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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington , D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended January 29, 2000

                                       OR

       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

            For the transition period from ___________ to ___________

                         COMMISSION FILE NUMBER 0-27920

                              GARDEN BOTANIKA, INC.
             (Exact name of registrant as specified in its charter)

            Washington                                   91-1464962
  (State or other jurisdiction of             (IRS Employer Identification No.)
  incorporation or organization)

                             8624 - 154th Avenue NE
                            Redmond, Washington 98052
                    (Address of principal executive offices)

                                 (425) 881-9603
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

         Title of each class:                  Name of each exchange on which
  Common Stock (Symbol: "GBOTQ.OB")                   registered: None
                                                    (OTC Bulletin Board)

      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. [ ]

      Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [ ] NO [X]

      The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates of the Registrant on April 25, 2000, was $1,526,543. 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 April 25, 2000.


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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 108 primarily mall-based retail stores and one outlet location in 29
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 at an
appropriate time. Following the grant by the Bankruptcy Court of its request,
Garden Botanika and its Creditors' Committee have been given the exclusive right
to file a reorganization plan through March 1, 2001 on a joint basis (the
"Exclusive Period"), provided that, if the Company were to file a non-consensual
plan during the Exclusive Period, the Company's Creditors' Committee would have
the right to file a competing plan. The Bankruptcy Court may also grant a
further request to extend the Exclusive Period. There can be no assurance,
however, that the Company will propose a plan in a timely fashion or that, if
requested, the Bankruptcy Court will grant a further extension. After expiration
of the Exclusive Period with any extensions, creditors of the Company and other
parties-in-interest have the right to propose their own reorganization plans.
Although management expects to file a reorganization plan that provides the
means for satisfying claims and interests in the Company, there can be no
assurance that a plan will be proposed or that, if proposed, it will be
confirmed by the Bankruptcy Court or that, if confirmed, it will be consummated.
At this time, it is not possible to predict the outcome of the Chapter 11 Case
or its effects on the Company's business. 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.

      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 pre-petition executory 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 contract or lease, but is subject to a claim
for damages for the breach of the contract or lease, 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.



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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
shopping experience, which the Company provides through its store design,
customer service and the visual presentation of its products, mailings and its
Web site.

      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 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 and
January 28, 2000, the Bankruptcy Court granted the Company the authority to
reject leases at 95 and 37 store locations, respectively. Together with leases
that expired in accordance with their terms or that terminated through
negotiations with landlords directly, this left the Company with its base of 108
retail stores (the "Retained Stores") and one outlet location in markets that
management believes can be made profitable.

      In fiscal 1999, the Retained Stores achieved average annual sales per
square foot of $370, at the end of which the average age of these stores was 60
months. The Company's comparable store sales increased 1% during fiscal 1997 and
declined 13% and 10% in fiscal 1998 and 1999, respectively.

INDUSTRY OVERVIEW

      The highly fragmented personal care products industry, which includes
color cosmetics, skin care, fine fragrances and bath and body care, has annual
sales nationwide in excess of $20 billion. Historically, a leading distribution
channel for such products has been mall-based department stores. The Company
believes that consumer preferences have shifted in recent years to favor
distribution channels offering generally lower prices and a less intimidating
sales environment, such as drugstores, mass merchandisers, television
"infomercials" and shopping channels and specialty retailers.

      The Company believes that, in targeting their respective market segments,
department stores on the one hand and the lower-priced mass distribution
channels on the other did not address or serve adequately a significant market
consisting of customers seeking a combination of quality products and reasonable
pricing. A number of specialty retailers, including Garden Botanika, have
addressed this market need by positioning themselves as alternatives to the
high-priced, high-quality designer brands offered by department stores and the
low-priced products sold by drugstores, mass merchandisers and supermarkets.
Within the personal care segment of specialty retailers, Garden Botanika has
sought to distinguish itself (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



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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 intends to
introduce new specialty branded product lines 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 are 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.

MARKETING

      General. 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 hotel
amenities or an Internet Web site 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.

      In fiscal 1999, the Company sought wider publicity outside of the malls
and apart from its use of customer lists. The Company sought and received free
product reviews in fashion and women's magazines, which reviews were then used
as selling points with in-store customers. The Company also received exposure
from being featured on the Internet at drugstore.com, as well as on cosmetics
industry and product review Web sites. To be more cost effective, the Company
generally reduced the contents and frequency of its direct-mail retail
advertising.

      Garden Club Membership Program. In May 1998, the Company launched its
Garden Club discount-based loyalty program. Under the terms of this program, for
an annual fee of ten dollars, a Garden Club member is entitled to an everyday
discount of ten percent on all Garden Botanika purchases, with a 20% discount on
the first Tuesday of each month and a 30% discount on certain days surrounding
the member's birthday. The discount is available to retail purchasers, as well
as to customers by mail-order, by telephone or on the Internet.

      There are currently approximately 250,000 Garden Club members, and they
account for approximately two-thirds of the Company's sales. On average, Garden
Club members are slightly older than mall shoppers generally, and their average
transaction size is higher than for the Company's customers as a whole. The
Company believes that its customer list of Garden Club members is a valuable
asset, as it allows the Company to focus its marketing



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efforts effectively on its most productive customers.

NEW PRODUCT DEVELOPMENT

      Garden Botanika is committed to the introduction of new products and
formulations on a regular basis. The Company also devotes substantial resources
to monitoring, market by market, which products are becoming more or less
important to its customers and uses this information in its new product
development efforts. For example, soon after consumers showed interest in
products containing alpha hydroxy acids, the Company introduced its Skin
Renewing treatment and 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 a positive image of the
Garden Botanika brand.

      In 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 than if outside suppliers were used.
The Company's laboratory capabilities also allow for quality testing of the
products it manufactures as well as products produced for Garden Botanika by
others.

STORE ENVIRONMENT AND LOCATIONS

      The Company seeks to offer an attractive store environment that showcases
its product offerings and promotes product testing and trial by its customers. A
majority of the Company's stores utilize neutral white fixtures and all have
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. Seventeen of the Company's 108 Retained Stores
contain Color Studios and average 1,714 square feet per store. Excluding the
Color Studio stores, the average size of the Company's Retained Stores is 1,129
square feet per store with sizes ranging from 662 to 1,890 square feet.

      The following map shows the number of stores in each state:



                                     [MAP]



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STORE OPERATIONS

      Management and Employees. The Company's stores are organized into two
geographic regions (East and West), each of which has a regional manager who is
responsible for store operations within her region and who reports to the
Company's Director of Stores. The Company's 12 district managers report to the
regional managers and frequently visit the cluster of approximately eight to 12
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. The Company has recently hired two field trainers who will spend
a significant part of their time travelling to provide in-store training of
store associates, with an emphasis on product knowledge, 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. 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. The Company has
recently expanded its policy of providing sales associates with free samples of
new products in advance of their introduction, so the associates can sell with
first-hand product knowledge. 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 1999, the Company's largest supplier, a bath
products manufacturer, accounted for approximately 9.2% of the Company's
purchases, and approximately 63% 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, it can 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.

PRODUCT DISTRIBUTION

      Management believes that the Company's distribution system allows it to
support a wide selection of inventory in its stores, as well as in its
fulfillment center for catalog and Internet sales, while minimizing inventory
requirements and maintaining effective inventory control. The Company currently
leases its distribution facilities, consisting of approximately 92,000 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.

DIRECT-SALE OPERATIONS



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      Catalog. 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 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. With
more limited resources, the Company intends to more narrowly focus its retail
catalog mailings in the current year. In fiscal 1999, the Company prepared and
circulated four editions of its catalog, which averaged 36 pages, as well as
four shorter folios and six postcards, with total mailings of approximately 7.5
million.

      Internet. The Company launched its Web site in June 1998, which was
supported by the Company's call-in and fulfillment centers already in place for
catalog operations. Without the benefit of a marketing plan, the Company's
Internet sales have nonetheless steadily increased, totaling approximately
$504,000 for fiscal 1999. The Company recently completed an upgrade to its Web
site to improve performance and accommodate a higher level of traffic. The
Company currently intends to increase Internet sales through increased publicity
of its Web site and the conversion of displaced customers from closed store
locations.

      Wholesale. The Company has experimented in the past with limited sales to
dominant retailers such as Costco Wholesale and TJ Maxx. More recently, Garden
Botanika has begun to supply its branded products through e-commerce by selling
wholesale to online retailers such as drugstore.com. During the recent holiday
season, drugstore.com made wholesale purchases of approximately $150,000.

      Licensing. The Company has licensed its name to provide amenities to the
hotel industry since 1996. While the revenues from hotel licensing was not
material in fiscal 1999, the Company feels that such licensing provides
important opportunities for exposure to the Garden Botanika brand. With its new
direct-sales division, the Company will seek to expand its licensing programs.

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 addressed the need to ensure that its operations were not
adversely impacted by software or other system failures related to the year
2000. The Company's outside vendors that supply its management information
systems have represented to the Company that they have made the necessary
modifications to their computer systems, applications and business processes,
which the Company has acquired, and, to date, the Company has not experienced
any interruptions in its operations related to the year 2000. However, no
assurances can be given that the Company has completely identified or addressed
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



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      The personal care, make-up and fragrance businesses are highly
competitive. The Company's products compete directly against personal care,
make-up, fragrance and other functionally similar products sold through a
variety of channels, including department stores, drugstores, mass
merchandisers, supermarkets, telemarketing programs, television "infomercials,"
catalogs and the Internet. 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 April 25, 2000, the Company employed approximately 1,200 persons, of
whom approximately 1,075 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 April 25, 2000, 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 registrations and pending applications for
registration in the United States and selected foreign countries. The Company
believes that establishing and maintaining brand identities are important to the
Company's operations.

GOVERNMENTAL REGULATION

      The Company and its products are subject to regulation by the Food and
Drug Administration ("FDA") and the Federal Trade Commission ("FTC") in the
United States, as well as various other federal, state and local regulatory
authorities. Such regulations relate principally to the ingredients, labeling,
packaging and marketing of the Company's products. The Company believes that it
is in substantial compliance with such regulations, as well as with applicable
federal, state, local and foreign rules and regulations governing the discharge
of materials hazardous to the environment. There are no significant capital
expenditures for environmental control matters either estimated in the current
fiscal year or expected in the near future.

ITEM 2 - PROPERTIES -

      The Company currently leases all of its existing store locations and
expects that its policy of leasing, rather than owning, will continue. The
Company's store leases generally provide for initial lease terms of five to 12
years. Management believes that these terms, in contrast to longer lease terms,
allow the Company flexibility to 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 lease termination agreements and closed 36 stores. Under authority
granted by the Bankruptcy Court in the Chapter 11 Case, the Company and a
liq-



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uidator that it retained closed 134 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 to obtain lease renewals for present
store locations. There can be no assurance, however, that lease renewals can be
obtained in the future or, if obtainable, that they will be on favorable terms.

      In addition to its stores, the Company currently leases approximately
9,600 square feet of office space in Redmond, Washington for its corporate
headquarters and catalog call and customer service center. The Company also
leases approximately 92,000 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 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. Following
the grant by the Bankruptcy Court of its request, Garden Botanika and its
Creditors' Committee have been given the exclusive right to file a
reorganization plan through March 1, 2001 on a



                                       9
<PAGE>   10

joint basis, provided that, if the Company were to file a non-consensual plan
during the Exclusive Period, the Company's Creditors' Committee would have the
right to file a competing plan.

      Inherent in a successful plan of reorganization is a capital structure
that 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 distribution, if any, 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.



                                       10
<PAGE>   11

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 29, 2000.


                                     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. From February 1, 1999 through
February 13, 2000, the Company's Common Stock was traded on the OTC Bulletin
Board under the same symbol. Since February 13, 2000, the Company's Common Stock
has been traded on the OTC Bulletin Board under the symbol "GBOTQ.OB." 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 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 ...............................     $ 0.469     $ 0.375
         Third quarter.................................     $ 0.375     $ 0.188
         Fourth quarter................................     $ 0.188     $ 0.141

        FISCAL 2000:
         First quarter (through April 25, 2000)........     $ 0.406     $ 0.156
</TABLE>

      The last sale price of the Company's Common Stock on April 25, 2000 as
reported by the OTC Bulletin Board, was $0.22 per share.

      As of April 25, 2000, there were 276 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.



                                       11
<PAGE>   12

ITEM 6 - SELECTED FINANCIAL DATA -

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED
                                                      --------------------------------------------------------------------
                                                         FEB. 3,       FEB. 1,       JAN. 31,       JAN. 30,       JAN 29,
                                                         1996(1)        1997           1998           1999          2000
--------------------------------------------------------------------------------------------------------------------------
                                                        (DOLLARS IN THOUSANDS EXCEPT PER SQUARE FOOT AND PER SHARE DATA)
<S>                                                   <C>            <C>            <C>            <C>           <C>
RESULTS OF OPERATIONS DATA:
    Net sales ....................................    $  55,339      $  92,465      $ 114,591      $ 102,815     $  69,884
    Cost of sales (including buying
      and occupancy costs) .......................       31,448         52,551         73,846         71,817        46,730
                                                      --------------------------------------------------------------------
    Gross margin .................................       23,891         39,914         40,745         30,998        23,154
    Operating expenses:
      Stores and catalog .........................       18,746         35,544         39,524         39,136        23,615
      General and administrative .................        6,041          8,871         10,919         12,021         7,623
    Preopening and facility relocation
      expenses ...................................          798          1,426            397            323            --
    Provision for store closing and
      impairment loss on long-lived assets .......           --             --          5,800         27,400         8,397
    Interest income (expense), net ...............           30            994            315            (92)         (219)
    Reorganization charges .......................                                                                  (1,585)
                                                      --------------------------------------------------------------------
    Net loss .....................................    $  (1,664)     $  (4,933)     $ (15,580)     $ (48,034)    $ (18,285)
                                                      ====================================================================
    Basic and diluted loss per share(2) ..........    $   (0.44)     $   (0.80)     $   (2.20)     $   (6.79)    $   (2.59)
    Cash dividends declared per
      common share ...............................           --             --             --             --            --
    Weighted average common
      shares (000's)(2) ..........................        3,756          6,146          7,069         7,069          7,069
    Capital expenditures .........................    $  16,800      $  24,225      $  14,161      $   1,401     $     149

SELECTED OPERATING DATA:
    Stores open at period-end(3) .................          152            253            280            252           148
    Comparable store sales per square foot(4) ....    $     444      $     391      $     339      $     278     $     331
    Average store age (in months) ................           18             20             30             42            60
    Comparable store sales change(5) .............           16%             7%             1%           (13)%         (10)%
    Total promotional mailings (000's) ...........        5,021         15,933         16,753         19,441         7,411

BALANCE SHEET DATA (AT PERIOD-END):
    Working capital ..............................    $   2,662      $  36,315      $  19,690      $   5,647     $  10,141
    Total assets .................................    $  47,137      $ 103,523      $  87,837      $  42,088     $  28,877
    Note payable to bank .........................    $   2,540             --             --             --            --
    Shareholders' equity .........................    $  33,117      $  84,456      $  68,936      $  20,962     $   2,737
</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)   Includes one outlet location and 39 stores that were identified for
      closure in the first quarter of fiscal 2000.

(4)   For comparable stores open at the beginning and end of the period
      indicated. The numbers of stores used to compute such percentages were 86,
      152, 253, 252 and 147 in fiscal years 1995 through 1999, respectively. In
      fiscal 1999, sales per square foot of the 108 Retained Stores was $370.

(5)   Stores enter the comparable store base upon completing one full fiscal
      year of operation. The numbers of comparable stores used to compute such
      percentages were 86, 152, 253, 252 and 148 in fiscal years 1995 through
      1999, respectively.



                                       12
<PAGE>   13

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 the Company's
assets and liquidation of its liabilities at their recorded amounts is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the accompanying
financial statements. The financial statements do not include any adjustments
relating to the recoverability of the value of recorded asset amounts or the
amounts and classification of liabilities that might be necessary as a
consequence of a plan of reorganization.

      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 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, comparable 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 distri-



                                       13
<PAGE>   14

bution, 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
store locations. 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.

      In January 1999, recognizing that a significant reorganization was needed,
the Board of Directors authorized the retention of McDonald Investments Inc., a
KeyCorp Company ("McDonald"), as the Company's financial advisors. In that
capacity, McDonald was to evaluate the Company; determine the viability of its
core business, if any; facilitate a reorganization, if feasible; and, if in the
best interests of the appropriate parties, market the Company for sale.
Following McDonald's retention and prior to the Petition Date, the Company
substantially changed the Board of Directors and senior management; reduced
corporate headcount by approximately 30%; and downsized corporate headquarters
from approximately 23,000 square feet to 9,700 square feet. The Company was able
to close 29 unprofitable store locations between the end of the 1998 holiday
season and the Petition Date. McDonald was not retained in the Chapter 11 Case.

      In looking forward to the balance of fiscal 1999, the Company built a
financial plan based on achieving a neutral cash flow by the year 2000 on a
reduced store base; obtained debtor-in-possession financing in the amount of
$7.0 million to facilitate the execution of the financial plan; and commenced
the Chapter 11 Case, primarily to allow for the closure of stores and the
rejection of leases at unprofitable locations. In the balance of fiscal year
1999, with Bankruptcy Court approval, Garden Botanika closed 97 additional store
locations and sought to stabilize its operations by, among other things,
increasing inventory from suppliers who had previously become reluctant to
provide payment terms or, in some cases, to ship to the Company altogether. With
its debtor-in-possession financing, the Company was able to introduce new
products, including Aromatics Salt Glow, a skin exfoliant, and Vitamin C Skin
Renewing Treatment, an anti-aging facial cream. While comparable store sales
decreased 10% for the year, the Company's losses from operations before
interest, taxes, depreciation, amortization, store closing and reorganization
costs decreased to $2.90 million in fiscal 1999, compared to $12.4 million in
fiscal 1998.

      In February 2000, Garden Botanika and its Creditors' Committee were
granted the exclusive right to file a reorganization plan through March 1, 2001
on a joint basis, provided that, if the Company were to file a non-consensual
plan during the Exclusive Period, the Company's Creditors' Committee would have
the right to file a competing plan. As a condition for this extension of the
Exclusive Period, the Company set aside for the benefit of its creditors
proceeds of approximately $2.0 million from the liquidation of inventory at 37
additional store locations closed in the first quarter of fiscal 2000. In the
first quarter of fiscal 2000, the Company also amended its credit facility with
Fleet Retail Finance Inc. ("Fleet"), the successor to BankBoston Retail Finance
Inc. ("BankBoston"), increasing its borrowing base to 90% of the cost of
acceptable inventory from September 15 to December 15, and including a cash
set-aside for the benefit of creditors in the borrowing base.

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 1997 through
1999, respectively, the Company incurred net losses $15.58 million, $48.03
million and $18.29 million. As of the end of fiscal 1999, the Company had an
accumulated deficit of $95.96 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, in-



                                       14
<PAGE>   15

cluding the Company's ability to (i) stimulate brand awareness and
attract customers in stores and to channels of distribution 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 2000 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. Under the terms
of the agreement, 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, as amended, is calculated as a percentage of the net
liquidation value of the Company's inventory, plus the set-aside reserves of
approximately $2.0 million resulting from the liquidation sale of inventory at
37 store locations. Operating restrictions under the DIP Facility and other
limitations on the Company's borrowing ability and access to funding generally
may also limit the Company's ability to pursue certain business initiatives that
it might otherwise undertake in an effort to increase sales. The Company's
limited resources, and 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. In fiscal 1999, the Company's
comparable store sales decreased 10%. 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. Except for January of 2000, when the Company experienced
a 15% increase, Garden Botanika has experienced monthly comparable store sales
declines throughout fiscal 1998 and 1999. This trend has continued in February
and March of 2000, as comparable store sales declined, respectively, 3% and 16%.
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 1999 and 2000 of the Company's President and Chief
Executive Officer, Chief Financial Officer and Vice President of Stores. The
Company is dependent upon the efforts of its current key officers and employees,
including William L. Lawrence, Jr., Acting President and Chief Executive Officer
and Jeffrey M. Hare, Vice President--Operations. The loss of either of these
individuals could adversely affect the Company's business, financial condition
and operating results. 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 operations will impose on such systems. Failure to maintain and, as
needed, upgrade its information systems or unexpected difficulties encountered
with these systems could adversely affect the Company's business, financial
condition and operating results.



                                       15
<PAGE>   16

      Reduced Store Advertising Expense. The Company's store advertising program
historically has been 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 2000, the Company intends to reduce the
number of catalogs mailed per store by focusing on what it believes are or will
be its most productive customers. 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. 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.

      Reliance on Management Information Systems Vendors. The Company currently
relies on three outside vendors, two of which are related, for the software and
day-to-day support that form the basis of the Company's management information,
distribution and financial systems. While the Company believes that these
vendors have sufficient experience and commitment to their product lines to be
relied upon for continued support in developing, testing and implementing
systems and controls that are adequate to support the Company's current
operations and anticipated future growth, it may have little control, apart from
changing vendors, over the level of systems maintenance and support it receives.
In the event it were to change information systems vendors, the Company could
experience unforeseen delays or interruptions in its access to information. Such
problems, were they to occur, could adversely affect the Company's business,
financial condition and operating results.

      Concentration of Suppliers. In fiscal 1999, approximately 63% 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 9.2% 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. As a result, 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. The inability, failure or unwillingness of one or more
principal vendors to continue to supply the Company on standard terms could have
a material adverse effect on the Company's business, financial condition and
operating results.

      Regulation and Potential Claims. The Company's advertising and product
labeling practices are subject to regulation by the FTC, and its cosmetic
manufacturing practices are subject to regulation by the FDA, as well as various
other federal, state and local regulatory authorities. 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.



                                       16
<PAGE>   17

RESULTS OF OPERATIONS

      The following table sets forth, for the periods indicated, the Company's
results of operations expressed as percentages of net sales.

<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED(1)
                                               ---------------------------------------
                                                JAN 31,        JAN 30,         JAN 29,
                                                 1998            1999            2000
                                               ---------------------------------------
<S>                                            <C>             <C>             <C>
Net sales (in thousands) .................     $114,591        $102,815        $69,884
                                               =======================================

Net sales ................................        100.0%          100.0%         100.0%
Cost of sales (including buying and
  occupancy costs) .......................         64.4            69.9           66.8
                                               ---------------------------------------
Gross margin .............................         35.6            30.1           33.2
Operating expenses:
  Stores and catalog .....................         34.5            38.1           33.8
  General and administrative .............          9.5            11.7           10.9
Preopening and facility
  relocation expenses ....................          0.3             0.3            0.0
Provision for store closings and
  impairment loss on long-lived assets ...          5.1            26.6           12.1
                                               ---------------------------------------
Operating loss ...........................        (13.9)          (46.6)         (23.6)
Reorganization charges ...................          2.3
Interest income (expense), net ...........          0.3            (0.1)          (0.3)
                                               ---------------------------------------
Net loss .................................        (13.6)%         (46.7)%        (26.2)%
                                               =======================================
</TABLE>

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


FISCAL 1999 VS. FISCAL 1998

      General. Garden Botanika operated 148 stores at the end of fiscal 1999,
compared to 252 stores at the end of fiscal 1998. In addition, of its 148
stores, the Company had identified 39 stores for closure in the first quarter of
fiscal 2000, leaving a base of 108 Retained Stores and one outlet location for
future operations. There were 2,050 store months of operations during fiscal
1999 versus 3,247 store months in the prior period, a decrease of 37%. The
average age of the Company's stores increased from 42 months to 60 months.

      Net Sales. Net sales for fiscal 1999 were $69.88 million, compared to net
sales of $102.82 million for fiscal 1998. The decrease of $32.94 million, or
32.0%, in net sales was due primarily to the decrease in the number of stores
and a 10% decrease in comparable store sales over the prior year. These
decreases were partially offset by an increase in revenue recorded on the sale
of annual memberships in the Company's discount-based customer loyalty program.
Membership sales are amortized over the course of twelve months, and the
recorded revenue in fiscal year 1999 was $2.9 million based on total membership
sales of $2.5 million, compared to recorded revenue of $1.0 million based on
total membership sales of $2.7 million in the prior year. Mail order sales
declined by 5.2% primarily as a result of decreased mailings.

      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 reduce
expenses in fiscal 1999, the Company reduced its mailings to a total of
approximately 7.4 million catalogs, folios and postcards, compared to
approximately 19.4 million similar mailings in fiscal 1998, a decrease of 62%.
Mail-order sales in fiscal 1999 declined by 5.2% over the prior year, to $3.0
million, representing 4% of total sales compared to 3% the prior year. Included
in mail-order sales for fiscal 1998 are Internet sales of $504,000.

      Gross Margin. Gross margin improved as a percentage of net sales from
30.1% in fiscal 1998 to 33.2% in fiscal 1999. This increase primarily reflects
the impact of the closure of poorly performing stores with lower average margins
than the Company's 148 store base at the fiscal-year end. This impact was
partially offset by a valuation reserve of $1.4 million for estimated losses on
components as a result of both the downsizing and the restructuring of product
lines. The dollar amount of gross margin decreased by $6.44 million, or 21%,
primarily as a result of the decrease in customer transactions due to the
closure of 104 stores.



                                       17
<PAGE>   18

      Operating Expenses

      Stores and Catalog. Store and catalog expenses, including distribution,
decreased as a percentage of net sales from 38.1% in fiscal 1998 to 33.8% in
fiscal 1999. This decrease was primarily attributable to a decrease in
advertising expense as a percentage of sales from 8.3% in fiscal 1998 to 5.7% in
fiscal 1999 and also to the leveraging impact of the higher average sales of the
Company's continuing store base. The dollar amount of store and catalog expenses
decreased by $15.58 million or 39.7% from the prior year, primarily as a result
of store closures and the decrease in advertising expense.

      General and Administrative. General and administrative expenses, at 10.9%
of net sales, represents a decrease from the fiscal 1998 level of 11.7%. The
dollar amount of general and administrative expenses decreased by $4.3 million,
or 36.6%, from the prior year reflecting the implementation in February 1999 of
reductions in the Company's workforce.

      Provision for Store Closings and Impairment Loss on Long-Lived Assets In
fiscal year 1999, the Company closed 104 stores and recorded a provision for the
closing of an additional 39 stores in the amount of $8.39 million. The provision
consisted of $2.70 million to cover estimated asset write-offs, $7.70 million
for lease termination and other closure expenses, offset by a credit of $2.01
million as a reduction of the deferred rent liability for stores closed and to
be closed. The carrying values of the long-lived assets for the majority of the
104 stores closed in fiscal year 1999 were reduced under Statement of Financial
Accounting Standards ("SFAS") No. 121 in the fourth quarter of fiscal 1998 as
impaired and were included in the $20.1 million charge for that year. All 39 of
the additional stores identified for closure were closed in the first quarter of
fiscal 2000.

      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 charge may not be necessary for other stores as a result of a
future deterioration in performance.

      Operating Loss. For the reasons explained above, the fiscal 1999 loss from
operations decreased 66%, to $16.48 million, from $47.92 million in the prior
year. Expressed as a percentage of net sales, the Company's loss from operations
decreased from 46.6% to 23.6%.

      Reorganization Charges. In fiscal 1999, the Company also incurred certain
costs relating to the Chapter 11 Case. These costs included the termination
costs and related write-offs of approximately $200,000 associated with the early
termination of its credit facility with Foothill Capital Corporation and legal
and other professional fees of $1.58 million, which were partially offset by a
net gain of $200,000 recognized in connection with the liquidation of inventory
for stores closed in fiscal 1999 and projected to be closed in the first quarter
of fiscal 2000.

      Interest Income (Expense), Net. Net interest expense during fiscal 1999
was $219,000, or 0.3% of net sales, compared to net interest expense of $92,000,
or 0.1% of net sales, during the prior year. This change was primarily due to
decreased levels of cash investment in fiscal 1999, as compared to the prior
year.

      Income Taxes. The Company did not record an income tax benefit for either
fiscal 1999 or fiscal 1998. Net operating loss carryforwards of $28.85 million
at January 29, 2000 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 1999, the
Company's net loss decreased 62%, to $18.28 million, or $2.59 per weighted
average common share, from $48.03 million, or $6.79 per share, in fiscal 1998.
The net loss also decreased as a percentage of net sales, from 46.7% in fiscal
1998 to 26.2% in fiscal year 1999.



                                       18
<PAGE>   19

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. The recorded revenue
for membership sales 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. 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 write-offs 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 write-off 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 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 additional 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. The carrying values of the long-lived assets of
all 95 stores having leases the Company intends to reject were 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.



                                       19
<PAGE>   20

      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 measured by the discounted cash flow
expected to be produced over the remaining lease term.

      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. 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.

YEAR 2000 READINESS

      The Company recognized the need to ensure its operations would 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 completed its assessment of the risks to the
availability and integrity of financial systems and the reliability of
operational systems prior to the year 2000 and, to date, has not been adversely
affected by year 2000 technology failures. The Company also communicated with
vendors, financial institutions and others with which it does business to
coordinate year 2000 conversion.

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 35% to 39% during the past three
fiscal years) of the Company's annual net sales 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.



                                       20
<PAGE>   21

<TABLE>
<CAPTION>
                                                FISCAL QUARTER(1)
                              --------------------------------------------------
                                 FIRST        SECOND         THIRD        FOURTH
                              --------------------------------------------------
                                                (IN THOUSANDS)
<S>                           <C>           <C>           <C>           <C>
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) income ....    $ (4,997)     $(10,173)     $ (5,812)     $(27,052)

FISCAL 1999:
    Net sales ............    $ 17,939      $ 13,477      $ 12,718      $ 25,750
      % of full year .....        25.7%         19.3%         18.2%         36.8%
    Gross margin .........    $  5,714      $  4,688      $  4,508      $  8,244
      % of full year .....        24.7%         20.2%         19.5%         35.6%
    Net loss .............    $(10,478)     $ (1,938)     $ (4,789)     $ (1,080)
</TABLE>

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


LIQUIDITY AND CAPITAL RESOURCES

   CASH FLOW FOR FISCAL 1999

      The Company began fiscal 1999 with cash and cash equivalents totaling
$4.30 million and no short-term investments. During the year, cash was primarily
used to fund the Company's net loss of $12.08 million, before depreciation,
amortization and store closing and impairment losses.

      On April 23, 1999, the Company entered a Loan and Security Agreement (the
"DIP Facility") with BankBoston, which has since been succeeded by Fleet. The
DIP Facility is intended to provide Garden Botanika with the cash and liquidity
to conduct its operations and pay for inventory during the course of the Chapter
11 Case. The DIP Facility, which was amended in the first quarter of fiscal
2000, consists of a revolving line of credit in the amount of $7.0 million,
subject to a borrowing base calculated as the lesser of 70% of eligible
inventory or 80% of the net liquidation value, except that, for the period from
September 15 to December 15, the borrowing base is calculated as 90% of eligible
inventory. A cash set-aside for the benefit of creditors of approximately $2.0
million is also a part of the borrowing base. The facility expires on the
earlier of April 23, 2001 or the Company's emergence from bankruptcy. The DIP
Facility, which is secured by the assets of the Company, bears interest at
Fleet's prime lending rate plus one percent (1.0%). The Company is required to
maintain certain financial covenants, including covenants relating to earnings
and limitations on losses that vary from month to month.

      In the third quarter of fiscal 1999, the Company began borrowings under
the DIP facility to meet operating expenses and, subsequently, to build up
inventory levels for the holiday season. The maximum amount borrowed during this
time was $5.98 million and the interest rate on all borrowings was generally
9.5%. All borrowings were repaid during December. The Company was in compliance
with all covenants as of January 29, 2000.

   FUTURE CASH FLOW PLANS AND EXPECTATIONS

      The Company believes that its cash balance at the end of fiscal 1999,
combined with its cash flow from operations and borrowings under its DIP
Facility, will be sufficient to satisfy its currently anticipated working
capital and capital expenditure requirements through fiscal 2000. The Company's
uses of capital for the remainder of fiscal



                                       21
<PAGE>   22

2000 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 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. Pursuant to the Bankruptcy Code or Court orders, the
Company continues to pay customary post-petition 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 not completed
its review of all of its pre-petition contracts and leases for assumption or
rejection and continues to seek extensions of deadlines to assume or reject
commercial real estate leases under which the Company is lessee. The ultimate
amount of, and settlement terms for, pre-petition liabilities are subject to the
approval of a plan of reorganization or Bankruptcy Court orders, 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 declined to
present levels, the Company has generally been able to consolidate its
purchasing with larger vendors and to maintain 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
Fleet'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-13).

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AUDITING AND FINANCIAL
DISCLOSURE -

      There were no changes in or disagreements with the Company's independent
accountants on auditing and financial disclosure during the fiscal year ended
January 29, 2000.



                                       22
<PAGE>   23

                                    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>
William L. Lawrence, Jr.     49       President, Acting Chief Executive Officer
                                         and Chief Financial Officer
Jeffrey M. Hare              35       Vice President--Operations
Arlee J. Jensen              50       Director
Michael W. Luce              49       Director
George W. Newman             50       Director
</TABLE>

      William L. Lawrence, Jr. has been the Company's President and Acting Chief
Executive Officer and Chief Financial Officer since February 2000. Prior to
that, Mr. Lawrence was the Company's Chief Operating Officer from November 1999,
a position he filled to manage the Company's ongoing operations during the
reorganization process. From February 1995 through October 1999, Mr. Lawrence
was the Chief Financial Officer and Executive Vice President of Jay Jacobs,
Inc., a Seattle-based retail men's and women's apparel retailer. Prior to that,
Mr. Lawrence was the Chief Financial Officer of Paul Harris Stores Inc., a
women's apparel retailer based in Indianapolis. Paul Harris Stores filed for
bankruptcy protection in 1991 and emerged in September 1992. Jay Jacobs filed
for bankruptcy protection in 1998 and underwent liquidation in October 1999.

      Jeffrey M. Hare has been the Company's Vice President -- Operations since
March 1999. 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.

      Arlee J. Jensen has been on the Board of Directors since January 1999 and
has been the Executive Vice President, Retail Operations, of zydeco.com, an
Internet start-up company, since February 2000. From January 1999 to February
2000, Ms. Jensen was the Company's President and Chief Executive Officer. 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.

      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.

      George W. Newman has been on the Board of Directors since January 1999.
From December 1998 to January 2000, he was the Company's Vice President -- Chief
Financial Officer. 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.

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 (or their successors) whose terms expire



                                       23
<PAGE>   24

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. Kern L. Gillette, who was
appointed to the Board on March 3, 1999, resigned effective March 31, 2000, and
J. Victor Fandel, who was appointed to the Board on March 19, 1999, resigned
effective April 7, 2000. The number of members on the Board of Directors is
currently set at five, and there are two vacancies.

   Further Information Concerning the Board of Directors

      The Board of Directors held ten meetings during fiscal year 1999. 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.

      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 1999. All of the members of the
Board of Directors are currently 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"). Although members of the
Compensation Committee held frequent discussions regarding compensation and
senior management issues in 1999, it did not hold a formal meeting during the
fiscal year. Grants of options under the Employee Plan are completely
discretionary, and no options were granted under that plan in fiscal 1999. All
of the members of the Board of Directors are currently 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, except that Mr. Fandel
attended only 50% of the Audit Committee meetings.

   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 2000 would
ordinarily be scheduled to be held following the Annual Meeting of Shareholders
which, in view of the Company's Chapter 11 Case and related developments, is not
currently scheduled. If such meetings were to take place and current directors
re-elected by shareholders, the Company expects that options to purchase an
aggregate of 2,542 shares would be granted to current directors. To date, 7,626
options have been granted under the Directors' Plan, of which 5,084 have
expired. No options have been exercised under the Directors' Plan. To the extent
that the Directors' Plan or any underlying options constitute executory
contracts, they have neither been assumed nor rejected in the Chapter 11 Case.

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,



                                       24
<PAGE>   25

"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 1999, except that
Messrs. Fandel and Gillette failed to timely file Forms 3 and 5 to report their
initial appointment to the Board of Directors and the automatic grant to each of
them of stock options for 1,271 shares at the fair market value at the time of
the grant under the terms of the Directors' Plan.



                                       25
<PAGE>   26

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 29, 2000,
(ii) the three executive officers of the Company other than the Chief Executive
Officer who were serving as executive officers at the end of the fiscal year
ending January 29, 2000, and (iii) two individuals who were among the four most
highly paid employees of the Company other than the Chief Executive Officer
during fiscal 1999 but who were not serving as executive officers on January 29,
2000 (collectively referred to as "the Named Officers") for the indicated fiscal
years.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                    LONG-TERM
                                                                  COMPENSATION
                                                                     AWARDS
                                           ANNUAL COMPENSATION    ------------
                                           --------------------    SECURITIES
                                                          BONUS    UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITION      YEAR      SALARY ($)      ($)     OPTIONS(#)   COMPENSATION
---------------------------      ----      ----------     -----   ------------  ------------
<S>                              <C>        <C>            <C>      <C>         <C>
Arlee J. Jensen                  1999       $201,923        --          --       $ 16,233(1)
   Former President and Chief    1998       $188,580        --          --       $  7,258(1)
   Executive Officer             1997       $184,005        --      20,800
                                                                                 $  6,142(1)

William L. Lawrence, Jr          1999(2)    $ 51,923        --          --             --
  President, Acting Chief        1998             --        --          --             --
  Executive and Chief            1997             --        --          --             --
  Financial Officer

George W. Newman                 1999       $150,000        --          --             --
   Former Vice President and     1998       $118,205        --          --             --
   Chief Financial Officer       1997       $ 89,477        --       4,900             --

Jeffrey M. Hare                  1999       $121,154        --          --       $ 28,050(3)
  Vice President--Operations     1998       $ 85,092        --          --             --
                                 1997       $ 73,204        --       6,100             --

John A. Garruto                  1999       $124,734        --          --       $ 47,355(3)
 Director of Research            1998       $143,999        --          --             --
 And Development                 1997       $132,675        --      10,300             --

Kay Kowanko                      1999       $125,000        --          --       $ 35,167(3)
   Creative Director             1998       $124,444        --          --             --
                                 1997(4)    $ 34,308        --       5,000       $ 22,797(5)
</TABLE>

(1)   Represents term life insurance and medical insurance premiums.

(2)   Mr. Lawrence joined the Company during fiscal 1999. If Mr. Lawrence had
      been employed for the entire year at the same annual base salary rate, his
      annual salary would have been $225,000.

(3)   Represents pre-bankruptcy retention bonus.

(4)   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.

(5)   Represents relocation expenses.

STOCK OPTIONS

   Option Grants in Fiscal Year 1999

      No option grants were made in fiscal 1999 to any of the Named Officers.



                                       26
<PAGE>   27

1999 Fiscal Year-End Option Values

      The following table shows the value of option grants outstanding as of
January 29, 2000 for each Named Officer. None of the Named Officers exercised
options in fiscal 1999.

<TABLE>
<CAPTION>
                            NUMBER OF SECURITIES UNDERLYING
                            -------------------------------       VALUE OF UNEXERCISED, IN-THE-
                                  UNEXERCISED OPTIONS                    MONEY OPTIONS(1)
                                  -------------------             -----------------------------
                                                                  EXERCISABLE     UNEXERCISABLE
         NAME             EXERCISABLE (#)    UNEXERCISABLE (#)     ($ VALUE)        ($ VALUE)
         ----             ---------------    -----------------    -----------     -------------
<S>                       <C>                <C>                  <C>             <C>
Arlee J. Jensen               80,122              20,400               --              --
William L. Lawrence,             0                   0                 --              --
Jr.
George W. Newman               6,200               3,700               --              --
Jeffrey M. Hare               13,062               4,800               --              --
John A. Garruto               27,125              12,475               --              --
Kay Kowanko                    2,500               2,500               --              --
</TABLE>

(1)   Calculation based on the spread between the closing sale price of $0.156
      per share of Common Stock on the last trading day before January 29, 2000
      and the exercise price of the grants.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

      The Company is a party to an amended Option and Severance Agreement with
Mr. John A. Garruto, the Company's Director of Research and Product Development,
which provides for an annual base salary of $90,000. 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, and, to the extent they may constitute executory contracts, they
have neither been assumed nor rejected in the Chapter 11 Case.

      In February 1998, the Board of Directors authorized a retention plan (the
"Pre-Bankruptcy 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 covered 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 in
the amounts of $62,500 and $30,333, respectively, which were accrued as a
liability of the Company. In the Chapter 11 Case, the Company has rejected its
remaining obligations under the Pre-Bankruptcy Retention Plan. Claims arising
from the rejection of the Pre-Petition Retention Plan constitute unsecured
claims against the Company.

      In April 1999, after the rejection of the Pre-Bankruptcy Retention Plan,
the Bankruptcy Court authorized and the Company granted certain
middle-management employees the right to earn two additional months of salary if
they stayed continuously employed by the Company, one month of which would be
earned and payable on September 15, 1999 and one month of which would be earned
and payable on March 15, 2000 (the "Reorganization Retention Plan"). Payments
have been made to the employees who earned their additional salary in accordance
with the Reorganization 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.
To the extent that the Employee Plan or any underlying options constitute
executory contracts, they have neither been assumed nor rejected in the Chapter
11 Case.

REPORT OF THE COMPENSATION COMMITTEE

      The Compensation Committee of the Board of Directors administered the
compensation of the Company's executive officers during fiscal 1999. During
fiscal 1999, the Company began its reorganization proceedings. As a consequence,
potential compensation decisions were reviewed and discussed by the Board of
Directors as a whole in consultation with outside counsel, in accordance with
the requirements of the Chapter 11 Case.

   Compensation Principles



                                       27
<PAGE>   28

      Historically, the Company's executive compensation program consisted 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 was to be
weighted more heavily toward variable performance-based incentives. In
developing its compensation program and setting compensation levels, the Company
consulted with compensation experts and reviewed prior years' compensation
levels among comparable executives. With the filing of the Chapter 11 Case,
however, many of the Company's historical compensation principles no longer
apply in the same way.

      In fiscal 1999, the Board of Directors was aware of the need to retain
certain key executive officers through the reorganization proceedings and to
focus their efforts on managing the Company. The Compensation Committee believed
it necessary to pay salaries that were competitive within the industry and
geographic region in order to attract and retain the types of executives needed
to manage the business. In determining cash compensation, the Compensation
Committee considered retail industry and other compensation surveys, comparisons
to practices at other retail companies, the Committee members' knowledge of and
experience in the retail industry and information from the Company's consultants
regarding compensation paid by companies in Chapter 11. The Board of Directors
also considered (i) the contribution of the executive officers during 1998, (ii)
their experience, responsibilities and achievements, and (iii) the difficulty of
replacing such individuals if they left the employment of the Company at such a
critical time in the Company's history.

      Based on the disappointing results produced by the Company in 1998 and
1999 and the commencement of the Chapter 11 Case, no executive cash bonuses were
paid and no stock options were granted for those years. Furthermore, due to
significant declines in the market price of the Company's Common Stock, all of
the stock options granted to key employees in past years had exercise prices
substantially in excess of the fair market value of the Common Stock in much of
1998 and all of 1999. As a result, in order to ensure that the Company would
retain the services of many of its employees, including executive officers, at a
critical time in the Company's history, it was determined that retention bonuses
would be an appropriate additional component of compensation. The Reorganization
Retention Program was approved for certain members of middle management, and a
separate retention pay program was considered for key executive officers.

      The Board of Directors next considered whether to provide key executives
with a retention or a performance bonus, generally preferring a performance
bonus. A performance bonus would be based on the Company's achievement of
certain financial goals for fiscal 1999 or the confirmation of a Chapter 11 plan
of reorganization. The Board of Directors also understood that it is customary
to provide key executives with severance agreements that reflect the risks
associated with working for a company in Chapter 11. In discussions, the Board
of Directors and key executives understood that various retention proposals
would be tied to the waiver by key executives of any pre-petition claims
associated with the Company's deferral of certain payments under the
Pre-Petition Retention Plan and the Company's ultimate rejection of it.

      To date, the Company has not provided for a retention pay program for its
key executives. The balance of the deferred payments and the obligations, if
any, arising from the rejection of the Pre-Petition Retention Plan constitute
unsecured claims by current and former key executives against the Company.

   Chief Executive Officer Compensation

      During fiscal 1999, Garden Botanika's most highly compensated officer was
Arlee J. Jensen, President and Chief Executive Officer of the Company from
January 1999 until February 2000. Following the resignation of Mr. Luce as the
Company's President and Chief Executive Officer on January 19, 1999, Ms. Jensen
assumed those positions. Ms. Jensen's 1998 performance and the Company's
financial condition, which were the bases for setting the level of her
compensation for fiscal 1999, were reviewed by the Compensation Committee and
discussed with the Board of Directors and Ms. Jensen. Against this background,
her salary was not then adjusted from that which she earned previously as the
Company's Senior Vice President--Marketing. In addition, no annual cash bonus
and no stock options were awarded to Ms. Jensen for the year.

      During the course of fiscal 1999, it was determined that it would be in
the best interests of the Company to strengthen management with the creation and
appointment of a new executive officer, Chief Operating Officer. Provided
appropriate compensation were found acceptable to both parties, the Board
selected William L. Lawrence, Jr. to fill that position. In connection with the
proposed appointment of Mr. Lawrence, the Company considered compensation paid
by other specialty retail companies to senior management. The Board of Directors
believes that the employment market for its executive officers, including its
Chief Operating and Chief Executive Officers, must take into account the
Company's status as a Chapter 11 debtor, as well as exceptional contributions in
connection with the



                                       28
<PAGE>   29

reorganization. As a result, an appropriate offer was extended to Mr. Lawrence.
In November 1999, Ms. Jensen's salary was adjusted upward to align it with Mr.
Lawrence's. The appointment of Mr. Lawrence and the adjustment to Ms. Jensen's
salary were both approved by the Bankruptcy Court.

   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 1999
will exceed the $1 million limitation.

                           1999 Compensation Committee
                              J. Victor Fandel
                              Kern L. Gillette
                              Michael W. Luce



                                       29
<PAGE>   30

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.


              [GRAPH -- Garden Botanika; NASDAQ US; NASDAQ Retail]


<TABLE>
<CAPTION>
                                                           CUMULATIVE
                                                         TOTAL RETURN(1)
                                         -----------------------------------------------
                                         5/22/96   1/31/97   1/30/98   1/30/99   1/29/00
                                         -------   -------   -------   -------   -------
<S>                                      <C>       <C>       <C>       <C>       <C>
Garden Botanika, Inc. ...............      $100      $ 48      $ 10      $  2      $  1
Nasdaq Stock Market (U.S.) Index ....      $100      $111      $131      $204      $314
Nasdaq Retail Trade Stocks Index ....      $100      $ 96      $112      $134      $114
</TABLE>

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      During fiscal 1999, the following individuals served on the Company's
Compensation Committee: Messrs. J. Victor Fandel, Kern L. Gillete and Michael W.
Luce. Mr. Luce was President and Chief Executive Officer of the Company from its
inception until his resignation in January 1999. Mr. Luce has also submitted a
claim against the Company in the amount of $194,000, representing amounts
claimed that are owed under the terms of the Second Amendment to Employment
Agreement. See Item 13--"Certain Relationships and Related Transactions." There
were no interlocks with other companies within the meaning of the Commission's
proxy rules during fiscal 1999.



                                       30
<PAGE>   31

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
                                                      Beneficial
                        Name                           Ownership   Percentage
                        ----                          ----------   ----------
<S>                                                   <C>          <C>
            Arlee J. Jensen(1) ...................      108,242      1.53%
            Michael W. Luce(2)  ..................      323,965      4.58%
            William L. Lawrence, Jr ..............            0         0
            George W. Newman(3) ..................        6,350         *
            Jeffrey M. Hare(4) ...................       13,062         *
            John A. Garruto(5)  ..................       31,281         *
            Kay Kowanko(6) .......................        2,500         *
            All directors and executive
              officers as a group (4 persons) ....      130,267      1.84%

</TABLE>

 *    Less than one percent.

(1)   Includes 200 shares of Common Stock held by Ms. Jensen's spouse for the
      benefit of a minor child and 80,122 shares of Common Stock that are
      issuable upon the exercise of currently exercisable options.

(2)   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 188,624 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.

(3)   Includes 6,200 shares of Common Stock that are issuable upon the exercise
      of currently exercisable options.

(4)   Includes 12,681 shares of Common Stock that are issuable upon the exercise
      of currently exercisable options and 381 shares of Common Stock that are
      issuable upon the exercise of options exercisable within 60 days.

(5)   Includes 27,125 shares of Common Stock that are issuable upon the exercise
      of currently exercisable options.

(6)   Consists of 2,500 shares of Common Stock that are issuable upon the
      exercise of currently exercisable options.

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.

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 1999 was
approximately $799,000. These purchases represented approximately 4.8% of the
Company's total purchases for such year.

      The Company is a party to an amended employment agreement with Michael W.
Luce that provided, 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, Mr. 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, Mr. Luce made written demand for immediate payment
of $194,000. Under the agreement, Mr. Luce's stock options continue to vest as
though he were an employee of the Company. Under the amended agreement, Mr. Luce
is no longer bound by prior noncompetition provisions.



                                       31
<PAGE>   32

                                     PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -

      (a)   The following documents are filed as part of this Report:

      1.    FINANCIAL STATEMENTS:

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

            -     Balance Sheets - January 29, 2000 and January 30, 1999..................      F-3

            -     Statements of Operations - For the fiscal years ended January 29, 2000,
                  January 30, 1999 and January 31, 1998...................................      F-4

            -     Statements of Cash Flows - For the fiscal years ended January 29, 2000,
                  January 30, 1999 and January 31, 1998...................................      F-5

            -     Statements of Shareholders' Equity - For the fiscal years ended January
                  29, 2000, January 30, 1999 and January 31, 1998.........................      F-6

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

            -     Selected Quarterly Financial Data (Unaudited) - For the fiscal years
                  ended January 29, 2000, January 30, 1999 and January 31, 1998 -
                  See Note (9) of Notes to Financial Statements...........................     F-13
</TABLE>

      2.    FINANCIAL STATEMENT SCHEDULES:

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

      3.    EXHIBITS:

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

      (b)   Reports on Form 8-K:

            No Report on Form 8-K was filed during the quarter ended January 29,
      2000.



                                       32
<PAGE>   33

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 27, 2000.


                                          GARDEN BOTANIKA, INC.



                                          By: /s/ William L. Lawrence, Jr.
                                             ----------------------------------
                                              President and Chief Executive
                                              Officer


      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on April 27, 2000, on
behalf of the Registrant and in the capacities indicated.

<TABLE>
<CAPTION>
              SIGNATURE                                TITLE
--------------------------------------------------------------------------------
<S>                                       <C>
   /s/ William L. Lawrence, Jr.           President, Chief Executive Officer
----------------------------------           and Chief Financial Officer
     William L. Lawrence, Jr.                  (Principal Executive and
                                                 Accounting Officers)

        /s/ Arlee J. Jensen               Director
----------------------------------
          Arlee J. Jensen


       /s/ George W. Newman               Director
----------------------------------
         George W. Newman

</TABLE>



                                       33
<PAGE>   34

                              GARDEN BOTANIKA, INC.

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

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>

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

            -     Balance Sheets - January 29, 2000 and January 30, 1999..................      F-3

            -     Statements of Operations - For the fiscal years ended January 29, 2000,
                  January 30, 1999 and January 31, 1998...................................      F-4

            -     Statements of Cash Flows - For the fiscal years ended January 29, 2000,
                  January 30, 1999 and January 31, 1998...................................      F-5

            -     Statements of Shareholders' Equity - For the fiscal years ended January
                  29, 2000, January 30, 1999 and January 31, 1998.........................      F-6

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

            -     Selected Quarterly Financial Data (Unaudited) - For the fiscal years
                  ended January 29, 2000, January 30, 1999 and January 31, 1998 -
                  See Note (9) of Notes to Financial Statements...........................     F-13

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.
</TABLE>



                                       34
<PAGE>   35

                    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 29, 2000 and January 30, 1999, and the
related statements of operations, shareholders' equity and cash flows for the
fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998.
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 auditing standards generally accepted
in the United States. 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 as of January
29, 2000 and January 30, 1999, and the results of its operations and its cash
flows for the fiscal years ended January 29, 2000, January 30, 1999 and January
31, 1998, in conformity with accounting principles generally accepted in the
United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred significant
losses since 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 the accompanying financial
statements. 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 assets 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
April 7, 2000



                                       35
<PAGE>   36

                              GARDEN BOTANIKA, INC.
                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                        JANUARY 29,    JANUARY 30,
                                                                           2000           1999
                                                                        -----------    -----------
                                                                       (amounts in thousands)
                                     ASSETS
<S>                                                                     <C>            <C>
Current assets:
   Cash and cash equivalents                                             $  2,480       $  4,295
   Inventory liquidation receivable                                         2,382             --
   Inventories                                                              9,585         16,204
   Prepaid expenses:
     Rent                                                                     731          1,580
     Other                                                                  1,081          1,338
                                                                         --------       --------
       Total current assets                                                16,259         23,417

Property and equipment:
   Leasehold improvements                                                  19,450         23,920
   Furniture and equipment                                                  8,948         11,244
   Equipment under capital lease                                              261            261
                                                                         --------       --------
                                                                           28,659         35,425
   Less accumulated depreciation and amortization                         (16,041)       (16,754)
                                                                         --------       --------
     Net property and equipment                                            12,618         18,671

                                                                         --------       --------
       Total assets                                                      $ 28,877       $ 42,088
                                                                         ========       ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Checks drawn in excess of bank balances                               $      0       $  1,522
   Accounts payable                                                         2,182          9,436
   Reserve for store closings                                                 547          1,327
   Accrued salaries, wages and benefits                                     1,113          1,890
   Accrued sales tax                                                          496            680
   Garden Club- deferred revenue                                            1,263          1,607
   Other                                                                      517          1,307
                                                                         --------       --------
       Total current liabilities                                            6,118         17,769

Liabilities subject to compromise                                          18,390             --
Deferred rent and other                                                     1,632          3,357
                                                                         --------       --------
       Total liabilities                                                   26,140         21,126

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        98,693         98,633
   Accumulated deficit                                                    (95,956)       (77,671)
                                                                         --------       --------
       Total shareholders' equity                                           2,737         20,962

       Total liabilities & shareholders' equity                          $ 28,877       $ 42,088
                                                                         ========       ========
</TABLE>

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



                                       36

<PAGE>   37

                              GARDEN BOTANIKA, INC.
                            STATEMENTS OF OPERATIONS
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                     FISCAL YEAR ENDED
                                                        ---------------------------------------------
                                                         JANUARY 29,    JANUARY 30,       JANUARY 31,
                                                             2000            1999             1998
                                                        ------------    -----------       -----------
                                                        (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                     <C>             <C>               <C>
Net sales                                                 $  69,884       $ 102,815       $ 114,591
Cost of sales (including buying and occupancy costs)         46,730          71,817          73,846
                                                          ---------       ---------       ---------
     Gross margin                                            23,154          30,998          40,745

Operating expenses:
   Stores and catalog                                        23,615          39,196          39,524
   General and administrative                                 7,623          12,021          10,919
Provision for store closing and impairment losses
     on long lived assets                                     8,397          27,400           5,800
Preopening and facility relocation expenses                      --             323             397
                                                          ---------       ---------       ---------
     Operating loss                                         (16,481)        (47,942)        (15,895)

Interest income, net                                           (219)            (92)            315
Reorganization charges                                       (1,585)             --              --
                                                          ---------       ---------       ---------
     Net loss                                             $ (18,285)      $ (48,034)      $ (15,580)
                                                          =========       =========       =========


Basic loss per share                                      $   (2.59)      $   (6.79)      $   (2.20)

Weighted average common shares, giving effect to the
   conversion of all preferred shares to common               7,069           7,069           7,069
</TABLE>





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



                                       37
<PAGE>   38

                              GARDEN BOTANIKA, INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            FISCAL YEAR ENDED
                                                              -----------------------------------------
                                                              JANUARY 29,    JANUARY 30,    JANUARY 31,
                                                                 2000           1999           1998
                                                              -----------    -----------    -----------
                                                                         (AMOUNTS IN THOUSANDS)
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
   Net loss                                                    $(18,285)      $(48,034)      $(15,580)
                                                               --------       --------       --------

   Adjustments to reconcile net loss to net cash used by
         operating activities:
     Depreciation and amortization                                3,703          8,135          7,869
     Loss on retirements, store closing and impairment            2,499         26,850          4,577
     Changes in assets and liabilities:
       Inventories                                                6,619          7,543         (4,807)
       Prepaid rent                                                 849             60           (402)
       Inventory liquidation receivable                          (2,382)            --             --
       Other assets                                                 257           (287)         1,490
       Accounts payable, accrued expenses and liabilities
         subject to comppromise                                   7,863            272         (2,084)
       Garden club- deferred revenue                               (344)         1,607             --
       Reserve for store closings                                  (780)            16          1,311
       Deferred rent and other                                   (1,725)           330            607
                                                               --------       --------       --------
        Total adjustments                                        16,559         44,526          8,561
                                                               --------       --------       --------
        Net cash used by operating activities                    (1,726)        (3,508)        (7,019)
                                                               --------       --------       --------

Cash flows from investing activities:
   Additions to property and equipment                             (149)        (1,401)       (14,161)
   Redemption (purchase) of short-term investments                   --             --         20,426
   Decrease (increase) in receivable from lessors                    --            550          2,083
                                                               --------       --------       --------
        Net cash used by investing activities                      (149)          (851)         8,348
                                                               --------       --------       --------

Cash flows from financing activities:
   Advances on note payable to bank                              30,208         36,180         16,325
   Payments on note payable to bank                             (30,208)       (36,180)       (16,325)
   Other                                                             60             60             60
                                                               --------       --------       --------
        Net cash provided by financing activities                    60             60             60
                                                               --------       --------       --------

(Decrease) increase in cash and cash equivalents, net            (1,815)        (4,299)         1,389
Cash and cash equivalents, beginning of period                    4,295          8,594          7,205
                                                               --------       --------       --------

Cash and cash equivalents, end of period                       $  2,480       $  4,295       $  8,594
                                                               ========       ========       ========

Supplemental disclosures:
   Cash paid for interest                                      $    130       $    157       $     92
   Cash paid for income taxes                                  $     --       $     --       $     --
</TABLE>





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



                                       38
<PAGE>   39

                              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, 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

   Deferred compensation                                                 60                       60
   Net loss                                                                     (18,285)     (18,285)
                              -------     --------        -----    --------    --------     --------
Balance, January 29, 2000          --     $     --        7,069    $ 98,693    $(95,956)    $  2,737
                              =======     ========        =====    ========    ========     ========
</TABLE>





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




                                       39
<PAGE>   40

                              GARDEN BOTANIKA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                JANUARY 29, 2000

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 29,
2000, Garden Botanika operated 109 retail locations in 29 states. An additional
39 retail locations not included in the above total were in liquidation and
slated to be closed as of January 29, 2000.

      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 2000.

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.

   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 Liquidation Receivable

      In February 2000, the Company and its Creditors' Committee were granted
the exclusive right to file a reorganization plan through March 1, 2001 on a
joint basis. As a condition for this extension, the Company set aside for



                                       40
<PAGE>   41

the benefit of its creditors proceeds of approximately $2.01 million from the
liquidation of inventory at 37 store locations closed in the first quarter of
fiscal 2000, which proceeds had not been received at the end of fiscal 1999 and
are shown on the balance sheet as a receivable.

   Inventories

      Inventories are 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 29, 2000 and
January 30, 1999, respectively, $12,000 and $66,000 of advertising was reported
as assets. Advertising expense was $4.01 million, $8.77 million and $7.93
million in fiscal years 1999, 1998 and 1997, 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. Depreciation and amortization expense was $3.70
million, $8.13 million and $7.87 million, for fiscal years 1999, 1998 and 1997,
respectively.

      In February 1998, the Company announced its intention to close
approximately 12 under-performing stores during the coming year. A charge of
$3.20 million was recorded as of January 31, 1998 to cover estimated asset
writeoffs and closure expense. 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 the 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
for closing an additional 24 stores in the amount of $7.30 million. The
provision represented $6.10 million to cover estimated asset writeoffs and $1.20
million for lease termination and other closure expenses. 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 $20.10 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.

      In fiscal year 1999, the Company closed 104 stores and recorded a
provision for closing an additional 39 stores in the amount of $8.39 million.
The provision consisted of $2.70 million to cover to cover estimated asset
writeoffs, $7.70 million for lease termination and other closure expenses offset
by a credit of $2.01 million as a reduction of the deferred rent liability for
stores closed and to be closed. All 39 of the additional stores identified for
closure were closed in the first quarter of fiscal 2000. As of January 29, 2000
the Company has a liability for lease termination costs on the stores identified
above in the amount of $8.70 million recorded as a liabilities subject to
compromise on the balance sheet.. The carrying value of the long lived assets of
the 104 stores closed in fiscal year 1999 was reduced under SFAS No. 121 in the
fourth quarter of fiscal 1998 as impaired and were included in the $20.10
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



                                       41
<PAGE>   42

      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 $1.26 million of revenue in fiscal year 1999. During fiscal
year 1999, total Garden Club membership sales were $2.59 million and recorded
revenue was $2.95 million.

   Liabilities Subject to Compromise

      Under the Bankruptcy Code, as a general matter, creditors' pre-petition
claims are generally allowable against the Company in amounts to be fixed by the
Bankruptcy Court or otherwise agreed upon. The Company has established reserves
of $18.39 million approximating what the Company believes will be its liability,
subject to compromise, under some of these claims.

   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. As a result of the store closures the
deferred rent liability has been reduced by $2.01 million for stores closed and
projected to be closed.

   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.

      For each of fiscal years 1999, 1998 and 1997, 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>
                                                  1999         1998
                                                -------      -------
<S>                                             <C>          <C>
      Finished products held for sale ....      $ 5,961      $ 9,531
      Raw materials and components .......        3,624        6,673
                                                -------      -------
             Total inventories ...........      $ 9,585      $16,204
</TABLE>

      Raw materials and component inventories have been reduced by a valuation
reserve of $1.40 million to



                                       42
<PAGE>   43

cover the estimated loss on disposition as a result of store closings and change
in product lines.

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 $21,000, $107,000 and
$184,000 and rent expense was $10.02 million, $14.61 million and $14.99 million
for fiscal years 1999, 1998 and 1997, respectively. Such leases are subject to
ultimate assumption or rejection in the Chapter 11 Case.

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

<TABLE>
<CAPTION>
      FISCAL YEAR                                           AMOUNT
      ------------------------------------------------------------
<S>                                                        <C>
        2000 ........................................        6,097
        2001 ........................................        6,129
        2002 ........................................        5,853
        2003 ........................................        4,870
        2004 ........................................        5,500
        Thereafter ..................................        7,025
                                                           -------
            Total future minimum rental payments ....      $35,474
                                                           =======
</TABLE>


The Company has announced its intention to close an additional 39 stores during
the first quarter of fiscal 2000. Minimal rental commitments for these stores
have been excluded from the above table.

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 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 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 of fiscal 1998, the Company began borrowing 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 which was amended in
the first quarter of 2000, consists of a revolving line of credit in the amount
of $7.0 million, subject to a borrowing base calculated as the lesser of 70% of
eligible inventory or 80% of the net liquidation value, except that, for the
period from September 15 to December 15, the borrowing base is calculated as 90%
of eligible inventory. A cash set-aside for the benefit of creditors of
approximately $2.0 million is also part of the borrowing base. The facility
expires on the earlier of April 23, 2001 or the Company's emergence from
bankruptcy. The DIP Facility, which is secured by the assets of the Company,
bears interest at 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.

      In the third quarter of fiscal 1999, the Company began borrowings under
the DIP facility to meet operating



                                       43
<PAGE>   44

expenses and, subsequently, to build up inventory levels for the holiday season.
The maximum amount borrowed during this time was $5.98 million and the interest
rate on all borrowings ranged from 9.25% to 9.5%. All borrowings were repaid
during December. Management believes it is in compliance with all covenants as
of January 29, 2000.

      During fiscal years 1998, 1997 and 1996, the Company incurred interest
expense of $130,000, $170,000 and $321,000, 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>
                                                     1999          1998
                                                  -----------------------
<S>                                               <C>            <C>
      Net operating loss carryforward ......      $ 28,847       $ 17,000
      Depreciation .........................        (2,105)        (1,700)
      Inventory ............................           411            270
      Deferred rent ........................           556          1,150
      Reserves not currently deductible ....         7,428         10,100
      Other ................................           226            226
      Valuation allowance ..................       (35,363)       (27,046)
                                                  -----------------------
         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.

7.    SHAREHOLDERS' EQUITY

   Stock Compensation Plans

      At January 29, 2000, 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 1999, 1998 and
1997 reported net losses and basic losses per share would have been increased to
the amounts indicated below:

<TABLE>
<CAPTION>
                                                                   1999        1998         1997
                                  -----------------------------------------------------------------
<S>                               <C>                            <C>         <C>          <C>
      Net loss (in thousands)...  As reported................    $(18,285)   $(48,034)    $(15,580)
                                  Pro forma SFAS No. 123.....    $(19,154)   $(49,272)    $(17,427)

      Basic loss per share......  As reported................      $(2.58)     $(6.79)      $(2.20)
                                  Pro forma SFAS No. 123.....      $(2.71)     $(6.97)      $(2.47)
</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 ( Information for fiscal 1999 not presented as no options
were granted in that year):

<TABLE>
<CAPTION>
                                            1998                  1997
                                     -----------------------------------------
<S>                                  <C>                    <C>
</TABLE>



                                       44

<PAGE>   45

<TABLE>
<CAPTION>
                                            1998                  1997
                                     -----------------------------------------
<S>                                  <C>                    <C>
      Risk-free interest rate ....          6.40%             6.35% to 6.44%
      Expected life ..............   3 years to 8 years     6 years to 8 years
      Dividend rate ..............           0%                     0%
      Expected volatility ........          140%                   90%
</TABLE>

      The Company's two fixed stock option plans are: (i) the 1992 Combined
Incentive and Non-Qualified Stock Option Plan (the "1992 Plan") and (ii) the
1996 Directors' Non-Qualified Stock Option Plan (the "1996 Plan"). Under the
terms of the 1992 Plan, as amended at the 1997 Annual Meeting of Shareholders,
incentive or non-qualified stock options to purchase 1,089,038 shares of the
Company's Common Stock may be granted to employees, directors, consultants and
independent contractors of the Company. The exercise price of incentive stock
options may not be less than 100% of fair market value at the date of grant,
while the exercise price of non-qualified stock options may be greater than or
less than fair market value. Substantially all options outstanding at January
29, 2000 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 29, 2000,
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 29, 1999, 20,339 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
1999, 1998 and 1997 is presented below:

<TABLE>
<CAPTION>
                                               1999                   1998                    1997
                                       -------------------------------------------------------------------
                                                  EXERCISE                 EXERCISE               EXERCISE
                                        SHARES    PRICE(1)     SHARES      PRICE(1)    SHARES     PRICE(1)
                                       -------------------------------------------------------------------
<S>                                    <C>        <C>          <C>         <C>         <C>        <C>
Outstanding, beginning
  of year .......................       730,216     $7.65      839,718      $8.61      273,333     $11.16
Previously granted options
  brought under 1992 Plan by
  shareholder approval ..........                                                      447,735     $ 8.63
Granted .........................                              155,000      $4.58      283,223     $ 6.13
Exercised
Canceled ........................      (119,361)    $7.82     (264,502)     $8.91     (164,573)    $ 8.61
                                       --------               --------                --------
Outstanding, end of year ........       610,855      7.62      730,216      $7.65      839,718     $ 8.61
                                       ========               ========                ========
Exercisable, end of year ........       358,912                290,442                 225,503
Weighted average fair value
  of options granted during
  year ..........................                                $1.51                   $5.03
</TABLE>

--------------
(1)   Weighted average

The following table summarizes information regarding all fixed stock options
outstanding at January 29, 2000:

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING
                   ---------------------------------       OPTIONS EXERCISABLE
   RANGE OF                     REMAINING                 ---------------------
<S>                <C>         <C>          <C>           <C>          <C>
</TABLE>



                                       45
<PAGE>   46

<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      75,424      7.3 years    $1.99         57,839       $1.99
$4.00 to $9.83     500,660      6.9 years    $7.43        276,254       $8.11
    $13.77          60,195      5.0 years   $13.77         45,152      $13.77
                  --------                                -------
$1.97 to $13.77    636,279      6.8 years    $7.39        379,245       $7.78
                  ========                                =======
</TABLE>

--------------
(1)   Weighted average

8.      RELATED PARTY TRANSACTIONS

      Approximately 5%, 9% and 12% of merchandise purchases during fiscal years
1999, 1998 and 1997, respectively, were from a supplier whose president was a
director of the Company. As of January 30, 1999, $141,000 was payable to this
supplier and 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 1999
 First quarter.............       $17,939    $5,714    $(10,478)     7,069      $(1.48)
 Second quarter............       $13,477    $4,688    $ (1,938)     7,069      $(0.27)
 Third quarter.............       $12,718    $4,508    $ (4,789)     7,069      $(0.68)
 Fourth quarter............       $25,750    $9,644    $ (1,080)     7,069      $(0.15)

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)
</TABLE>

--------------
(1)   In thousands.

(2)   Interim per share amounts may not accumulate to annual amounts.



                                       46
<PAGE>   47

                                    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
</TABLE>



                                       47
<PAGE>   48

<TABLE>
<S>          <C>
                 Garden Botanika, Inc., dated October 8, 1992, as amended.

10.12*       --  Corporate Headquarters expansion lease agreement by and between Teachers
                 Insurance & Annuity Association and Garden Botanika, Inc., dated September 27,
                 1995.

10.13*       --  Ontario Distribution Facility lease agreement by and between Grumet-Goodrich
                 Corporation and Garden Botanika, Inc., dated December 16, 1992.

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

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

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

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

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

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

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

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

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

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>



                                       48
<PAGE>   49

<TABLE>
<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.
</TABLE>



                                       49
<PAGE>   50

<TABLE>
<S>          <C>
10.35        --  Second Modification Agreement with Fleet Retail Finance Inc. f/k/a BankBoston
                 Retail Finance Inc. dated April 26, 2000.

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 for fiscal 1996, as filed May 3, 1999.



                                       50