mail-order sales in fiscal
1998 declined by only 26% over the prior year, to $3.2 million, representing 3%
of total sales compared to 4% the prior year. Included in mail-order sales for
fiscal 1998 are Internet sales of $128,000.

        Gross Margin. Gross margin declined as a percentage of net sales from
35.6% in fiscal 1997 to 30.1% in fiscal 1998. 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) increased shrinkage and writeoffs for damaged products, and (iii)
markdowns of primarily discontinued products at the Company's outlet locations.
The dollar amount of gross margin decreased by $9.75 million, or 24%, primarily
as a result of the 10% decrease in sales.

        Operating Expenses

                Stores and Catalog. Store and catalog expenses, including
distribution, increased as a percentage of net sales from 34.5% in fiscal 1997
to 38.1% in fiscal 1998. This increase was primarily attributable to an increase
in advertising expense as a percentage of sales from 6.9% in fiscal 1997 to 8.5%
in fiscal 1998. The dollar amount of store and catalog expenses decreased by
$328,000, or 0.8%, over the prior year, primarily as a result of a decrease in
catalog operating expense (including advertising) of $1.4 million and a decrease
of $750,000 from store operating expense. These savings were largely offset by
increased store advertising expense of $1.5 million.

                General and Administrative. General and administrative expenses,
at 11.7% of net sales, represented an increase over the fiscal 1997 level of
9.6%. The dollar amount of general and administrative expenses increased by $1.1
million, or 10.1%, from the prior year to reflect severance and retention bonus
payments of $640,000 and a reserve for collectibility of tenant construction
allowances receivable in the amount of $432,000.

        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 $324,000, which relate
to the writeoff of leasehold improvements for two stores remodeled in fiscal
1998 and expenses incurred for the one new store opened in fiscal 1998. The
Company incurred Preopening Expenses of $397,000, or 0.3% of net sales, in
fiscal 1997, when the Company opened 27 new stores and relocated three existing
stores.

        Provision for Store Closings and Impairment Loss on Long-Lived Assets.
In fiscal year 1998, the Company closed 29 stores and recorded a provision to
cover the closing expenses and lease termination costs of an additional 24
stores in the amount of $7.3 million. Seven of these stores were not closed
until the first quarter of fiscal 1999. At January 31, 1999, the Company had
spent $6.0 million of these closing expenses and had a liability of $1.3
million recorded on the balance sheet. At the conclusion of the 1998 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 $20.1 million was recorded at the end of the fourth
quarter of fiscal 1998 to recognize potential impairment of long lived assets
for 118 stores. This amount reduced property and equipment.

        On April 30, 1999, the Bankruptcy Court authorized the Company to reject
leases for 95 poorly performing stores. Seventeen of those stores had been
identified for closure in fiscal 1998 and were included in the reserves for
store closings described above. An additional charge of approximately $7.0
million will be recorded in the first quarter of fiscal 1999 to cover the
estimated additional costs for closure and lease termination expenses of 78 of
the 95 stores. The carrying value of the long lived assets of all 95 stores
having leases the Company intends to reject was reduced under SFAS No. 121 in
the fourth quarter of fiscal 1998 as potentially impaired and were included in
the $20.1 million charge described above.

        All stores opened prior to fiscal 1998 were included in the impairment
review, which then concentrated on the approximately 128 stores, opened
primarily during fiscal 1995 and 1996, with negative fiscal 1998 store level
contribution margins. An impairment charge was recorded for each of these stores
equal to the difference between its then-current net book value and the
estimated fair value of those assets as meas-




                                       21
<PAGE>   22

ured 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 stores, or that a future
charge may not be necessary for other stores.

        Operating Loss. For the reasons explained above, the fiscal 1998 loss
from operations increased 302%, to $47.94 million, from $15.90 million in the
prior year. Expressed as a percentage of net sales, the Company's loss from
operations increased from 13.9% to 46.6%, reflecting primarily (i) charges to
provide for the costs of anticipated store closings and potential impairment of
historical property and equipment, and (ii) the effects of declines in
comparable store sales.

        Interest Income (Expense), Net. Net interest expense during fiscal 1998
was $92,000, or 0.1% of net sales, compared to net interest income of $315,000,
or 0.3% of net sales, during the prior year. This change was primarily due to
decreased levels of cash investment in fiscal 1998 as compared to the prior year
and reflected the Company's earlier borrowings in fiscal 1998.

        Income Taxes. The Company did not record an income tax benefit for
either fiscal 1998 or fiscal 1997. Net operating loss carryforwards of $48
million at January 31, 1999 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 1998, the
Company's net loss increased 308%, to $48.03 million, or $6.79 per weighted
average common share, from $15.58 million, or $2.20 per share, in fiscal 1997.
The net loss also increased as a percentage of net sales, from 13.6% in fiscal
1997 to 46.7% in the current year, resulting from the negative effects of
significant charges for store closings and asset impairment and declines in
comparable store sales.

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, resulting from an increase in the number of customer
transactions, which was partially offset by a decrease in their average size.
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.

        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.




                                       22
<PAGE>   23

        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 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 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 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 was shown as a reserve for
store closing expenses to be incurred in future months.

        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 then-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.

        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 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.




                                       23
<PAGE>   24
        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 re-merchandising programs, as well in its
routine operations during the first nine months of the year.

        Income Taxes. The Company did not record an income tax benefit for
either fiscal 1997 or fiscal 1996. Net operating loss carryforwards of $7.37
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.

YEAR 2000 READINESS

        The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 technology failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company has substantially completed its assessment of the
risks to the availability and integrity of financial systems and the reliability
of operational systems. The Company is also communicating with vendors,
financial institutions and others with which it does business to coordinate Year
2000 conversion.

        Excluding in-house salaries, wages and benefits, the Company spent
$20,000 in fiscal 1998 for the enhancement of operational and financial software
to achieve Year 2000 readiness and has committed an additional $10,000 for
enhancements that the Company believes will be necessary and sufficient to
complete this process. The Company's commitment in fiscal year 1999 to Year 2000
issues represents less than two percent of the Company's budget for management
information systems. Due to some uncertainty inherent in the issue of Year 2000
readiness, including uncertainty regarding the readiness of suppliers, the
Company cannot yet complete a comprehensive analysis of the most likely worst
case Year 2000 scenario. However, the Company has been developing contingency
plans for Year 2000 related interruptions. These plans include emergency backup
and recovery procedures, manual processes, alternative systems and work-around
procedures. Contingency plans will be reviewed continually up through the date
change to Year 2000.

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 inventory liquidations and store closings,
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.



                                       24
<PAGE>   25

<TABLE>
<CAPTION>
                                                FISCAL QUARTER(1)
                             --------------------------------------------------------
                              FIRST           SECOND          THIRD           FOURTH
                             --------        --------        --------        --------
                                                  (IN THOUSANDS)
<S>                          <C>             <C>             <C>             <C>
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)

FISCAL 1998:
      Net sales............. $ 21,705        $ 20,862        $ 20,669        $ 39,579
        % of full year......     21.1%           20.3%           20.1%           38.5%
      Gross margin.......... $  6,110        $  4,917        $  5,901        $ 14,070
        % of full year......     19.8%           15.8%           19.0%           45.4%
      Net loss.............. $ (4,997)       $(10,173)       $ (5,812)       $(27,052)

</TABLE>

-------------

(1)     Percentage amounts may not total 100% due to rounding.

LIQUIDITY AND CAPITAL RESOURCES

    CASH FLOW FOR FISCAL 1998

        The Company began fiscal 1998 with cash and cash equivalents totaling
$8.59 million and no short-term investments. During the year, cash was used to
fund (a) the Company's net cash loss of $13.05 million, and (b) fixed asset
additions related to remodeling and the opening of one new store. On April 29,
1998, the Company entered a Loan and Security Agreement (the "Foothill Loan")
with Foothill Capital Corporation ("Foothill"), under which Foothill provided
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 was generally a variable percentage (ranging from 55% to 65%)
of eligible finished goods inventory. This line, which was secured by the assets
of the Company, bore 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 was 7.0%. In order to access the Foothill loan,
the Company was required to maintain certain financial covenants, including
covenants relating to earnings and limitations on losses, measured quarterly as
EBITDA (earnings before interest, taxes, depreciation and amortization), and
which varied from quarter to quarter.

        In the third quarter, the Company began borrowings under the Foothill
Loan to meet operating expenses and, subsequently, to build up inventory levels
for the holiday season. The maximum amount borrowed during this time was $6.0
million; the interest rate on all borrowings was 9.75%. All borrowings were
repaid during December, and the Company ended fiscal 1999 with cash and cash
equivalents totaling $4.29 million and no short-term investments or bank
borrowings. Due to its fourth quarter loss, the Company was in violation of the
EBITDA covenant of its credit line at January 30, 1999. The Company negotiated a
reduction in the early termination fee and, on April 14, 1999, terminated the
Foothill Loan with the payment of $125,000. The Company's ability to borrow
under the DIP Facility received the final approval of the Bankruptcy Court on
May 27, 1999.

    FUTURE CASH FLOW PLANS AND EXPECTATIONS

    On April 23, 1999, the Company entered the DIP Facility with BankBoston,
which is intended to provide Garden Botanika with the cash and liquidity to
conduct its operations and pay for inventory shipments at normal levels for the
Retained Stores during the course of the Chapter 11 Case. The DIP Facility
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 the Company's eligible
inventory valued at cost or 80% of the net liquidation value of the eligible
inventory. Advances under the facility are also subject to certain reserves, as
defined in the DIP Facility. The facility expires on the earlier of April 23,
2001 or the on the Company's emergence from bankruptcy.

    The DIP Facility, which is secured by the assets of the Company, bears
interest at BankBoston'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. In order to access the DIP Facility, the Company is
required to maintain certain financial covenants, including minimum consolidated
earnings before interest, taxes, depreciation, amortization and restructuring
expense and limitations on capital expenditures. The DIP facility also contains
restrictive covenants including, among other things, the maintenance 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 May 27, 1999 was $4.4 million. As of May 27, 1999, the Company
had made no borrowings under the DIP Facility.

    The Company believes that its cash balance at the end of fiscal 1998,
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 1999. The Company's uses of
capital for the remainder of fiscal 1999 are expected to include working capital
for operating expenses and satisfaction of liabilities incurred subsequent to
the Petition Date, expenditures related to maintaining Retained 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. The Company's capital requirements, and its ability to obtain
financing, may vary significantly from those anticipated, however, depending
particularly on the Chapter 11 Case, 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 Company has also received the authority of the Bankruptcy Court to retain
the services of a liquidator to close and conduct closing sales at 90 store
locations. The Company has not completed its review of all of its pre-petition
contracts and leases for assumption or rejection. The ultimate amount of, and
settlement terms for, such liabilities are subject to the approval of a plan of
reorganization and, accordingly, the timing and form of settlement are not
presently determinable.


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 June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This pronouncement establishes new standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The Company
adopted SFAS No. 130 during fiscal 1998. The adoption did not have a significant
impact on the Company's presentation of income or operations.

        In June 1997, the Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This pronouncement establishes standards for the way that public business
enterprises report information about operating segments in annual and interim
financial statements issued to shareholders. The Company adopted SFAS No. 131
during fiscal 1998. The Company has determined that it currently operates
entirely in one segment.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK

        The Company is subject to market risks from changes in interest rates.
The interest rate on the Company's revolving credit facilities, which may
represent a significant portion of the Company's outstanding debt, is variable
based upon BankBoston's prime rate.

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 -



                                       25
<PAGE>   26

        There were no changes in or disagreements with the Company's independent
accountants on auditing and financial disclosure during the fiscal year ended
January 30, 1999.




                                       26
<PAGE>   27

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -

        The executive officers and directors of the Company are set forth
below.


<TABLE>
<CAPTION>
NAME                         AGE                         POSITION
----                         ---                         --------
<S>                           <C>          <C>
Arlee J. Jensen               50           Director, President--Chief Executive Officer
George W. Newman              50           Director, Vice President--Chief Financial Officer
John A. Garruto               46           Vice President -- Research and Product Development
Jeffrey M. Hare               34           Vice President--Operations
J. Victor Fandel              45           Director
Kern L. Gillette              46           Director
Michael W. Luce               48           Director
</TABLE>

        Arlee J. Jensen has been the Company's President and Chief Executive
Officer since January 1999. Prior to that, she was its Senior Vice President --
Merchandising and Marketing from 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 Director --
Creative Merchandising.

        George W. Newman has been the Company's Vice President -- Chief
Financial Officer since December 1998. Prior to that, he was its Vice President
-- Controller from January 1998 and was its Controller since joining the Company
in February 1996. 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.

        John A. Garruto has been the Company's Vice President -- Research and
Product Development since October 1995. From February 1991 to October 1995, Mr.
Garruto was Vice President -- Research and Development for Innovative
Biosciences Corporation, a manufacturer of personal care products sold to, among
others, Garden Botanika. Mr. Garruto held the same position with Randall
International, which was founded by a Director of the Company, from 1989 to
1991.

        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 manager, including the position of Production Manager.




                                       27
<PAGE>   28

        J. Victor Fandel has been a director of the Company since March 1999.
Since 1985, Mr. Fandel has been one of three principals operating Terranomics
Retail Services ("Terranomics"), a division of BT Commercial Real Estate, a
regional real estate brokerage firm. In that capacity, Mr. Fandel directs
national and regional specialty tenant strategies for retailers and assists
urban and specialty retail developments with the management of their real
estate. From 1991 to 1994, Mr. Fandel assisted Garden Botanika in obtaining many
of its store locations. Mr. Fandel is also a director of The Roberts Foundation,
a charitable nonprofit foundation.

        Kern L. Gillette has been a director of the Company since March 1999.
Previously, Mr. Gillette was employed by Cinnabon, Inc., a leading retailer of
gourmet cinnamon rolls with 210 company-owned stores and 150 franchised stores
throughout North America, where, from 1997 to January 1999, he served as
President and Chief Executive Officer and where, from 1996 to January 1999, he
also served as Chief Financial Officer. Prior to that, Mr. Gillette served from
1992 to 1996 as Chief Financial Officer at Reese Brothers, Inc., a direct
response telemarketing firm, and he has held various executive positions with
turnaround responsibilities, from 1990 to 1992 at Action Industries, Inc., a
publicly held supplier of turnkey retail sales events, and from 1985 to 1989 at
General Nutrition, Inc., a publicly held specialty retailer of nutritional
supplements and related products.

        Michael W. Luce is a co-founder of the Company and has served as a
director since its formation in 1989. From 1989 until January 1999, Mr. Luce
served as the Company's President and Chief Executive Officer. Prior to founding
Garden Botanika, Mr. Luce was President and Chief Operating Officer of Eddie
Bauer Company ("Eddie Bauer"), an outdoor clothing retailer, until it was
acquired by Spiegel, Inc. in 1988. From 1984 to 1988, before becoming its
President, Mr. Luce held various positions in the store and mail-order divisions
of Eddie Bauer, including General Merchandise Manager and Vice President of
Marketing.

THE BOARD OF DIRECTORS

        The Board of Directors consists of three classes, each with either one
or two members. At the 1997 Annual Meeting of Shareholders, the directors in
Class 1 were elected for a one-year term, the directors in Class 2 were elected
for a two-year term, and the directors in Class 3 were elected for a three-year
term. At each subsequent annual meeting of shareholders, directors elected to
succeed those directors whose terms expire will each be elected for a three-year
term of office, so that directors will hold office for staggered terms of three
years and until their successors are elected and qualified.

        The Company's Board of Directors is authorized to set the number of
directors, so long as the number is not less than three nor more than nine, and
so long as any reduction in the number of members does not have the effect of
shortening the term of an incumbent director. The number of members on the Board
of Directors is currently set at five.

    Further Information Concerning the Board of Directors

        The Board of Directors held five meetings during fiscal year 1998. The
Company has established two standing committees of the Board of Directors, an
Audit Committee and a Compensation Committee, and does not have a standing
Nominating Committee.



                                       28
<PAGE>   29

        The purpose of the Audit Committee is to review the functions of the
Company's management and independent auditors pertaining to the Company's
financial statements and perform such other related duties and functions as are
deemed appropriate by the Audit Committee and the Board of Directors. The Audit
Committee held four meetings during fiscal year 1998. Messrs. Fandel and
Gillette are currently the members of the Audit Committee.

        The purpose of the Compensation Committee is to determine officer and
director compensation and administer the Company's 1992 Combined Incentive and
Nonqualified Stock Option Plan (the "Employee Plan"). The Compensation Committee
held two meetings during fiscal year 1998. Messrs. Fandel, Gillette and Luce are
currently the members of the Compensation Committee.

        All directors attended 75% or more of the aggregate number of Board
meetings and committee meetings on which they served.

    Directors' Compensation and Benefits

        Nonemployee directors of the Company are reimbursed for reasonable
out-of-pocket expenses in connection with their travel to and attendance at
Board of Directors meetings. Under the terms of the 1996 Directors' Nonqualified
Stock Option Plan (the "Directors Plan"), each nonemployee director will receive
an automatic grant of an option to purchase 1,271 shares of Common Stock upon
his or her election or appointment to the Board of Directors and thereafter at
each Annual Meeting of the Board of Directors for as long as the individual
continues to serve as a director of the Company. The exercise price of options
granted under the Directors' Plan must equal the fair market value of the Common
Stock on the date of grant. Options will vest at the rate of one-twelfth per
month so that each year's options are fully vested at the end of one year.

        On March 3, 1999, the Board of Directors authorized cash payments to
outside directors in the amount of $2,500 per year, payable quarterly in
advance. In addition, the Board authorized payment of $300 to outside directors
for each meeting of the Board of Directors or of a committee of the Board of
Directors attended by the outside directors.

        The Annual Meeting of the Board of Directors for fiscal 1999 is
scheduled to be held following the Annual Meeting of Shareholders, at which time
the Company expects that options to purchase an aggregate of 6,355 shares will
be granted to current directors. To date, 7,626 options have been granted under
the Directors' Plan.

ITEM 11 - EXECUTIVE COMPENSATION -

        The following Summary Compensation Table shows compensation information
for (i) all individuals serving as the Company's Chief Executive Officer or
acting in a similar capacity during the fiscal year ending January 30, 1999,
(ii) the four most highly paid executive officers of the Company other than the
Chief Executive Officer who were serving as executive officers at the end of the
year ending January 30, 1999, and (iii) two individuals who were among the four
most highly paid employees of the Company other than the Chief Executive Officer
during fiscal 1998 but who were not serving as executive officers on January 30,
1999 (collectively referred to as "the Named Officers") for the indicated fiscal
years.



                                       29

<PAGE>   30



                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                LONG-TERM
                                                              COMPENSATION
                                                                  AWARDS
                                                ANNUAL            ------
                                             COMPENSATION       SECURITIES
                                          -------------------    UNDERLING          ALL OTHER
NAME AND PRINCIPAL POSITION     YEAR      SALARY($)  BONUS($)    OPTIONS(#)       COMPENSATION
---------------------------     ----      ---------  --------    ----------       ------------
<S>                             <C>       <C>       <C>            <C>              <C>
Michael W. Luce                 1998      $258,000     --          150,000         $111,890(1)
   Former President and Chief   1997      $260,729     --           57,778         $  9,578(2)
   Executive Officer(3)         1996      $253,076     --          120,580         $  4,125(2)

Arlee J. Jensen                 1998      $188,580     --             --           $  7,258(2)
   President and Chief          1997      $184,005     --           20,800         $  6,142(2)
   Executive Officer            1996      $178,272  $15,132         40,000         $  2,527(2)

George W. Newman                1998      $118,205     --             --                 --
   Vice President and Chief     1997      $ 89,477     --            4,900               --
   Financial Officer            1996(4)   $ 69,751     --            5,000               --

John A. Garruto                 1998      $143,999     --             --                 --
  Vice President--Research      1997      $132,675     --           10,300               --
  and Development               1996      $130,201  $ 7,448         29,300               --

Jeffrey M. Hare                 1998      $ 85,092     --             --                 --
  Vice President--Operations    1997      $ 73,204     --            6,100               --
                                1996      $ 56,720  $ 3,006          7,000               --

Susan M. Walker                 1998      $129,262     --             --           $  6,600(5)
   Vice President--Stores       1997      $126,208     --            8,800
                                1996(6)   $100,798     --           15,000

Kay Kowanko                     1998      $124,444     --             --                 --
   Creative Director            1997(7)    $34,308     --            5,000         $ 22,797(8)

Susan M. Detmer                 1998      $143,086     --             --                 --
   Former Vice President--      1997      $157,041     --           17,200               --
   Merchandising (9)            1996(10)   $23,067     --           25,000               --
</TABLE>


(1)   Includes separation payment of $66,000; payout of accrued vacation time of
      $32,894; and term life insurance and medical insurance premiums.
(2)   Represents term life insurance and medical insurance premiums.
(3)   Mr. Luce resigned his positions as President and Chief Executive Officer
      of the Company effective January 1999.
(4)   Mr. Newman joined the Company during fiscal 1996. If Mr. Newman had been
      employed for the entire year at the same annual base salary rate, his
      annual salary would have been $76,093.
(5)   Represents automobile allowance.
(6)   Ms. Walker joined the Company during fiscal 1996. If Ms. Walker had been
      employed for the entire year at the same annual base salary rate, her
      annual salary would have been $120,958.
(7)   Ms. Kowanko joined the Company during fiscal 1997. If Ms. Kowanko had been
      employed for the entire year at the same annual base salary rate, her
      annual salary would have been $125,000.
(8)   Represents relocation expenses.
(9)   Ms. Detmer resigned her position as Vice President--Merchandising of the
      Company effective December 1998.




                                       30
<PAGE>   31

(10)  Ms. Detmer joined the Company during fiscal 1996. If Ms. Detmer had been
      employed for the entire year at the same annual base salary rate, her
      annual salary would have been $150,000.

STOCK OPTIONS

    Option Grants in Fiscal Year 1998

        The following table provides information on option grants to the Named
Officers in fiscal 1998. The only Named Officer to receive an option grant in
fiscal 1998 was Michael W. Luce. Options for a total of 150,000 shares of Common
Stock were granted to him on March 1, 1998 in three series of 50,000 shares
each, with exercise prices of $2.00, $4.00 and $8.00, respectively. The options
in the aggregate vest over the course of four years, with the lowest priced
options vesting first. For example, after one year, options for one quarter of
the shares, or 37,500 shares, would be fully vested. Options for 50,000 shares
have the lowest exercise price of $2.00, so that Mr. Luce would have the right
to purchase 37,500 shares for $2.00 each after one year. After year two, Mr.
Luce would, in addition, have the right to purchase the balance of 12,500 shares
for $2.00 each plus 25,000 shares with the next lowest exercise price, $4.00 per
share.

        In the table below, grants are listed separately for each series. In
addition, this table shows the potential gain that could be realized if the fair
market value of the Company's Common Stock were to appreciate at either a 5% or
10% annual rate for the period of the option term.

<TABLE>
<CAPTION>
                                                                POTENTIAL REALIZABLE VALUE AT
                                     INDIVIDUAL GRANTS(1)       ASSUMED ANNUAL RATES OF STOCK
                                     --------------------           PRICE APPRECIATION FOR
                                SECURITIES                               OPTION TERM(2)
                                UNDERLYING  EXERCISE  EXPIRATION         --------------
NAME                            OPTIONS(#)    PRICE      DATE          5%              10%
----                            ----------    -----      ----          --              ---
<S>                               <C>         <C>      <C> <C>      <C>             <C>
Michael W. Luce 1998 Series A     50,000      $2.00    3/3/2008     $32,348         $110,742
Michael W. Luce 1998 Series B     50,000      $4.00    3/3/2008        --            $10,742
Michael W. Luce 1998 Series C     50,000      $8.00    3/3/2008        --              --
</TABLE>

(1)   All options vest annually over a four-year period and expire after ten
      years and two days. See also "Employment Agreements and Change in Control
      Arrangements."
(2)   The assumed rates of growth are prescribed by the Securities and Exchange
      Commission for illustrative purposes only and are not intended to predict
      or forecast future stock prices, nor do they reflect the Company's
      estimate of future stock price growth. The fair market value of the
      Company's Common Stock at the beginning of the option term was $1.625 per
      share.

    1998 Fiscal Year-End Option Values

        The following table shows the value of option grants outstanding as of
January 30, 1999 for each Named Officer. None of the Named Officers exercised
options in fiscal 1998.





                                       31

<PAGE>   32

<TABLE>
<CAPTION>
                                                                  VALUE OF UNEXERCISED, IN-THE-
                           NUMBER OF SECURITIES UNDERLYING              MONEY OPTIONS(1)
                                 UNEXERCISED OPTIONS                    ----------------
                                 -------------------              EXERCISABLE     UNEXERCISABLE
        NAME             EXERCISABLE (#)     UNEXERCISABLE (#)     ($ VALUE)        ($ VALUE)
        ----             ---------------     -----------------     ---------        ---------
<S>                          <C>                  <C>                  <C>             <C>
Michael W. Luce              131,301              228,837              --              --
Arlee J. Jensen              56,022               44,500               --              --
George W. Newman              3,725                6,175               --              --
John A. Garruto              17,225               22,375               --              --
Jeffrey M. Hare               8,834                9,028               --              --
Susan M. Walker               9,700               14,100               --              --
Kay Kowanko                   1,250                3,750               --              --
Susan M. Detmer              14,300                  0                 --              --
</TABLE>

(1)   Calculation based on the spread between the closing sale price of $0.375
      per share of Common Stock on the last trading day before January 30, 1999
      and the exercise price of the grants.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

        The Company is a party to an amended employment agreement with Mr. Luce
that provides, among other things, for his resignation as President effective
January 19, 1999 and for his continued service as a member of the Board of
Directors for a period of at least one year. In return, the agreement calls for
severance payments equaling $131,000. Severance payments were to be made in
three installments, with $66,000 due on January 19, 1999, and $32,500 due on
each of April 19 and July 19, 1999. Under the agreement, in the event the
Company failed to make any required payment when due, Luce would be entitled to
severance totaling $260,000, less any amounts already paid. The Company made the
first installment payment of $66,000 but did not make the second payment of
$32,500 when due on April 19, 1999. On April 20, 1999, the Petition Date of the
Company's bankruptcy filing, Luce made written demand for immediate payment of
$194,000. Under the agreement, the Company continues to pay Luce's health and
life insurance benefits for a period of one year, and his stock options continue
to vest as though he were an employee of the Company. Under the amended
agreement, Luce is no longer bound by prior noncompetition provisions.

        The Company is also a party to an Option and Severance Agreement with
Mr. John A. Garruto, the Company's Vice President of Research and Product
Development, which provides for an annual base salary of $130,000. In addition,
Mr. Garruto received stock options to purchase 25,424 shares of Common Stock at
$1.97 per share, which options vest monthly over a five-year period for as long
as Mr. Garruto is employed by the Company. These options were not granted under
the Employee Plan. In the event Mr. Garruto is terminated without cause (as
determined by the Company's Board of Directors), he will be entitled to
severance payments equal to his then-current salary for nine months following
the effective date of termination.

        In February 1998, the Board of Directors authorized a Retention Plan and
granted certain key employees the right to earn two annual cash bonuses if they
stayed continuously employed by the Company for one and two years, respectively,
following the date of the grant. On the first anniversary of the date of the
grant, these employees, except for Ms. Jensen and Mr. Newman, were given their
first bonus retention installments, equal to one-third of the total amount which
they would be able to earn. Ms. Jensen and Mr. Newman both voluntarily forbore
acceptance of their bonuses, which were accrued as a liability of the Company.
In the Chapter 11 Case, the Company has indicated that it intends to reject its
future obligations under the Retention Plan.

        Under the Employee Plan, outstanding options vest, at the discretion of
the Compensation Committee, upon the occurrence of certain transactions,
including certain mergers and other business combinations involving the Company.




                                       32

<PAGE>   33

REPORT OF THE COMPENSATION COMMITTEE

        The Compensation Committee of the Board of Directors of the Company
determined and administered the compensation of the Company's executive officers
during fiscal 1998.

    Compensation Principles

        The Compensation Committee believes that, outside the context of a
bankruptcy filing, a significant portion of executive compensation should be
at risk, that performance should be rewarded, that the financial interests of
executive officers should be aligned with shareholders through stock ownership,
and that compensation should be competitive with others in the personal care
products industry. In fiscal 1998, we structured compensation at Garden
Botanika to meet these criteria.

        The Company's executive compensation program consists of three
components: (i) base salaries, (ii) short-term incentives in the form of annual
cash bonuses, and (iii) long-term incentives in the form of stock options. At
higher management levels, the mixture of components is weighted more heavily
toward variable performance-based incentives. In developing its compensation
program and setting compensation levels, the Company has consulted with
compensation experts and reviewed prior years' compensation levels among
comparable executives.

        Base salary levels are vital to the Company's ability to attract and
retain qualified key officers. Increases in salary, if appropriate, are made on
the basis of an annual performance rating of the individual. In formulating a
performance rating, the Compensation Committee considers an individual's
contribution to sales increases, operating efficiency, expense control, earnings
and expansion. Qualitative factors, such as leadership ability, are also
recognized.

        The purpose of annual cash bonus awards, which are paid after the fiscal
year-end, is to provide a direct linkage between executive compensation and the
Company's overall annual performance. At the beginning of each fiscal year, the
Compensation Committee and the Board of Directors establish target annual
financial performance levels for the Company. At the end of each fiscal year,
the Compensation Committee and the Board of Directors rate the Company's prior
year's performance based, in part, on its financial achievements (in relation to
the target performance levels for that year) and, in part, on a variety of
qualitative assessments. Based on the disappointing results produced by the
Company in 1997 and 1998, no executive cash bonuses were paid for those years.

        Stock option grants to executives constitute the long-term equity
incentive component of the Company's compensation program, the purpose of which
is to strengthen the link between the executive's compensation and the Company's
long-term stock performance. Stock options are granted at the fair market value
of the Company's Common Stock on the date of grant and expire after ten years
and two days. The Compensation Committee determines the vesting schedule, which
is generally in equal increments annually over the course of four or five years.
In determining stock option awards, the Compensation Committee considers the
executive's expected contributions toward meeting the Company's long-term
strategic goals and grants of options in prior years.

    Chief Executive Officer Compensation

        During fiscal 1998, Garden Botanika's most highly compensated officer
was Michael W. Luce, President and Chief Executive Officer of the Company from
its inception in 1989 until January 1999. Mr. Luce's 1997 performance, which was
the basis for setting the level of his compensation for fiscal 1998, was
reviewed by the Compensation Committee and discussed with the Board of Directors
and Mr. Luce. The Committee noted that, during fiscal 1997, the Company had
increased its sales volume by approximately 24% and opened 27 stores, increasing
its store base by approximately 11%. The Compensation Committee also noted,
however, that the Company's comparable store sales increased only 1%, well below
historical levels, and the Company needed to improve its performance in meeting
certain financial targets, such as overall sales and store contribution margins.
Against this background, Mr. Luce's annual salary for fiscal 1998 was not
increased from the prior year, and no annual cash bonus was awarded for the
year.





                                       33


<PAGE>   34

        At the beginning of fiscal 1998, the Compensation Committee also
determined that equity-based incentive compensation should serve as a
potentially significant portion of Mr. Luce's total compensation so that the
value ultimately realized by Mr. Luce would depend directly on the long-term
performance of the Company and would be commensurate with the value realized by
shareholders. On March 1, 1998, the Committee granted Mr. Luce nonqualified
stock options to purchase 50,000 shares at $2.00 per share, 50,000 shares at
$4.00 per share and 50,000 shares at $8.00 per share. The options vest at the
rate of 37,500 per year, with the options for the lowest exercise price vesting
first.

        Following the resignation of Mr. Luce as the Company's President and
Chief Executive Officer on January 19, 1999, Ms. Jensen assumed those positions.
Her salary was not adjusted in fiscal 1998 from that which she earned previously
as the Company's Senior Vice President--Marketing.

    Internal Revenue Code Section 162

        Under Section 162 of the Internal Revenue Code of 1986, as amended (the
"Code"), the federal income tax deduction for compensation paid to the Chief
Executive Officer and the four most highly compensated other executive officers
of publicly held corporations is limited to $1 million per officer per fiscal
year, unless the compensation qualifies as "performance-based compensation"
under Section 162(m) of the Code. The Compensation Committee is aware of this
limitation and believes that no compensation paid by the Company during 1998
will exceed the $1 million limitation.

        In fiscal 1998, the Compensation Committee consisted of Messrs. Jeffrey
H. Brotman, Gerald R. Gallagher and Dale J. Vogel, none of whom serve currently
on the Board of Directors. The current Compensation Committee anticipates that
its principles will be reconsidered in the context of the Chapter 11 Care.


                                            Compensation Committee
                                            J. Victor Fandel
                                            Kern L. Gillette
                                            Michael W. Luce

STOCK PERFORMANCE GRAPH

        The following graph compares cumulative total shareholder return on the
Common Stock since May 22, 1996, the date the Company's shares began trading on
the Nasdaq National Market, with the cumulative total return on the Nasdaq Stock
Market (U.S.) Index and the Nasdaq Retail Trade Stocks Index over the same
period. The comparison assumes $100 was invested on May 22, 1996 in the Common
Stock and in each of the indices and assumes reinvestment of dividends, if any,
since that date. The Company has not paid cash dividends on the Common Stock.
Historic stock price is not indicative of future stock performance.






                                       34


<PAGE>   35


                                   CUMULATIVE
                                 TOTAL RETURN(1)


<TABLE>
<CAPTION>
                                                  5/22/96   1/31/97   1/30/98   1/30/99
                                                  -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
Garden Botanika, Inc.............................   $100      $ 48      $ 10      $  2
Nasdaq Stock Market (U.S.) Index.................   $100      $111      $131      $204
Nasdaq Retail Trade Stocks Index.................   $100      $ 96      $112      $137
</TABLE>

------------

(1)   Assumes $100 investment of May 22, 1996.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        During fiscal 1998, the following individuals (none of whom was or had
been an employee of the Company) served on the Company's Compensation Committee:
Jeffrey H. Brotman, Gerald R. Gallagher and Dale J. Vogel. There were no
interlocks with other companies within the meaning of the Commission's proxy
rules during fiscal 1998.





                                       35


<PAGE>   36

Proxy Statement for the 1999 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 following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of May 20, 1999 by (i) each director;
(ii) the Named Officers; and (iii) all directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
                                                       Amount of
                            Name                 Beneficial Ownership  Percentage
                            ----                 --------------------  ----------
               <S>                                    <C>                <C>
               J. Victor Fandel(1) .............          318               *
               Kern L. Gillette(2) .............          424               *
               Michael W. Luce(3) ..............      236,942            3.35%
               Arlee J. Jensen(4) ..............       95,146            1.33%
               George W. Newman(5) .............        5,100               *
               John A. Garruto(6) ..............       48,742               *
               Jeffrey M. Hare(7) ..............       11,693               *
               Susan M. Walker(8) ..............       14,289               *
               Susan M. Detmer .................            0               0%
               Kay Kowanko(9) ..................        2,500               *
               All directors and executive
                 officers as a group (8 persons)      133,267            1.89%
</TABLE>


 *    Less than one percent.
(1)   Consists of 212 shares of Common Stock that are issuable upon the
      exercise of currently exercisable options and 106 shares of Common Stock
      that are issuable upon the exercise of options exercisable within 60 days.
(2)   Consists of 212 shares of Common Stock that are issuable upon the
      exercise of currently exercisable options and 212 shares of Common Stock
      that are issuable upon the exercise of options exercisable within 60 days.
(3)   Includes 5,084 shares of Common Stock held by certain family members of
      Mr. Luce for which Mr. Luce may be deemed a beneficial owner. Also
      includes 137,657 shares of Common Stock that are issuable upon the
      exercise of currently exercisable options and 1,444 shares of Common Stock
      that are issuable upon the exercise of options exercisable within 60 days.
(4)   Includes 200 shares of Common Stock held by Ms. Jensen's spouse for the
      benefit of a minor child, 61,826 shares of Common Stock that are issuable
      upon the exercise of currently exercisable options and 5,200 shares of
      Common Stock that are issuable upon the exercise of options exercisable
      within 60 days.
(5)   Includes 3,725 shares of Common Stock that are issuable upon the exercise
      of currently exercisable options and 1,225 shares of Common Stock that are
      issuable upon the exercise of options exercisable within 60 days.
(6)   Includes 39,257 shares of Common Stock that are issuable upon the exercise
      of currently exercisable options and 5,329 shares of Common Stock that are
      issuable upon the exercise of options exercisable within 60 days.
(7)   Consists of 9,978 shares of Common Stock that are issuable upon the
      exercise of currently exercisable options and 1,715 shares of Common
      Stock that are issuable upon the exercise of options exercisable within
      60 days.
(8)   Includes 11,289 shares of Common Stock that are issuable upon the exercise
      of currently exercisable options.
(9)   Consists of 1,250 shares of Common Stock that are issuable upon the
      exercise of currently exercisable options and 1,250 shares of Common Stock
      that are issuable upon the exercise of options exercisable within 60 days.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

        No person (including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act) is known by the Company to be the
beneficial owner of more than five percent of the Company's Common Stock.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Exchange Act ("Section 16(a)") requires the
Company's directors and certain of its officers, and persons who own more than
10% of a registered class of the Company's equity securities (collectively,
"Insiders"), to file reports of ownership and changes in ownership with the
Commission. Insiders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file.

        Based solely on its review of the copies of such forms received by it,
or written representation from certain reporting persons that no Form 5 was
required for those persons, the Company believes that its Insiders complied with
all applicable Section 16(a) filing requirements for fiscal 1998.




                                       36


<PAGE>   37

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -

        Since its inception, the Company has acquired through arm's length
transactions a significant portion of its finished personal care products,
particularly in its Aromatics line, from Randall International, the President
and majority shareholder of which, William B. Randall, was a member of the
Company's Board of Directors from 1990 to March 1999. The cost of products
purchased from Randall International by the Company in fiscal 1998 was
approximately $2.4 million. These purchases represented approximately 8.6% of
the Company's total purchases for such year.

        In the fourth quarter of fiscal 1997, the Company began to supply, on an
experimental basis through arm's length transactions, selected specially priced
Garden Botanika products for resale by Costco in certain of its membership
warehouse stores. Jeffrey H. Brotman, a founder of Costco and currently its
Chairman of the Board, is also a co-founder of the Company and served as its
Chairman of the Board and Secretary from 1990 until January 1999. Total sales by
the Company to Costco in fiscal 1998 were approximately $740,000. The Company
does not currently anticipate further sales to Costco in fiscal 1999.

                                   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 June 1, 1999.


                                      GARDEN BOTANIKA, INC.



                                      By:  /s/ Arlee J. Jensen
                                          --------------------------------------
                                           Arlee J. Jensen
                                           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 June 1, 1999, on behalf of the
Registrant and in the capacities indicated.

<TABLE>
<CAPTION>
              SIGNATURE                                       TITLE
              ---------                                       -----
<S>                                     <C>


        /s/ Arlee J. Jensen
----------------------------------      President, Chief Executive Officer and Director
            Arlee J. Jensen                (Principal Executive Officer)


       /s/ George W. Newman
----------------------------------      Vice President, Chief Financial Officer,
           George W. Newman                Secretary and Director (Principal Accounting
                                           Officer)


       /s/ Michael W. Luce
----------------------------------
           Michael W. Luce              Director


     /s/ J. Victor J. Fandel
----------------------------------
         J. Victor Fandel               Director


       /s/ Kern L. Gillette
----------------------------------
           Kern L. Gillette
</TABLE>




                                       37











<PAGE>   38

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:

<TABLE>
<CAPTION>
                1.      FINANCIAL STATEMENTS:                                                           PAGE
                                                                                                        ----
<S>                                                                                                     <C>
                        - Report of Arthur Andersen LLP, Independent Public Accountants .............    F-2

                        - Balance Sheets - January 30, 1999 and January 31, 1998 ....................    F-3

                        - Statements of Operations - For the fiscal years ended January 30, 1999,
                             January 31, 1998 and February 1, 1997...................................    F-4

                        - Statements of Shareholders' Equity - For the fiscal years ended January 30,
                             1999, January 31, 1998 and February 1, 1997 ............................    F-5

                        - Statements of Cash Flows - For the fiscal years ended January 30, 1999,
                             January 31, 1998 and February 1, 1997 ..................................    F-6

                        - Notes to Financial Statements .............................................    F-7

                        - Selected Quarterly Financial Data (Unaudited) - For the
                             fiscal years ended January 30, 1999, January 31, 1998 and
                             February 1, 1997 - See Note (9) of
                             Notes to Financial Statements ..........................................    F-14
</TABLE>

                2.      FINANCIAL STATEMENT SCHEDULES:

                        All schedules are omitted because they are not
                        applicable or because the information is presented in
                        the financial statements or notes thereto.

                3.      EXHIBITS:

                        The required exhibits are included at the end of the
                        Form 10-K Annual Report and are described in the Exhibit
                        Index immediately preceding the first exhibit.

                (b)     Reports on Form 8-K:

                        During the quarter ended January 30, 1999, a Report on
                Form 8-K was filed indicating that the Company had been notified
                that it had failed to meet certain requirements for the
                continued listing of its Common Stock on the Nasdaq Stock
                Market. The Form was filed on November 25, 1998.




                                       38

<PAGE>   39

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 May 17, 1999.


                                        GARDEN BOTANIKA, INC.



                                        By: /s/ Arlee J. Jensen
                                           -------------------------------------
                                           Arlee J. Jensen
                                           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 May 17, 1999, on behalf of the
Registrant and in the capacities indicated.


<TABLE>
<CAPTION>
             SIGNATURE                                   TITLE
             ---------                                   -----
<S>                                     <C>
       /s/ Arlee J. Jensen              President, Chief Executive Officer and Director
----------------------------------         (Principal Executive Officer)
           Arlee J. Jensen


      /s/ George W. Newman              Vice President, Chief Financial Officer,
----------------------------------         Secretary and Director (Principal
          George W. Newman                 Accounting Officer)


      /s/ Michael W. Luce               Director
----------------------------------
          Michael W. Luce


      /s/ J. Victor Fandel              Director
----------------------------------
          J. Victor Fandel


      /s/ Kern L. Gillette              Director
----------------------------------
          Kern L. Gillette
</TABLE>




                                       39


<PAGE>   40

                              GARDEN BOTANIKA, INC.

                               ------------------

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>
                                                                                         PAGE
                                                                                         ----
<S>                                                                                      <C>
FINANCIAL STATEMENTS:

    Report of Arthur Andersen LLP, Independent Public Accountants .......................F-2

    Balance Sheets - January 30, 1999 and January 31, 1998  .............................F-3

    Statements of Operations - For the fiscal years ended January 30, 1999,
      January 31, 1998, and February 1, 1997.............................................F-4

    Statements of Cash Flows - For the fiscal years ended January 30, 1999,
      January 31, 1998 and February 1, 1997..............................................F-5

    Statements of Shareholders' Equity - For the fiscal years ended January
      30, 1999, January 31, 1998 and February 1, 1997....................................F-6

    Notes to Financial Statements - For the fiscal years ended January 30,
      1999, January 31, 1998 and February 1, 1997........................................F-7

    Selected Quarterly Financial Data (Unaudited) - For the fiscal years ended
      January 30, 1999, January 31, 1998 and February 1, 1997 - 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>   41

                    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 30, 1999 and January 31, 1998, and the
related statements of operations, shareholders' equity and cash flows for the
fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997.
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 30, 1999 and January 31, 1998, and the results of its operations and its
cash flows for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses since its inception. In addition, as described in Note 1 to the
accompanying financial statements, on April 20, 1999, the Company filed a
voluntary petition for relief under Chapter XI of the U.S. Bankruptcy Code.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters,
including its intent to file a plan of reorganization that will be acceptable to
the Court and the Company's creditors, are also described in Note 1. In the
event a plan of reorganization is accepted, continuation of the business
thereafter is dependent on the Company's ability to achieve successful future
operations. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.

                                        ARTHUR ANDERSEN LLP

Seattle, Washington
May 10, 1999



                                      F-2
<PAGE>   42

                                       BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            JANUARY 30,       JANUARY 31,
                                                                               1999               1998
                                                                            -----------       -----------
                                                                                (amounts in thousands)
<S>                                                                          <C>                <C>
                                                 ASSETS
Current assets:
   Cash and cash equivalents                                                 $  4,295           $  8,594
   Inventories                                                                 16,204             23,747
   Prepaid expenses:
     Rent                                                                       1,580              1,640
     Other                                                                      1,338              1,583
                                                                             --------           --------
     Total current assets                                                      23,417             35,564

Property and equipment:
   Leasehold improvements                                                      23,920             53,030
   Furniture and equipment                                                     11,244             16,420
   Equipment under capital lease                                                  261                261
                                                                             --------           --------
                                                                               35,425             69,711
   Less accumulated depreciation and amortization                             (16,754)           (17,456)
                                                                             --------           --------
     Net property and equipment                                                18,671             52,255

Other assets                                                                       --                 18
                                                                             --------           --------
       Total assets                                                          $ 42,088           $ 87,837
                                                                             ========           ========

                                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Checks drawn in excess of bank balances                                   $  1,522           $  6,055
   Accounts payable                                                             9,436              5,818
   Reserve for store closings                                                   1,327              1,311
   Accrued salaries, wages and benefits                                         1,890              1,536
   Accrued sales tax                                                              680                398
   Garden Club- deferred revenue                                                1,607                 --
   Other                                                                        1,307                756
                                                                             --------           --------
       Total current liabilities                                               17,769             15,874

Deferred rent and other                                                         3,357              3,027
                                                                             --------           --------
       Total liabilities                                                       21,126             18,901

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            98,633             98,573
   Accumulated deficit                                                        (77,671)           (29,637)
                                                                             --------           --------
       Total shareholders' equity                                              20,962             68,936

       Total liabilities & shareholders' equity                              $ 42,088           $ 87,837
                                                                             ========           ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.





                                      F-3
<PAGE>   43

                              GARDEN BOTANIKA, INC.
                            STATEMENTS OF OPERATIONS
                  (amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                                                               FISCAL YEAR ENDED
                                                                               ---------------------------------------------------
                                                                               JANUARY 30,         JANUARY 31,         FEBRUARY 1,
                                                                                  1999                1998               1997
                                                                                ---------          -----------         -----------
                                                                                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                               <C>               <C>                 <C>
Net sales                                                                         102,815           $ 114,591           $  92,465
Cost of sales (including buying and occupancy costs)                               71,817              73,846              52,551
                                                                                ---------           ---------           ---------
       Gross margin                                                                30,998              40,745              39,914

Operating expenses:
    Stores and catalog                                                             39,196              39,524              35,544
    General and administrative                                                     12,021              10,919               8,871
Preopening and facility relocation expenses                                           323                 397               1,426
Provision for store closing and impairment losses on long lived assets             27,400               5,800                  --
                                                                                ---------           ---------           ---------
       Operating loss                                                             (47,942)            (15,895)             (5,927)

Interest income (expense), net                                                        (92)                315                 994
                                                                                ---------           ---------           ---------
       Net loss                                                                 $ (48,034)          $ (15,580)          $  (4,933)
                                                                                =========           =========           =========


Basic and diluted loss per share                                                $   (6.79)          $   (2.20)          $   (0.80)

Weighted average common shares                                                      7,069               7,069               6,146
</TABLE>


   The accompanying notes are an integral part of these financial statements.



                                      F-4
<PAGE>   44

                              GARDEN BOTANIKA, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         FISCAL YEAR ENDED
                                                                           -------------------------------------------------
                                                                           JANUARY 30,        JANUARY 31,        FEBRUARY 1,
                                                                              1999               1998               1997
                                                                           -----------        -----------        -----------
                                                                                        (AMOUNTS IN THOUSANDS)
<S>                                                                         <C>                <C>                <C>
Cash flows from operating activities:
    Net loss                                                                $(48,034)          $(15,580)          $ (4,933)
                                                                            --------           --------           --------

    Adjustments to reconcile net loss to net cash
      used by operating activities:
      Depreciation and amortization                                            8,135              7,869              5,153
      Loss on retirements, store closing and impairment losses                26,850              4,577                422
      Changes in assets and liabilities:
         Inventories                                                           7,543             (4,807)            (8,764)
         Prepaid rent                                                             60               (402)              (443)
         Other assets                                                           (287)             1,490               (499)
         Accounts payable and checks drawn in excess of bank balances           (915)            (2,165)             6,028
         Accrued expenses                                                      1,187                 81                987
         Garden club- deferred revenue                                         1,607                 --                 --
         Reserve for store closings                                               16              1,311                 --
         Deferred rent and other                                                 330                607              1,353
                                                                            --------           --------           --------
           Total adjustments                                                  44,526              8,561              4,237
                                                                            --------           --------           --------
           Net cash used by operating activities                              (3,508)            (7,019)              (696)
                                                                            --------           --------           --------

Cash flows from investing activities:
    Additions to property and equipment                                       (1,401)           (14,161)           (24,225)
    Redemption (purchase) of short-term investments                                0             20,426            (20,426)
    (Decrease) increase in construction accounts payable                                                              (744)
    Decrease (increase) in receivable from lessors                               550              2,083             (1,708)
    Other                                                                                                               --
                                                                            --------           --------           --------
           Net cash used by investing activities                                (851)             8,348            (47,103)
                                                                            --------           --------           --------

Cash flows from financing activities:
    Sale of stock                                                                 --                 --             56,191
    Advances on note payable to bank                                          36,180             16,325             11,958
    Payments on note payable to bank                                         (36,180)           (16,325)           (14,498)
    Other                                                                         60                 60                 45
                                                                            --------           --------           --------
           Net cash provided by financing activities                              60                 60             53,696
                                                                            --------           --------           --------

(Decrease) increase in cash and cash equivalents, net                         (4,299)             1,389              5,897
Cash and cash equivalents, beginning of period                                 8,594              7,205              1,308
                                                                            --------           --------           --------

Cash and cash equivalents, end of period                                    $  4,295           $  8,594           $  7,205
                                                                            ========           ========           ========

Supplemental disclosures:
    Cash paid for interest                                                  $    157           $     92           $    302
    Cash paid for income taxes                                              $     --           $     --           $     --
</TABLE>


   The accompanying notes are an integral part of these financial statements.





                                      F-5
<PAGE>   45
                              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

   Deferred compensation                                     --            --           --           60           --            60
   Net loss                                                  --            --           --           --      (48,034)      (48,034)
                                                       --------      --------     --------     --------     --------      --------
Balance, January 30, 1999                                    --      $     --        7,069     $ 98,633     $(77,671)     $ 20,962
                                                       ========      ========     ========     ========     ========      ========
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                       F-6


<PAGE>   46

                              GARDEN BOTANIKA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                JANUARY 30, 1999

                          -----------------------------


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 30,
1999, Garden Botanika operated 250 retail locations in 41 states.

        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. 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 1999.

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.

     Estimates and Assumptions

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the amounts of revenues and expenses reported during the
period. Actual results could differ from those estimates.


<PAGE>   47

     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.

     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 30, 1999 and January 31, 1998, respectively, $66,000 and $200,000
of advertising was reported as assets. Advertising expense was $8.77 million,
$7.93 million and $9.57 million in fiscal years 1998, 1997 and 1996,
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 and 1996 were $219,000 and $1.13 million. There were no leasehold
acquisition costs capitalized in fiscal year 1998. Depreciation and amortization
expense was $8.13 million, $7.87 million and $5.15 million, for fiscal years
1998, 1997 and 1996 , respectively.





                                      F-8
<PAGE>   48

        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. In addition, the Company performed an analysis
of the asset values of individual stores in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121. As a result of that review, an
additional charge of $2.60 million was recorded as of January 31, 1998.

        In fiscal year 1998, the Company closed 29 stores and recorded a
provision to cover the closing expenses and lease termination costs of an
additional 24 stores in the amount of $7.3 million. Seven of these stores were
not closed until the first quarter of fiscal 1999. At January 31, 1999, the
Company had spent $6.0 million of these closing expenses and had a liability of
$1.3 million recorded on the balance sheet. At the conclusion of the 1998
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 $20.1 million was recorded at the end
of the fourth quarter of fiscal 1998 to recognized potential impairment of long
lived assets for 118 stores. This amount reduced property and equipment.

        On April 30, 1999, the Bankruptcy Court authorized the Company to
reject leases for 95 poorly performing stores. Seventeen of those stores had
been identified for closure in fiscal 1998 and were included in the reserves
for store closings described above. An additional charge of approximately $7.0
million will be recorded in the first quarter of fiscal 1999 to cover the
estimated additional costs for closure and lease termination expenses of 78 of
the 95 stores. The carrying value of the long lived assets of all 95 stores
having leases the Company intends to reject was reduced under SFAS No. 121 in
the fourth quarter of fiscal 1998 as impaired and were included in the $20.1
million charge described above.

     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 Revenue

        The Company sells annual memberships in its Garden Club program, a
discount-based customer loyalty program. Membership sales for the Garden Club
are amortized on a straight-line basis over the course of twelve months. The
Company deferred $1.6 million of revenue in fiscal year 1998 based on total
Garden Club membership sales of $2.7 million.

     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.

ADOPTION OF ACCOUNTING STANDARDS

        In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This pronouncement establishes new standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The Company
adopted SFAS No. 130 during fiscal 1998. The adoption did not have a significant
impact on the Company's presentation of income or operations.

        In June 1997, the Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This pronouncement establishes standards for the way that public business
enterprises report information about operating segments in annual and interim
financial statements issued to shareholders. The Company adopted SFAS No. 131
during fiscal 1998. The Company has determined that it currently operates
entirely in one segment.

<PAGE>   49

        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.

    Reclassifications

        Certain reclassifications have been reflected in the financial
statements in order to conform prior years to the current year presentation.

3.      INVENTORIES

        Inventories at fiscal year-end were composed of the following (in
thousands):

<TABLE>
<CAPTION>
                                                       1998         1997
                                                      --------------------
<S>                                                   <C>          <C>
        Finished products held for sale ........      $ 9,531      $16,498
        Raw materials and components ...........        6,673        7,249
                                                      --------------------
           Total inventories ...................      $16,204      $23,747
                                                      ====================
</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 $107,000 $184,000 and
$218,000 and rent expense was $14.61 million, $14.99 million and $10.46 million
for fiscal years 1998, 1997 and 1996, respectively.

        Future minimum rental payments under operating leases are (in
thousands):

<TABLE>
<CAPTION>
        FISCAL YEAR                                             AMOUNT
        --------------------------------------------------------------
<S>                                                            <C>
         1999 .........................................        $12,906
         2000 .........................................         13,200
         2001 .........................................         13,360
         2002 .........................................         13,333
         2003 .........................................         13,200
         Thereafter ...................................         28,202
                                                               -------
             Total future minimum rental payments .....        $94,201
                                                               =======
</TABLE>

The Company has announced its intention to close approximately 102 stores during
fiscal 1999, and closed the first of these stores in February. The store closure
process, which will involve negotiation with landlords regarding individual
properties, are expected to result in changes to the future minimum rental
commitments shown above.

5.      LINE OF CREDIT

        On April 29, 1998, the Company entered a Loan and Security Agreement
with Foothill Capital Corporation (the "Foothill Loan"), under which Foothill
provided the Company with a three-year, $10.0 million revolving line of credit
for general corporate


<PAGE>   50

purposes. Credit under the line was based on a variable percentage (ranging from
55% to 65%) of eligible finished goods inventory. This line, which was be
secured by the assets of the Company, bore interest at prime plus 2.0%. The
minimum interest rate on any borrowings under the line was 7.0%. In order to
access the Foothill credit line, the Company was required to maintain certain
financial covenants, including covenants relating to earnings and limitations on
losses, measured quarterly as EBITDA (earnings before interest, taxes,
depreciation and amortization) which varied quarter to quarter.

        In the third quarter, the Company began borrowings under the Foothill
Loan to meet operating expenses and, subsequently, to build up inventory levels
for the holiday season. The maximum amount borrowed during this time was $6.0
million and the interest rate on all borrowings was 9.75%. All borrowings were
repaid during December. Due to its fourth quarter loss, the Company was in
violation of the EBITDA covenant at January 30, 1999. The Company negotiated a
reduction in the early termination fee and, on April 14, 1999, terminated the
Foothill Loan with a payment of $125,000.

        On April 23, 1999, the Company entered a Loan and Security Agreement
with BankBoston (the "DIP Facility"), which 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 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. 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 BankBoston's prime lending rate plus
one percent (1.0%) The Company is required to maintain certain financial
covenants, including covenants relating to earnings and limitations on losses
that vary from month to month.

        During fiscal years 1998, 1997 and 1996, the Company incurred interest
expense of $170,000, $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>
                                                       1998             1997
                                                     -------------------------
<S>                                                  <C>              <C>
        Net operating loss carryforward .....        $ 17,000         $  8,180
        Depreciation ........................          (1,700)          (1,456)
        Inventory ...........................             270              870
        Deferred rent .......................           1,150            1,020
        Reserves not currently deductible ...          10,100            2,503
        Other ...............................             226              226
        Valuation allowance .................         (27,046)         (11,343)
                                                     -------------------------
           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 are not material.

        The Company's net operating loss carryforward begins to expire in 2005.



                                      F-11
<PAGE>   51


GARDEN BOTANIKA, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                JANUARY 30, 1999
                          -----------------------------

7.      SHAREHOLDERS' EQUITY

    Stock Compensation Plans

        At January 30, 1999, 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 Company's fiscal 1998, 1997 and
1996 reported net losses and basic losses per share would have been increased to
the amounts indicated below:

<TABLE>
<CAPTION>
                                                                   1998                1997               1996
                                                                 --------            --------           --------
<S>                           <C>                                <C>                 <C>                <C>
Net loss (in thousands).....  As reported.....................   $(48,034)           $(15,580)          $(4,933)
                              Pro forma SFAS No. 123..........   $(49,272)           $(17,427)          $(5,751)

Basic loss per share........  As reported.....................   $  (6.79)           $  (2.20)          $ (0.80)
                              Pro forma SFAS No. 123..........   $  (6.97)           $  (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>
                                       1998                 1997                 1996
                                 ------------------   ------------------   ------------------
<S>                              <C>                  <C>                  <C>
Risk-free interest rate                6.40%            6.35% to 6.44%       5.88% to 6.41%
Expected life .........          3 years to 8 years   6 years to 8 years   6 years to 8 years
Dividend rate .........                 0%                    0%                   0%
Expected volatility ...                140%                   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.




                                      F-12
<PAGE>   52

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. Substantially
all options outstanding at January 30, 1999 vest on schedules of four to five
years and terminate after 10 years and two days. At that date, 355,087 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.
No options were granted under this plan during fiscal 1998. At January 30, 1999,
59,748 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 30, 1999, 16,524 of these options were
exercisable.

        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
1998, 1997 and 1996 is presented below:

<TABLE>
<CAPTION>
                                                         1998                       1997                       1996
                                                ----------------------     ----------------------      ---------------------
                                                              EXERCISE                   EXERCISE                   EXERCISE
                                                 SHARES       PRICE(1)      SHARES       PRICE(1)       SHARES      PRICE(1)
                                                --------      --------     --------      --------       -------     --------
Outstanding, beginning
<S>                                             <C>            <C>         <C>            <C>         <C>            <C>
PRICE (1)
   of year ...............................       839,718       $ 8.61       273,333       $11.16       268,581       $11.52
Previously granted options brought
   under 1992 Plan by shareholder approval                                  447,735       $ 8.63
Granted ..................................       155,000       $ 4.58       283,223       $ 6.13        25,000       $ 7.88
Exercised ................................                                                              (2,156)      $11.45
Canceled .................................      (264,502)      $ 8.91      (164,573)      $ 8.61       (18,092)      $11.84
                                                --------                   --------                   --------
Outstanding, end of year .................       730,216       $ 7.65       839,718       $ 8.61       273,333
                                                ========                   ========                   ========
Exercisable, end of year .................       290,442                    225,503                    104,105
Weighted average fair value
   of options granted during year ........      $   1.51                   $   5.03                   $   6.33
</TABLE>

----------

        (1)     Weighted average

        The following table summarizes information regarding all fixed stock
options outstanding at January 30, 1999:




                                      F-13
<PAGE>   53

<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 to $ 2.00             80,424           7.9 years         $1.99                 21,523           $1.97
  $4.00 to $ 9.83            607,440           7.8 years         $7.48                244,303           $8.10
      $13.77                  67,776           6.1 years        $13.77                 41,139          $13.77
                          ----------                                               ----------
  $1.97 to $13.77            755,640           7.6 years         $7.46                306,965           $8.43
                          ==========                                               ==========
</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 expired during
fiscal 1998.


8.      RELATED PARTY TRANSACTIONS

        Approximately 9%, 12% and 11% of merchandise purchases during fiscal
years 1998, 1997 and 1996, respectively, were from a supplier whose president
was a director of the Company. As of January 30, 1999 and January 31, 1998,
respectively, $141,000 and $656,000 payable to this supplier was included in
accounts payable on the balance sheet.

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 1998
         First quarter ..........        $21,705        $ 6,110       $ (4,997)          7,069        $ (0.71)
         Second quarter .........        $20,862        $ 4,917       $(10,173)          7,069        $ (1.44)
         Third quarter ..........        $26,669        $ 5,901       $ (5,812)          7,069        $ (0.82)
         Fourth quarter .........        $39,579        $14,010       $(27,052)          7,069        $ (3.82)

        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
</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>   54

<PAGE>   55


                                    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.
</TABLE>



<PAGE>   56

<TABLE>
<CAPTION>
EXHIBIT
NUMBER             DESCRIPTION
-------            -----------
<S>                <C>
10.13*      --     Ontario Distribution Facility lease agreement by and between
                   Grumet-Goodrich Corporation and Garden Botanika, Inc., dated
                   December 16, 1992.

10.14*      --     Fontana Distribution Facility lease agreement by and between the
                   Tuffli Company and Garden Botanika, Inc., dated June 29, 1995.

10.15*      --     Garden Botanika, Inc. 1992 Combined Incentive and Nonqualified
                   Stock Option Plan (as amended through October 30, 1995).

10.16*      --     1996 Directors' Nonqualified Stock Option Plan.

10.17*      --     Stock Option Agreement and Payment Obligation by and between
                   Garden Botanika, Inc. and Jeffrey Mason, dated January 4, 1995.

10.18*      --     Option and Severance Agreement by and between Garden Botanika,
                   Inc. and John Garruto, dated October 30, 1995.

10.19*      --     Warrant to Purchase 1,740 Shares of Common Stock, dated September
                   20, 1993, held by DLJ First ESC L.L.C.

10.20*      --     Warrant to Purchase 166 Shares of Common Stock, dated September
                   20, 1993, held by DLJ Capital Corporation.

10.21*      --     Warrant to Purchase 21,817 Shares of Common Stock, dated
                   September 20, 1993, held by DLJ Capital Corporation.

10.22*      --     Asset Purchase and Sale Agreement by and among Garden Botanika,
                   Inc., Innovative Biosciences Corporation and its Shareholders, dated
                   September 19, 1995, as amended by Amendment Number 1 to Asset
                   Purchase and Sale Agreement dated October 30, 1995.

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
</TABLE>



<PAGE>   57

<TABLE>
<CAPTION>
EXHIBIT
NUMBER             DESCRIPTION
-------            -----------
<S>                <C>
10.32***    --     Loan and Security Agreement with Foothill Capital Corporation
                   dated as of April 29, 1998

10.33****   --     Second Amendment to Employment Agreement with Michael W. Luce
                   dated January 19, 1999

10.34****   --     Loan and Security Agreement with BankBoston dated April 22, 1999

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.

99.2****    --     Press Release dated April 20, 1999 announcing bankruptcy filing
</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.

***     Incorporated by reference to exhibits filed with Registrant's Report on
        Form 10-K/A for fiscal 1997, as filed May 29, 1998.

****    Incorporated by reference to exhibits filed with Registrant's Report on
        Form 8-K, as filed May 3, 1999.

+       Incorporated by reference to exhibits filed with registrant's Report on
        10-K for fiscal 1998, as filed May 17, 1999.